<PAGE> 1
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A)
OF THE SECURITIES EXCHANGE ACT OF 1934
[X] Filed by the Registrant
[ ] Filed by a Party other than the Registrant
Check the appropriate box:
[ ] Preliminary Proxy Statement [ ] Confidential, for Use of
the Commission Only (as
permitted by Rule
14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
HSN, INC.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified in Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[ ] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and
0-11.
(1) Title of each class of securities to which transaction applies:
(2) Aggregate number of securities to which transaction applies:
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined):
(4) Proposed maximum aggregate value of transaction:
(5) Total fee paid:
[X] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
1) Amount Previously Paid:
2) Form, Schedule or Registration Statement No.:
3) Filing Party:
4) Date Filed:
<PAGE> 2
[hsn logo]
January 12, 1998
Dear Stockholder:
We have agreed to a transaction to acquire USA Networks and the domestic
television business of Universal Studios, Inc. For these businesses, Universal
will receive $4.075 billion, broken down as follows:
- an effective 45.8% equity interest in HSNi, comprised of a combination of
HSNi common stock and securities of a newly-formed subsidiary of HSNi;
and
- approximately $1.633 billion in cash, of which $300 million will be
deferred until the closing of a later transaction with Liberty Media
Corporation.
If our stockholders approve, and we complete, this transaction, we believe that
the new HSNi, which will be renamed USA Networks, Inc., will be one of the
leading producers and distributors of television programs. We also believe this
transaction will provide significant opportunities for our Home Shopping
programming services, local broadcast stations and other existing businesses.
Before we can go ahead with the transaction, the holders of a majority of
our outstanding shares of common stock must vote in favor of increasing the
authorized capital stock of HSNi. We have scheduled the Annual Meeting of
Stockholders of HSNi for this vote as well as to vote on matters related to the
transaction and proposals which are customary for an annual meeting of
stockholders. The Annual Meeting will be held:
Wednesday, February 11, 1998
10:00 a.m. (local time)
Century Plaza Hotel and Tower
2025 Avenue of the Stars
Los Angeles, California 90067
This proxy statement provides detailed information about the proposed
transaction, including information about HSNi and the businesses we propose to
acquire, and the annual meeting matters on which you are being asked to vote.
Your Board of Directors has carefully considered the terms and conditions
of the proposed transaction and the other proposals for the annual meeting, and
believes that the transaction and other proposals are in the best interests of
HSNi and its stockholders. ACCORDINGLY, YOUR BOARD OF DIRECTORS, BY THE
UNANIMOUS VOTE OF ALL DIRECTORS VOTING, RECOMMENDS THAT YOU APPROVE EACH
PROPOSAL BEING SUBMITTED TO YOU FOR APPROVAL.
YOUR VOTE IS VERY IMPORTANT. Whether or not you plan to attend the Annual
Meeting, please take the time to vote by completing and mailing the enclosed
proxy card. If you attend the Annual Meeting, you may vote in person if you
wish, even though you have previously returned your proxy card.
Sincerely,
/s/ Barry Diller
Barry Diller
Chairman of the Board and
Chief Executive Officer
<PAGE> 3
HSN, INC.
152 WEST 57TH STREET
NEW YORK, NEW YORK 10019
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON WEDNESDAY, FEBRUARY 11, 1998
TO THE STOCKHOLDERS OF HSN, INC.:
The Annual Meeting of Stockholders of HSN, Inc., a Delaware corporation,
will be held on Wednesday, February 11, 1998 at 10:00 a.m., local time, at the
Century Plaza Hotel and Tower, 2025 Avenue of the Stars, Los Angeles, California
90067 for the following purposes:
A. To vote on matters relating to the transaction in which HSNi will
acquire from Universal Studios, Inc. USA Networks, consisting of USA Network and
Sci-Fi Channel, and the domestic television business of Universal, and receive a
contribution from Liberty Media Corporation.
Specifically, you will be asked at the Annual Meeting to approve the
following proposals:
1. Issuance of shares of HSNi Common Stock and HSNi Class B Common Stock
in connection with the transaction.
2. Approval of the terms of the Governance Agreement, dated as of
October 19, 1997, among HSNi, Universal Studios, Inc., Liberty Media
Corporation and Barry Diller.
3. Amendment of the Amended and Restated Certificate of Incorporation of
HSNi (the HSNi Certificate) to increase the authorized shares of HSNi
Common Stock from 150,000,000 shares to 800,000,000 shares and to
increase the authorized shares of HSNi Class B Common Stock from
30,000,000 shares to 200,000,000 shares.
4. Addition of a new Article to the HSNi Certificate to restrict total
alien equity ownership and voting power of HSNi stock each to a
maximum of 25% and to make certain other modifications to facilitate
HSNi's continued compliance with regulations under the Communications
Act of 1934, as amended.
5. Amendment of the HSNi Certificate to change the corporate name of
HSNi to "USA Networks, Inc." in the event that we complete the
transaction with Universal.
6. Amendment of the HSNi Certificate to eliminate the clause that
specifies that the number of directors of HSNi shall be no less than
3 and no more than 15 and to eliminate certain other provisions which
are duplicative of Delaware law.
7. Amendment of the HSNi Certificate to provide that HSNi's Chief
Executive Officer can only be removed without cause by the
affirmative vote of at least 80% of the entire HSNi Board of
Directors, the further amendment of which provision will require the
affirmative vote of at least 80% of the entire HSNi Board of
Directors and of the voting power of HSNi's outstanding voting
securities. This provision will be effective if we complete the
transaction with Universal and only while Mr. Diller is Chief
Executive Officer of HSNi.
B. In connection with the Annual Meeting, HSNi stockholders will also be
asked:
1. To approve the election of eight members of the HSNi Board of
Directors, each to hold office for a one-year term ending on the date
of the next succeeding annual meeting of stockholders and until such
director's respective successor shall have been duly elected and
qualified.
2. To approve the adoption of HSNi's 1997 Stock and Annual Incentive
Plan for HSNi's officers and certain key employees and consultants.
3. To ratify the appointment of Ernst & Young LLP as the firm of
independent auditors to audit the consolidated financial statements
of HSNi and its subsidiaries for the fiscal years ending December 31,
1997 and December 31, 1998.
C. To transact such other business as may properly come before the Annual
Meeting or any adjournment or postponement thereof.
The foregoing items of business are more fully described in the Proxy
Statement accompanying this Notice.
<PAGE> 4
Only stockholders of record of HSNi Common Stock and HSNi Class B Common
Stock at the close of business on December 30, 1997 are entitled to notice of,
and will be entitled to vote at, the Annual Meeting or any adjournment or
postponement thereof.
BY ORDER OF THE BOARD OF DIRECTORS
James G. Gallagher
Vice President,
General Counsel and
Corporate Secretary
New York, New York
January 12, 1998
TO ENSURE THAT YOUR SHARES ARE REPRESENTED AT THE ANNUAL MEETING, WE URGE
YOU TO COMPLETE, DATE AND SIGN THE ENCLOSED PROXY AND MAIL IT PROMPTLY IN THE
POSTAGE-PAID ENVELOPE PROVIDED, WHETHER OR NOT YOU PLAN TO ATTEND THE ANNUAL
MEETING IN PERSON. YOUR PROXY CAN BE WITHDRAWN BY YOU AT ANY TIME BEFORE IT IS
VOTED.
------------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
REGULATOR HAS APPROVED THE SHARES OF HSNi COMMON STOCK OR HSNi CLASS B COMMON
STOCK TO BE ISSUED IN THE TRANSACTION, OR DETERMINED IF THIS PROXY STATEMENT IS
ACCURATE OR ADEQUATE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
This Proxy Statement is dated January 12, 1998,
and was first mailed to stockholders on January 13, 1998.
<PAGE> 5
QUESTIONS AND ANSWERS ABOUT THE TRANSACTION
AND THE ANNUAL MEETING
Q: WHY IS HSNi ACQUIRING USA NETWORKS (USAN) AND UNIVERSAL STUDIOS' DOMESTIC
TELEVISION BUSINESS (UTV)?
A: Your Board of Directors believes that the combination of these businesses
with HSNi's existing businesses will provide numerous strategic benefits to
the combined company, including:
- becoming a leader in cable programming -- HSNi will be one of the leading
cable programming companies in the U.S.
- creating a new mass distribution system -- HSNi will control several mass
distribution channels -- Home Shopping Network, the Silver King stations,
USA Network and Sci-Fi Channel -- each of which can promote the others and
all of which can be combined under a few brand names.
- diversifying HSNi's cash flow -- the combined company will benefit from
diversified sources of cash flow, which will include electronic retailing,
cable programming and television production and distribution.
Q: HOW WILL I BE AFFECTED BY THE TRANSACTION?
A: Each HSNi stockholder will continue to own the same number of shares of HSNi
common stock that it owned immediately prior to the transaction. Each share
of HSNi common stock, however, will represent a smaller ownership percentage
of a significantly larger company. Public stockholders currently own 78% of
the outstanding equity and 29% of the outstanding voting power of HSNi.
Immediately following the transaction, HSNi's public stockholders will own:
- 33% of the total equity of HSNi. This gives effect to Universal's and
Liberty's total ownership interests, which we describe in the following
question and answer; and
- 23% of the outstanding voting power of HSNi.
Q: HOW WILL THE TRANSACTION BE STRUCTURED?
A: For tax and regulatory reasons, Universal's interest in HSNi will consist of
HSNi common shares and shares of a newly-formed subsidiary of HSNi (the LLC).
After the transaction is completed, Universal will own the following:
- 6.75 million shares of HSNi stock, consisting of about 3.6 million shares
of common stock and 3.2 million shares of Class B stock. This represents
17.1% of the voting power of HSNi; and
- 54.3 million LLC shares, representing 45.8% of the LLC. Each LLC share
owned by Universal will be exchangeable for one HSNi common or Class B
share.
These numbers give effect to the transaction with Liberty Media Corporation
which we describe below.
Regulations under the Communications Act which limit foreign ownership of HSNi
will restrict Universal from being able to exchange LLC shares for HSNi common
shares until HSNi has additional outstanding common shares. However, if these
regulations did not apply, Universal could exchange its LLC shares for up to
36.8 million shares of Class B stock and 17.5 million shares of common stock.
The actual combination of shares of common and Class B stock is also subject
to Universal's agreement to limit its voting power to 67%. These shares would
represent a 45.8% equity interest in HSNi.
The LLC will hold USAN, UTV and all of the businesses of HSNi and its
subsidiaries other than HSNi's broadcast-related business and HSNi's current
equity interest in Ticketmaster Group, Inc. HSNi's management will manage the
LLC's businesses.
At a subsequent closing, Liberty will purchase $300 million in shares or
contribute assets that would have to be agreed upon among HSNi, Universal and
Liberty.
Q: HOW WILL HSNi FINANCE THE CASH PORTION OF THE TRANSACTION?
A: HSNi will initially borrow $1.4 billion in bank financing for the
transaction. HSNi expects that transactions anticipated to occur within six
months of the closing will allow HSNi to reduce its total outstanding debt to
approximately $1 billion. We summarize these transactions beginning on page
41.
QUESTIONS AND ANSWERS
<PAGE> 6
Q: WHO WILL HAVE VOTING CONTROL OF HSNi?
A: Barry Diller, HSNi's Chairman of the Board and Chief Executive Officer. As
part of the transaction, Mr. Diller, Universal and Liberty have agreed to new
stockholder arrangements relating to their shares of HSNi equity securities,
including LLC shares. These shares represent 77% of the combined voting
power, 97% of the Class B stock and 9% of the common stock of HSNi. These
arrangements provide that Mr. Diller will generally have a proxy over all
shares of HSNi stock owned by Universal and Liberty as long as Mr. Diller is
Chief Executive Officer of HSNi. Mr. Diller, Universal and Liberty will,
however, each have the right to consent to actions which the parties consider
to be fundamental to their investment in HSNi and its subsidiaries, including
the LLC. These fundamental actions are summarized on pages 34-35.
Q: WHEN DO YOU EXPECT THE TRANSACTION TO BE COMPLETED?
A: We are working to complete the transaction as soon as possible. We currently
expect to complete the transaction promptly following the annual meeting.
Q: AM I ENTITLED TO DISSENTERS' RIGHTS?
A: No. You will have no right under Delaware law to seek appraisal of the value
of your HSNi shares in connection with the transaction. For a more detailed
description of the absence of dissenters' rights under Delaware law, see page
24.
Q: ARE THERE ANY SIGNIFICANT DISADVANTAGES TO ME FROM THE TRANSACTION?
A: We do not think so. Your Board of Directors has approved the transaction, and
believes it is in the best interests of HSNi's stockholders.
Q: WHAT DO I NEED TO DO NOW?
A: Just mail your signed proxy card in the enclosed return envelope as soon as
possible, so that your shares may be represented at the annual meeting. The
meeting will take place on Wednesday, February 11, 1998. HSNi'S BOARD OF
DIRECTORS, BY THE UNANIMOUS VOTE OF ALL DIRECTORS VOTING, RECOMMENDS THAT YOU
VOTE IN FAVOR OF EACH PROPOSAL BEING SUBMITTED TO YOU FOR APPROVAL.
Q: CAN I CHANGE MY VOTE AFTER I HAVE MAILED IN MY SIGNED PROXY CARD?
A: Yes. You can change your vote at any time before we vote your proxy at the
annual meeting. You can do so in one of three ways. First, you can send a
written notice stating that you would like to revoke your proxy to The Bank
of New York at the address given below. Second, you can complete a new proxy
card and send it to The Bank of New York at the address given below. Third,
you can attend the Annual Meeting and vote in person. You should send any
written notice or new proxy card to HSNi c/o The Bank of New York at the
following address: HSN, Inc., P.O. Box 11064, New York, New York 10203-0064.
You may request a new proxy card by calling MacKenzie Partners, Inc. at
1-800-322-2885.
Q: WHERE CAN I FIND MORE INFORMATION?
A: You may obtain more information from various sources, as set forth under
"Additional Information -- Where You Can Find More Information." (Page 95)
QUESTIONS AND ANSWERS
<PAGE> 7
To find any one of the principal sections identified below, simply bend the
document slightly to expose the black tabs and open the document to the tab
which corresponds to the title of the section you wish to read. For your
convenience, we have included an index of frequently used capitalized terms in
this Proxy Statement in an Index of Defined Terms, which is printed on gold
paper towards the back of this Proxy Statement to help you locate it quickly.
TABLE OF CONTENTS
----------
SUMMARY
----------
SPECIAL CONSIDERATIONS
----------
THE TRANSACTION
----------
FINANCIAL AND BUSINESS INFORMATION
----------
THE ANNUAL MEETING
----------
ADDITIONAL INFORMATION
----------
APPENDICES
----------
<PAGE> 8
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
SUMMARY
The Companies and the Businesses.............................................. 1
Recommendations to Stockholders............................................... 1
Interests of Officers and Directors in the Transaction........................ 2
The Transaction............................................................... 2
Annual Meeting Proposals...................................................... 3
Markets and Market Prices..................................................... 5
Selected Historical Financial Data of HSNi.................................... 6
Selected Historical Financial Data of USAN.................................... 7
Selected Historical Financial Data of Universal Television Group.............. 8
Selected Pro Forma Financial Data of HSNi..................................... 9
SPECIAL CONSIDERATIONS
Dependence on Certain Key Personnel........................................... 11
Controlling Stockholders...................................................... 11
Dilution to HSNi Stockholders................................................. 12
Integration of Operations; Management of Growth............................... 12
Competition................................................................... 13
THE TRANSACTION
Background.................................................................... 15
Background of the Transaction............................................ 15
Reasons for the Transaction.............................................. 16
Recommendation of the HSNi Board......................................... 18
Opinion of Allen & Company Incorporated.................................. 18
Certain Federal Income Tax Matters....................................... 24
Accounting Treatment..................................................... 24
Absence of Dissenters' Rights............................................ 24
Description of the Transaction................................................ 24
General.................................................................. 24
Investment Agreement..................................................... 26
Related Agreements....................................................... 31
Governance Agreement............................................... 31
Stockholders Agreement............................................. 35
Spinoff Agreement.................................................. 39
Ancillary Business Agreements...................................... 40
Financing of the Transaction............................................. 41
Interests of Certain Persons in the Transaction.......................... 42
</TABLE>
TABLE OF CONTENTS
<PAGE> 9
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
FINANCIAL AND BUSINESS INFORMATION
Recent Developments........................................................... 45
Ticketmaster Proposed Transaction........................................ 45
Market Price and Dividend Information......................................... 45
Stock Price Performance Graph............................................ 46
Selected Historical Financial Data of HSNi.................................... 47
The Acquired Businesses....................................................... 48
Description of the Acquired Businesses................................... 48
USAN............................................................... 48
Universal Television Group/UTV..................................... 50
Selected Historical Financial Data....................................... 55
USAN............................................................... 55
Universal Television Group......................................... 56
Management's Discussion and Analysis of Financial Condition and Results
of Operations.......................................................... 57
USAN............................................................... 57
Universal Television Group......................................... 58
Unaudited Pro Forma Combined Condensed Financial Statements................... 61
THE ANNUAL MEETING
Business to Be Conducted at the Annual Meeting................................ 71
Matters to Be Considered................................................. 71
Date, Time and Place of Meeting.......................................... 72
Record Date; Shares Outstanding and Entitled to Vote..................... 72
Voting and Revocation of Proxies......................................... 72
Vote Required............................................................ 72
Quorum; Broker Non-Votes................................................. 73
Solicitation of Proxies and Expenses..................................... 74
Description of Proposals and HSNi Board Recommendations....................... 74
Transaction Proposal..................................................... 74
Governance Agreement Proposal............................................ 74
Authorized Capital Stock Proposal........................................ 75
Ownership Proposal....................................................... 75
Name Change Proposal..................................................... 75
Director Number Proposal................................................. 75
Removal Proposal......................................................... 76
Election of HSNi Directors............................................... 76
1997 Incentive Plan Proposal............................................. 78
Ratification of Auditors Proposal........................................ 81
Directors and Executive Officers of HSNi...................................... 82
Directors and Executive Officers......................................... 82
Board of Directors and Board Committees.................................. 83
Compensation of Directors and Certain Executive Officers of HSNi......... 84
Related Party Transactions............................................... 90
Security Ownership of Certain Beneficial Owners and Management................ 92
</TABLE>
TABLE OF CONTENTS
ii
<PAGE> 10
ADDITIONAL INFORMATION
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
Cautionary Statement Concerning Forward-Looking Statements................ 95
Stockholder Proposals..................................................... 95
Other Matters............................................................. 95
Where You Can Find More Information....................................... 95
Index of Defined Terms.................................................... 97
APPENDICES
APPENDIX A Investment Agreement......................................... A-1
APPENDIX B Governance Agreement......................................... B-1
APPENDIX C Stockholders Agreement....................................... C-1
APPENDIX D Spinoff Agreement............................................ D-1
APPENDIX E Fairness Opinion of Allen & Company.......................... E-1
APPENDIX F HSNi 1997 Stock and Annual Incentive Plan.................... F-1
APPENDIX G Proposed Amendments to the HSNi Certificate.................. G-1
APPENDIX H USA Networks Financial Statements............................ H-1
APPENDIX I Universal Television Group Financial Statements.............. I-1
APPENDIX J HSN, Inc. Supplemental Unaudited Pro Forma Combined Condensed
Financial Statements......................................... J-1
</TABLE>
TABLE OF CONTENTS
iii
<PAGE> 11
COMPARISON OF HSNI OWNERSHIP
The diagrams below and on the following page illustrate generally the
equity ownership and combined voting power of all classes of HSNi common stock
before and after the Transaction. The actual structure is more complicated (for
example, HSNi's Home Shopping subsidiary is owned 80.1% by HSNi and 19.9% by
Liberty). Unless we indicate otherwise, the percentages are based on shares
issued and outstanding. Percentages have been rounded to the nearest whole
number. The percentage of combined voting power is different from the percentage
of equity because HSNi has two classes of stock: common shares, which have one
vote each, and Class B shares, which have ten votes each.
[PRE-TRANSACTION OWNERSHIP CHART]
LIBERTY PUBLIC
| |
| |
----------------------- ----------------------
| HSNi | | UNIVERSAL |
----------------------- ----------------------
| | | |
| | | |
| | | |
OTHER HOME SHOPPING UNIVERSAL
HSNi (INCLUDING HSNi USAN TELEVISION GROUP
SUBSIDIARIES CONTRIBUTED ASSETS) (INCLUDING UTV)
OWNERSHIP OF HSNI
<TABLE>
<CAPTION>
EQUITY VOTING POWER
------ ------------
<S> <C> <C>
Mr. Diller................ 1% 71%*
Universal................. 0% 0%
Liberty................... 21% 0%*
Public.................... 78% 29%
</TABLE>
* The voting power reflects Mr. Diller's general right to vote shares of HSNi
stock in which Liberty has an interest. Mr. Diller has this right under a
stockholders agreement with Liberty. This agreement also provides that Mr.
Diller and Liberty must agree for Mr. Diller to vote these shares in favor of
any fundamental actions of HSNi, such as a substantial asset sale or a
significant amendment to the HSNi certificate of incorporation.
<PAGE> 12
POST-TRANSACTION OWNERSHIP
This chart summarizes the post-transaction ownership of HSNi. The LLC will
be managed by Mr. Diller and HSNi management. Universal will own 45.8% of the
LLC; Liberty is expected to own about 6%; and HSNi will own the remaining 48%.
[POST-TRANSACTION OWNERSHIP CHART]
---------- LIBERTY PUBLIC UNIVERSAL-------
| | | | |
| | | | |
| | ------------------ | |
| | | | | |
| ----------| |-------- |
| | HSNi | |
| OTHER HSNi-----------| | |
| SUBSIDIARIES ------------------ |
| | |
| ------------------ |
| | | |
| | HOME | |
| | SHOPPING | |
| | | |
| ------------------ |
| | |
| ---------- |
-------------------------------| LLC |-----------------------------
----------
|
|
---------------------------------------------------------
| | |
HSNi
CONTRIBUTED USAN UTV
ASSETS
OWNERSHIP OF HSNi*
<TABLE>
<CAPTION>
EQUITY VOTING POWER
------------- ------------
<S> <C> <C>
Mr. Diller.......... less than 1% 77%**
Universal........... 11% 0%**
Liberty............. 20% 0%**
Public.............. 69% 23%
</TABLE>
* This chart assumes that HSNi exercises its option to deliver to Universal an
additional $75 million in LLC Shares, instead of cash. In addition, the chart
gives effect to Liberty's contribution (to be completed by June 30, 1998) of
$300 million in cash to the LLC in exchange for 7.5 million LLC Shares.
** The voting power reflects Mr. Diller's general right to vote shares of HSNi
stock in which Universal or Liberty otherwise has an interest. Mr. Diller has
this right under the new stockholders agreement among HSNi, Universal,
Liberty and Mr. Diller. Mr. Diller, Universal and Liberty have also agreed
that, in the case of fundamental actions, all three stockholders must agree
for Mr. Diller to vote these shares in favor of these actions.
<PAGE> 13
SUMMARY
This summary highlights selected information from this document, and may
not contain all of the information that is important to you. To understand the
transaction fully and for a more complete description of the legal terms of the
transaction, you should read carefully this entire document and the documents to
which we have referred you. See "Additional Information -- Where You Can Find
More Information." (Page 95)
THE COMPANIES AND THE BUSINESSES
HSN, Inc.
152 West 57th Street
New York, New York 10019
(212) 247-5810
HSNi is an electronic retailing and television broadcasting company. HSNi,
through its subsidiaries, operates two retail sales programs, The Home Shopping
Network and America's Store, and operates 16 full power television broadcast
stations.
For more information relating to HSNi, you should review the documents
referenced in "Additional Information -- Where You Can Find More Information" on
page 95.
THE ACQUIRED BUSINESSES
USAN (PAGE 48)
USAN develops, owns, acquires, produces, packages, promotes and distributes
television programming in the United States and internationally. USAN operates
two advertiser-supported 24-hour cable television networks, USA Network, a
general entertainment network, and Sci-Fi Channel, which features science
fiction, horror, fantasy and science-fact oriented programming. USAN also
operates USA Brazil through a joint venture and has a licensing agreement with
USA Latin America.
UNIVERSAL TELEVISION GROUP/UTV (PAGE 50)
Universal Television Group is the domestic and international television
business of Universal. Universal Television Group produces and distributes
motion picture films intended for viewing on television and home video. HSNi
will acquire the domestic television business (UTV), and Universal will retain
its international television business. UTV will distribute its current
programming and, under a license agreement, Universal's television library, in
the United States and will grant Universal a license to distribute UTV's
programming internationally.
OTHER PARTIES IN THE TRANSACTION
Universal Studios, Inc.
100 Universal City Plaza
Universal City, California 91608
(818) 777-1000
Universal produces and distributes motion picture, television and home
video products and recorded music. Universal also operates theme parks and
retail stores. Universal is owned 84% by The Seagram Company Ltd. and 16% by
Matsushita Electric Industrial Co. Ltd.
Liberty Media Corporation
8101 East Prentice Avenue
Englewood, Colorado 80111
(303) 721-5400
Liberty is a wholly-owned subsidiary of Tele-Communications, Inc. Liberty
produces, acquires and distributes entertainment for an international audience,
educational and informational programming, as well as home shopping via
television and other interactive media and marketing services.
USANi, LLC
152 West 57th Street
New York, New York 10019
(212) 247-5810
The LLC is a newly-formed subsidiary of HSNi formed solely for the purposes
of the transaction.
RECOMMENDATIONS TO STOCKHOLDERS
Your Board of Directors believes the transaction is in your best interests
and in HSNi's best interests and recommends, by the unanimous vote of all
directors voting, that you vote FOR the proposals related to the transaction,
FOR each of the amendments to HSNi's certificate of incorporation, FOR each of
the nominees for director named in this Proxy Statement and FOR each of the
other proposals being submitted to you.
SUMMARY
<PAGE> 14
INTERESTS OF OFFICERS AND DIRECTORS IN THE TRANSACTION
The officers and directors of HSNi may have interests in the transaction
that are different from, or in addition to, yours. We discuss these interests in
this Proxy Statement. (Page 42)
THE TRANSACTION
INVESTMENT AGREEMENT (PAGE 26)
The Investment Agreement is the legal document that governs the
transaction. This agreement is attached as Appendix A to this Proxy Statement.
We encourage you to read it carefully.
HOW THE TRANSACTION WILL BE COMPLETED
(PAGE 24)
The Transaction will involve the following steps, all of which will take
place at the closing of the transaction:
- - Universal will transfer to HSNi and the LLC all of the interests in USAN and
UTV in exchange for $4.075 billion in cash and stock, broken down as follows:
- an effective 45% equity interest in HSNi, comprised of a combination of HSNi
common shares and LLC shares, valued at $40 per share; and
- approximately $1.633 billion in cash, of which $300 million will be deferred
(and will accrue interest) until the closing of a later transaction with
Liberty.
- - HSNi and its subsidiaries will contribute all of their businesses to the LLC,
except for the broadcasting business and HSNi's equity interest in
Ticketmaster.
- - The amount of the cash to be received by Universal, as well as the number of
LLC shares, are subject to adjustment as follows:
- the cash amount will be lower and the number of LLC shares will be higher if
the value of the actual Liberty contribution exceeds $300 million; and
- HSNi may elect to pay $75 million of the cash portion of the purchase price
with LLC shares valued at $40 per share. HSNi intends to exercise this
election. If it does, Universal's effective equity interest in HSNi will be
45.8%.
In addition, Liberty has agreed that it will purchase 7.5 million LLC
shares (and/or shares of HSNi common stock) valued at $40 per share plus
interest from the date of the closing of the Universal transaction. Liberty,
HSNi and Universal have discussed the possibility that Liberty may also
contribute assets to the LLC in exchange for LLC shares valued at $40 per share.
If Liberty contributes assets, Liberty may reduce the number of LLC shares it
purchases for cash by an amount having a value equal to 45% of the value of the
contributed assets. These assets would have to be agreed upon by HSNi, Liberty
and Universal and have not yet been identified. The closing of any transaction
with Liberty is to take place on or prior to June 30, 1998.
RELATED AGREEMENTS
The transaction includes a number of other important agreements, including
the Governance Agreement, Stockholders Agreement and Spinoff Agreement, which
are attached as Appendices B, C and D to this Proxy Statement. We encourage you
to read them carefully.
GOVERNANCE AGREEMENT (PAGE 31)
HSNi, Universal, Liberty and Mr. Diller are parties to the Governance
Agreement. This agreement places limits on Universal's ability to acquire
additional equity securities of HSNi and restricts Universal from transferring
HSNi securities. In addition, this agreement provides for representation on
HSNi's Board of Directors by Universal and Liberty. It also lists the
fundamental actions that require the prior consent of Universal, Liberty and Mr.
Diller before HSNi can take any such action.
STOCKHOLDERS AGREEMENT (PAGE 35)
Universal, Liberty, Mr. Diller, HSNi and Seagram are parties to the
Stockholders Agreement. Generally, this agreement governs how much HSNi stock
Liberty may acquire, defines each party's voting rights, and restricts the
transfer of shares. Under this agreement, Mr. Diller generally has voting
control over all of the HSNi stock owned by Universal and Liberty except with
respect to the fundamental actions we discuss above under "Governance
Agreement."
SUMMARY
2
<PAGE> 15
SPINOFF AGREEMENT (PAGE 39)
Universal, Liberty and HSNi are parties to the Spinoff Agreement. This
agreement provides for arrangements generally following the time Mr. Diller is
no longer Chief Executive Officer of HSNi or becomes disabled. The interim
arrangements generally relate to the management of HSNi and efforts to dispose
of HSNi's broadcast stations, either through a spinoff to HSNi stockholders or a
sale.
OTHER BUSINESS AGREEMENTS (PAGE 40)
In connection with the Universal transaction, HSNi and Universal have
agreed to various ongoing business arrangements, including with respect to:
- - Universal's right to distribute internationally programs produced by the new
combined company for a fee.
- - HSNi's right to distribute specific Universal programming, including
Universal's library of television programs, for a fee. This right applies only
in the United States.
- - A 50-50 joint venture governing the development and exhibition of USA Network,
Sci-Fi Channel and Universal's new action/suspense channel, 13th Street,
outside the United States.
- - Agreements relating to merchandising, music administration and music
publishing, the use by USAN and UTV of Universal's studio facilities, video
distribution and other matters.
OPINION OF FINANCIAL ADVISOR (PAGE 18)
In deciding to approve the transaction, HSNi's Board of Directors
considered, among other things, advice from Allen & Company, its financial
advisor. HSNi's Board received an opinion from Allen & Company that as of the
date of its opinion the terms of the transaction are fair to HSNi from a
financial point of view. Allen & Company's opinion is attached as Appendix E to
this Proxy Statement. We encourage you to read it thoroughly.
ACCOUNTING TREATMENT (PAGE 24)
We expect the transaction to be accounted for as a purchase in accordance
with generally accepted accounting principles.
SPECIAL CONSIDERATIONS (PAGE 11)
For a description of certain things which you should consider in connection
with the transaction in addition to the other information described in this
document, see "Special Considerations."
ANNUAL MEETING PROPOSALS
PROPOSAL TO APPROVE THE TRANSACTION (PAGE 74)
Because the number of HSNi securities to be issued in the transaction will
exceed 20% of the number of HSNi securities outstanding prior to the
transaction, approval by HSNi's stockholders of the issuance of HSNi securities
is required under the rules of the NASD.
PROPOSAL TO APPROVE THE GOVERNANCE AGREEMENT (PAGE 74)
In connection with the transaction, HSNi has entered into a Governance
Agreement. The Governance Agreement proposal provides for the approval by HSNi's
stockholders of the terms of the Governance Agreement. The Governance Agreement
is summarized starting on page 28 and is attached as Appendix B to this Proxy
Statement.
PROPOSAL TO INCREASE THE AUTHORIZED CAPITAL STOCK (PAGE 75)
Article IV of HSNi's certificate of incorporation currently authorizes
150,000,000 shares of HSNi common stock and 30,000,000 shares of HSNi Class B
common stock. The authorized capital stock proposal provides that the authorized
shares of such HSNi capital stock will be increased to 800,000,000 shares of
HSNi common stock and 200,000,000 shares of HSNi Class B common stock. Any
authorized but unissued capital stock may be used for general corporate
purposes, including for possible future acquisitions. An increase in the
authorized number of shares of HSNi common stock and HSNi Class B common stock
is required to complete the transaction.
PROPOSAL TO CAP FOREIGN OWNERSHIP OF HSNi (PAGE 75)
Because HSNi owns television broadcasting stations, it is subject to the
provisions of and regulations under the Communications Act. These regulations
currently cap the maximum amount of
SUMMARY
3
<PAGE> 16
HSNi that may be owned by foreign entities or individuals to 25%. This 25% cap
applies both to equity ownership and voting power of HSNi. HSNi is proposing to
amend HSNi's certificate of incorporation by adding a new Article to ensure its
continued compliance with these rules and regulations. The Article restricts
total equity ownership and voting power of HSNi securities that may be owned by
foreigners each to a maximum of 25%. In addition, the Article enables HSNi to
continue to comply with these regulations, including by permitting HSNi's Board
of Directors to redeem enough HSNi securities to avoid violation of these
regulations. There are currently no limitations on foreign ownership in HSNi's
certificate of incorporation.
HSNi seeks to add these provisions because Universal is considered foreign
for purposes of these regulations because it is owned 84% by Seagram, a Canadian
corporation, and 16% by Matsushita, a Japanese corporation. While Universal is
receiving an effective 45.8% equity interest in HSNi, the transaction is
structured so that most of that interest will consist of LLC shares, which are
not regarded as interests in HSNi under these regulations.
PROPOSAL TO CHANGE HSNi'S NAME TO USA NETWORKS, INC. (PAGE 75)
This proposal provides that, upon completion of the Universal transaction,
Article I of HSNi's certificate of incorporation will be amended so that HSNi's
name will be "USA Networks, Inc."
PROPOSAL TO ELIMINATE THE PRECISE NUMBER OF BOARD MEMBERS (PAGE 75)
This proposal eliminates the provision in HSNi's certificate of
incorporation requiring that HSNi's Board of Directors consist of 3-15
directors, so that there will not be any minimum or maximum number of directors.
Instead, the precise number of directors will be fixed by HSNi's Board.
PROPOSAL RELATING TO THE REMOVAL OF THE CHIEF EXECUTIVE OFFICER FROM OFFICE
(PAGE 76)
HSNi is proposing to amend Article XII of HSNi's certificate of
incorporation when we complete the Universal transaction to provide that HSNi's
Chief Executive Officer can only be removed without cause by the affirmative
vote of at least 80% of the entire HSNi Board. In addition, any amendment to
this provision will require the affirmative vote of at least 80% of the entire
HSNi Board and 80% of the voting power of HSNi's outstanding voting securities.
This provision will be effective only while Mr. Diller is Chief Executive
Officer of HSNi.
ELECTION OF HSNi DIRECTORS (PAGE 76)
At the Annual Meeting, HSNi stockholders will be asked to elect the
following eight director nominees: Barry Diller, Paul G. Allen, James G. Held,
Victor A. Kaufman, Bruce M. Ramer, William D. Savoy, Gen. H. Norman Schwarzkopf
and Richard E. Snyder. Messrs. Ramer and Savoy will stand for election by the
holders of HSNi common stock voting as a separate class. The remaining nominees
will stand for election by the holders of HSNi common stock and HSNi Class B
common stock voting together as a single class, with each share of HSNi Class B
common stock having ten votes and each share of HSNi common stock having one
vote. After the Universal transaction is completed, HSNi has agreed that four
nominees of Universal, Edgar Bronfman, Jr., Robert W. Matschullat, Frank J.
Biondi, Jr. and Samuel Minzberg, will become directors of HSNi.
PROPOSAL TO APPROVE THE 1997 INCENTIVE PLAN (PAGE 78)
The Compensation/Benefits Committee and HSNi's Board of Directors have
approved the 1997 Incentive Plan. The 1997 Incentive Plan is attached as
Appendix F to this Proxy Statement. In connection with the transaction, the
Compensation/Benefits Committee granted Mr. Diller options to purchase 4,750,000
shares of HSNi common stock and granted Victor A. Kaufman options to purchase
250,000 shares of HSNi common stock. In each case, the exercise price was set at
$38.625 per share, the last closing price of HSNi common stock prior to the
grants.
PROPOSAL TO RATIFY AUDITORS (PAGE 81)
We have appointed Ernst & Young LLP as the independent auditors of our
consolidated financial statements for the fiscal years ending December 31, 1997
and 1998. At the Annual Meeting, you will be asked to ratify this appointment.
SUMMARY
4
<PAGE> 17
RECORD DATE; VOTE REQUIRED FOR HSNi STOCKHOLDER APPROVAL OF THE PROPOSALS (PAGE
72)
Only holders of record of HSNi common stock or HSNi Class B common stock at
the close of business on December 30, 1997 are entitled to notice of and to vote
at the Annual Meeting. HSNi Class B common stock is entitled to ten votes per
share and HSNi common stock is entitled to one vote per share on each matter
that HSNi Class B common stock and HSNi common stock vote together as a single
class.
The following proposals must be approved by a majority of the total
combined voting power of HSNi common stock and HSNi Class B common stock, voting
together as a single class and represented and voting at the Annual Meeting:
- proposal to approve the transaction;
- proposal to approve the Governance Agreement;
- proposal to approve the 1997 Incentive Plan; and
- proposal to ratify auditors.
The following proposals must be approved by a majority of the outstanding
combined voting power of HSNi common stock and HSNi Class B common stock, voting
together as a single class:
- proposal to cap foreign ownership of HSNi;
- proposal to change HSNi's name to USA Networks, Inc.;
- proposal to eliminate the precise number of board members; and
- proposal relating to removing the Chief Executive Officer from office.
The proposal to increase the authorized capital stock of HSNi must be
approved by a majority of the outstanding HSNi common stock and separately by a
majority of the outstanding HSNi Class B common stock.
Nominees for directors who receive a majority of all votes cast will be
elected as follows:
- Holders of HSNi common stock will
vote separately to elect two directors, Messrs. Ramer and Savoy; and
- Holders of HSNi common stock and Class B common stock will vote as a
single class to elect the remaining six directors.
Mr. Diller and Liberty have agreed to vote the shares of HSNi common shares
controlled by them in favor of each of these proposals. As of the record date,
these shares represent:
- 97% of the outstanding HSNi Class B common stock;
- 1% of the outstanding HSNi common stock; and
- 71% of the total voting power of HSNi.
Accordingly, all of the proposals are assured to be approved except those
proposals that the holders of HSNi common stock must approve as a separate
class. The holders of HSNi common stock must separately approve the following:
- the proposal to increase the authorized capital stock -- we cannot
complete the transaction unless you approve this proposal; and
- the election of Messrs. Ramer and Savoy to the Board of Directors.
MARKETS AND MARKET PRICES
Shares of HSNi common stock have been traded on NASDAQ under the symbol
"HSNi" since December 23, 1996 and previously under the symbol "SKTV" since
August 26, 1993. Each share of HSNi Class B common stock is convertible at any
time into one share of HSNi common stock. For information regarding the
historical market price of HSNi common stock, see page 45.
On October 17, 1997, the last trading day prior to the public announcement
of the proposed transaction, HSNi common stock closed at $38.625 per share. On
January 9, 1998, the last trading day before the printing of this Proxy
Statement, HSNi common stock closed at $47.750 per share.
SUMMARY
5
<PAGE> 18
SELECTED HISTORICAL FINANCIAL DATA OF HSNi
(in thousands, except per share data)
In the tables below, we provide you with selected historical financial data
of HSNi. We prepared this data using the consolidated financial statements of
HSNi. When you read this selected historical consolidated financial data, it is
important that you read the footnotes set forth below the financial data. You
should also read the historical financial statements and accompanying notes that
HSNi has included in its Annual Report on Form 10-K for the year ended December
31, 1996 and its Quarterly Report on Form 10-Q for the nine months ended
September 30, 1997 (you can obtain these reports by following the instructions
we provide in this Proxy Statement under "Where You Can Find More Information"
on page 95).
It is also important that you read the unaudited pro forma combined
financial information and accompanying notes that we have included in this Proxy
Statement under "Financial and Business Information -- Unaudited Pro Forma
Combined Condensed Financial Statements" on page 61 and the supplemental
unaudited pro forma combined condensed financial statements of HSNi included in
Appendix J to this Proxy Statement.
<TABLE>
<CAPTION>
NINE MONTHS NINE MONTHS FOUR MONTHS
SUMMARY CONSOLIDATED ENDED ENDED YEAR ENDED ENDED YEARS ENDED AUGUST 31,
STATEMENTS OF OPERATIONS SEPTEMBER 30, SEPTEMBER 30, DECEMBER 31, DECEMBER 31, -----------------------------------------
DATA 1997(1) 1996 1996(2) 1995 1995 1994 1993 1992
- ------------------------ ------------- ------------- ------------ ------------ -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenue............. $ 871,493 $ 33,249 $ 75,172 $ 15,980 $ 47,918 $ 46,563 $ 46,136 $ 46,729
Earnings (loss) before
cumulative effect of
change in accounting
principle(3).......... 9,758 (1,429) (6,539) (2,882) 115 (899) (6,386) (15,222)
Net earnings
(loss)(4)............. 9,758 (1,429) (6,539) (2,882) 115 (3,878) (6,386) (15,222)
Earnings (loss) per
common share:
Earnings (loss) before
cumulative effect of
change in accounting
principle(5).......... .18 (.15) (.61) (.31) .01 (.10) (.72) --
Net earnings
(loss)(5)............. .18 (.15) (.61) (.31) .01 (.44) (.72) --
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31, AUGUST 31,
SUMMARY CONSOLIDATED ----------------------------- --------------------------- -----------------------------------------
BALANCE SHEET DATA 1997(1) 1996 1996(2) 1995 1995 1994 1993 1992
- ------------------------ ------------- ------------- ------------ ------------ -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Working capital
(deficit)............. $ 56,189 $ 4,160 $ (24,444) $ 7,553 $ 6,042 $ 1,553 $ 4,423 $ (594)
Total assets............ 2,637,305 122,674 2,116,232 136,670 142,917 145,488 153,718 153,491
Long-term obligations... 428,754 83,922 271,430 95,980 97,937 114,525 128,210 185
Stockholders' equity
(deficit)............. 1,441,538 8,162 1,158,749 7,471 9,278 2,614 6,396 (87,064)
</TABLE>
- ---------------
(1) Includes 75 days of Ticketmaster Group, Inc.'s results of operations. The
acquisition by HSNi of its interest in Ticketmaster occurred on July 17,
1997.
(2) As a result of the mergers with Savoy and Home Shopping, the results of
operations for the year ended December 31, 1996 include HSNi for the full
year and 11 and 12 days of Home Shopping Network, Inc. and Savoy Pictures
Entertainment, Inc., respectively. The balance sheet reflects purchase
accounting adjustments for the consolidated entity. Performance bonus
commissions of $3.4 million were not paid to HSNi by Home Shopping for 1996
as a result of the merger with Home Shopping.
(3) In fiscal 1994, HSNi adopted Statement of Financial Accounting Standards No.
109, "Accounting for Income Taxes." The cumulative effect of the accounting
change resulted in a charge of approximately $3.0 million. Prior years'
financial statements were not restated.
(4) Beginning in fiscal 1992, the 12 independent full power UHF television
stations owned and operated by HSNi and its subsidiaries (before the
mergers) (the SKTV STATIONS) were charged interest based on the historical
cost of the SKTV Stations to HSNi and Home Shopping's then cost of long-term
borrowings. In fiscal 1993, the SKTV Stations were charged interest expense
on the note payable to HSN Capital Corporation (HSNCC), a wholly-owned
subsidiary of Home Shopping, at a rate of 9.5% per annum. In fiscal 1994,
HSNi paid interest to HSNCC until August 1, 1994 when HSNi repaid the
long-term obligation to HSNCC.
(5) Net earnings (loss) per share for the year ended December 31, 1996, for the
four months ended December 31, 1995 and for the years ended August 31, 1995,
1994 and 1993 have been computed based upon the weighted average shares
outstanding of 10,785,743; 9,394,696; 9,144,772; 8,881,380; and 8,851,339,
respectively. Loss per share for fiscal year 1992 has been omitted due to
lack of comparability.
SUMMARY
6
<PAGE> 19
SELECTED HISTORICAL FINANCIAL DATA OF USAN
(INCLUDING SCI-FI EUROPE)
(in thousands)
In the table below, we provide you with selected historical combined
financial data of USAN (including Sci-Fi Europe). We prepared this data using
the combined financial statements of USA Networks (including Sci-Fi Europe).
When you read this selected historical combined financial data, it is important
that you read along with it the combined financial statements of USA Networks
(including Sci-Fi Europe) and accompanying notes, which we attached as Appendix
H to this Proxy Statement.
It is also important that you read the unaudited pro forma combined
financial information and accompanying notes that we have included in this Proxy
Statement under "Financial and Business Information -- Unaudited Pro Forma
Combined Condensed Financial Statements" on page 61.
<TABLE>
<CAPTION>
FOR THE
NINE MONTHS FOR THE
SUMMARY COMBINED ENDED SEPTEMBER 30, YEAR ENDED DECEMBER 31,
STATEMENT OF -------------------- --------------------------------------------------------
OPERATIONS DATA 1997 1996 1996 1995 1994 1993(1) 1992
- ---------------------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues.............. $553,292 $497,245 $666,472 $569,981 $457,771 $390,768 $367,948
Operating income
(loss).............. 96,363 108,966 147,392 137,809 64,618 (21,910) 77,472
Net income (loss)..... 94,362 107,182 145,558 135,637 64,901 (21,910) 75,138
</TABLE>
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, AS OF DECEMBER 31,
SUMMARY COMBINED -------------------- --------------------------------------------------------
BALANCE SHEET DATA 1997 1996 1996 1995 1994 1993 1992
- ---------------------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Working capital....... $ 69,874 $ 82,273 $ 69,834 $ 72,300 $ 77,757 $ 71,062 $ 67,203
Total assets.......... 598,863 555,703 555,945 525,859 536,983 524,540 428,666
Partners' equity...... 147,984 143,671 149,754 117,491 114,453 121,552 170,462
</TABLE>
- ---------------
(1) The operating loss and net loss were due to significant program inventory
write-downs.
SUMMARY
7
<PAGE> 20
SELECTED HISTORICAL FINANCIAL DATA OF UNIVERSAL TELEVISION GROUP
(in thousands)
In the table below, we provide you with selected historical combined
financial data of the domestic and international television business of
Universal (UNIVERSAL TELEVISION GROUP). We prepared this data using the combined
financial statements of Universal Television Group. When you read this selected
historical combined financial data, it is important that you read the footnotes
set forth below the financial data. You should also read the combined financial
statements of Universal Television Group and accompanying notes, which we
attached as Appendix I to this Proxy Statement.
When you read the following selected historical financial data, you should
also be aware that the selected historical financial data for the period July 1,
1994 to June 4, 1995 and the fiscal years ended June 30, 1994 and 1993 are
presented on a different cost basis than the selected historical financial data
for the fiscal years ended June 30, 1997 and 1996. The selected historical
financial data for the fiscal years ended June 30, 1997 and 1996 are presented
on a basis incorporating purchase accounting as a result of Seagram's
acquisition of an 80% interest in Universal on June 5, 1995. As a result, the
selected historical financial data for the period July 1, 1994 to June 4, 1995
and the fiscal years ended June 30, 1994 and June 30, 1993 are not comparable to
the selected historical financial data presented for the fiscal years ending
June 30, 1997 and 1996 and the three month periods ended September 30, 1997 and
1996.
It is also important that you read the unaudited pro forma combined
financial information and accompanying notes that we have included in this Proxy
Statement under "Financial and Business Information -- Unaudited Pro Forma
Combined Condensed Financial Statements" on page 61.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C>
FOR THE
THREE MONTHS FOR THE FOR THE PERIOD FOR THE
SUMMARY COMBINED ENDED SEPTEMBER 30, YEAR ENDED JUNE 30, JULY 1, 1994 YEAR ENDED JUNE 30,
STATEMENT OF ------------------------ ------------------------ TO JUNE 4, --------------------------------
OPERATIONS DATA 1997 1996 1997 1996 1995(1) 1994 1993
- -------------------- ---------- ---------- ---------- ---------- -------------- -------------- --------------
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues............ $ 172,710 $ 168,113 $ 684,340 $ 735,148 $ 710,596 $ 635,123 $ 494,490
Operating income
(loss)............ 15,574 30,859 23,815 86,602 (54,141) 27,112 (8,043)
Net income
(loss)(2)......... 12,885 23,660 38,737 78,492 (5,976) 1,584 4,404
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C>
AS OF SEPTEMBER 30, AS OF JUNE 30, AS OF JUNE 30,
SUMMARY COMBINED ------------------------ ------------------------ AS OF JUNE 4, --------------------------------
BALANCE SHEET DATA 1997 1996 1997 1996 1995 1994 1993
- -------------------- ---------- ---------- ---------- ---------- -------------- -------------- --------------
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C>
Working capital..... $ 189,823 $ 200,893 $ 155,930 $ 190,512 $ 301,206 $ 303,007 $ 246,971
Total assets(2)..... 1,722,513 1,691,844 1,699,518 1,641,431 1,592,496 1,614,198 1,638,381
Universal equity
investment(2)..... 1,350,594 1,334,861 1,330,825 1,308,564 1,070,678 1,119,033 1,143,501
</TABLE>
- ---------------
(1) The results for the 25 day period from June 5, 1995 to June 30, 1995 are
summarized below:
<TABLE>
<S> <C>
Revenues........................................................... $23,044
Operating income................................................... 3,865
Net income......................................................... 5,465
</TABLE>
(2) These operating results include 50% of the operations of USAN (including
Sci-Fi Europe) accounted for on the equity method, because the Universal
Television Group held Universal's assets and equity investment in these
businesses.
SUMMARY
8
<PAGE> 21
SELECTED PRO FORMA FINANCIAL DATA OF HSNi
(in thousands, except per share data)
(unaudited)
In the table below, we attempt to illustrate the financial results that
might have occurred if the transaction had been completed previously. Presented
is combined statement of operations information for HSNi for the nine months
ended September 30, 1997 and the fiscal year ended December 31, 1996 as if the
transaction had been completed on January 1, 1996. Also presented is combined
balance sheet information for HSNi as of September 30, 1997 as if the
transaction had been completed on September 30, 1997.
It is important to remember that this information is hypothetical, and does
not necessarily reflect the financial performance that would have actually
resulted if the transaction had been completed on those dates. It is also
important to remember that this information does not necessarily reflect future
financial performance if the transaction actually occurs.
Please see "Financial and Business Information -- Unaudited Pro Forma
Combined Condensed Financial Statements" on page 61 of this Proxy Statement for
a more detailed explanation of this analysis.
<TABLE>
<CAPTION>
NINE MONTHS
ENDED YEAR ENDED
SEPTEMBER 30, 1997 DECEMBER 31, 1996
------------------ -----------------
<S> <C> <C>
SUMMARY PRO FORMA COMBINED
STATEMENT OF OPERATIONS DATA(1)
------------------------------
Net revenues.............................................. $2,052,304 $ 2,620,863
Operating income.......................................... 129,243 118,153
Net loss.................................................. (19,842) (45,068)
Net loss per share........................................ (.31) (.69)
SUMMARY PRO FORMA COMBINED
BALANCE SHEET DATA
-----------------------------
Working capital........................................... $ 222,427
Total assets.............................................. 7,321,747
Long-term obligations(2).................................. 1,763,754
Minority interest......................................... 2,898,828
Stockholders' equity...................................... 1,743,691
</TABLE>
- ---------------
(1) Equivalent pro forma per share data has not been included because it is not
applicable to this transaction.
(2) See "The Transaction -- Description of the Transaction -- Financing of the
Transaction."
SUMMARY
9
<PAGE> 22
10
<PAGE> 23
SPECIAL CONSIDERATIONS
Each HSNi stockholder should carefully consider and evaluate the following
factors, among others, before voting.
DEPENDENCE ON CERTAIN KEY PERSONNEL
HSN, Inc. ("HSNi") is dependent upon the continued contributions of its
senior corporate management, particularly Barry Diller, and certain key
employees for its future success. Mr. Diller is the Chairman of the Board and
Chief Executive Officer of HSNi. Mr. Diller does not have an employment
agreement with HSNi and does not receive a salary from HSNi, although he has
been granted options to purchase a substantial number of shares of common stock,
par value $.01 per share, of HSNi ("HSNi COMMON STOCK") and the vesting of such
options is to occur over the next several years, subject to acceleration in
certain specified circumstances. See "The Annual Meeting -- Directors and
Executive Officers of HSNi -- Compensation of Directors and Certain Executive
Officers of HSNi." Except in certain circumstances, such vesting is conditioned
upon Mr. Diller remaining at HSNi.
If Mr. Diller no longer served in his positions at HSNi, the business of
HSNi, as well as the market price of HSNi Common Stock, could be substantially
adversely affected. In addition, under the terms of a governance agreement,
dated as of October 19, 1997, among Universal Studios, Inc. ("UNIVERSAL"), HSNi,
Mr. Diller and Liberty Media Corporation ("LIBERTY") (the "GOVERNANCE
AGREEMENT"), if Mr. Diller no longer serves as Chief Executive Officer of HSNi,
certain restrictions on Universal's conduct will be eliminated, and Universal's
ability to acquire in excess of its post-Transaction HSNi equity interest will
be accelerated. See "The Transaction -- Description of the Transaction --
Related Agreements -- Governance Agreement." Due to current regulatory
restrictions of the Federal Communications Commission (the "FCC") on foreign
ownership and on the ability of Liberty and Universal to exercise voting control
over entities that hold broadcast licenses, in the event that Mr. Diller were no
longer Chief Executive Officer of HSNi, became disabled or otherwise no longer
exercised control over HSNi, HSNi would be required either to divest itself of
its broadcast licenses so that Universal and Liberty could exercise control over
HSNi or otherwise enter into arrangements relating to the control of HSNi in
compliance with FCC law. See "The Transaction -- Description of the Transaction
- -- Related Agreements -- Spinoff Agreement." There can be no assurance that HSNi
will be able to retain the services of Mr. Diller or any other members of senior
management or key employees of HSNi.
CONTROLLING STOCKHOLDERS
Mr. Diller, through entities he controls, currently beneficially owns or
has the right to vote a sufficient number of shares of Class B common stock, par
value $.01 per share, of HSNi ("HSNi CLASS B COMMON STOCK") to control the
outcome of any matter submitted to a vote or for the consent of stockholders of
HSNi with respect to which holders of HSNi Common Stock and HSNi Class B Common
Stock vote together as a single class. Assuming consummation of the Transaction
(as hereinafter defined) (but without giving effect to the issuance of any HSNi
securities upon exercise of options held by Mr. Diller or upon exchange of
shares of the LLC ("LLC SHARES") or outstanding Additional Liberty Shares (as
hereinafter defined)), Mr. Diller will own or have the right to vote
approximately 9% of the then-outstanding HSNi Common Stock, 97% of the
outstanding HSNi Class B Common Stock and 77% of the outstanding total voting
power of the HSNi Common Stock and HSNi Class B Common Stock. Mr. Diller,
subject to the terms of a stockholders agreement, dated as of October 19, 1997,
among Universal, Liberty, Mr. Diller, HSNi and The Seagram Company Ltd.
("SEAGRAM") (the "STOCKHOLDERS AGREEMENT"), will effectively be able to control
the outcome of all matters submitted to a vote or for the consent of HSNi
stockholders (other than with respect to the election by the holders of HSNi
Common Stock of 25% of the members of the Board of Directors of HSNi ("HSNi
BOARD") (rounded up to the nearest whole number) and certain matters as to which
a separate class vote of the holders of HSNi Common Stock is required under the
Delaware General Corporation Law (the "DGCL")). See "The Transaction -- Related
Agreements -- Stockholders Agreement."
SPECIAL CONSIDERATIONS
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Pursuant to the Stockholders Agreement, Mr. Diller, Universal and Liberty
have agreed that HSNi securities owned by any of Mr. Diller, Universal, Liberty
and certain of their affiliates will not be voted in favor of the taking of any
action with respect to certain fundamental changes relating to HSNi, except with
the consent of each of Mr. Diller, Universal and Liberty. Accordingly, in
respect of such matters, each of Mr. Diller and Liberty currently has and, upon
consummation of the Transaction, Mr. Diller, Universal and Liberty each will
have the ability to veto, in his or its sole discretion, the taking of any
action with respect to these actions. In addition, there can be no assurance
that Mr. Diller, Universal and Liberty will be able to agree in the future with
respect to any such transaction or action, in which case HSNi would not be able
to engage in such transaction or take such action, provided that, under the
terms of the Stockholders Agreement, if Mr. Diller and Universal agree to
certain fundamental changes that Liberty does not agree to, subject to certain
conditions, Universal will be entitled to purchase Liberty's entire HSNi equity
interest, and HSNi would then be able to engage in such transaction or take such
action.
In addition to the specific requirements of the Stockholders Agreement, the
existence of a controlling stockholder of HSNi may have the effect of making it
more difficult for a third party to acquire, or of discouraging a third party
from seeking to acquire, a majority of the outstanding HSNi securities. A third
party would be required to negotiate any such transaction with Mr. Diller,
Universal and Liberty and the interests of any one or more of such persons as
stockholders may be different from the interests of other HSNi stockholders.
Upon Mr. Diller's permanent departure from HSNi, HSNi may change in various
fundamental respects. For example, generally, Universal would be able to control
the LLC and also would have the ability to seek to cause a spinoff or other
disposition of HSNi's broadcast businesses, after which Universal could directly
control HSNi. In addition, Universal and Liberty have certain agreements
relating to the management and governance of HSNi, as well as the voting and
disposition of their shares of HSNi stock and the stock of the regulated
businesses that are spun off (including preemptive rights). HSNi has generally
agreed to use its reasonable best efforts to implement the arrangements agreed
to by Universal and Liberty. In the case of Universal or Liberty selecting the
manager of the LLC, these actions could, depending on the circumstances, result
in deconsolidation for financial accounting purposes of the results of
operations of the LLC from those of HSNi. These arrangements could have a
material impact on the voting and other rights of HSNi's public stockholders and
could adversely affect the market price of HSNi's common stock. See "The
Transaction -- Description of the Transaction -- Related Agreements -- Spinoff
Agreement" and Appendix D.
DILUTION TO HSNi STOCKHOLDERS
The Transaction will have both immediate and future effects on the voting
and equity interests of HSNi's public stockholders. Immediately following
consummation of the Transaction, HSNi's public stockholders, which today own 78%
of the outstanding HSNi equity and 29% of the outstanding voting power, will
have a 69% equity interest and a 23% voting interest. In addition, if the
Communications Act of 1934, as amended (the "COMMUNICATIONS ACT"), were amended
to eliminate or loosen the restriction on foreign ownership of the stock of
FCC-regulated companies such as HSNi (or HSNi were no longer to own
FCC-regulated businesses such as broadcast stations), Universal could convert
its LLC Shares for shares of HSNi stock that could represent up to 67% of the
HSNi voting power. (See "The Annual Meeting -- Description of Proposals and HSNi
Board Recommendations -- Ownership Proposal" for more discussion of FCC
requirements relating to foreign ownership.) Taking into account the LLC Shares
to be issued to Universal and Liberty, each of which effectively represents one
share of HSNi stock, and the shares of HSNi's stock outstanding today, the
Transaction results in HSNi's public stockholders holding a 33% equity interest
in HSNi.
INTEGRATION OF OPERATIONS; MANAGEMENT OF GROWTH
The integration of the operations of HSNi, USAN and UTV following the
Transaction will require the dedication of management resources, which will
temporarily detract attention from the day-to-day business of the combined
company. The difficulties of assimilation may be increased by the necessity of
coordinating geographically separated organizations, integrating personnel with
disparate business backgrounds and
SPECIAL CONSIDERATIONS
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combining different corporate cultures. The process of combining the
organizations may cause an interruption of, or a loss of momentum in, the
activities of any or all of the companies' businesses, which could have an
adverse effect on the revenues and operating results of the combined company, at
least in the near term. There can be no assurance that the combined entity will
be able to retain its key technical and management personnel or that the
combined entity will realize any of the other anticipated benefits of the
Transaction.
COMPETITION
The markets for HSNi's, USAN's and UTV's products and services are
intensely and increasingly competitive. Certain competitors of HSNi, USAN and
UTV have greater financial, technical, marketing, sales and customer support
resources than HSNi, USAN and UTV. In addition to competitors in the electronic
retailing industry, HSNi must compete with store and catalogue retailers and its
business, financial condition and results of operations can be adversely
affected by changes in the general retailing industry. HSNi also competes for
distribution of its programming with other cable programmers, many of whom have
substantially greater resources. There can be no assurance that the combined
company will compete successfully in the future. HSNi, USAN and UTV expect that
the environment of increased competition may place significant strain on the
marketing, technological and financial resources of HSNi, USAN and UTV, possibly
affecting the combined company.
SPECIAL CONSIDERATIONS
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14
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THE TRANSACTION
BACKGROUND
BACKGROUND OF THE TRANSACTION
HSNi regularly evaluates strategic opportunities, including business
combinations with other companies, that could complement and strengthen its
communications business. Since Mr. Diller became Chairman of the Board and Chief
Executive Officer of HSNi in August 1995, HSNi has evaluated growth strategies,
including growth through internal development, acquisitions and strategic
investments. Mr. Diller and Edgar Bronfman, Jr., President and Chief Executive
Officer of Seagram, over the years have discussed in general the entertainment
industry. Beginning in the late spring of 1997 and from time to time thereafter,
Mr. Diller and Mr. Bronfman discussed generally the possible combination of HSNi
with USAN and UTV (collectively, the "ACQUIRED BUSINESSES"). These conversations
were an outgrowth of the publicity at that time about the litigation involving
USAN between Universal and Viacom Inc.
Beginning in the summer of 1997, Mr. Diller and, shortly thereafter, Mr.
Kaufman and HSNi's financial and legal advisors held discussions and meetings
with senior officers of Seagram and Universal, as well as their financial and
legal advisors, regarding the financial, operating and business condition of
each of the Acquired Businesses and the terms of a possible acquisition by HSNi
of the Acquired Businesses. During the course of these discussions, Mr. Diller
discussed the possibility of a transaction with Universal with the senior
officers of Liberty. The terms of the proposed Universal transaction and Liberty
transaction (together, the "TRANSACTION") were determined pursuant to
discussions among senior officers of Seagram, HSNi and Liberty.
During the course of the foregoing discussions and negotiations, the
parties and their financial and legal advisors expressed substantial concern
that premature disclosure regarding the Transaction could adversely impact the
ability of the parties to reach agreement on the terms and conditions, or to
consummate, the Transaction. As a result, the negotiation group was limited to
the key officers and executives of each of HSNi, Seagram, Universal and Liberty,
and their respective advisors.
In addition, during this period, HSNi's financial advisor, Allen & Company
Incorporated ("ALLEN & COMPANY"), and Seagram's financial advisor, Goldman,
Sachs & Co. ("GOLDMAN, SACHS"), each conducted certain financial due diligence
regarding the Acquired Businesses and HSNi, respectively. Neither firm provided
an appraisal of the Acquired Businesses nor made any recommendation about the
amount or form of the consideration for the Transaction.
At a special informational meeting of the HSNi Board held on Friday,
October 17, 1997, Mr. Diller, together with HSNi's advisors, informed the HSNi
Board about the status of the ongoing discussions with Universal and Liberty and
the terms of the proposed Transaction.
During the period of October 17-19, 1997, the parties and their advisors
conducted extensive discussions and negotiations to finalize the terms of each
of the Investment Agreement, dated as of October 19, 1997, among Universal,
HSNi, Home Shopping Network, Inc. ("HOME SHOPPING") and Liberty (as amended and
restated as of December 18, 1997, the "INVESTMENT AGREEMENT"), and the
agreements attached as exhibits to the Investment Agreement, including the
Governance Agreement, and the parties likewise negotiated the terms of the
Stockholders Agreement.
Over the course of the same weekend, Messrs. Diller and Kaufman,
representatives from Allen & Company and special outside legal counsel to HSNi
held discussions with members of the HSNi Board and provided them with oral and
written information regarding the proposed Transaction. A special meeting of the
HSNi Board was held on the afternoon of Sunday, October 19, 1997.
At the October 19 special meeting of the HSNi Board, HSNi management
reported to the HSNi Board on the course of negotiations relating to the
proposed Transaction, reported results of the due diligence that had been
conducted to date on each of USAN and UTV, discussed with the other directors
the potential benefits and risks of the proposed Transaction and their view of
the business and financial condition of each of the Acquired Businesses, and
responded to questions from the directors. Allen & Company discussed various
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analyses relating to the proposed Transaction and responded to questions from
the directors regarding the manner and conclusion of its analyses. At the HSNi
Board meeting, the HSNi Board received an oral opinion of Allen & Company that,
as of such date, the terms of the Transaction were fair, from a financial point
of view, to HSNi. See "-- Opinion of Allen & Company Incorporated." Thereafter,
the HSNi Board received the written opinion of Allen & Company confirming their
oral opinion at the HSNi Board meeting. In addition, at the October 19 special
meeting, special outside counsel to HSNi reviewed with the HSNi Board the
principal terms and conditions of each of the transaction documents, including
the Investment Agreement and the Governance Agreement and, in connection
therewith, the Stockholders Agreement (collectively, the "TRANSACTION
AGREEMENTS"), as well as tax, regulatory and other legal matters relating to the
Transaction. The HSNi Board approved each of the Transaction Agreements, subject
to finalization by HSNi's management and advisors of the necessary
documentation.
In addition, at a meeting of the Compensation/Benefits Committee of the
HSNi Board (the "COMPENSATION/BENEFITS COMMITTEE") on October 19, 1997, the
Compensation/Benefits Committee approved HSNi's 1997 Stock and Annual Incentive
Plan (the "1997 INCENTIVE PLAN") and recommended that the HSNi Board and HSNi
stockholders approve such plan. Pursuant thereto and in connection with the
Transaction, the Compensation/Benefits Committee granted Mr. Diller options to
purchase 4,750,000 shares of HSNi Common Stock and granted Mr. Kaufman options
to purchase 250,000 shares of HSNi Common Stock, in each case, at an exercise
price of $38.625 per share, and subject to stockholder approval of the 1997
Incentive Plan. The HSNi Board also approved, and recommended stockholder
approval of, the 1997 Incentive Plan. See "The Annual Meeting -- Description of
Proposals and HSNi Board Recommendations -- 1997 Incentive Plan Proposal."
During October 1997, senior management of Seagram and Universal provided
the members of the Board of Directors of Seagram (the "SEAGRAM BOARD") with
information on the status of the discussions and negotiations with HSNi and due
diligence on HSNi. A special meeting of the Seagram Board was held on Sunday,
October 19, 1997. Prior to the special meeting, each director was provided with
materials outlining and analyzing the proposed Transaction. At the meeting of
the Seagram Board, Seagram and Universal senior management presented to the
Seagram Board the background of the proposed Transaction, the outline of the
terms and conditions of the proposed Transaction, a strategic and financial
analysis of the proposed Transaction, results of the due diligence that had been
conducted on each of HSNi's businesses, governance issues, the potential
benefits and risks of the proposed Transaction and legal issues. Seagram and
Universal senior management also responded to questions from directors. The
Seagram Board approved the Investment Agreement and related documentation
subject to finalization by Seagram's management and its legal advisors of the
necessary documentation.
Upon conclusion of the foregoing, the respective parties entered into the
Transaction Agreements. On October 20, 1997, HSNi and Universal issued a joint
press release announcing the Transaction.
Throughout the remainder of October 1997 and continuing through
mid-December, the parties discussed revised terms of a possible Liberty
contribution. On December 18, 1997, the parties negotiated and entered into the
amended and restated Investment Agreement setting forth the revised terms and
conditions of Liberty's contribution to HSNi. See "Description of the
Transaction -- Investment Agreement -- Consideration to be Paid in the
Transaction -- Liberty." The parties also negotiated the terms of the other
agreements contemplated by the Investment Agreement.
Throughout the remainder of October 1997 and continuing through the date of
this Proxy Statement, HSNi, Seagram, and Universal continued to meet to exchange
information and to prepare for the anticipated consummation of the Transaction.
REASONS FOR THE TRANSACTION
In reaching its determination to approve the Investment Agreement, the
Transaction and related transactions, the HSNi Board has identified the
following potential benefits of the Transaction that it believes will contribute
to the success of the combined company:
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- Leader in Cable Programming Business. As a result of the Transaction,
HSNi will become one of the largest cable programming companies.
- Integrated Production and Distribution Platform. HSNi believes that the
combination of USAN and UTV will represent an integrated platform under
which UTV can originate and sell programming content to USAN and USAN
will provide an important distribution outlet for UTV programming.
- Enhanced Cable Assets. HSNi believes that the Transaction will enhance
HSNi's other cable assets, including the Home Shopping Network, by
increasing cross-promotion opportunities and providing HSNi with
potential economies of scale in program acquisition, affiliate marketing
and advertising sales areas.
- Increased Branding Opportunities. HSNi believes that the Transaction
will create opportunities to increase branding through cross-promotions
within HSNi's cable assets or through a potential strategic alliance with
another partner.
- Role of Mr. Diller. The HSNi Board believes that the roles of Mr. Diller
as Chairman of the Board, Chief Executive Officer and controlling
stockholder of HSNi have been, and will continue to be, of substantial
benefit to the evolving business strategies of HSNi, USAN, UTV and the
combined company.
- Enhanced Operating and Financial Base. HSNi believes that the
Transaction will enhance HSNi's operating and financial base by
substantially increasing HSNi's revenues. The Transaction will increase
HSNi's capital base and should enable it to be better positioned for
future growth through internal growth and possible future acquisitions.
HSNi believes that both USAN and UTV offer substantial management talent,
particularly in its most senior executive officers, which will assist
HSNi in accelerating its growth and development.
In the course of its deliberations, the HSNi Board reviewed and considered
a number of other factors relevant to the proposed Transaction with HSNi's
management. In particular, the HSNi Board considered, among other things:
(i) information concerning HSNi's and the Acquired Businesses'
respective prospects, financial performance, financial condition, assets
and operations;
(ii) management's belief that, due to the nature of its divided
ownership, USAN had not been fully utilized as a strategic asset;
(iii) with the assistance of Allen & Company, premiums to market price
and multiples paid in other merger and acquisition transactions in the
communications, media, entertainment and other industries;
(iv) with the assistance of Allen & Company, an analysis of the
respective contributions to revenues, operating profits and net profits of
the combined companies;
(v) alternatives for growth in the television station ownership and
operation business, including internal development, which the HSNi Board
viewed as less advantageous due to HSNi's limited development resources as
well as the uncertainty of the success of such development efforts, none of
which presented the opportunity that an acquisition of the Acquired
Businesses presented;
(vi) a presentation by Allen & Company, including the opinion of Allen
& Company that the terms of the Transaction are fair, from a financial
point of view, to HSNi, as well as the underlying financial analysis of
Allen & Company presented in connection therewith;
(vii) USAN's cable network presence, which the HSNi Board believed
would enhance HSNi's competitive position;
(viii) the expectation that the Transaction would not require the
approval of the FCC;
(ix) the expectation that the Transaction would be accounted for as a
purchase for financial reporting purposes and would be tax free to HSNi for
U.S. federal income tax purposes; and
THE TRANSACTION
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(x) a review with HSNi's special outside legal counsel of the terms of
the Investment Agreement, and related agreements, including the provisions
limiting the ability of Universal to increase its percentage ownership of
HSNi during the Standstill Period (as hereinafter defined).
In connection with its deliberations concerning the proposed Transaction
and its consideration of the fairness opinion of Allen & Company, the HSNi Board
also considered a variety of specific financial factors, including the
following: (i) the fact that in October 1997 HSNi Common Stock was trading at or
near the high end of its historical trading range; (ii) the expectation that the
Acquired Businesses represented a complementary business and that the
Transaction may be viewed favorably by investors due to such complementary
nature; (iii) the opportunities presented by the current securities market
environment which support the ability to use HSNi Common Stock as an attractive
currency for the Transaction; and (iv) the recognition that high-quality
acquisition and merger opportunities are relatively limited within the
television station ownership and operation industry.
Following its deliberations concerning such factors and its review of the
presentation and fairness opinion of Allen & Company, the HSNi Board concluded
that the Transaction may increase the long-term prospects of the combined
company for continued sales and cash flow growth, may increase stockholder value
and was in the best interests of HSNi and its stockholders from both a financial
and strategic perspective.
The HSNi Board also considered a variety of potentially negative factors in
its deliberations concerning the Transaction, including: (i) the possible
dilutive effect of the issuance of HSNi Common Stock in the Transaction; (ii)
the charges expected to be incurred in connection with the Transaction,
including the transaction costs and costs of integrating the businesses of the
companies; (iii) the risk that, despite the efforts of the combined company, key
technical and management personnel of the Acquired Businesses may not be
retained by the combined company; and (iv) the risk that other benefits sought
to be obtained by the Transaction may not be obtained.
In view of the wide variety of factors, both positive and negative,
considered by the HSNi Board, the HSNi Board did not find it practical to, and
did not, quantify or otherwise assign relative weights to the specific factors
considered. In addition, individual members of the HSNi Board may have given
different weights to the various factors considered.
RECOMMENDATION OF THE HSNi BOARD
THE HSNi BOARD HAS APPROVED THE INVESTMENT AGREEMENT AND THE TRANSACTION BY
THE UNANIMOUS VOTE OF ALL DIRECTORS VOTING AND HAS DETERMINED THAT THE TERMS OF
THE INVESTMENT AGREEMENT AND RELATED AGREEMENTS ARE FAIR TO, AND THAT THE
TRANSACTION IS IN THE BEST INTERESTS OF, HSNi AND ITS STOCKHOLDERS AND,
THEREFORE, RECOMMENDS THAT THE HOLDERS OF HSNi COMMON STOCK AND HSNi CLASS B
COMMON STOCK VOTE FOR THE PROPOSALS RELATING TO THE TRANSACTION. YOUR PROXY WILL
BE SO VOTED UNLESS YOU SPECIFY OTHERWISE.
OPINION OF ALLEN & COMPANY INCORPORATED
In connection with the meeting of the HSNi Board on October 19, 1997, Allen
& Company delivered its oral opinion (subsequently confirmed in writing) to the
effect that, as of such date, the terms of the Transaction are fair, from a
financial point of view, to HSNi.
The full text of the written opinion of Allen & Company, dated October 19,
1997, is attached as Appendix E to this Proxy Statement and describes the
assumptions made, matters considered and limits on the review undertaken. HSNi
stockholders are urged to read the opinion in its entirety. Allen & Company's
opinion is directed to the fairness, from a financial point of view, of the
terms of the Transaction to HSNi and does not constitute a recommendation of the
Transaction over other courses of action that may be available to HSNi or
constitute a recommendation to any holder of HSNi Common Stock or HSNi Class B
Common Stock concerning how such holder should vote with respect to the
Transaction proposal. The summary of the
THE TRANSACTION
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opinion of Allen & Company set forth in this Proxy Statement is qualified in its
entirety by reference to the full text of such opinion.
In arriving at its opinion, Allen & Company (i) reviewed the terms and
conditions of the Transaction, including the Investment Agreement and related
agreements; (ii) analyzed certain financial aspects of the Transaction and
consideration to be paid by HSNi in connection with the Transaction; (iii)
reviewed and analyzed publicly available historical business and financial
information relating to HSNi and Seagram, as presented in documents filed with
the Securities and Exchange Commission (the "SEC"); (iv) analyzed selected
summary non-public financial and operating results of operations of HSNi, USAN
and UTV; (v) analyzed the financial conditions and prospects of HSNi, USAN and
UTV; (vi) reviewed and analyzed public information, including certain stock
market data and financial information relating to selected companies with
operating and financial characteristics similar to those of HSNi, USAN and UTV;
(vii) reviewed the trading history of HSNi Common Stock, including such stock's
performance in comparison to market indices and to selected companies with
operating and financial characteristics similar to those of HSNi; (viii)
conferred with the management teams of each of HSNi, Seagram and Universal; (ix)
reviewed public financial and transaction information relating to multiples paid
in selected merger and acquisition transactions similar to the Transaction or
relevant portions thereof; and (x) conducted such other financial analyses and
investigations as Allen & Company deemed necessary or appropriate for the
purposes of the opinion expressed herein.
In connection with its review, Allen & Company assumed and relied on the
accuracy and completeness of the information it reviewed for the purpose of its
opinion and did not assume any responsibility for independent verification of
such information or for any independent evaluation or appraisal of the assets of
HSNi, USAN or UTV. With respect to HSNi's non-public financial and operating
data, Allen & Company assumed that they had been reasonably prepared on bases
reflecting the best currently available estimates and judgments of the
management of HSNi, and with respect to USAN's and UTV's non-public financial
and operating data, Allen & Company assumed that they had been reasonably
prepared on bases reflecting the best currently available estimates and
judgments of the management of Seagram. Allen & Company expressed no opinion
with respect to such non-public financial and operating data or the assumptions
on which they were based. Allen & Company's opinion was necessarily based upon
business, market, economic and other conditions as they existed on, and could be
evaluated as of, the date of its opinion. Allen & Company's opinion does not
imply any conclusion as to the likely trading range of HSNi Common Stock
following the consummation of the Transaction, which may vary depending on,
among other factors, changes in interest rates, dividend rates, financial and
operating performance of HSNi, market conditions, general economic conditions
and other factors that generally influence the price of securities.
The following is a summary of the presentation made by Allen & Company to
the HSNi Board in connection with the rendering of Allen & Company's fairness
opinion:
TRANSACTION SUMMARY
Prior to delivering its written opinion to the HSNi Board, Allen & Company
reviewed certain information with the HSNi Board relating to HSNi, USAN and UTV,
including the financial terms of the Transaction and the financial analyses
summarized below. Allen & Company also reviewed certain strategic and economic
benefits of the Transaction. Allen & Company also noted that upon consummation
of the Transaction, HSNi would become one of the leading cable programming
companies. Allen & Company commented that the combination of USAN and UTV with
HSNi will represent an integrated production and distribution platform under
which UTV can originate and sell programming content to USAN and HSNi and USAN
and HSNi will provide an important distribution outlet for UTV programming. In
addition, Allen & Company noted that the consummation of the Transaction should
enhance HSNi's other cable assets, including The Home Shopping Network, by
increasing cross-promotion opportunities and providing HSNi with potential
economies in program acquisition, affiliate marketing and advertising sales
areas.
Allen & Company stated that, based upon the separate analyses described
below, it calculated a valuation range for the USAN and UTV assets, including,
for purposes of its analyses, certain international assets
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operated by USAN (the "INTERNATIONAL ASSETS") and certain related potential tax
benefits, of between $3.8 billion and $4.4 billion. Allen & Company also
calculated the implied range of multiples of estimated 1998 earnings before
interest, taxes, depreciation and amortization ("EBITDA") for the USAN and UTV
assets to be 12.5x to 14.4x, after excluding the estimated value of and
projected losses from the International Assets and the estimated value of
certain potential tax benefits. Subject to the assumptions and qualifications
included in its analyses described below, Allen & Company noted that, based upon
an assumed market price of HSNi Common Stock of $40 per share, the consideration
to be paid for the USAN and UTV assets in connection with the Transaction
implied a valuation for such assets of approximately $4.075 billion and a
multiple of estimated 1998 EBITDA of 13.5x, excluding the estimated value of and
projected losses from the International Assets and the estimated value of
certain potential tax benefits.
OVERVIEW AND VALUATION OF USAN
Allen & Company presented an overview of USAN's business and the current
cable programming environment. Allen & Company noted that USAN represented one
of the premier cable network assets and summarized the business of its three
component parts: USA Network, Sci-Fi Channel and the International Assets, as
well as the estimated value of related potential tax benefits. Allen & Company
stated that, based upon its valuation methodologies summarized below, it arrived
at an estimated value range for USAN, including the International Assets and the
potential tax benefits, of between approximately $3.5 billion and $4.0 billion.
Allen & Company proceeded to explain how it arrived at such valuation range by
examining each of USAN's three major component businesses.
USA NETWORK
Allen & Company presented an overview of USA Network's business, noting
that it had 72.6 million subscribers as of September 1997 and penetration in
over 98% of all cable homes in the United States. Allen & Company reviewed with
the HSNi Board USA Network's subscriber growth versus overall cable growth for
the period beginning 1988 through 1997 and USA Network's historical cash flow
margins compared to other major cable networks for the period 1988 through 1996.
Allen & Company also reviewed certain of USA Network's historical and projected
operating results for the fiscal years 1994 through 2006.
As part of its analysis of USA Network, Allen & Company performed a
discounted cash flow analysis using projections provided by Seagram's and
Universal's management in order to derive an implied present value of USA
Network. The discounted cash flow valuation of USA Network was determined by
adding (i) the present value of projected unleveraged after-tax free cash flow
of USA Network over the period from 1998 through 2006 and (ii) the present value
of USA Network's terminal value in the year 2006. The range of terminal values
was calculated by applying a range of multiples (from 13.0x to 14.0x) to USA
Network's projected 2006 EBITDA. The cash flows and terminal values of USA
Network were discounted to present value using a range of discount rates (from
10.0% to 11.0%) chosen to reflect various assumptions regarding estimated costs
of capital. Based upon this analysis, Allen & Company calculated an estimated
value for USA Network at between $2.5 billion and $2.8 billion, which
represented an implied value per subscriber of $34.19 to $38.41 and an implied
multiple of estimated 1998 EBITDA of between 13.9x and 15.6x.
Allen & Company also derived an implied valuation for USA Network based
upon the range of multiples of projected 1998 EBITDA and value per subscriber
for a selected number of transactions for the control of major programming
services deemed to be comparable to USA Network by Allen & Company ("SELECTED
USA INDUSTRY TRANSACTIONS"). Allen & Company noted that a range of multiples of
projected one-year forward EBITDA of 12.5x to 17.1x and a range of value per
subscriber of $8.48 to $70.48 were found for the Selected USA Industry
Transactions. Based upon an extrapolation of this analysis, Allen & Company
calculated the estimated value for USA Network at between $2.3 billion and $2.9
billion, which represented an implied range of multiples of projected 1998
EBITDA of 13.0x to 16.2x and an implied range of value per subscriber of $33.65
to $40.00. Allen & Company stated that, based upon its analyses of discounted
cash flows, implied values per subscriber and multiples of projected 1998
EBITDA, the range of value for USA Network was approximately $2.4 billion to
$2.7 billion.
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SCI-FI CHANNEL
Allen & Company presented an overview of Sci-Fi Channel's business, noting
that it had 45.8 million subscribers as of September 1997 and was one of the
fastest growing basic cable programming channels. Allen & Company reviewed with
the HSNi Board Sci-Fi Channel's subscriber growth versus overall cable growth
for the period beginning 1992 through 1997 and Sci-Fi Channel's historical and
projected operating results for the fiscal years 1994 through 2006.
As part of its analysis of Sci-Fi Channel, Allen & Company performed a
discounted cash flow analysis using projections provided by Seagram's and
Universal's management in order to derive an implied present value of Sci-Fi
Channel. The discounted cash flow valuation of Sci-Fi Channel was determined by
adding (i) the present value of projected unlevered after-tax free cash flow of
Sci-Fi Channel over the period from 1998 through 2006 and (ii) the present value
of Sci-Fi Channel's terminal value in the year 2006. The range of terminal
values was calculated by applying a range of multiples (from 13.0x to 14.0x) to
Sci-Fi Channel's projected 2006 EBITDA. The cash flows and terminal values of
Sci-Fi Channel were discounted to present value using a range of discount rates
(from 13.0% to 15.0%) chosen to reflect various assumptions regarding estimated
costs of capital. Based upon this analysis, Allen & Company calculated an
estimated value for Sci-Fi Channel at between $626 million and $749 million,
which represented an implied value per subscriber of $13.68 to $16.36 and an
implied multiple of estimated 1998 EBITDA of between 23.4x and 28.0x.
Allen & Company also derived an implied valuation for Sci-Fi Channel based
upon the range of the value per subscriber for a selected number of transactions
for niche programming services deemed to be comparable by Allen & Company to
Sci-Fi Channel ("SELECTED SCI-FI INDUSTRY TRANSACTIONS"). Allen & Company noted
a range of value per subscriber of $8.64 to $39.87 was found for the Selected
Sci-Fi Industry Transactions. An extrapolation of this analysis resulted in an
estimated value for Sci-Fi Channel of between $733 million and $824 million,
which represented an implied range of value per subscriber of $16.00 to $18.00.
Allen & Company stated that based upon its analyses of discounted cash flows and
implied values per subscriber, the range of value for Sci-Fi Channel was
approximately $700 million to $800 million.
INTERNATIONAL ASSETS
Allen & Company presented an overview of the International Assets operated
by USAN. Allen & Company noted that the information provided to it regarding the
International Assets was not sufficient to derive an accurate valuation of such
assets and that neither historical nor projected revenues had been provided for
the International Assets by management of Seagram and Universal. Consequently,
in its analysis of the International Assets, Allen & Company performed only a
discounted cash flow analysis in order to derive an implied present value of the
50% of the International Assets being contributed to the venture as part of the
Transaction. The discounted cash flow valuation of the International Assets was
determined by adding (i) the present value of projected unlevered after-tax free
cash flow of the International Assets over the period from 1998 through 2006 and
(ii) the present value of the International Assets's terminal value in the year
2006. The range of terminal values was calculated by applying a range of
multiples (from 12.0x to 14.0x) to the International Assets's projected 2006
EBITDA. The cash flows and terminal values of the International Assets were
discounted to present value using different discount rates (from 35.0% to 45.0%)
chosen to reflect the highly speculative nature of the information available to
Allen & Company. Based upon this analysis, Allen & Company calculated an
estimated value for 50% of the International Assets at between $35 million and
$54 million, which represented an implied value per subscriber of $4.87 to
$7.45.
POTENTIAL TAX BENEFITS
Allen & Company also valued certain related tax benefits which may be
enjoyed by HSNi as a result of the Transaction. Allen & Company assumed for this
analysis that HSNi can shelter operating income to the fullest extent of the
estimated tax shield. Utilizing a range of discount rates of 7.0% to 8.0%, Allen
& Company estimated the net present value of the potential tax benefits to be
between $377 million and $401 million. Allen & Company noted that HSNi has not
received an opinion of counsel as to the ability of HSNi to utilize such tax
benefits.
THE TRANSACTION
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OVERVIEW AND VALUATION OF UTV
Allen & Company presented an overview of UTV's business and the current
television production environment. Allen & Company noted that UTV, through four
major divisions, represented a leading producer of network, first-run, cable,
daytime and children's television shows and made-for-television movies. Allen &
Company reviewed UTV's historical and projected operating results for the fiscal
years 1993 through 1998 and the television ultimates provided by Seagram
management.
As part of its analysis of UTV, Allen & Company performed a discounted cash
flow analysis using projections provided by Seagram's management (assuming
reductions in overhead and program development spending in connection with the
Transaction) in order to derive an implied present value of UTV. The discounted
cash flow valuation of UTV was determined by adding the discounted cash flow
values of distinct UTV assets (i.e. existing network series, first-run
syndication operations, talk shows, made-for-television operations and library
distribution contracts) utilizing discount rates (from 8.0% to 15.0%) chosen to
reflect various assumptions regarding estimated costs of capital. In addition,
Allen & Company attached a value to the expected severance costs and estimated
"franchise" value of the UTV distribution operations. Based upon this analysis,
Allen & Company calculated an estimated value for UTV at between $321 million
and $439 million, which represented an implied multiple of enterprise value to
net sales of 1.0x to 1.4x and an implied multiple of enterprise value to EBITDA
of between 4.8x and 6.5x. Allen & Company also compared such multiples for UTV
to the average of multiples of net sales and EBITDA derived from the
consideration paid in transactions involving programming properties similar to
UTV (1.9x of net sales and 10.4x of EBITDA).
OVERVIEW OF HSNi
Allen & Company reviewed HSNi's historical and estimated operating results
for the four fiscal years 1995 through 1998. Allen & Company also reviewed stock
price data for HSNi Common Stock and the market reaction to selected public
announcements regarding HSNi. Allen & Company noted that HSNi's general trading
patterns have generally performed above the S&P 500 Index, the S&P Entertainment
Index and the S&P Broadcasting Index. Allen & Company also reviewed trading
volumes of HSNi Common Stock relative to various HSNi trading prices and noted
that over 70% of the volume since the mergers of HSNi with Home Shopping (the
"HOME SHOPPING MERGER") and Savoy Pictures Entertainment, Inc. ("SAVOY") (the
"SAVOY MERGER," and together with the Home Shopping Merger, the "MERGERS") has
traded at prices for HSNi Common Stock at less than $34 per share. Allen &
Company also analyzed the range of HSNi equity values by valuing the various
segments and businesses that comprise HSNi. HSNi's cable network, the SF
Broadcasting television stations and HSNi's majority holding in Ticketmaster
Group, Inc. ("TICKETMASTER") were valued based on a range of multiples of
estimated 1998 attributable EBITDA. HSNi's UHF television stations were valued
based on recent comparable "stick" acquisitions of UHF stations in the top 25
demographic market areas ("DMAS"). After making certain adjustments for HSNi's
debt position, Allen & Company noted that this analysis resulted in an equity
value range of $2.9 billion to $3.6 billion (or $36.64 to $45.08 per share on a
fully-diluted basis). Allen & Company also reviewed trading multiples associated
with comparable diversified media companies with large cable networks (The News
Corporation; Time Warner, Inc.; Viacom Inc.; and The Walt Disney Company) and
cable programming companies (BET Holdings, Inc.; International Family
Entertainment; Gaylord Entertainment; Turner Broadcasting System, Inc.;
Valuevision International; and Shop at Home, Inc.) and noted that such multiples
were consistent with HSNi's current and historical trading range. Allen &
Company concluded that, based upon the above analyses, in its opinion, the HSNi
Common Stock price of $38.625 on October 17, 1997, the last trading day prior to
public announcement of the Transaction, was a representative price for that
security.
Allen & Company also reviewed with the HSNi Board its pro forma analysis of
the ownership of HSNi Common Stock (or common equivalents) based upon numerous
potential scenarios, including the minimum and maximum number of shares of HSNi
Common Stock potentially issuable in connection with the Transaction. Allen &
Company's analysis assumed for the minimum number of shares calculation that
Liberty did not purchase any additional shares of HSNi Common Stock and did not
give effect to any other conversions into HSNi Common Stock; the maximum number
of shares gave pro forma effect to Liberty's
THE TRANSACTION
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<PAGE> 35
participation at 25% of the total HSNi equity, the issuance of at least
5.7 million shares of HSNi Common Stock in the Ticketmaster Merger and
conversion of HSNi's convertible debt. Under these assumptions, the number of
shares issuable in connection with the Transaction ranged from 53 million to
107 million. Allen & Company noted that Seagram's pro forma percentage of the
voting power ranged from 69.2% to 67.0% and Liberty's pro forma percentage of
the voting power ranged from 22.8% to 24.3%, based upon the minimum and maximum
number of issuable shares, respectively. The range of pro forma voting power was
based on the size of Liberty's participation in the Transaction, however,
Seagram's equity interest remained at 45%, with the cash portion of Seagram's
consideration being reduced as Liberty's participation increased. Allen &
Company also reviewed with the HSNi Board its pro forma analysis of the
capitalization of HSNi based upon the minimum and maximum number of shares of
HSNi Common Stock potentially issuable in connection with the Transaction.
No company used in the comparable company analyses summarized above is
identical to HSNi, USAN or UTV, and no transaction used in the comparable
transaction analysis summarized above is identical to the Transaction.
Accordingly, any such analysis of the consideration to be paid by HSNi in
connection with the Transaction involves complex considerations and judgments
concerning differences in the potential financial and operating characteristics
of the comparable companies and transactions and other factors in relation to
the trading and acquisition values of the comparable companies.
The preparation of a fairness opinion is not susceptible to partial
analysis or summary description. Allen & Company believes that its analyses and
the summary set forth above must be considered as a whole and that selecting
portions of its analyses and the factors considered by it, without considering
all analyses and factors, could create an incomplete view of the processes
underlying the analysis set forth in its opinion. Allen & Company has not
indicated that any of the analyses which it performed had a greater significance
than any other.
In determining the appropriate analyses to conduct and when performing
those analyses, Allen & Company made numerous assumptions with respect to
industry performance, general business, financial, market and economic
conditions and other matters, many of which are beyond the control of HSNi, USAN
and UTV. The analyses which Allen & Company performed are not necessarily
indicative of actual values or actual future results, which may be significantly
more or less favorable than suggested by such analyses. Such analyses were
prepared solely as part of Allen & Company's analysis of the fairness, from a
financial point of view, to HSNi of the terms of the Transaction. The analyses
do not purport to be appraisals or to reflect the prices at which a company
might actually be sold or the prices at which any securities may trade at the
present time or at any time in the future.
Allen & Company is a nationally recognized investment banking firm that is
continually engaged in the valuation of businesses and their securities in
connection with mergers and acquisitions, negotiated underwritings, competitive
bids, secondary distributions of listed and unlisted securities, private
placements and valuations for estate, corporate and other purposes. HSNi
retained Allen & Company based on such qualifications as well as its familiarity
with HSNi.
HSNi entered into a letter agreement with Allen & Company, dated October
19, 1997 (the "ENGAGEMENT LETTER"), pursuant to which Allen & Company agreed to
act as HSNi's financial advisor in connection with the Transaction and to
evaluate the fairness, from a financial point of view, of the terms of the
Transaction to HSNi. Pursuant to the Engagement Letter, HSNi agreed, among other
things, to pay Allen & Company a fee in an amount to be mutually agreed upon by
HSNi and Allen & Company, which fee has not yet been determined or discussed.
Whether or not the Transaction is consummated, HSNi has agreed, pursuant to the
Engagement Letter, to reimburse Allen & Company for all its reasonable
out-of-pocket expenses and to indemnify Allen & Company against certain
liabilities and expenses in connection with its engagement.
Allen & Company has from time to time provided various investment banking
and financial advisory services to HSNi, including in connection with HSNi's
acquisition of approximately 49.6% of the then outstanding common stock of
Ticketmaster in July 1997. During 1996 and 1997, Allen & Company was paid a
total of $9.9 million in connection with agency and advisory work performed for
HSNi and its affiliates. In addition, Allen & Company served as lead underwriter
in connection with the initial public offering of
THE TRANSACTION
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<PAGE> 36
Ticketmaster common stock in November 1996, and acted as financial advisor to
Matsushita Electric Industrial Co. Ltd. ("MATSUSHITA") in connection with its
purchase of MCA INC. (presently, Universal Studios, Inc.) in January 1991, and
in connection with its sale of 80% of MCA INC. to Seagram in June 1995. Allen &
Company also advised Seagram with respect to its purchase of an approximately
15% interest in Time Warner, Inc. in May 1993. Paul A. Gould, a managing
director of Allen & Company, serves as a director of Tele-Communications, Inc.,
an affiliate of Liberty. Also, Allen & Company and certain of its officers and
directors own securities of HSNi and other parties involved in the Transaction.
From time to time in the ordinary course of its business as a broker-dealer,
Allen & Company may also hold positions and trade in securities of HSNi and such
other parties.
CERTAIN FEDERAL INCOME TAX MATTERS
For U.S. federal income tax purposes, no income, gain or loss will be
recognized by HSNi or the stockholders of HSNi as a result of the Transaction.
ACCOUNTING TREATMENT
In accordance with generally accepted accounting principles ("GAAP"), the
Universal transaction will be accounted for as a purchase of certain assets and
assumption of certain liabilities of USAN and UTV with HSNi treated as the
acquiror for accounting purposes in accordance with Accounting Principles Board
Opinion No. 16, "Business Combinations," as amended.
Representatives of Ernst & Young LLP are expected to be present at the
Annual Meeting. Such representatives will have the opportunity to make a
statement if they desire to do so and are expected to be available to respond to
appropriate questions.
ABSENCE OF DISSENTERS' RIGHTS
HSNi is incorporated in the State of Delaware, and, accordingly, is
governed by the provisions of the DGCL. HSNi stockholders are not entitled to
appraisal rights under the DGCL with respect to the Transaction. Although
approval of the stockholders of HSNi is required for the issuance of HSNi Common
Stock in the Transaction under the rules and bylaws of the National Association
of Securities Dealers, Inc. (the "NASD"), the approval of the stockholders of
HSNi is not required under the DGCL for the Transaction itself.
DESCRIPTION OF THE TRANSACTION
GENERAL
The Investment Agreement provides for HSNi's acquisition from Universal of
USAN, consisting of USA Network and Sci-Fi Channel, and UTV, Universal's
domestic television production and distribution business, in exchange for $4.075
billion in value, comprised of a combination of securities, including LLC
Shares, that effectively represents a 45.8% equity interest in HSNi and
approximately $1.633 billion in cash.
Due to regulatory restrictions applicable to Universal on the maximum level
of foreign ownership of HSNi, Universal is limited in the number of shares of
HSNi stock it may own. Accordingly, Universal's interest in HSNi will consist of
HSNi common equity securities and the LLC Shares. The LLC structure also allows
for a tax-free contribution of assets and a single level of taxation. Upon
consummation of the Transaction, Universal will own the following:
- 6.75 million shares of HSNi stock, consisting of 3.56 million shares of
HSNi Common Stock and 3.19 million shares of Class B Common Stock. This
represents 17.1% of the voting power of HSNi; and
- 54.3 million LLC Shares, representing approximately 45.8% of the LLC
(after giving effect to the minimum Liberty transaction, a $300 million
cash investment in the LLC). Each LLC Share owned by Universal will be
exchangeable for one share of HSNi Common Stock or HSNi Class B Common
Stock (subject to a maximum of 40 million shares of HSNi Class B Common
Stock).
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<PAGE> 37
The precise allocation between shares of HSNi Common Stock and HSNi Class B
Stock cannot be determined until shortly prior to the Closing. HSNi does not
expect the final allocation to differ significantly from that set forth above.
The LLC will hold USAN, UTV and all of the businesses of HSNi and its
subsidiaries other than the broadcast-related business of HSNi and its
subsidiaries and HSNi's current equity interest in Ticketmaster (the "HSNi
CONTRIBUTED ASSETS").
The Transaction will involve the following steps, all of which will take
place on the closing of the Universal transaction (the "CLOSING"):
- Universal will transfer to HSNi and the LLC all of the interests in USAN
and UTV in exchange for $4.075 billion in cash and stock, broken down as
follows:
- an effective 45.8% equity interest in HSNi, comprised of 6.75
million HSNi common shares and 54.3 million LLC Shares, valued at
$40 per share; and
- approximately $1.633 billion in cash, of which $300 million will be
deferred (and will accrue interest) until the earlier of the closing
of the transaction with Liberty, or June 30, 1998, or reduced in
connection with the exercise by Universal of its preemptive rights
on or prior to that time.
- HSNi and its subsidiaries will contribute all of their businesses to the
LLC, except for the broadcasting business and HSNi's equity interest in
Ticketmaster.
- Any variations of the cash and stock amounts will not be significant.
However, the amount of the cash to be received by Universal, as well as
the number of LLC Shares, are subject to adjustment as follows:
- the cash amount will be lower and the number of LLC Shares will be
higher if the value of the actual Liberty contribution exceeds $300
million; and
- HSNi may elect to pay $75 million of the cash portion of the
purchase price with LLC Shares valued at $40 per share (the "HSNi
SHARE OPTION"). HSNi intends to exercise this option. If it does,
Universal's effective equity interest in HSNi will be approximately
45.8% instead of 45%.
In addition, at the subsequent closing of the Liberty transaction, Liberty
has agreed that it will purchase for cash an aggregate of 7.5 million shares of
HSNi Common Stock and LLC Shares valued at $40 per share plus interest from the
date of the Closing. Liberty may also contribute assets to the LLC in exchange
for LLC Shares valued at $40 per share. These assets would have to be agreed
upon by HSNi, Universal and Liberty. If Liberty contributes assets, Liberty may
reduce the number of shares it purchases for cash by an amount having a value
equal to 45% of the value of the contributed assets.
Any reduction in the cash contribution by Liberty will be offset by the
cash to be contributed by Universal pursuant to its mandatory preemptive right
in connection with such Liberty contribution. See "-- Investment
Agreement -- Preemptive Rights -- Universal -- Mandatory Preemptive Right."
Accordingly, the $300 million deferred amount due to Universal will essentially
be matched by the proceeds received from the Liberty contribution or offset by
cash due from Universal in connection with Universal's preemptive rights,
including those described below. The closing of any transaction with Liberty is
to take place by June 30, 1998 (the "LIBERTY CLOSING").
All LLC Shares issued to Universal at the Closing will be exchangeable
(subject to regulatory restrictions) for either one share of HSNi Common Stock
or one share of HSNi Class B Common Stock. A total of 40 million shares of HSNi
Class B Common Stock and LLC Shares exchangeable for shares of HSNi Class B
Common Stock will be issued to Universal in connection with its investment at
the Closing (with the remainder of the LLC Shares exchangeable for shares of
HSNi Common Stock). The LLC Shares received by Liberty will be exchangeable for
shares of HSNi Common Stock. Each LLC Share will be exchangeable for one HSNi
common share, subject to anti-dilution adjustments for events which affect HSNi
Common Shares.
THE TRANSACTION
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If the requisite approvals of the stockholders of HSNi are received, the
Universal transaction is expected to be consummated as soon as practicable after
the satisfaction or waiver of each of the conditions set forth in the Investment
Agreement applicable to the Universal transaction.
INVESTMENT AGREEMENT
GENERAL
The Investment Agreement (which includes as exhibits the Governance
Agreement, among other agreements) is the legal document that governs the
Transaction and is attached as Appendix A to this Proxy Statement. You are
encouraged to read the Investment Agreement in its entirety, and the description
in this section of that agreement is qualified by reference to the full
agreement contained in Appendix A to this Proxy Statement.
CONSIDERATION TO BE PAID IN THE TRANSACTION
Universal
Pursuant to the Investment Agreement, the total consideration for the
Acquired Businesses equals $4.075 billion in value, comprised of a number of
HSNi common equity securities and LLC Shares (exchangeable for HSNi securities),
each valued at $40 per share, in effect representing a 45.8% equity interest in
HSNi, after giving effect to the issuance in the Transaction of HSNi stock (or
securities exchangeable for HSNi stock) to Universal and Liberty, and assuming
all HSNi securities issuable in respect of any Additional Liberty Shares have
been issued. "ADDITIONAL LIBERTY SHARES" means the HSNi securities which HSNi is
obligated to issue to Liberty pursuant to certain agreements entered into
between Liberty and HSNi in connection with the Home Shopping Merger. As of the
Record Date, there were outstanding Additional Liberty Shares representing
7,905,016 shares of HSNi Common Stock and 988,297 shares of HSNi Class B Common
Stock. As a result of the Transaction, 589,161 Additional Liberty Shares will be
issued to Liberty at the Closing (all of which shares will be HSNi Class B
Common Stock).
The amount of cash to be paid at the Closing in respect of the Transaction
is the difference between $4.075 billion less the total value of HSNi stock and
LLC Shares to be issued to Universal (the "CASH AMOUNT"). In the event the Cash
Amount exceeds $1.43 billion, only $1.43 billion in cash will be paid to
Universal in respect of the Transaction. Any excess of the Cash Amount over
$1.43 billion also will be distributed to Universal as proceeds of debt which
are allocated to Universal for Federal income tax purposes. Accordingly, the
total amount of cash paid or distributed by HSNi and the LLC to Universal at the
Closing may exceed $1.43 billion; however, only $1.43 billion will be paid in
respect of the Transaction. HSNi expects that the total cash received by
Universal will be $1.633 billion, based on the Liberty contribution described
below and HSNi's election of its option under the Investment Agreement to pay
$75 million of the Cash Amount in the form of LLC Shares rather than cash. Of
the cash portion, $300 million (with interest at Seagram's cost of capital plus
50 basis points) will be paid to Universal at the Liberty Closing, but such
amount may be reduced in connection with Universal's mandatory preemptive right
in respect of the Liberty contribution and as otherwise described below.
Liberty
Liberty, which is presently HSNi's largest stockholder, has agreed to
contribute $300 million in cash to the LLC by June 30, 1998, in exchange for 7.5
million LLC Shares or shares of HSNi Common Stock. Liberty's cash purchase price
will increase at an annual interest rate of 7.5% beginning from the date of the
Closing through the date of the Liberty Closing.
In addition, HSNi, Universal and Liberty have agreed that, before June 30,
1998, if the parties agree on assets owned by Liberty that are to be contributed
to the LLC, Liberty will contribute those assets in exchange for LLC Shares
valued at $40 per share. If Liberty contributes such additional assets, Liberty
has the right to elect to reduce the number of LLC Shares it is obligated to
purchase for cash by an amount having a value equal to 45% of the value of the
total Liberty asset contribution. In the event Liberty exercises the option to
THE TRANSACTION
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<PAGE> 39
reduce its cash contribution, Universal will have a mandatory preemptive right,
at $40 per share, with respect to the net value of the Liberty asset
contribution. In addition, Universal will have an optional preemptive right,
valued at $40 per share, with respect to any part of a Liberty asset
contribution which is not applied towards reducing Liberty's cash contribution.
PREEMPTIVE RIGHTS
In connection with the Transaction, each of Universal and Liberty will be
granted a preemptive right, subject to certain limitations, to maintain their
respective percentage ownership interests in HSNi as of the Closing or the
Liberty Closing, as the case may be, in connection with future issuances of HSNi
capital stock. In addition, with respect to issuances of HSNi capital stock in
certain specified circumstances, Universal will be obligated to maintain its
percentage ownership interest in HSNi that it had immediately prior to such
issuances.
Universal
General. In the event that, following the Closing, HSNi issues any HSNi
securities, Universal will have the right to purchase for cash the number of
shares of HSNi Common Stock (or, if Universal requests, LLC Shares or a
combination of HSNi Common Stock and LLC Shares) so that Universal will maintain
the identical percentage equity ownership interest (but not in excess of the
lesser of the percentage ownership interest limitations applicable pursuant to
the Governance Agreement and 57.5%) in HSNi that Universal owned immediately
prior to such issuance. Universal will not have a preemptive right with respect
to issuances of shares of HSNi securities in a Sale Transaction, issuances of
restricted stock or issuances of HSNi securities upon conversion of shares of
HSNi Class B Common Stock or in respect of LLC Shares, Additional Liberty Shares
or pursuant to a public offering consummated between the fifth business day
prior to the Closing and the Closing. A "SALE TRANSACTION" is defined as a
merger, consolidation or amalgamation between HSNi and a non-affiliate of HSNi
in which HSNi is acquired by such other entity or a sale of all or substantially
all of the assets of HSNi to another entity which is not a subsidiary of HSNi.
Universal's preemptive right percentage will initially be 45%. To the
extent that, during the first four years after the Closing, Universal sells
shares of HSNi stock (or of the LLC) or does not exercise preemptive rights, its
preemptive percentage will be reduced, and subsequent purchases will not result
in an increase in that percentage. After this four-year period, Universal's
preemptive right percentage will increase or decrease to the extent Universal
buys or sells HSNi stock (or LLC Shares), as permitted by the Stockholders
Agreement and the Governance Agreement.
In measuring the percentage equity or voting interest owned by Universal
(or Liberty) regarding the exercise of preemptive rights and the standstill
provisions under the Governance Agreement described below, the LLC Shares and
the Additional Liberty Shares will be regarded as outstanding HSNi shares on an
as-exchanged basis (the "ASSUMPTIONS"). The Assumptions were also used in
determining the percentage equity ownership of HSNi to be received by Universal.
Mandatory Preemptive Right. Universal will be obligated to exercise its
preemptive right in full (a "MANDATORY PURCHASE EVENT") for (i) additional
issuances caused by the conversion of Home Shopping's 5 7/8% Convertible
Subordinated Debentures due March 1, 2006 (the "CONVERTIBLE SUBORDINATED
DEBENTURES") into HSNi Common Stock, (ii) additional issuances within four
months of the Closing in the aggregate amount of up to $200 million in HSNi
Common Stock and (iii) additional issuances in the aggregate amount up to 6.3
million HSNi securities in connection with the acquisition by HSNi of additional
equity of Ticketmaster. The Universal purchase price for these HSNi Shares will
be $40 in cash per share. These mandatory events are in addition to Universal's
mandatory preemptive right under "-- Consideration to be Paid in the
Transaction -- Liberty."
Universal Voting Threshold. If, in connection with the exercise by
Universal of its optional preemptive right, its voting power in HSNi would be
less than 67% (based on the Assumptions), Universal may elect to purchase in
connection with a preemptive right exercise shares of HSNi Class B Common Stock
(or LLC Shares exchangeable for HSNi Class B Common Stock). However, if
Universal has previously declined to
THE TRANSACTION
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exercise its optional preemptive right, then the voting threshold will be
reduced to the lower percentage voting threshold owned by Universal at such
time.
In addition, HSNi has a purchase right relating to LLC Shares owned by
Universal to the extent that HSNi purchases or redeems HSNi securities, to
maintain Universal's ownership percentage at the levels set forth in the
Governance Agreement.
Liberty
In the event that HSNi issues any HSNi securities under the circumstances
set forth in the first paragraph under "-- Universal -- General," Liberty will
be entitled to purchase the number of shares of HSNi Common Stock or LLC Shares
exchangeable for HSNi Common Stock so that Liberty will maintain the identical
percentage equity beneficial ownership interest in HSNi that Liberty owned
immediately prior to such issuance (but not in excess of the percentage equity
beneficial ownership interest that Liberty owned immediately following the
Closing or the Liberty Closing). Liberty, unlike Universal, will not be
obligated to maintain its percentage equity beneficial ownership interest in
HSNi in connection with a Mandatory Purchase Event, but Liberty may elect to do
so at a cash purchase price of $40 per share. Liberty will only be entitled to
purchase LLC Shares (as opposed to shares of HSNi Common Stock) if and to the
extent the total number of HSNi securities then owned directly or indirectly by
Liberty would exceed the amount allowable under FCC regulations.
MANAGEMENT AND OWNERSHIP OF HSNi LLC
At the Closing and after giving effect to the Liberty Closing, Universal
will own 45.8% of the LLC, Liberty will own about 6% and HSNi (through a
subsidiary) will own the remaining 48% interest. Except with respect to certain
fundamental changes related to the LLC, HSNi will manage and operate the
businesses of the LLC in the same manner as it would if such businesses were
wholly owned by HSNi. For a description of the fundamental changes, see
"-- Related Agreements -- Summary of Governance Agreement -- Fundamental
Changes." Following the CEO Termination Date (as hereinafter defined) or Mr.
Diller's becoming Disabled (as hereinafter defined), Universal (unless Liberty's
beneficial ownership of HSNi securities represents more than 5% in excess of the
voting power of HSNi securities then beneficially owned by Universal) will
designate the manager of the LLC who will generally be responsible for managing
the businesses of the LLC. If Liberty and Universal together do not own HSNi
securities representing at least 40% of the total voting power of the HSNi
securities (and which represent a greater percentage than the amount owned by
any other person), then HSNi will select the manager.
The LLC Shares will be exchangeable for shares of HSNi Common Stock or HSNi
Class B Common Stock (in the case of Universal) and shares of HSNi Common Stock
(in the case of Liberty). In the case of Liberty, this exchange obligation is
generally mandatory and will occur prior to the exchange of Liberty HSN's shares
of Home Shopping Network stock pursuant to the Home Shopping Merger. The
exchange agreement relating to LLC Shares (the "LLC EXCHANGE AGREEMENT")
provides customary anti-dilution adjustments relating to the capital stock and
assets of HSNi (except to the extent that dividends or other distributions of
HSNi stock are accompanied by pro rata distributions with respect to LLC Shares
held by Universal and Liberty, which the LLC is generally obligated to do
pursuant to the Investment Agreement).
If HSNi issues additional HSNi securities, HSNi is obligated to purchase an
equal number of LLC Shares for the same consideration as received by HSNi for
the issued HSNi securities. If HSNi repurchases or redeems shares of HSNi stock,
HSNi will sell to the LLC an equal number of LLC Shares for the same
consideration (or for cash, if the LLC cannot provide the same consideration).
The net effect of these provisions is to cause the LLC generally to hold the
proceeds of any HSNi equity sales or to fund the costs of any HSNi equity
redemptions.
The LLC Exchange Agreement also contains provisions regarding the exchange
or other conversion of LLC Shares in connection with a tender offer, merger or
similar extraordinary transaction, which permit Universal and Liberty to
participate with respect to their LLC Shares in such a transaction as if they
held HSNi stock.
THE TRANSACTION
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LLC Shares owned by Universal and Liberty are not transferable, except to
each other in connection with transactions permitted by the Stockholders
Agreement or to their respective controlled affiliates or in connection with
certain extraordinary transactions relating to HSNi or the LLC.
REPRESENTATIONS AND WARRANTIES; COVENANTS
The Investment Agreement contains standard representations and warranties
of Universal and HSNi, as well as general corporate authority and similar
representations of Liberty. It also has customary covenants as well as specific
covenants relating to the conduct of the respective parties' business pending
the Closing.
HSNi also has agreed that, upon the CEO Termination Date or Mr. Diller
becoming Disabled, at the request of Universal and subject to applicable law and
the Spinoff Agreement (as defined below), HSNi will distribute those
subsidiaries which engage in broadcasting or other regulated businesses (the
"SPINOFF COMPANY") in a distribution to its stockholders (the "SPINOFF") as
promptly as practicable on terms and conditions that are reasonably satisfactory
to Universal. Prior to effecting the Spinoff, HSNi will enter into ten-year
affiliation agreements with the Spinoff Company that will provide that the
Spinoff Company will broadcast programming produced by HSNi on customary terms
and conditions, including arm's-length payment obligations. HSNi, Universal and
Liberty are parties to an agreement, dated as of October 19, 1997 (the "SPINOFF
AGREEMENT") regarding certain matters relating to the Spinoff and the Spinoff
Company. This agreement is described below, see "-- Related
Agreements -- Spinoff Agreement."
Universal has covenanted that in the event UTV's EBITDA (as defined in the
Investment Agreement) for the three-year periods ending on December 31, 1998,
1999 and 2000 (the "DETERMINATION PERIOD") is less than $150 million, Universal
will pay HSNi the excess of $150 million over UTV's EBITDA for the Determination
Period, subject to a maximum of $75 million.
Universal also has agreed generally that, as of the Closing, USAN will
include $5 million in cash, and that, to the extent that USAN cash flow during
the first 30 days following the Closing does not equal at least $5 million,
Universal will contribute up to an additional $5 million to the LLC to the
extent of the shortfall.
INDEMNIFICATION
The parties to the Investment Agreement have entered into customary
indemnification arrangements regarding the breach of representations, warranties
and covenants of each party. These obligations are generally subject to a $50
million "basket," pursuant to which an indemnifying party is required to
compensate an indemnified party for any losses related to the breaches described
above only to the extent all such losses exceed $50 million. In the case of
indemnification obligations relating to taxes, the indemnifying party has a
complete obligation, from the first dollar of an indemnified loss relating to
tax matters covered by the Investment Agreement.
CONDITIONS TO THE TRANSACTION
In addition to the approval of the stockholders of HSNi sought at the
Annual Meeting in connection with the Transaction, the obligations of HSNi and
Universal to consummate the Transaction are subject to the satisfaction of a
number of other customary conditions, including:
- the expiration or termination of any waiting periods under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the
"HSR ACT");
- the absence of any injunction or order by any U.S. federal or state court
of competent jurisdiction that prohibits or otherwise seeks to prohibit,
restrain, enjoin or delay the consummation of any of the transactions
contemplated by the Investment Agreement; and
- the absence of any action, suit, investigation or proceeding pending with
or threatened by, any public or governmental authority, against or
affecting either HSNi or Universal which (i) seeks to restrain, enjoin or
prevent the consummation of the transactions contemplated by the
Investment Agreement, or
THE TRANSACTION
29
<PAGE> 42
(ii) challenges the validity or legality of any transactions contemplated by the
Investment Agreement or seeks to recover damages or to obtain other relief in
connection with any such transactions.
HSNi's obligations to consummate the Transaction are further conditioned
upon HSNi obtaining financing sufficient to pay the cash portion of the purchase
price. Universal's obligations to consummate the Transaction are further
conditioned upon Mr. Diller not having ceased serving as Chief Executive Officer
of HSNi. Liberty's obligation at the Liberty Closing is subject to conditions
similar to Universal's.
At any time prior to the Closing, HSNi or Universal, without approval of
the stockholders of such respective company, may waive compliance with any of
the agreements or satisfaction of any of the conditions contained in the
Investment Agreement for the benefit of that respective company. HSNi has agreed
with Liberty that prior to the Closing it will not enter into or permit any
material amendment to, or waiver or modification of material rights or
obligations under, the Investment Agreement (including the exhibits attached to
the Investment Agreement) without the prior written consent of Liberty, which
will not be unreasonably withheld.
GOVERNMENTAL APPROVAL
Antitrust
The Transaction is subject to the requirements of the HSR Act, which
provides that certain transactions may not be consummated until required
information and materials are furnished to the Antitrust Division of the U.S.
Department of Justice (the "ANTITRUST DIVISION") and the U.S. Federal Trade
Commission (the "FTC") and the applicable waiting period(s) has expired or is
terminated. On January 12, 1998, the waiting period under the HSR Act relating
to the Universal transaction was terminated. The parties have not yet made any
filings under the HSR Act relating to the Liberty transaction. The waiting
period with respect to that transaction will expire 30 days after such filings
have been made, unless earlier terminated by the FTC or the Antitrust Division
or the parties receive a request for additional information or documentary
material prior thereto. If within such waiting period, either the FTC or the
Antitrust Division were to request additional information or documentary
material from the parties, the waiting period with respect to the Universal
transaction would be extended for an additional period of twenty calendar days
following the date of substantial compliance with such request by the parties.
The additional waiting period may be terminated sooner by the FTC or the
Antitrust Division. Notwithstanding such termination, however, at any time
before or after the Closing, the Antitrust Division, the FTC, state attorneys
general or a private person or entity could challenge the Transaction under
antitrust laws and seek, among other things, to enjoin the Transaction or to
cause HSNi to divest itself, in whole or in part, of USAN, of UTV or of other
businesses conducted by HSNi. Based on information available to it, HSNi
believes that the Transaction will not violate U.S. federal or state antitrust
laws. There can be no assurance, however, that a challenge to the Transaction on
antitrust grounds will not be made.
FCC
Consummation of the Transaction is not subject to the review of, and does
not require, the formal approval of the FCC; however, documents relating to
Liberty's investment in and relationship to HSNi will be filed with the FCC.
Other Approvals
HSNi, USAN and UTV are not aware of any other governmental approvals or
actions that are required in order to consummate the Transaction. Should any
other approval or action be required, it is contemplated that HSNi, USAN and/or
UTV would seek such approval or action. There can be no assurance as to whether
or when any such approval or action, if required, could be obtained.
THE TRANSACTION
30
<PAGE> 43
AMENDMENT OR TERMINATION OF THE INVESTMENT AGREEMENT
Amendment
Except as otherwise provided in the Investment Agreement, the Investment
Agreement may be amended only by an instrument in writing signed by HSNi,
Universal, and, to the extent that any such amendment would adversely affect the
rights and obligations of Liberty, Liberty. In addition, HSNi has agreed with
Liberty that prior to the Closing it will not enter into or permit any material
amendment to, or waiver or modification of material rights under, the Investment
Agreement (including the exhibits attached to the Investment Agreement) without
the prior consent of Liberty, which will not be unreasonably withheld.
Termination
The Investment Agreement may be terminated for any reason before the
Closing by the mutual written consent of the parties to the Investment Agreement
or by either HSNi or Universal if, among other things:
- the Closing has not occurred by June 30, 1998, and the party exercising
its right to terminate pursuant to this provision has not failed to
fulfill any obligation under the Investment Agreement which caused, or
resulted in, the failure of the Closing to occur on or before such date,
or
- any court or governmental authority of competent jurisdiction has issued
an order, decree, writ or ruling or taken any other action, or there is
in effect any statute, rule or regulation permanently restraining,
enjoining or otherwise prohibiting the Transaction.
The Investment Agreement may also be terminated by Universal if:
- Mr. Diller is no longer Chief Executive Officer of HSNi, or
- the average unweighted closing price of HSNi Common Stock is not at least
$29 per share during any seven out of the nine consecutive trading days
ending three trading days prior to the Closing.
RELATED AGREEMENTS
This section summarizes various other agreements that HSNi, Seagram,
Universal, Liberty and Mr. Diller have entered into relating to the Transaction.
These agreements involve (i) certain governance matters relating to HSNi, (ii)
stockholder arrangements among Universal, Liberty and Mr. Diller, (iii)
agreements between Universal and Liberty relating to the Spinoff, and (iv) a
number of ancillary business agreements between Universal and HSNi for ongoing
business relationships involving the development of international channels,
television programming distribution, and other matters. You are encouraged to
read the Governance Agreement, the Stockholders Agreement and the Spinoff
Agreement in their entirety, and the descriptions in this section of those
agreements are qualified by reference to the full agreements, attached as
Appendices B, C and D to this Proxy Statement, respectively.
GOVERNANCE AGREEMENT
General
HSNi, Universal, Liberty and Mr. Diller are parties to the Governance
Agreement. This document sets forth certain restrictions on the acquisition of
additional securities of HSNi, on the transfer of HSNi securities and other
conduct restrictions, in each case, applicable to Universal. In addition, the
Governance Agreement governs Universal's and Liberty's rights to representation
on the HSNi Board and Universal's, Liberty's and Mr. Diller's right to approve
certain actions by HSNi or any subsidiary of HSNi (including the LLC) (the
"FUNDAMENTAL CHANGES"). At the Annual Meeting, HSNi stockholders will be asked
to consider and vote upon the approval of the terms of the Governance Agreement.
For a description of the Governance Agreement Proposal, see "The Annual
Meeting -- Description of Proposals and HSNi Board Recommendations -- Governance
Agreement Proposal."
THE TRANSACTION
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Restrictions on the Acquisition of Additional Voting Securities
The Governance Agreement provides that, for a four-year period commencing
on the Closing (the "STANDSTILL PERIOD"), without the approval of the HSNi
Board, Universal will not acquire additional beneficial ownership of HSNi common
equity other than through the exercise of Universal's preemptive right to
maintain its percentage equity beneficial ownership interest and will not,
except as a result of the exercise of the HSNi Share Option, beneficially own in
excess of 45% of HSNi's common equity (45.8% in the event that HSNi elects to
pay Universal $75 million in stock instead of cash, which amount increases to
48.5% between the Closing and the Liberty Closing) or a lesser percentage to the
extent Universal transfers HSNi equity securities or fails to exercise its
preemptive right (except, in any case, to the extent caused by HSNi's redemption
or purchase of HSNi securities). Following expiration of the Standstill Period,
subject to applicable law, Universal may acquire additional HSNi securities to
increase its beneficial ownership of stock up to 50.1% of HSNi's outstanding
equity securities. In addition, following the first anniversary of the
expiration of the Standstill Period and subject to compliance with applicable
law, Universal can acquire up to 57.5% of HSNi's outstanding equity securities,
but not in excess of 1.5% in any 12-month period. Following the CEO Termination
Date or Mr. Diller becoming Disabled, Universal also can engage in a Permitted
Business Combination. The maximum permissible ownership percentages set forth in
this paragraph exclude any shares Universal may acquire from Liberty or Mr.
Diller pursuant to the Stockholders Agreement. (These percentages are all based
on the Assumptions.)
The Governance Agreement defines a "PERMITTED BUSINESS COMBINATION" to mean
(i) a tender or exchange offer by Universal for all the equity securities of
HSNi that is accepted by a majority of HSNi's Public Stockholders or (ii) a
merger (other than a merger following a tender or exchange offer complying with
(i) above) involving HSNi and Universal that is approved, in addition to any
vote required by law, by a majority of the Public Stockholders, so long as, in
either case, a committee of HSNi's directors (excluding directors designated by
Universal and Liberty and any director who has a conflict of interest)
determines that the tender offer, exchange offer or merger, as the case may be,
is fair to the Public Stockholders. "PUBLIC STOCKHOLDERS" is defined as any
stockholder who beneficially owns less than 10% of HSNi's outstanding voting
power on an applicable vote or less than 10% of HSNi's outstanding equity
securities to be tendered in any applicable tender or exchange offer.
If, during the Standstill Period, Mr. Diller no longer serves as Chief
Executive Officer of HSNi (provided that he does not hold a proxy to vote
Universal's HSNi equity securities under the Stockholders Agreement) or becomes
disabled, the Standstill Period will be deemed expired and the transfer
restrictions summarized below will terminate. The date that is the later of the
date that Mr. Diller no longer serves as Chief Executive Officer and such date
that Mr. Diller no longer holds the Universal proxy under the Stockholders
Agreement is referred to as the "CEO TERMINATION DATE." In addition, the
restrictions described above generally terminate:
- if any person or group (other than Universal) beneficially owns more than
one-third of HSNi's equity securities (excluding any securities acquired
from Universal, Liberty or Mr. Diller in accordance with the Stockholders
Agreement so long as Universal was offered (and did not accept) a
reasonable opportunity to buy such equity securities or from HSNi); or
- if any person or group (other than HSNi or Universal) commences a tender
or exchange offer for more than a majority of HSNi's outstanding equity
securities, which is not recommended against by the HSNi Board. In the
case of such an offer by Liberty in breach of its standstill obligations
under the Stockholders Agreement, this provision applies only if
Universal is unsuccessful after using good faith efforts in enforcing its
standstill with Liberty. See "-- Stockholders Agreement -- Rights and
Restrictions Specific to Liberty."
"DISABLED," when used in the Governance Agreement or the Stockholders
Agreement, means a disability after the expiration of 180 consecutive days which
is determined by a designated physician to be total and permanent (i.e., a
mental or physical incapacity that prevents Mr. Diller from managing the
business affairs of HSNi) and which continues after 90 days following receipt of
notice from HSNi that a disability has occurred.
THE TRANSACTION
32
<PAGE> 45
Transfer Restrictions
The Governance Agreement also restricts, until the earlier of the CEO
Termination Date or Mr. Diller becoming Disabled, Universal's ability to
transfer HSNi securities to another party by providing that during the
Standstill Period and subject to the Stockholders Agreement that further
restricts Universal's ability to transfer HSNi securities, Universal may only
transfer HSNi securities in limited circumstances, including as follows:
- in a widely dispersed public offering pursuant to registration rights to
be granted to Universal or a pro rata distribution to Universal's
stockholders (which, in the case of Seagram, must be to its public
stockholders);
- in a sale in accordance with Rule 144 under the Securities Act of 1933,
as amended (the "SECURITIES ACT"), except generally not to a transferee
who would beneficially own more than 5% of the HSNi equity following such
purchase;
- in a tender or exchange offer that is not rejected by the HSNi Board or
to HSNi in connection with a self-tender offer;
- in transfers of up to 5% in the aggregate to any institutional or
financial investors, not exercisable on more than two occasions in any
six-month period;
- in pledges in connection with bona fide financings with a financial
institution; and
- in transfers to Liberty, Mr. Diller or any controlled affiliate of
Universal that signs the Governance Agreement.
At any time that Universal beneficially owns at least 20% of HSNi's equity
securities, any transfers by Universal, other than the transfers permitted
during the Standstill Period, will be subject to a right of first refusal in
favor of HSNi which right is secondary to the right of first refusal of Mr.
Diller (to the extent applicable) provided in the Stockholders Agreement.
In addition, the Governance Agreement provides that LLC Shares cannot be
transferred by Universal or Liberty to non-affiliates, other than to each other.
Accordingly, prior to a permitted transfer, any LLC Shares intended to be
transferred by either Universal or Liberty generally must first be exchanged
into HSNi securities. The Stockholders Agreement further provides that, as long
as the CEO Termination Date has not occurred and Mr. Diller is not Disabled,
Universal or Liberty, as the case may be, must first offer Mr. Diller (or his
designee) the opportunity to exchange shares of HSNi Class B Common Stock owned
by the transferring party for shares of HSNi Common Stock. If Mr. Diller (or his
designee) does not exchange such shares (or if the CEO Termination Date has
occurred or Mr. Diller is Disabled), any shares of HSNi Class B Common Stock to
be transferred by Universal must first be exchanged into shares of HSNi Common
Stock unless the transferee agrees to be bound by the restrictions contained in
the Governance Agreement applicable to Universal to the extent that the
transferee owns 10% or more of the Total Voting Power. Such a transferee would
be subject to the remaining limitations on Universal's acquisition of HSNi
securities and conduct restrictions contained to the Governance Agreement. See
"-- Stockholders Agreement -- Transfers of Shares of HSNi Class B Common Stock."
Universal Conduct Restrictions
Universal has agreed not to propose to the HSNi Board any merger, tender
offer or other business combination involving HSNi. Universal also has agreed to
related restrictions on its conduct, such as:
- not seeking to influence the management of HSNi, other than as permitted
by the Governance Agreement and the Stockholders Agreement;
- not entering into agreements relating to the voting of HSNi securities,
except as permitted by the Governance Agreement and the Stockholders
Agreement;
THE TRANSACTION
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- generally not initiating or proposing any stockholder proposal in
opposition to the recommendation of the HSNi Board; and
- not joining with others (other than Liberty and Mr. Diller pursuant to
the Transaction Agreements) for the purpose of acquiring, holding, voting
or disposing of any HSNi securities.
The foregoing restrictions terminate on the earlier of the CEO Termination Date
and such time as Mr. Diller becomes Disabled.
Representation on the HSNi Board
Pursuant to the Governance Agreement, Universal initially will be permitted
to designate four persons, reasonably satisfactory to HSNi, to the HSNi Board,
of whom no more than one can be a non-affiliate of Universal and generally will
have the right to designate one HSNi Board member for each 10% ownership of HSNi
equity (including LLC Shares) up to a maximum of four directors. The four
persons currently expected to serve as directors of HSNi following consummation
of the Transaction are Edgar Bronfman, Jr., Robert W. Matschullat, Frank J.
Biondi, Jr. and Samuel Minzberg. See "The Annual Meeting -- Description of
Proposals and HSNi Board Recommendations -- Election of HSNi Directors --
Information Regarding Directors, Nominees for Election as Directors and Certain
Contemplated Directors."
In addition, pursuant to the Governance Agreement, provided that Liberty's
HSNi stock ownership remains at certain levels and subject to applicable law,
Liberty will have the right to designate up to two directors at such time as
Liberty is no longer prohibited from having representation on the HSNi Board.
Pursuant to FCC law and regulations, Liberty is not currently permitted to have
a designee on the HSNi Board. HSNi has also agreed in the LLC operating
agreement that, subject to the same ownership thresholds, Liberty will be
permitted to designate two (or one) director on the Board of Directors of the
LLC, to the extent that Liberty is not permitted to designate directors of HSNi.
The other members of the Board of Directors of the LLC will be the HSNi
directors.
Fundamental Changes
HSNi has agreed that neither HSNi nor any subsidiary of HSNi (including the
LLC) will effect a Fundamental Change without the prior approval of Universal,
Liberty and Mr. Diller (each, a "STOCKHOLDER") so long as such Stockholders
beneficially own certain minimum amounts of HSNi securities. The Fundamental
Changes are as follows:
- Any transaction not in the ordinary course of business, launching new or
additional channels or engaging in any new field of business which will
result in or is reasonably likely to result in such Stockholder being
required under law to divest itself of all or any part of its HSNi
securities, LLC Shares or any material assets or render any such
ownership illegal or subject such Stockholder to any fines, penalties or
material additional restrictions or limitations.
- Any combination of the following, in any case, in one transaction or a
series of transactions during a six-month period, with a value of 10% or
more of the market value of HSNi's outstanding equity securities at the
time of such transaction (assuming that all LLC Shares and Additional
Liberty Shares are converted or exchanged into HSNi securities):
- acquiring or disposing of any assets or business, provided that the
matters contemplated by the Investment Agreement including with
respect to the Spinoff (conducted in accordance with the Investment
Agreement) will not require the prior approval of Liberty;
- granting or issuing any debt or equity securities of HSNi or any of
its subsidiaries (including the LLC) other than as contemplated by
the Investment Agreement;
- redeeming, repurchasing or reacquiring any debt or equity securities
of HSNi or any of its subsidiaries (including the LLC) other than as
contemplated by the Investment Agreement and agreements relating to
the Additional Liberty Shares; or
- incurring any indebtedness;
THE TRANSACTION
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- For a five-year period following the Closing, disposing of any interest
in USAN or, other than in the ordinary course of business, its assets,
provided that matters set forth in this bullet point will constitute a
Fundamental Change only with respect to Mr. Diller and Universal and will
not require the approval of Liberty.
- Disposing of or issuing any LLC Shares except as contemplated by the
Investment Agreement or pledges in connection with financings.
- Voluntarily commencing any liquidation, dissolution or winding up of HSNi
or any material subsidiary (including the LLC).
- Making any material amendments to the Amended and Restated Certificate of
Incorporation of HSNi (the "HSNi CERTIFICATE") or the Amended and
Restated By-Laws of HSNi (the "HSNi BY-LAWS").
- Engaging in any line of business other than media, communications and
entertainment products, services and programming, and electronic
retailing, or other businesses engaged in by HSNi on the date of the
Investment Agreement or as contemplated by the Investment Agreement,
provided that neither HSNi nor the LLC shall engage in theme park, arcade
or film exhibition businesses so long as Universal is restricted from
competing in such lines of business under non-compete or similar
agreements and such agreements would be applicable to HSNi and/or the
LLC, as the case may be, by virtue of Universal's ownership therein. The
matters set forth in the foregoing proviso will constitute a Fundamental
Change only with respect to Mr. Diller and Universal and will not require
the approval of Liberty.
- Settling of any litigation, arbitration or other proceeding which is
other than in the ordinary course of business and which involves any
material restriction on the conduct of business by HSNi or such
Stockholder or the continued ownership of assets by HSNi or such
Stockholder.
- Engaging in any transaction (other than those contemplated by the
Investment Agreement) between HSNi and its affiliates, on the one hand,
and Mr. Diller, Universal or Liberty, and their respective affiliates, on
the other hand, subject to exceptions relating to the size of the
proposed transaction and those transactions which are otherwise on an
arm's-length basis.
- Adopting any stockholder rights plan (or any other plan or arrangement
that could reasonably be expected to disadvantage any stockholder on the
basis of the size or voting power of its shareholding) that would
adversely affect such Stockholder.
- Entering into any agreement with any holder of HSNi's equity securities
or LLC Shares in such stockholder's or interest holder's capacity as
such, as the case may be, which grants such stockholder with approval
rights similar in type and magnitude to those set forth in these
Fundamental Changes.
- Entering into any transaction that could reasonably be expected to impede
HSNi's ability to engage in the Spinoff or cause it to be taxable.
Registration Rights
The Governance Agreement provides that Universal, Liberty and Mr. Diller
are entitled to customary registration rights (including six, four and two
"demand" rights for Universal, Liberty and Mr. Diller, respectively) relating to
the HSNi securities they own.
STOCKHOLDERS AGREEMENT
General
Universal, Liberty, Mr. Diller, HSNi and Seagram are parties to a
Stockholders Agreement, which, upon consummation of the Transaction, will govern
the ownership, voting, transfer or other disposition of HSNi securities owned by
Universal, Liberty and Mr. Diller (and their respective affiliates) and pursuant
to which
THE TRANSACTION
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Mr. Diller will generally exercise voting control over the equity securities of
HSNi held by such persons and certain of their affiliates. Such shares represent
approximately 71% of the total voting power of the outstanding HSNi securities
as of the Record Date. The Stockholders Agreement supersedes as of the Closing,
in its entirety, the agreement, dated as of August 24, 1995, between Mr. Diller
and Liberty, as amended by the letter agreement, dated as of August 25, 1996,
relating to the securities of HSNi.
Voting Authority
Pursuant to the Stockholders Agreement, each of Universal and Liberty have
granted to Mr. Diller an irrevocable proxy over all HSNi securities owned by
Universal, Liberty and certain of their affiliates for all matters except for a
Fundamental Change, which requires the consent of each of Mr. Diller, Universal
and Liberty. The proxy will generally remain in effect until the earlier of the
CEO Termination Date or such date that Mr. Diller becomes Disabled, provided
that Mr. Diller continues to beneficially own at least 5,000,000 shares of HSNi
Common Stock (including options to acquire shares of HSNi Common Stock, whether
or not exercisable).
Universal, Liberty and Mr. Diller have also agreed to vote all HSNi
securities over which they have voting control in favor of the respective
designees of Universal and Liberty to the HSNi Board, as provided in the
Transaction Agreements.
Mr. Diller has agreed with Universal that, after the CEO Termination Date
or such date that Mr. Diller becomes Disabled, and so long as he beneficially
owns HSNi securities representing at least 7.5% of the Total Voting Power
(excluding securities beneficially owned by Universal or Liberty), at
Universal's option he will either vote his shares in his own discretion or in
proportion to the vote of the Public Stockholders.
Liberty Conduct Limitations; Board Representation
Liberty has agreed with Universal that it will not beneficially own the
greater of 20% or the percentage of HSNi securities beneficially owned by it
upon the Liberty Closing (up to 25%), which percentage will be reduced to
reflect sales of HSNi equity by Liberty or in the event that Liberty does not
exercise its preemptive right pursuant to the Investment Agreement, provided
that if Liberty's initial ownership percentage is less than 20%, such reduction
is calculated as if it were 20 percent. This restriction terminates upon the
earlier of such time as Liberty beneficially owns less than 5% of the shares of
HSNi securities or the date that Universal beneficially owns fewer shares than
Liberty beneficially owns (the "STANDSTILL TERMINATION DATE").
Liberty also has agreed not to propose to the HSNi Board the acquisition by
Liberty, in a merger, tender offer or other business combination, of the
outstanding HSNi securities. Liberty has agreed to related restrictions on its
conduct, such as:
- not seeking to elect directors to the HSNi Board or otherwise to
influence the management of HSNi, other than as permitted by the
Governance Agreement and the Stockholders Agreement;
- not entering into agreements relating to the voting of HSNi securities,
except as permitted by the Stockholders Agreement;
- generally not initiating or proposing any stockholder proposal in
opposition to the recommendation of the HSNi Board; and
- not joining with others (other than Universal and Mr. Diller pursuant to
the Transaction Agreements) for the purpose of acquiring, holding, voting
or disposing of any HSNi securities.
The foregoing restrictions terminate on the earlier of the termination of
Liberty's obligations under the Stockholders Agreement (when Liberty no longer
beneficially owns at least 5% of the shares of HSNi securities) or the
Standstill Termination Date.
Liberty is not permitted to designate for election to the HSNi Board more
than two directors, subject to applicable law. This restriction terminates on
the Standstill Termination Date. See "-- Governance Agreement -- Representation
on the HSNi Board."
THE TRANSACTION
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Consent Relating to the Transaction
For purposes of the current stockholders agreement between Liberty and Mr.
Diller, each of Liberty and Mr. Diller has consented to, and agreed to take any
action which is reasonably necessary or appropriate to approve and consummate,
the transactions contemplated by the Investment Agreement and the related
agreements.
The Stockholders Agreement contains a number of provisions that limit or
control the transfer of HSNi securities (including LLC Shares) by Universal,
Liberty and Mr. Diller. These provisions generally have the effect of permitting
this group of stockholders to maintain control of a majority of the Total Voting
Power.
Restrictions on Transfers
Until the earlier of the CEO Termination Date or such date that Mr. Diller
becomes Disabled, neither Liberty nor Mr. Diller can transfer shares of HSNi
stock, other than:
- transfers by Mr. Diller to pay taxes relating to certain HSNi incentive
compensation and stock options;
- transfers to each party's respective affiliates; and
- certain pledges relating to borrowings.
These restrictions are subject to a number of exceptions, including the
following:
- after August 24, 2000, Liberty or Mr. Diller may generally sell all or
any portion of their HSNi stock.
- either stockholder may transfer HSNi stock so long as, in the case of Mr.
Diller, Mr. Diller continues to beneficially own at least 1,100,000
shares of HSNi stock (including stock options) and, in the case of
Liberty, Liberty continues to beneficially own at least 1,000,000 shares
of HSNi stock and, in the case of a transfer of the shares of HSNi Class
B Common Stock by certain BDTV Entities (as defined herein) (which
together hold 11,811,702 shares of HSNi Class B Common Stock), after such
transfer, Liberty, Universal and Mr. Diller collectively control 50.1% of
the Total Voting Power.
Universal has agreed that, until August 24, 2000, it will not transfer
shares of HSNi stock (or convert HSNi Class B Common Stock into HSNi Common
Stock, subject to certain exceptions) which it acquires at the Closing.
Rights of First Refusal and Tag-Along Rights
Each of Universal and Mr. Diller have a right of first refusal with respect
to certain sales of HSNi securities by the other party. Liberty's rights in this
regard are secondary to any Universal right of first refusal on transfers by Mr.
Diller. Liberty and Mr. Diller each also generally has a right of first refusal
with respect to certain transfers by the other party. In addition, Universal has
a right of first refusal (subject to Mr. Diller not having exercised his right
of first refusal) with respect to sales by Liberty prior to August 24, 2000 of a
number of shares of HSNi stock having the aggregate number of votes represented
by the shares of HSNi Common Stock and HSNi Class B Common Stock received by
Universal at the Closing. Rights of first refusal may be exercised by the
stockholder or the stockholder's designee, subject to the terms of the
Stockholders Agreement.
In addition, Mr. Diller and Liberty have agreed to grant the other
stockholder a right to "tag along" (i.e., participate on a pro rata basis) on
certain sales of HSNi stock by the transferring stockholder. These tag-along
rights are subject to a number of exceptions, including relating to the quantity
of shares sold or the permitted transfers described in the first paragraph above
under "-- Restrictions on Transfers."
In the event that Universal transfers a substantial amount of its HSNi
stock (more than 50% of its interest as of the Closing or an amount that results
in a third party owning a greater percentage of the HSNi equity than that owned
by Universal, Liberty or any other stockholder and which represents at least 25%
of the Total Voting Power), Universal has granted a tag-along right to each of
Liberty and Mr. Diller.
THE TRANSACTION
37
<PAGE> 50
Under the Governance Agreement, transfers of HSNi securities by Universal
(whether before or after the CEO Termination Date or such date as Mr. Diller
becomes Disabled) are subject to a right of first refusal in favor of HSNi (but
secondary to Mr. Diller's first refusal right), as long as Universal
beneficially owns at least 20% of the total HSNi securities. This right of first
refusal does not apply to permitted transfers by Universal under the Governance
Agreement, which are permitted prior to the CEO Termination Date. See "--
Governance Agreement -- Transfer Restrictions."
Put and Call Rights
Universal, Liberty and Mr. Diller have agreed to certain put and call
arrangements, pursuant to which one party has the right to sell (or the other
party has the right to acquire) shares of HSNi stock held by another party.
Liberty/Universal Put and Call Rights. Prior to the CEO Termination Date
or such date as Mr. Diller becomes Disabled, Universal has the right to acquire
substantially all of Liberty's HSNi securities in the event that Mr. Diller and
Universal agree to take an action that would constitute a Fundamental Change
described in the second bullet under "Fundamental Changes" above but Liberty
does not provide its consent. In addition, at any time after the CEO Termination
Date or such date as Mr. Diller becomes Disabled, Liberty has the right to
require Universal to purchase substantially all of Liberty's HSNi securities,
and Universal has the reciprocal right to elect to acquire such shares.
Universal may effect these acquisitions through a designee. The Stockholders
Agreement sets forth provisions to establish the purchase price and conditions
for these transactions.
Universal also has certain rights and obligations to acquire Liberty's HSNi
securities in connection with a Permitted Business Combination, in the event
that Universal using its best efforts cannot provide Liberty with tax-free
consideration in connection with such a transaction. This provision effectively
means that, after such a transaction, Liberty would not own in excess of 20% of
the outstanding equity of the resulting company.
Diller Put. Following the CEO Termination Date or such date as Mr. Diller
becomes Disabled (the "PUT EVENT"), Mr. Diller has the right, during the
one-year period following the Put Event, to require Universal to purchase for
cash shares of HSNi stock beneficially owned by Mr. Diller and that were
acquired by Mr. Diller from HSNi (such as pursuant to the exercise of stock
options). If the Put Event occurs prior to the fourth anniversary of the
Closing, the purchase price will be an average purchase price for the HSNi
Common Stock for a period following public announcement of the Put Event. If the
Put Event occurs after that four-year period, but Mr. Diller exercises his put
right within 10 business days of the Put Event, the price will be based on the
market price of the HSNi Common Stock prior to public announcement of the Put
Event. In all other cases, the price per share received by Mr. Diller will be an
average market price for a period immediately preceding the exercise of the put.
Mr. Diller's put right must be transferred by Universal in the event that
it sells a certain amount of its HSNi securities to a third party. Universal's
obligations with respect to the put terminate at the time that Universal no
longer beneficially owns at least 10% of the HSNi equity. Liberty does not have
a tag-along right with respect to the Put Event exercise.
Transfers of Shares of HSNi Class B Common Stock
During the term of the Stockholders Agreement, transfers of shares of HSNi
Class B Common Stock are generally prohibited (other than to another stockholder
party or between a stockholder and its affiliates). If a stockholder proposes to
transfer these shares, Mr. Diller is entitled to first swap any shares of HSNi
Common Stock he owns for such shares and, thereafter, any other non-transferring
stockholder (with Universal's right preceding Liberty's) may similarly swap
shares of HSNi Common Stock for shares of HSNi Class B Common Stock proposed to
be transferred. To the extent there remain shares of HSNi Class B Common Stock
that the selling stockholder would otherwise transfer to a third party, such
shares must be converted into shares of HSNi Common Stock prior to the transfer.
This restriction does not apply to, among other transfers, a transfer by
Universal after the CEO Termination Date. Under the Governance Agreement, a
transferee of
THE TRANSACTION
38
<PAGE> 51
Universal's shares of HSNi Class B Common Stock must agree to the conduct and
securities ownership restrictions applicable to Universal, if such transferee
would own at least 10% of the Total Voting Power.
BDTV Entity Arrangements
Mr. Diller and Liberty will continue to have substantially similar
arrangements with respect to the voting control and ownership of the equity of
the BDTV Entities, which hold a substantial majority of the Total Voting Power.
These arrangements effectively provide that Mr. Diller controls the voting of
HSNi securities held by these entities, other than with respect to Fundamental
Changes, and Liberty retains substantially all of the equity interest in such
entities. If applicable law permits Liberty to hold directly the shares of HSNi
stock held by the BDTV Entities, then Liberty may purchase Mr. Diller's nominal
equity interest in these entities for a fixed price, in which case the shares of
HSNi stock then held by Liberty would otherwise be subject to the proxy
described above held by Mr. Diller with respect to Liberty's and Universal's
shares of HSNi stock pursuant to the Stockholders Agreement.
Termination of Stockholders Agreement
Universal's rights and obligations generally terminate at such time as
Universal no longer beneficially owns at least 10% of the HSNi equity.
Mr. Diller's and Liberty's rights and obligations under this agreement
generally terminate (other than with respect to Mr. Diller's put right) at such
time as, in the case of Mr. Diller, he no longer beneficially owns at least
1,100,000 shares of HSNi equity securities, and, in the case of Liberty,
1,000,000 shares. Certain of Liberty's rights and obligations relating to its
put/call arrangements with Universal and its tag-along rights terminate when it
no longer has the right to consent to Fundamental Changes under the Governance
Agreement. See "-- Governance Agreement -- Fundamental Changes." Mr. Diller's
rights and obligations (other than with respect to Mr. Diller's put right) also
generally terminate upon the CEO Termination Date or such date as Mr. Diller
becomes Disabled.
Transferees of HSNi securities as permitted by the Stockholders Agreement
and who would beneficially own in excess of 15% of the Total Voting Power are
generally not entitled to any rights of the transferring stockholder under the
agreement but are, for a period of 18 months, subject to the obligations
regarding the election of directors. These transferees must also vote with
respect to Fundamental Changes in the manner agreed upon by the other two
stockholders. In addition, a transferee of Liberty or Mr. Diller who would own
that amount of the Total Voting Power would also be subject, for a period of 18
months, to the limitations on acquisitions of additional HSNi securities
summarized above under "-- Liberty Conduct Limitations; Board Representation."
SPINOFF AGREEMENT
Universal, Liberty and HSNi are parties to the Spinoff Agreement, which
generally provides for interim arrangements relating to management of HSNi and
efforts to achieve the Spinoff or a sale of HSNi's broadcast stations and, in
the case of a Spinoff, certain arrangements relating to their respective rights
(including preemptive rights) in HSNi resulting from the Spinoff. The provisions
of the Spinoff Agreement do not become operative until the earlier of the CEO
Termination Date or such date as Mr. Diller becomes Disabled.
Liberty and Universal have agreed to use their reasonable best efforts to
cause an interim CEO to be appointed, who is mutually acceptable to them and is
independent of Liberty and Universal. If Universal elects, within 60 days of the
CEO Termination Date or such date as Mr. Diller becomes Disabled, to effect a
sale of HSNi's broadcast stations, this designated CEO would generally have a
proxy to vote Liberty's HSNi stock, at Universal's option, either in such CEO's
discretion or in the same proportion as the public stockholders, pending
completion of the station divestiture.
If Universal elects to complete the station divestiture, Liberty and
Universal (and HSNi) have agreed to use best efforts to cause the divestiture to
be structured as a tax-free distribution to HSNi's shareholders (the
THE TRANSACTION
39
<PAGE> 52
Spinoff). If a tax-free Spinoff is not available, HSNi has agreed to use its
best efforts to sell the stations, except that if the HSNi Board (other than any
designees of Universal or Liberty) concludes that a taxable spinoff, when
compared with a sale, represents a superior alternative, HSNi will consummate a
taxable spinoff. Universal has agreed to reimburse Liberty in connection with
any such taxable spinoff in an amount up to $50 million with respect to any
actual tax liability incurred by Liberty in such a transaction.
If Universal makes the election described above, Liberty has agreed not to
transfer, directly or indirectly, any of its HSNi Common Stock or Class B Common
Stock for a period of fourteen months after the CEO Termination Date (or such
date as Mr. Diller becomes Disabled) if such transfer would result in Universal
and Liberty ceasing to own at least 50.1% of the outstanding HSNi voting power
(as long as Universal has not transferred more than 3% of the outstanding HSNi
stock following the Closing).
The Spinoff Agreement also contains agreements between Universal and
Liberty regarding the selection of the CEO of the company resulting from the
Spinoff, and provides that the Stockholders Agreement shall continue in effect
subject to its terms with respect to HSNi following the Spinoff.
Liberty and Universal have also agreed not to take any action under the
Spinoff Agreement that would cause the loss or termination of HSNi's FCC
licenses or cause the FCC to fail to renew those licenses.
HSNi has agreed that, so long as (i) Universal beneficially owns at least
40% of the total equity securities of HSNi and no other stockholder owns more
than the amount owned by Universal, or (ii) Liberty and Universal together own
at least 50.1% of such equity securities, HSNi will use its reasonable best
efforts to enable Universal and Liberty to achieve the purposes of the Spinoff
Agreement.
The Spinoff Agreement terminates, with respect to Universal, at the earlier
of the termination of Universal's right to seek a Spinoff under the Investment
Agreement or such time as Universal beneficially owns less than 7.5% of the
voting power of the HSNi equity securities. Liberty's rights terminate at the
earlier of the termination generally of Liberty's rights and obligations under
the Stockholders Agreement or when Liberty beneficially owns less than 7.5% of
the voting power of HSNi equity securities.
ANCILLARY BUSINESS AGREEMENTS
In connection with the Transaction, HSNi and Universal have agreed to
various other business relationships relating to UTV and the other businesses of
Universal. These agreements cover the following principal areas:
Domestic Television Distribution Agreement
For a period of 15 years following the Closing, HSNi will generally be the
exclusive distributor in the United States of television programs with respect
to which Universal is retaining, or acquires, distribution rights. This
programming includes substantial television product owned by Universal as part
of its television library (such as series no longer in production, "made for
television" movies, animated programs, action adventures and talk shows). This
exclusive relationship is subject to certain exceptions regarding future
extraordinary transactions by Universal and certain excluded programming. HSNi
will receive a 10% distribution fee (based on gross receipts) for Universal
television library programs and any one-hour programs it distributes and fees
ranging from 5% to 7.5% for other programs.
International Television Distribution Agreement
The LLC has granted Universal an exclusive right similar to the rights
described above regarding the distribution outside the United States of
programming owned or controlled by the LLC (other than the Home Shopping
programming services and similar home shopping programming of HSNi). Universal
will generally receive a 10% distribution fee with respect to distributed LLC
programs. Subject to certain exceptions, HSNi has generally agreed that it will
not engage in the international programming distribution business, and Universal
has agreed to give first priority to HSNi programming under its output and
volume deals with foreign distribution customers.
THE TRANSACTION
40
<PAGE> 53
International TV Joint Venture
Universal and HSNi have agreed to form a 50-50 joint venture to be managed
by Universal which will own, operate and exploit the international development
of USA Network, Sci-Fi Channel and a new action/suspense channel known as "13th
Street." Under the agreement, unless HSNi elects not to participate in such
venture (in which case Universal will acquire HSNi's 50% interest (or Sci-Fi
Europe and USA's international business) for an agreed-upon price) each of
Universal and HSNi has agreed to fund up to $100 million in additional capital
contributions. The developed international channels will be managed by
Universal. The international joint venture agreement will also generally, so
long as HSNi is a member of the venture, give Universal the option to develop,
as part of the venture, other international channels based on new domestic
channels that HSNi develops (other than home shopping channels and local
broadcast stations).
Other Ongoing Business Relationships
HSNi and Universal have also agreed that, with respect to television
productions for the major networks produced by UTV or USAN in Southern
California or Florida, the LLC generally will utilize the preproduction,
production and post-production facilities of Universal, at specified rates.
The parties will enter into various agreements relating to merchandising of
products derived from the UTV acquired programs, video distribution of LLC
programs, music publishing and theme park rights. In addition, Universal has
agreed to provide certain services to the LLC on a transitional basis for up to
one year following the Closing at specified fees.
FINANCING OF THE TRANSACTION
In connection with the Transaction, HSNi has entered into a letter
arrangement for a $1.6 billion senior secured credit facility, of which HSNi
will borrow initially $1.355 billion for the Transaction and $100 million to
refinance existing debt. Chase Securities, Inc. is the Advisor and Arranger with
The Chase Manhattan Bank as Administrative Agent. The credit facility will
consist of the following:
- a revolving credit facility for $600 million; and
- two term loans for a total of $1 billion.
HSNi expects the average cost of borrowing, based on the current market
interest rate and projected total debt to EBITDA ratio, to be 7.5% for 1998. The
credit facility is expected to be secured by the stock of HSNi's operating
subsidiaries and guaranteed by HSNi and its subsidiaries, including subsidiaries
of the LLC.
HSNi expects that certain transactions anticipated to occur within six
months of the Closing (including obligations of Universal pursuant to the
Investment Agreement to purchase additional LLC Shares in the event of certain
issuances of HSNi securities) will allow HSNi to reduce its total outstanding
debt to approximately $1 billion. These transactions are summarized below:
- HSNi expects to sell a total of $200 million in additional equity of HSNi
to a third party or parties in a private transaction. Pursuant to the
terms of the Transaction, Universal is obligated to exercise its
preemptive right in full with respect to any such third-party investment
that occurs within four months of the Closing at a price of $40 per share
in cash. Accordingly, based upon issuance of such shares to a third party
at the closing price of HSNi Common Stock on the last trading day prior
to the printing of this Proxy Statement ($47.75), Universal would
contribute $137 million in exchange for 3.43 million LLC Shares.
- Pursuant to the terms of the indenture relating to the Convertible
Subordinated Debentures, HSNi has the right (assuming the HSNi Common
Stock trades over a specified period at prices of at least $37.33 per
share), on or after March 1, 1998, to require the conversion of such
Convertible Subordinated Debentures for an aggregate of 3.75 million
shares of HSNi Common Stock. Pursuant to the terms of the Transaction,
Universal is obligated to exercise its preemptive right in full with
respect to the conversion of the Convertible Subordinated Debentures.
Accordingly, upon conversion of the Convertible Subordinated Debentures,
Universal would contribute $123 million in exchange for 3.07 million LLC
Shares.
THE TRANSACTION
41
<PAGE> 54
- On October 23, 1997, HSNi announced the proposed Ticketmaster Merger (as
hereinafter defined), pursuant to which HSNi would acquire all publicly
held shares of common stock of Ticketmaster in a tax-free merger
transaction in which each share of Ticketmaster would be exchanged for
.506 of a share of HSNi Common Stock, for a total issuance of 6.86
million shares of HSNi Common Stock. Pursuant to the terms of the
Transaction, Universal is obligated to exercise its preemptive right with
respect to a maximum issuance of 6.3 million shares of HSNi Common Stock
(at $40 per share), and HSNi expects that Universal would exercise its
preemptive right on the entire amount of the Ticketmaster Merger.
Accordingly, based on a $47.75 share price for the optional portion of
Universal's preemptive right, Universal would contribute $224 million in
exchange for 5.61 million LLC Shares.
The foregoing transactions are subject to a number of factors not within the
control of HSNi, including stock market prices, general economic conditions,
negotiations with other parties and regulatory approvals. There can be no
assurance that HSNi's expectations regarding the above-summarized transactions
will be realized, or the time at which such transactions may be completed.
The following chart shows the effect of the anticipated transactions and the
amount of HSNi debt outstanding, assuming cash proceeds are used to repay such
debt:
<TABLE>
<CAPTION>
CASH PROCEEDS
NUMBER OF ---------------------
HSNi OR LLC (in millions)
SECURITIES
---------------
(in millions)
<S> <C> <C>
Third Party Investment*..................................... 4.19 $ 200
Universal................................................... 3.43 137
Convertible Debt............................................ 3.75 --
Universal................................................... 3.07 123
Ticketmaster Merger......................................... 6.86 --
Universal................................................... 5.61 228
------
TOTAL CASH PROCEEDS......................................... $ 688
TOTAL OUTSTANDING DEBT OF HSNi**............................ $ 990
</TABLE>
- ---------------
* Assumes a third-party contribution of $200 million valued at $47.75 per
share, the closing price of HSNi Common Stock on January 9, 1998.
** Assumes a bank borrowing of $1.455 billion (which includes $100 million to
refinance existing debt), existing Savoy debt of $73 million (excluding the
portion of the obligation attributable to SF Broadcasting's minority
shareholder) plus the assumption of Ticketmaster debt of $150 million less
the total cash proceeds of $688 million.
INTERESTS OF CERTAIN PERSONS IN THE TRANSACTION
GRANT OF HSNi OPTIONS TO MESSRS. DILLER AND KAUFMAN
In connection with the Transaction, Mr. Diller and Mr. Kaufman have been
granted options to purchase 4,750,000 shares and 250,000 shares, respectively,
of HSNi Common Stock, in each case, at an exercise price of $38.625 per share
pursuant to the 1997 Incentive Plan, which 1997 Incentive Plan is subject to
stockholder approval.
CERTAIN OTHER INTERESTS OF MR. DILLER
In connection with the Transaction, Mr. Diller entered into the
Stockholders Agreement, which supercedes the current stockholders agreement with
Liberty. The Stockholders Agreement includes, among other things, the right of
Mr. Diller to require Universal to purchase certain shares of HSNi stock
beneficially owned by Mr. Diller following the CEO Termination Date or such date
as Mr. Diller becomes Disabled (which right will supercede a similar put right
as against Liberty contained in the current stockholders
THE TRANSACTION
42
<PAGE> 55
agreement between Mr. Diller and Liberty). For a description of this put right,
see "-- Related Agreements -- Stockholders Agreement -- Put and Call
Rights -- Diller Put." In addition, HSNi has proposed an amendment to the HSNi
Certificate to provide that HSNi's Chief Executive Officer can only be removed
without cause by the affirmative vote of at least 80% of the entire HSNi Board.
This provision would only be effective in the event that the Transaction is
consummated, and only while Mr. Diller is Chief Executive Officer. See "The
Annual Meeting -- Description of Proposals and HSNi Board Recommendations --
Removal Proposal." In addition, it is expected that Mr. Diller will be elected a
member of the Seagram Board of Directors upon consummation of the Transaction.
INTERESTS IN HSNi SECURITIES AND OPTIONS
As of the Record Date, the executive officers and directors of HSNi and
their affiliates beneficially owned shares of HSNi Common Stock and HSNi Class B
Common Stock as set forth under "The Annual Meeting -- Security Ownership of
Certain Beneficial Owners and Management."
THE TRANSACTION
43
<PAGE> 56
44
<PAGE> 57
FINANCIAL AND BUSINESS INFORMATION
RECENT DEVELOPMENTS
TICKETMASTER PROPOSED TRANSACTION
In October, 1997, HSNi announced a proposal to acquire all publicly held
shares of common stock of Ticketmaster in a tax-free merger transaction in which
each share of Ticketmaster would be exchanged for .506 of a share of HSNi Common
Stock, subject to adjustment in certain circumstances (the "TICKETMASTER
MERGER"). The Board of Directors of Ticketmaster has formed a special committee
to consider HSNi's proposal to acquire the remaining Ticketmaster shares for
shares of HSNi Common Stock. HSNi and Ticketmaster have not entered into a
definitive agreement regarding HSNi's proposal.
MARKET PRICE AND DIVIDEND INFORMATION
Shares of HSNi Common Stock have been traded on the Nasdaq National Market
("NASDAQ") under the symbol "HSNi" since December 23, 1996 and previously under
the symbol "SKTV" since August 26, 1993. Each share of HSNi Class B Common Stock
is convertible into one share of HSNi Common Stock. The following table sets
forth the range of high and low sale prices reported on NASDAQ for HSNi Common
Stock for the periods indicated:
<TABLE>
<CAPTION>
HSNi COMMON STOCK
--------------------
HIGH LOW
-------- --------
<S> <C> <C>
Year Ended December 31, 1996
First Quarter.............................................. $ 34.750 $ 27.500
Second Quarter............................................. $ 34.500 $ 28.000
Third Quarter.............................................. $ 30.500 $ 21.250
Fourth Quarter............................................. $ 26.500 $ 21.000
Year Ended December 31, 1997
First Quarter.............................................. $ 29.375 $ 20.000
Second Quarter............................................. $ 34.250 $ 22.250
Third Quarter.............................................. $ 41.125 $ 30.625
Fourth Quarter............................................. $ 51.750 $ 36.750
Year Ended December 31, 1998
First Quarter (until January 9, 1998)...................... $ 51.750 $ 47.000
</TABLE>
On October 17, 1997, the last trading day prior to the public announcement
of the proposed Transaction, HSNi Common Stock closed at $38.625 per share. On
January 9, 1998, the latest practicable trading day before the printing of this
Proxy Statement, HSNi Common Stock closed at $47.750. Stockholders are advised
to obtain current market quotations.
HSNi has never paid cash dividends and does not anticipate paying cash
dividends on HSNi Common Stock.
FINANCIAL & BUSINESS INFORMATION
45
<PAGE> 58
STOCK PRICE PERFORMANCE GRAPH
The Stock Price Performance Graph shall not be deemed incorporated by
reference by any general statement incorporating by reference this Proxy
Statement into any filing under the Securities Act or the Securities Exchange
Act of 1934, as amended (the "EXCHANGE ACT," and together with the Securities
Act, the "ACTS"), except to the extent that HSNi specifically incorporates this
information by reference, and shall not otherwise be deemed filed under such
Acts.
The graph below compares cumulative total return of HSNi Common Stock, the
Nasdaq Composite Index and the Nasdaq Tele-Comm Index based on $100 invested at
the close of trading on December 31, 1992 through the date of the latest
available information. HSNi selected the Nasdaq Tele-Comm Index as its Peer
Group because the Nasdaq Tele-Comm Index is the category designated for HSNi by
the NASD.
<TABLE>
<CAPTION>
Measurement Period NASDAQ TELE- COMM NASDAQ COMPOSITE
(Fiscal Year Covered) HSNi INDEX INDEX
<S> <C> <C> <C>
12/31/92 100.00 100.00 100.00
8/31/93 355.00 148.43 109.32
8/31/94 240.00 139.20 113.79
8/31/95 726.25 164.39 153.24
12/31/95 695.00 168.50 158.68
12/31/96 475.01 172.29 195.17
11/28/97 892.50 241.81 243.36
</TABLE>
FINANCIAL & BUSINESS INFORMATION
46
<PAGE> 59
SELECTED HISTORICAL FINANCIAL DATA OF HSNi
The following HSNi selected historical financial data have been derived
from the financial statements of HSNi. The data should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Consolidated Financial Statements of HSNi and the related
notes appearing in the HSNi 1996 Form 10-K and HSNi's Quarterly Report on Form
10-Q for the nine months ended September 30, 1997, which we incorporate here by
reference.
<TABLE>
<CAPTION>
NINE MONTHS NINE MONTHS FOUR MONTHS
SUMMARY CONSOLIDATED ENDED ENDED YEAR ENDED ENDED YEARS ENDED AUGUST 31,
STATEMENTS OF SEPTEMBER 30, SEPTEMBER 30, DECEMBER 31, DECEMBER 31, -----------------------------------------
OPERATIONS DATA 1997(1) 1996(1) 1996(2) 1995 1995 1994 1993 1992
- --------------------- ------------- ------------- ------------ ------------ -------- -------- -------- --------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenue.......... $ 871,493 $ 33,249 $ 75,172 $ 15,980 $ 47,918 $ 46,563 $ 46,136 $ 46,729
Earnings (loss)
before cumulative
effect of change in
accounting
principle(3)....... 9,758 (1,429) (6,539) (2,882) 115 (899) (6,386) (15,222)
Net earnings
(loss)(4).......... 9,758 (1,429) (6,539) (2,882) 115 (3,878) (6,386) (15,222)
Earnings (loss) per
common share:
Earnings (loss)
before cumulative
effect of change in
accounting
principle(5)....... .18 (.15) (.61) (.31) .01 (.10) (.72) --
Net earnings
(loss)(5).......... .18 (.15) (.61) (.31) .01 (.44) (.72) --
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31, AUGUST 31,
SUMMARY CONSOLIDATED ----------------------------- --------------------------- -----------------------------------------
BALANCE SHEET DATA 1997(1) 1996(1) 1996(1) 1995 1995 1994 1993 1992
- --------------------- ------------- ------------- ------------ ------------ -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Working capital
(deficit).......... $ 56,189 $ 4,160 $ (24,444) $ 7,553 $ 6,042 $ 1,553 $ 4,423 $ (594)
Total assets......... 2,637,305 122,674 2,116,232 136,670 142,917 145,488 153,718 153,491
Long-term
obligations........ 428,754 83,922 271,430 95,980 97,937 114,525 128,210 185
Stockholders' equity
(deficit).......... 1,441,538 8,162 1,158,749 7,471 9,278 2,614 6,396 (87,064)
</TABLE>
- ---------------
(1) Includes 75 days of Ticketmaster's results of operations. The acquisition by
HSNi of its interest in Ticketmaster occurred on July 17, 1997.
(2) As a result of the Savoy Merger and Home Shopping Merger, the results of
operations for the year ended December 31, 1996 includes HSNi (formerly
Silver King Communications, Inc.) for the full year and 11 and 12 days of
Home Shopping and Savoy, respectively. The balance sheet reflects purchase
accounting adjustments for the consolidated entity. Performance bonus
commissions of $3.4 million were not paid to HSNi by Home Shopping for 1996
as a result of the Home Shopping Merger.
(3) In fiscal 1994, HSNi adopted Statement of Financial Accounting Standards No.
109 "Accounting for Income Taxes." The cumulative effect of the accounting
change resulted in a charge of approximately $3.0 million. Prior years'
financial statements were not restated.
(4) Beginning in fiscal 1992, the SKTV Stations were charged interest based on
the historical cost of the SKTV Stations to HSNi and Home Shopping's then
cost of long-term borrowings. In fiscal 1993, the SKTV Stations were charged
interest expense on the note payable to HSNCC, a wholly-owned subsidiary of
Home Shopping, at a rate of 9.5% per annum. In fiscal 1994, HSNi paid
interest to HSNCC until August 1, 1994 when HSNi repaid the long-term
obligation to HSNCC.
(5) Net earnings (loss) per share for the year ended December 31, 1996, for the
four months ended December 31, 1995 and for the years ended August 31, 1995,
1994 and 1993 have been computed based upon the weighted average shares
outstanding of 10,785,743; 9,394,696; 9,144,772; 8,881,380; and 8,851,339,
respectively. Loss per share for fiscal year 1992 has been omitted due to
lack of comparability.
FINANCIAL & BUSINESS INFORMATION
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<PAGE> 60
THE ACQUIRED BUSINESSES
DESCRIPTION OF THE ACQUIRED BUSINESSES
USAN
General
USAN operates two domestic advertiser-supported 24-hour cable television
networks -- USA Network and Sci-Fi Channel. USAN, through a joint venture,
operates USA Brazil and has a licensing agreement with USA Latin America. USAN's
executive offices are located at 1230 Avenue of the Americas, New York, New
York, 10020. USAN employs approximately 550 full-time employees.
The USA Network program service began as the MSG Sports Network in 1977. In
1980, it was reorganized into its present form under the USA Network name. Since
that time, it has grown into one of the nation's most widely distributed and
viewed satellite-delivered television networks. According to A.C. Nielsen, as of
December 1997, USA Network is available in approximately 72.4 million U.S.
households (75% of the total U.S. homes with televisions). USA Network is a
general entertainment network featuring original series and movies, theatrical
movies, off-network television series and major sporting events, designed to
appeal to the available audiences during particular dayparts. In general, USA
Network's programming is targeted at viewers between the ages of 18 to 54.
Presently, USA Network's program line-up features original series, produced
exclusively for USA Network, including the following: La Femme Nikita, Silk
Stalkings and Pacific Blue. USA Network also exhibits approximately 22 movies
produced exclusively for it each year, more than any other television network.
USA Network's programming includes off-network series such as Baywatch and
Walker, Texas Ranger and major theatrically-released feature films. USA Network
is home to exclusive midweek coverage of the U.S. Open Tennis Championships and
early round coverage of The Masters and major PGA Tour golf events.
USA Network typically enters into long-term agreements for its major
off-network series programming. Its original series commitments usually start
with less than a full year's commitment, but contain options for further
production over several years. USA Network acquires theatrical films in both
their "network" windows and "pre-syndication" windows. Under these arrangements,
the acquisition of such rights is concluded many years before the actual
exhibition of the films begins on the network. USA Network's original films
start production less than a year prior to their initial exhibition. USA Network
obtains the right to exhibit both its acquired theatrical films and original
films numerous times over multiple year periods.
Sci-Fi Channel was acquired and launched in 1992. It has been one of the
fastest-growing satellite-delivered networks since its inception. According to
A.C. Nielsen, as of December 1997, Sci-Fi Channel is available in 46.7 million
U.S. households. Sci-Fi Channel features science fiction, horror, fantasy and
science-fact oriented programming. The network's programming is designed to
appeal to viewers between the ages of 18 to 49. Sci-Fi Channel's program lineup
includes original programs produced specifically for it, such as Sightings and
Mystery Science Theater 3000, as well as science fiction movies and classic
science fiction series, such as The Twilight Zone, Lost in Space and Quantum
Leap. Beginning in September 1998, Sci-Fi Channel will have the exclusive right
to carry the original Star Trek series. Sci-Fi Channel's programming
arrangements for off-network series, original series, theatrical movies and
original movies are similar to those entered into by USA Network.
USA Network and Sci-Fi Channel each distribute their programming service on
a 24-hour per day, seven day per week basis. Both networks are distributed in
all 50 states and Puerto Rico via satellite for distribution by cable television
operators and other distributors (e.g., direct-to-home satellite distributors).
Each of the networks enters into agreements with cable operators and other
distributors which agree to carry the programming service, generally as part of
a package with other advertiser-supported programming services. These agreements
are multi-year arrangements in which the distributor pays USAN a fee for each
subscriber to the particular programming service.
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USA Network and Sci-Fi Channel derive virtually all of their revenues from
two sources. The first is the per-subscriber fees paid by the cable operators
and other distributors. The second is from the sale of advertising time within
the programming carried on each of the networks.
In 1994, through a licensing agreement with Latusa Company CV ("LATUSA"),
USAN launched USA Latin America, a general entertainment satellite-delivered
network, transmitted primarily in Spanish (either dubbed or subtitled), that
serves Mexico, Central America and South America (other than Brazil). USAN
retains 60% of the revenues generated by the network while Latusa retains the
other 40% of such revenues. USAN costs of USA Latin America are limited to costs
of acquiring programming rights and New York overhead costs. USA Latin America
transmits programming 24 hours per day, seven days per week. The network
consists primarily of U.S.-produced programming, including series such as
Frasier and Cybill, and theatrical motion pictures. Revenues are generated from
fees paid by the local distributors of the network and from advertising sales.
USA Latin America presently is available in approximately six million
households.
USA Brazil was launched in 1996 and is 50% owned by subsidiaries of USAN
and 50% owned by Globosat Programadura Ltd. USA Brazil is a general
entertainment satellite-delivered network operating only in Brazil. USA Brazil
transmits programming 24 hours per day, seven days per week that is dubbed or
subtitled in Portuguese. Revenues are generated from fees paid by the local
distributors of the network and from advertising sales. USA Brazil presently is
available in approximately 1.4 million households.
USAN's interests in USA Latin America and USA Brazil will be contributed at
the Closing to a newly formed joint venture that will be owned equally by
Universal and the LLC.
Sci-Fi Channel Europe, L.L.C. ("SCI-FI EUROPE"), which is related to USAN
through common ownership, is not being acquired by HSNi, but also will be
contributed to the newly formed joint venture that is expected to be owned
equally by Universal and the LLC. Sci-Fi Europe was launched in late 1995. It
serves Belgium, Finland, Ireland, Luxembourg, The Netherlands, Norway, Sweden,
Denmark and the United Kingdom. It carries programming 24 hours per day, seven
days per week via cable and also serves the direct-to-home market in the United
Kingdom separately via satellite seven days per week for eight hours during
prime time and late-night. The network features science fiction, horror, fantasy
and science-fact orientated programming. Sci-Fi Europe distributes its
programming in English, although occasionally it is dubbed or subtitled into the
language of the receiving country. As of 1996, the service was expanded to reach
South Africa and six countries contiguous to South Africa. Revenues are
generated from fees paid by the local distributors of the network and from
advertising sales. Sci-Fi Europe presently is available in approximately 5.6
million households (5.5 million in Europe and 0.1 million in southern Africa).
COMPETITION
In recent years, there has been a proliferation of satellite-delivered
networks which compete with USA Network and Sci-Fi Channel. Cable operators and
other distributors only contract to carry a limited number of the available
networks. Therefore, they may decide not to offer a particular network to their
subscribers, or they may package a network in such a manner (for example, by
charging an additional fee) that only a portion of their subscribers will
receive the service. In addition, there has been increased consolidation among
cable operators, so that USA Network and Sci-Fi Channel have become increasingly
subject to the carriage decisions made by a small number of operators. This
consolidation may reduce the per-subscriber fees received from cable operators
in the future. The consolidation also means that the loss of any one or more of
the major distributors could have a material adverse impact on the networks.
The competition for advertising revenues also has become more intense as
the number of overall television networks has increased. While many factors
affect advertising rates, ultimately they are dependent on the numbers and types
of viewers which a program attracts. As more networks compete for viewers, it
becomes increasingly difficult to increase or even maintain a network's number
of viewers. Moreover, to do so may require a network to expend significantly
greater amounts of money on programming. Therefore, increased pressure may be
placed on the networks' ability to generate advertising revenue increases
consistent with the increases they have achieved in the past.
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The competition for third-party programming is likely to increase as more
networks seek to acquire such programming. In addition, many networks now are
affiliated with companies which produce programming. As a result, non-affiliated
networks may have a diminished capacity to acquire product from production
companies affiliated with other networks.
Regulation
The Telecommunications Act of 1996 (the "TELECOMMUNICATIONS ACT") became
law on February 8, 1996. The Telecommunications Act modifies certain provisions
of the Communications Act, and the Cable Television Consumer Protection and
Competition Act of 1992. The intent of the Telecommunications Act is to
establish a pro-competitive, deregulatory framework for telecommunications, by
among other things, permitting new competitors to enter the business of
distributing video programming. USAN is unable, at this time, to predict the
effect, if any, that this legislation, or the FCC's implementation thereof, may
have on USAN's operations.
Properties
The executive offices of USAN are located at 1230 Avenue of the Americas,
New York, New York 10020. USAN leases approximately 168,000 square feet at this
location pursuant to a lease that continues until March 31, 2005 subject to two
five-year options to continue the term. USAN also has smaller offices in
Chicago, Detroit, Los Angeles, Miami and London.
USAN also leases approximately 55,000 square feet in Jersey City, New
Jersey, where USAN has its broadcast operations center. This space is used to
originate and transmit USA Network and Sci-Fi Channel. Post-production for both
the domestic and international networks, including, editing, graphics and
duplication, also is performed at this location. The lease for this space
continues through April 30, 2009, and there are options to continue the term
beyond that time.
Legal Proceedings
USAN, along with almost every other satellite-delivered network, is
involved in continuing disputes regarding the amounts to be paid by it for the
performance of copyrighted music from members of the American Society of
Composers, Authors and Publishers ("ASCAP") and by Broadcast Music, Inc.
("BMI"). The payments to be made to ASCAP will be determined in a "rate court"
proceeding under the jurisdiction of the U.S. District Court in the Southern
District of New York. In the initial phase of this proceeding, it was determined
that USAN must pay ASCAP a specified interim fee, calculated as a percentage of
the gross revenues of each of USA Network and Sci-Fi Channel. This fee level is
subject to upward or downward adjustment in future rate court proceedings, or as
the result of future negotiations, for all payments subsequent to January 1,
1986 with respect to USA Network and for all payments subsequent to launch with
respect to Sci-Fi Channel. All ASCAP claims prior to these times have been
settled and are final.
As to BMI, USAN has agreed with BMI with respect to certain interim fees to
be paid by both USA Network and Sci-Fi Channel, subsequent to July 1, 1992 and
subsequent to launch, respectively. These interim fees are subject to upward or
downward adjustment, based on a future negotiated resolution or submission of
the issue to BMI's own federal "rate court."
USAN cannot predict the final outcome of the above disputes, but does not
believe that it will suffer any material liability as a result thereof.
USAN also is a defendant in other legal actions involving claims incidental
to the normal conduct of the running of its business. The amounts that may be
paid in these actions are not believed to be material to the financial position
of USAN or the results of operations or cash flows.
UNIVERSAL TELEVISION GROUP/UTV
General
Universal Television Group (which includes UTV) is the domestic television
production and the domestic and international television distribution business
of Universal. Universal Television Group currently produces and distributes
motion picture films intended for initial exhibition on television ("TELEVISION
FILMS") and home video in both domestic and international markets. These
productions include original programming
FINANCIAL & BUSINESS INFORMATION
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for network television, first-run syndication through local television stations,
pay television, basic cable and home video and made-for-television movies.
Universal Television Group also distributes motion picture films from its
extensive television and feature film library in both domestic and international
markets. The domestic and international distribution operations are each
headquartered in Los Angeles on the Universal production lot. Domestic sales
offices are also located in New York, Chicago, Atlanta and Dallas. The
international distribution sales offices are located in Paris, London, Sydney,
Toronto, Miami and Amsterdam.
As a result of the Transaction, Universal Television Group will transfer
its domestic television production and distribution activities, UTV, to HSNi.
The UTV assets include shows currently in production for domestic airing,
including previously aired episodes, and all current development projects.
Universal Television Group will retain the shows which are currently being
produced for initial airing in international markets and also will retain its
feature film and television libraries and its international distribution
operations. Pursuant to a domestic television distribution agreement, HSNi will
generally be the exclusive distributor in the U.S. of television programs with
respect to which Universal is retaining, or acquires, distribution rights for a
period of 15 years. Pursuant to an international television distribution
agreement, the LLC granted Universal with a similar exclusive right regarding
the distribution outside the U.S. of programming owned or controlled by the LLC.
UTV produces television films and home video. These productions include
original programming for network television, first-run syndication through local
television stations, pay television, basic cable and home video. UTV has
produced programming for network television since the early 1950's and remains a
major supplier of network programming today. UTV is a leader in the first-run
syndication market currently producing Hercules: The Legendary Journeys and
Xena: Warrior Princess, both highly-rated programs in this market. In December
1996, UTV acquired Sally Jessy Raphael and The Jerry Springer Show when it
purchased substantially all of the production assets of Multimedia
Entertainment, Inc. ("MULTIMEDIA"). UTV generally retains foreign and
off-network distribution rights for programming originally produced for
television networks. In addition, UTV distributes original television
programming in domestic markets for first-run syndication as well as exhibition
on basic cable and in other media.
Production
Production generally includes four steps: development, pre-production,
principal photography and post-production. The production/distribution cycle
represents the period of time from development of the property through
distribution and varies depending upon such factors as type of product and
primary form of exhibition. Production activities are centered on the Universal
production lot. Some television films are produced, in whole or in part, at
other locations both inside and outside the United States.
Development of television films begins with ideas and concepts of producers
and writers which form the basis of a television series. Producers and writers
are signed to term agreements generally providing UTV with exclusive use of
their services for a term ranging from one to five years in the case of
producers and one to two years in the case of writers. Term agreements are
signed with such talent to develop network comedy and drama and first-run
syndication programming. Term agreements are also signed with actors, binding
them to UTV for a period of time during which UTV attempts to attach them to a
series under development. These term agreements represent a significant
investment for UTV.
In the case of network development, the ideas and concepts developed by
producers and writers are presented to broadcast networks to receive their
approval to develop a "pilot" that could possibly become a commitment from the
network to license a minimum number of episodes based on the pilot. In general,
the production cycle for network programming begins with the presentation of
pilots to network broadcasters in the fall of each year. Each May, networks
release their fall schedules, committing to the series production of pilots,
renewing existing programs and cancelling others. Networks typically commit to
seven to thirteen episodes for such new series with options to acquire
additional episodes for a negotiated license fee and twenty-two episodes for a
renewed series. Production on these series begins in June and continues through
March, depending upon the network commitment. The network broadcast season runs
from September through May. UTV incurs production costs throughout the
production cycle up through completion of an
FINANCIAL & BUSINESS INFORMATION
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<PAGE> 64
episode while networks remit a portion of the license fees to UTV upon
commencement of episodic production and a portion upon delivery of episodes.
UTV produces television films for the U.S. broadcast networks for primetime
television exhibition. Certain television films are initially licensed for
network television exhibition in the U.S. and are simultaneously syndicated
outside the U.S. Historically, UTV's customers for network television film
product have been concentrated with the three established major U.S. television
networks -- ABC, CBS and NBC. In recent years, Fox Broadcasting, UPN and the WB
Network have created new networks, decreasing to some extent UTV's dependence on
ABC, CBS and NBC and expanding the outlets for its network product. Revenue from
licensing agreements is recognized in the period that the films are first
available for telecast. Programming consists of various weekly series and "made
for television" feature length films. Current network programming includes
returning productions Law & Order, New York Undercover and Something So Right
and initial year productions of Players and The Tom Show. In the initial
telecast season, the network license provides for the production of a minimum
number of episodes, with the network having the option to order additional
episodes for both the current and future television seasons. Network licenses
give the networks the exclusive right to telecast a given series for a period of
time, generally four to five years. The success of any one series may be
influenced by the time period in which the network airs the series, the strength
of the programs against which it competes, promotion of the series by the
network and the overall commitment of the network to the series.
In addition to the broadcast networks, UTV has had a long-standing
relationship with USAN and its related entity, Sci-Fi Europe, producing original
programming and licensing off-network and off-syndication product. UTV licenses
seven to ten made-for-television movies per year to USA Network and has produced
the original series Weird Science and Campus Cops for the network. UTV is
currently producing the original series Sliders for USA Network and has licensed
48 previously developed episodes of Sliders that had originally aired on the Fox
Network. UTV has licensed to USA Network off-syndication episodes of Hercules:
The Legendary Journeys and Xena: Warrior Princess and off-network episodes of
New York Undercover that will become available for broadcast in the fall of
1998.
UTV also produces television film product that is initially syndicated
directly to independent television stations for airing throughout the broadcast
day and to network affiliated stations for non-primetime airing. Current
first-run syndication programming includes one hour weekly series including
returning productions of Hercules: The Legendary Journeys and Xena: Warrior
Princess as well as the initial year production of Team Knight Rider and talk
shows including returning productions of Sally Jessy Raphael and The Jerry
Springer Show. In an effort to become a leading producer in the talk show
market, Universal Television Group acquired Sally Jessy Raphael and The Jerry
Springer Show in December 1996 when it purchased substantially all the
production assets of Multimedia. Additionally, UTV has entered into an agreement
with talk show veteran Maury Povich to host a talk show that will premiere in
the fall of 1998.
UTV licenses television film product to independent stations and directly
to network affiliated stations in return for either a cash license fee, barter
or part-barter and part-cash. Barter syndication is the process whereby UTV
obtains commitments from television stations to broadcast a program in certain
agreed upon time periods. UTV retains advertising time in the program in lieu of
receiving a cash license fee, and sells such retained advertising time for its
own account to national advertisers at rates based on the projected number of
viewers. By placing the program with television stations throughout the United
States, an "ad hoc" network of stations is created to carry the program. The
creation of this ad hoc network of stations, typically representing a
penetration of at least 80% of total U.S. television households, enables UTV to
sell the commercial advertising time through advertising agencies for sponsors
desiring national coverage. The rates charged for this advertising time are
typically lower than rates charged by U.S. broadcast networks for similar
demographics since the networks' coverage of the markets is generally greater.
In order to create this ad hoc network of stations and reach 80% of total U.S.
television households, UTV must syndicate its programming with stations that are
owned and operated by the major broadcast networks and station groups, which are
essentially entities which own many stations in the major broadcast markets
across the United States. Without commitments from broadcast network stations
and station groups, the necessary market penetration may not be achieved which
may adversely affect the chances of success in the first-run syndication market.
FINANCIAL & BUSINESS INFORMATION
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Generally, television films produced for broadcast or cable networks or
barter syndication provide license fees and/or advertising revenues that cover
only a portion of the anticipated production costs. The recoverability of the
balance of the production costs and the realization of profits, if any, is
dependent upon the success of other exploitation including international
syndication licenses, subsequent basic cable and domestic syndication licenses,
releases in the home video market, merchandising and other uses. Universal
Television Group has been successful in exploiting the international market for
its television films. During the period from July 1, 1994 through June 30, 1997,
international sales as a percentage of total revenue has grown from
approximately 26% to 39%. During this period, international sales have made a
substantial contribution to UTV's net income. To ensure continued sales in the
international market, Universal has signed several international free television
output and volume agreements with television broadcasters in major international
territories. These agreements are described in more detail below.
Distribution
In general, during a series' initial production years (i.e., seasons one to
four), domestic network and international revenues fall short of production
costs. As a result, the series will likely remain in a deficit position until
sold in the domestic syndication market. The series will be available for airing
in the off-network syndication market after a network's exclusivity period ends,
typically the September following the completion of the fourth network season or
the fifth season if the series was a mid-season order. For a successful series,
the syndication sales process generally begins during the third network season.
The price that a series will command in syndication is a function of supply and
demand. UTV syndicated series are sold for cash and/or bartered services (i.e.,
advertising time) for a period of at least five years. Barter transactions have
played an increasingly important role in the syndication process as they can
represent a majority of the distributor's syndication revenue.
UTV will distribute its current programming domestically. In addition, the
LLC and Universal have agreed that UTV will have the exclusive right to
distribute domestically Universal's vast television library, with programming
dating back to the 1950's and including such series as Alfred Hitchcock
Presents, The Virginian, Marcus Welby, M.D., Dragnet, Columbo, Kojak, The
Rockford Files, Murder, She Wrote, Magnum, P.I., Miami Vice, Coach and Northern
Exposure. Universal has also agreed that UTV will distribute domestically any
future television programming produced by Universal during the next 15 years.
In addition, HSNi and Universal have agreed that Universal will have the
exclusive right to distribute all UTV programming internationally. In that
regard, Universal has recently signed several output and volume agreements with
international television broadcasters that include programming produced by UTV.
These agreements include an output deal with RTL (Germany) and volume agreements
with TF1 (France), TVE (Spain), IMS (Italy) and ITV (United Kingdom). In May
1996, Universal signed a free television output and co-production agreement with
Germany's RTL. The ten-year agreement covers all new and existing product
distributed by Universal to RTL, UFA and CLT broadcasting outlets in Germany and
other German-speaking territories and provides that RTL will co-produce a
minimum number of series from Universal and UTV over the term of the agreement,
providing a portion of each series' production costs. With regard to the output
arrangement, RTL has exclusive first-run free television rights in its
territories to carry every series and television movie made by Universal and UTV
during the term of the agreement. In 1997, Universal signed similar volume
agreements in France, Spain, Italy and the United Kingdom in which the licensor
generally committed to license a minimum number per year of first-run series and
first-run television movies during a specified term in the territory. Pursuant
to the terms of the agreement between HSNi and Universal, HSNi programming will
have the first right to participate in these output and volume agreements.
While HSNi has not acquired Universal's animated television films business,
UTV will continue to produce Casper, an animated series that currently airs on
the Fox Kids Network. UTV will also produce direct to video programming. UTV has
licensed a third party to sell a video of The Jerry Springer Show that contains
portions of previously produced programs that had been edited out when the
episodes aired on television.
Universal will retain the video rights as well as the right to license to
manufacturers, retailers and others, the characters, titles and other material
from its television library. Universal will retain the right to exploit any
FINANCIAL & BUSINESS INFORMATION
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copyright or other intellectual property contained in any current program or any
Universal derived program in any theme park or related facility.
Employees
As of September 30, 1997, UTV had approximately 230 employees. Universal
has a collective bargaining agreement with a labor union governing wages and
benefits, hours, working conditions and similar matters covering approximately
140 of its employees. The agreement expires on September 30, 1998. In general,
UTV believes its labor relations are good.
Competition
While television films produced by UTV compete with all other forms of
network and syndication programming, UTV essentially competes with all other
forms of entertainment and leisure activities. Competition is also faced from
other major television studios and independent producers for creative talent,
writers and producers, essential ingredients in the filmed entertainment
business. The profitability of UTV is dependent upon factors such as public
taste that is volatile, shifts in demand, economic conditions and technological
developments.
In a decision released September 6, 1995, the FCC repealed its financial
interest and syndication rules ("FIN-SYN RULES") effective as of September 21,
1995. The fin-syn rules, which were adopted in 1970 to limit television network
control over television programming and thereby foster the development of
diverse programming sources, had restricted the ability of the three
established, major U.S. television networks (i.e., ABC, CBS and NBC) to own and
syndicate television programming. The repeal of the fin-syn rules has increased
in-house production of television programming for the networks' own use. As a
result of the repeal of the fin-syn rules, the industry has become vertically
integrated, with four of the six major broadcast networks being aligned with a
major studio. In addition, two major broadcast networks have formed their own
in-house production units. Recent mergers and acquisitions of broadcast networks
by studios (e.g., Disney-ABC) have altered the landscape of the industry. It is
possible that this change will have a negative impact on UTV's business as its
network customers are now able to choose between their own product and UTV's
product in making programming decisions.
Properties
UTV conducts its domestic television production and distribution operations
primarily from its executive and administrative offices in Universal City,
California. These offices, totaling approximately 75,000 square feet, are leased
from Universal. Additionally, UTV has four domestic administrative and sales
offices which lease a total of approximately 23,000 square feet. Production
facilities are leased from Universal on its Universal City lot on an as-needed
basis depending upon production schedules. UTV leases three production
facilities in New York, New York totaling approximately 120,000 square feet and
a production facility in North Hollywood, California totaling approximately
34,300 square feet.
Legal Proceedings
UTV is a party, in the ordinary course of business, to litigation involving
property, personal injury and contract claims. The amounts that UTV believes may
be recoverable in these matters are either covered by insurance or are not
material to the financial position of UTV or the results of operations or cash
flows.
FINANCIAL & BUSINESS INFORMATION
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SELECTED HISTORICAL FINANCIAL DATA
USAN
SELECTED HISTORICAL FINANCIAL DATA OF USAN (INCLUDING SCI-FI EUROPE)
(in thousands)
The following is the selected combined financial data of USAN (including Sci-Fi
Europe), which has been derived from the financial statements of USA Networks
(including Sci-Fi Europe). The data should be read in conjunction with
"-- Management's Discussion and Analysis of Financial Condition and Results of
Operations -- USAN (including Sci-Fi Europe)" and the combined financial
statements of USA Networks (including Sci-Fi Europe) and related notes, which
are attached as Appendix H to this Proxy Statement.
<TABLE>
<CAPTION>
FOR THE
NINE MONTHS FOR THE
SUMMARY COMBINED ENDED SEPTEMBER 30, YEAR ENDED DECEMBER 31,
STATEMENT OF OPERATIONS ------------------- ----------------------------------------------------
DATA 1997 1996 1996 1995 1994 1993(1) 1992
- ------------------------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues................. $553,292 $497,245 $666,472 $569,981 $457,771 $390,768 $367,948
Operating income
(loss)................. 96,363 108,966 147,392 137,809 64,618 (21,910) 77,472
Net income (loss)........ 94,362 107,182 145,558 135,637 64,901 (21,910) 75,138
</TABLE>
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, AS OF DECEMBER 31,
SUMMARY COMBINED ------------------- ----------------------------------------------------
BALANCE SHEET DATA 1997 1996 1996 1995 1994 1993 1992
- ------------------------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Working capital.......... $ 69,874 $ 82,273 $ 69,834 $ 72,300 $ 77,757 $ 71,062 $ 67,203
Total assets............. 598,863 555,703 555,945 525,859 536,983 524,540 428,666
Partners' equity......... 147,984 143,671 149,754 117,491 114,453 121,552 170,462
</TABLE>
- ---------------
(1) The operating loss and net loss were due to significant program inventory
write-downs.
FINANCIAL & BUSINESS INFORMATION
55
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UNIVERSAL TELEVISION GROUP
SELECTED HISTORICAL FINANCIAL DATA OF UNIVERSAL TELEVISION GROUP
(in thousands)
The following is the selected combined financial data of Universal Television
Group, which has been derived from the financial statements of Universal
Television Group. The data should be read in conjunction with "-- Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Universal Television Group" and the Combined Financial Statements
of Universal Television Group and the related notes, which are attached as
Appendix I to this Proxy Statement. The period July 1, 1994 to June 4, 1995 and
the fiscal years ending June 30, 1994 and 1993 are presented on a different cost
basis than the fiscal years ended June 30, 1997 and 1996, which are presented on
a basis incorporating purchase accounting resulting from Seagram's acquisition
of an 80% interest in Universal on June 5, 1995. As a result, the selected
historical financial data presented for the period July 1, 1994 to June 4, 1995
and the fiscal years ending June 30, 1994 and June 30, 1993 are not comparable
to the selected historical financial data presented for the fiscal years ending
June 30, 1997 and 1996 and the three month periods ending September 30, 1997 and
1996.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C>
FOR THE
THREE MONTHS FOR THE FOR THE PERIOD FOR THE
SUMMARY COMBINED ENDED SEPTEMBER 30, YEAR ENDED JUNE 30, JULY 1, 1994 YEAR ENDED JUNE 30,
STATEMENT OF ------------------------ ------------------------ TO JUNE 4, --------------------------------
OPERATIONS DATA 1997 1996 1997 1996 1995(1) 1994 1993
- -------------------- ---------- ---------- ---------- ---------- -------------- -------------- --------------
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues............ $ 172,710 $ 168,113 $ 684,340 $ 735,148 $ 710,596 $ 635,123 $ 494,490
Operating income
(loss)............ 15,574 30,859 23,815 86,602 (54,141) 27,112 (8,043)
Net income
(loss)(2)......... 12,885 23,660 38,737 78,492 (5,976) 1,584 4,404
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C>
AS OF SEPTEMBER 30, AS OF JUNE 30, AS OF JUNE 30,
SUMMARY COMBINED ------------------------ ------------------------ AS OF JUNE 4, --------------------------------
BALANCE SHEET DATA 1997 1996 1997 1996 1995 1994 1993
- -------------------- ---------- ---------- ---------- ---------- -------------- -------------- --------------
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C>
Working capital..... $ 189,823 $ 200,893 $ 155,930 $ 190,512 $ 301,206 $ 303,007 $ 246,971
Total assets(2)..... 1,722,513 1,691,844 1,699,518 1,641,431 1,592,496 1,614,198 1,638,381
Universal equity
investment(2)..... 1,350,594 1,334,861 1,330,825 1,308,564 1,070,678 1,119,033 1,143,501
</TABLE>
- ---------------
(1) The results for the 25-day period from June 5, 1995 to June 30, 1995 are
summarized below:
<TABLE>
<S> <C>
Revenues........................................................... $23,044
Operating income................................................... 3,865
Net income......................................................... 5,465
</TABLE>
(2) These operating results include 50% of the operations of USAN (including
Sci-Fi Europe) accounted for on the equity method, because the Universal
Television Group held Universal's assets and equity investment in these
businesses.
FINANCIAL & BUSINESS INFORMATION
56
<PAGE> 69
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
USAN (INCLUDING SCI-FI EUROPE)
Results of Operations
Comparison of 1996 to 1995 Results. Revenues increased 17% in 1996 to
$666 million due to increased affiliate revenues and higher advertising sales
for both USA Network and Sci-Fi Channel. USA Network affiliate revenues
increased by $34 million, or 15%, due to an increase in monthly subscriber rates
and subscriber growth. USA Network subscribers per Nielsen increased from 66.5
million at year-end 1995 to 70.7 million at year-end 1996. USA Network
advertising sales increased $18 million, or 6%, net of an increase in makegood
expense of $23 million caused by ratings shortfalls. Ad sales were up due to a
higher number of subscribers and higher rates per thousand viewers, or costs per
thousand ("CPMS"). Sci-Fi Channel affiliate revenues were up $16 million, or
92%, due mainly to increased subscribers and rates. Sci-Fi Channel subscribers
per Nielsen increased from 26.7 million at year-end 1995 to 37.4 million at
year-end 1996. Sci-Fi Channel advertising sales were up $15 million, or 49%,
based on a higher number of subscribers, increased number of network spots and
CPMs. The increase in other income from $3.5 million in 1995 to $8.6 million in
1996 results from the settlement of an affiliate rate dispute with a major
multiple cable system operator in 1996 resulting in a reduction in the allowance
for trade accounts receivable.
Program costs increased 18%, or $54 million, as additional investments in
original programming at USA Network, such as the series Pacific Blue and The Big
Easy, resulted in additional costs of $36 million. In addition, international
program costs increased by $12 million mainly due to the launch of Sci-Fi Europe
in November 1995. Also, broadcast costs increased 28%, or $33 million, due
primarily to increased consumer media and affiliate marketing support.
Selling, general and administrative expenses increased 15%, or $7 million,
to $52 million principally due to increased general and administrative costs to
support the higher volume. As a percentage of revenue, these costs were
comparable.
Operating income increased 7%, or $10 million, to $147 million due
principally to improved operations at Sci-Fi Channel which reported a $19
million improvement in income in 1996, its first year of profitability. This was
partially offset by increased losses internationally, primarily due to a full
year's results of Sci-Fi Europe in 1996 versus two months in 1995.
Comparison of 1995 to 1994 Results. Revenues increased 25% in 1995 to $570
million due to increased affiliate revenues and higher advertising sales for
both USA Network and Sci-Fi Channel. USA Network affiliate revenues increased by
$50 million, or 29%, due to an increase in subscriber rates, a higher number of
subscribers and the favorable resolution of certain rate disputes in 1995. USA
Network subscribers per Nielsen increased from 61.8 million at year-end 1994 to
66.5 million at year-end 1995. USA Network advertising sales increased $34
million, or 13%, due to the increased number of subscribers and higher CPMs.
Sci-Fi Channel affiliate revenues were up $13 million, or 318%, due to increased
subscriber rates and number of subscribers. Sci-Fi Channel subscribers per
Nielsen increased from 16.8 million at year-end 1994 to 26.7 million at year-end
1995. Sci-Fi Channel advertising sales were up $12 million, or 68%, based on the
increased number of subscribers, increased number of network spots and CPMs.
Program costs increased 6%, or $18 million, due to increased costs of $9
million at USA Network and $5 million at Sci-Fi Channel as rights fees and
production expenses both increased. In addition, international costs increased
$4 million due to the launch of Sci-Fi Europe in November 1995. Broadcast costs
increased 20%, or $20 million, primarily due to increased marketing costs of $7
million at USA Network and Sci-Fi Channel, primarily affiliate marketing
support, and increased international marketing and other support costs of $6
million with the launch of Sci-Fi Europe in November 1995.
Selling, general and administrative expenses increased 17%, or $7 million,
to $46 million principally due to increased general and administrative costs to
support the higher volume. As a percentage of revenue, these costs were
comparable.
FINANCIAL & BUSINESS INFORMATION
57
<PAGE> 70
Operating income increased 113%, or $73 million, to $138 million due
principally to improved operations as USA Network which reported a $65 million
improvement in income in 1995 based on higher affiliate and advertising
revenues. Sci-Fi Channel reduced its operating losses by $18 million as a result
of higher affiliate and advertising revenues.
Taxes increased from $.5 million in 1994 to $3.4 million in 1995 as 1994
did not reflect any provision for New York Unincorporated Business Taxes due to
a utilization of carryforward losses from prior years and a claim for refund of
1992 taxes paid.
Comparison of Nine Months Ended September 30, 1997 and 1996
Results. Revenues increased 11% in 1997 to $553 million due to increased
affiliate revenues and higher advertising sales for both USA Network and Sci-Fi
Channel. USA Network affiliate revenues increased by $15 million, or 8%, due to
an increase in subscriber rates and number of subscribers. USA Network
subscribers per Nielsen increased from 69.4 million at the end of September 1996
to 72.6 million in 1997. USA Network advertising sales increased $15 million, or
6%, due to the increased number of subscribers and higher CPMs. Sci-Fi Channel
affiliate revenues were up $11 million, or 47%, due to increased subscriber
rates and number of subscribers. Sci-Fi Channel subscribers per Nielsen
increased from 35.6 million subscribers at the end of September 1996 to 45.8
million in 1997. Sci-Fi Channel advertising sales were up $13 million, or 41%,
based on a higher number of subscribers, increased number of network spots and
CPMs.
Program costs increased 17%, or $47 million, due to increased costs at USA
Network as there was increased investment in original programming of $24
million, such as the series La Femme Nikita, Pacific Blue and The Big Easy, and
programming writedowns of $21 million for discontinued series. Broadcast costs
increased 19%, or $22 million, primarily due to increased marketing costs of $15
million at USA Network and Sci-Fi Channel, mainly media support for new original
programming and network branding and increased international marketing and other
support costs of $4 million.
Selling, general and administrative expenses increased 7%, or $3 million,
to $43 million principally due to increased general and administrative costs to
support the higher volume. As a percentage of revenue, these costs were
comparable.
Operating income decreased 12%, or $13 million, to $96 million due to a $22
million decrease at USA Network as sales increases were more than offset by
higher increases in programming and marketing expenses. This was partly offset
by a $7 million increase in operating income at Sci-Fi Channel due to higher
affiliate and advertising revenue.
Liquidity and Capital Resources
USAN (including Sci-Fi Europe) has financed its working capital
requirements from its operating cash flow and distributed all of the excess cash
flow to its two partners. USAN (including Sci-Fi Europe) has distributed excess
cash of $95.5 million during the nine months ended September 30, 1997, $116
million during 1996 and $130 million during 1995. The major cash expenditure of
USAN (including Sci-Fi Europe) is the acquisition of program rights (program
rights acquisitions were $311 million during the first nine months of 1997, $334
million during 1996 and $243 million during 1995). In addition, USAN has
unrecorded commitments for future broadcast rights of approximately $661 million
at September 30, 1997 which compares to $651 million at December 31, 1996.
UNIVERSAL TELEVISION GROUP
Results of Operations
Comparison of the Fiscal Years Ended June 30, 1997 to 1996
Results. Universal Television Group's total revenues decreased $51 million, or
7%, to $684 million in 1997. The decrease was primarily due to the cancellation
of six series, including the long-running series Murder, She Wrote and Dream On,
which accounted for a reduction in revenues of $157 million. This was partially
offset by six new domestic series which resulted in $91 million of additional
revenues. In addition, revenues were impacted by the delivery of four fewer
Movies-of-the-Week ("MOW"), one less mini-series and the purchase of
substantially all of the
FINANCIAL & BUSINESS INFORMATION
58
<PAGE> 71
production assets of Multimedia on December 1, 1996, which resulted in
additional revenues principally from the talk shows Sally Jessy Raphael and The
Jerry Springer Show.
Program costs decreased $6 million, or 1%, to $554 million. This was due to
lower program costs associated with the six series canceled ($127 million) and
was partially offset by increased program costs relating to the six new domestic
series ($110 million). Also, program costs decreased as a result of the fewer
MOW's and mini-series produced during the year offset by the addition of the
acquired talk shows. Program costs were 81% of revenues for 1997 compared to 76%
for 1996. This percentage relationship is a factor of both the mix of programs
and library product generating revenues in the two periods as well as changes in
the projected lifetime profitability of individual programs.
Selling, general and administrative expenses increased $14 million, or 18%,
to $93 million principally due to higher marketing and overhead costs resulting
from the addition of the acquired talk shows. Depreciation and amortization
increased $4 million, or 38%, to $14 million also due to the amortization of
goodwill related to the acquisition of the acquired talk shows.
Operating income decreased $63 million, or 73%, to $24 million due
principally to the cancellation of the two profitable long-running series,
Murder, She Wrote and Dream On, deficits related to six new domestic series and
higher selling, general and administrative expenses. This was partially offset
by the improved profitability of library sales due to a more favorable product
mix. Fiscal year 1997 results reflect a domestic operating loss of $44 million
due to the above deficit funding on the six new domestic series.
USAN (including Sci-Fi Europe) (or Combined USAN) pre-tax equity earnings,
net of goodwill amortization, decreased $2 million, or 3%, to $51 million as
higher affiliate revenues were more than offset by higher programming costs.
The effective tax rate in 1997 was 49% compared to an effective tax rate of
44% in the prior period. The increase in the effective tax rate is due to the
nondeductibility of goodwill amortization.
Comparison of the Fiscal Year Ended June 30, 1996 to 1995 Results.
Universal Television Group's total revenues increased $25 million, or 3%, to
$735 million in 1996 primarily due to higher revenues from the first season of
Xena: Warrior Princess and the first full season of Hercules: The Legendary
Journeys ($32 million). Revenues also increased as a result of six additional
network pilot deliveries which were more than offset by the cancellation of four
network series including Earth 2, seaQuest DSV and Mantis.
Program costs decreased $133 million, or 19%, to $560 million due
principally to lower program costs as a result of the cancellation of the four
network series ($111 million). Also, lower program costs due to the cancellation
of four first-run syndication series, including Vanishing Son and Universal
Action Pack, were partially offset by the increased program costs relating to
the six additional network pilot deliveries and Hercules: The Legendary Journeys
and Xena: Warrior Princess. Program costs were 76% of revenues for 1996 compared
to 98% for 1995. This percentage relationship is a factor of both the mix of
programs and library product generating revenues in the two periods as well as
changes in the projected lifetime profitability of individual programs.
Selling, general and administrative expenses increased $28 million, or 55%,
to $78 million principally due to higher corporate overhead costs, marketing
costs and administrative and executive costs. Depreciation and amortization
decreased $11 million, or 53%, to $10 million due to the reduced basis of
certain assets in connection with the June 5, 1995 Seagram acquisition.
Operating income increased $141 million to $87 million principally due to
lower program costs and reduced deficits resulting from the cancellation of
network and first-run series.
USAN (including Sci-Fi Europe) (or Combined USAN) pre-tax equity earnings,
net of goodwill amortization, increased $8 million, or 17%, to $52 million in
1996 principally as a result of higher advertising and affiliate revenues for
Sci-Fi Channel partially offset by additional amortization due to the increased
valuation of the investment in connection with the June 5, 1995 Seagram
acquisition.
FINANCIAL & BUSINESS INFORMATION
59
<PAGE> 72
The effective tax rate in 1996 was 44% compared to an effective tax rate of
34% in the prior period. The increase in the effective tax rate is due to the
nondeductibility of goodwill amortization.
25 Day Period from June 5, 1995 to June 30, 1995. Revenues were $23 mil-
lion during the 25 day period and principally included approximately $19 million
from library sales to syndication, basic cable and foreign markets as well as
some licensing of network series to foreign customers. As is normal during the
June period, there were no network or first run syndication series deliveries
and related revenue recognition for current series production during the 25 day
period. Program costs were 61% of revenues, reflecting the mix of programs and
library product generating revenues during the 25 day period as well as any
changes in the lifetime profitability of individual programs. Also, approx-
imately $5 million of pre-tax equity earnings, net of goodwill amortization,
for combined USAN is included for the 25 day period.
Comparison of September 30, 1997 and 1996 Quarter Results. Universal
Television Group's total revenues increased $5 million, or 3%, to $173 million
for the quarter ended September 30, 1997. The increase was due to the purchase
of substantially all of the television production assets from Multimedia on
December 1, 1996 which resulted in additional revenues of $23 million from the
talk shows Sally Jessy Raphael and The Jerry Springer Show. Revenues from two
new network series, Roar and The Tom Show, were more than offset by lower
domestic library sales.
Program costs increased $16 million, or 14%, to $131 million primarily due
to higher program costs associated with the addition of the acquired talk shows
($16 million). Also, additional program costs for the two new network series
were partially offset by lower program costs from library series. Program costs
were 76% of revenues for the 1997 period compared to 69% for 1996. This
percentage relationship is a factor of both the mix of programs and library
product generating revenues in a period and changes in the projected lifetime
profitability of individual programs. Depreciation and amortization increased $2
million, or 78%, to $4 million due to the amortization of goodwill related to
the talk show acquisition.
Operating income decreased $15 million, or 50%, to $16 million principally
due to lower domestic library sales, partially offset by the favorable talk show
results.
USAN (including Sci-Fi Europe.)(Combined USAN) pre-tax equity earnings, net
of goodwill amortization, decreased $7 million, or 42%, to $10 million,
principally due to higher programming costs.
Liquidity and Capital Resources
For the periods July 1, 1996 through June 30, 1997, July 1, 1995 through
June 30, 1996 and July 1, 1994 through June 4, 1995, cash flows from operations
have been adequate to finance Universal Television Group's cash flow
requirements. Cash flows from second cycle domestic syndication sales,
international syndication sales and library sales have been more than adequate
to fund film production costs relating to current network and first-run
productions. During the periods ended June 30, 1997, June 30, 1996 and June 4,
1995, cash used in film production totaled $425 million, $468 million and $567
million, respectively. Net cash generated from operations was more than adequate
to fund the $49.1 million acquisition of Multimedia Entertainment in fiscal year
1997.
Substantially all international sales were contracted for in U.S. dollars.
The effect on the results of operations from changes in foreign currency
exchange rates is minimal.
FINANCIAL & BUSINESS INFORMATION
60
<PAGE> 73
UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS
The following unaudited pro forma combined condensed financial statements
(the "CONDENSED STATEMENTS") have been prepared to give effect to the
Transaction. In addition, the Condensed Statements have been prepared to give
effect to the Mergers and the acquisition, in July 1997, of a controlling
interest in Ticketmaster ("TICKETMASTER INVESTMENT"), as well as acquisitions
made by Ticketmaster during the applicable periods. The purchase method of
accounting was used to give effect to all transactions.
The Condensed Statements reflect certain assumptions regarding the proposed
Transaction and are based on the historical consolidated financial statements of
the respective entities. The Condensed Statements, including the notes thereto,
are qualified in their entirety by reference to, and should be read in
conjunction with, the audited financial statements and the unaudited interim
financial statements, including the notes thereto, of HSNi, USAN, Universal
Television Group and Ticketmaster, which are incorporated by reference or
included in this Proxy Statement.
The pro forma combined condensed balance sheet as of September 30, 1997
gives effect to the Transaction as if it had occurred on September 30, 1997 and
combines the unaudited balance sheets of HSNi, USAN and Universal Television
Group as of that date.
The pro forma combined condensed statement of operations for the nine
months ended September 30, 1997 reflects the unaudited pro forma statement of
operations of HSNi, combined with the unaudited results of operations of
Ticketmaster (including the pro forma effects of certain acquisitions of
Ticketmaster), USAN, and UTV, in each case, for the nine months ended September
30, 1997.
The pro forma combined condensed statement of operations for the year ended
December 31, 1996 reflects the unaudited pro forma statements of operations of
HSNi for the year ended December 31, 1996 (giving effect to the Mergers and the
Ticketmaster Investment as if they had occurred on January 1, 1996 and
illustrating the pro forma effects of certain acquisitions by Ticketmaster)
combined with the results of operations of USAN and UTV for the year ended
December 31, 1996.
The historical combined financial statements of Universal Television Group
include UTV and other television programming which Universal is retaining.
Excluded programming includes substantial television products owned by Universal
as part of its television library (such as series no longer in production, "made
for television" movies, animated programs, action adventures and certain talk
shows and other programming). The pro forma financial statements reflect the
exclusion of assets and corresponding liabilities, revenues and expenses, for
programming not in production for the periods presented.
After the consummation of the Transaction, HSNi will determine the fair
value of significant assets, liabilities and business operations acquired, which
may include the use of independent appraisals. In connection with finalizing the
purchase price allocation, HSNi is currently evaluating the fair value of assets
acquired and liabilities assumed, specifically including television program
rights, commitments to produce or purchase television programming, contractual
commitments to provide ticketing services and other contractual commitments.
Using this information, HSNi will make a final allocation of the excess purchase
price, including allocation to the intangibles other than goodwill. Accordingly,
the purchase accounting information is preliminary and has been made solely for
the purpose of developing such unaudited pro forma combined condensed financial
information.
The Condensed Statements are presented for illustrative purposes only and
are not necessarily indicative of the financial position or results of
operations which would have actually been reported had the Transactions occurred
as of September 30, 1997, or for the nine months ended September 30, 1997, or
for the year ended December 31, 1996, nor are the Condensed Statements
necessarily indicative of future financial position or results of operations.
FINANCIAL & BUSINESS INFORMATION
61
<PAGE> 74
HSNi
UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET
SEPTEMBER 30, 1997
(in thousands)
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
HSNi TRANSACTION(k) ADJUSTMENTS COMBINED
---------- -------------- ----------- ----------
<S> <C> <C> <C> <C>
ASSETS
Current Assets:
Cash and short-term investments............................ $ 106,121 $ 8,165 $ -- $ 114,286
Accounts and notes receivable, net......................... 98,364 160,991 259,355
Inventories, net........................................... 155,844 -- 155,844
Program inventory.......................................... -- 329,778 329,778
Deferred income taxes...................................... 33,714 -- 33,714
Other...................................................... 13,381 7,981 21,362
---------- -------------- ----------- ----------
Total current assets................................... 407,424 506,915 -- 914,339
Program inventory.......................................... -- 203,229 203,229
Property, plant and equipment, net......................... 173,691 33,308 206,999
Intangible assets including goodwill and broadcast
licenses, net............................................ 1,857,803 81,329 3,819,135(a) 5,782,523
24,256(c)
Cable distributions fees, net.............................. 104,137 -- 104,137
Long-term investments...................................... 33,576 -- 33,576
Notes receivable........................................... 11,552 -- 11,552
Deferred income taxes...................................... 5,592 -- 5,592
Deferred charges and other................................. 43,530 16,270 59,800
---------- -------------- ----------- ----------
Total assets........................................... $2,637,305 $841,051 $ 3,843,391 $7,321,747
========= ============ ========== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable, accrued and other current liabilities.... $ 339,972 $111,655 $ 6,000(a) $ 457,627
Program liabilities........................................ -- 196,426 196,426
Deferred revenue........................................... -- 26,596 26,596
Current portion of long-term debt.......................... 11,263 -- 11,263
---------- -------------- ----------- ----------
Total current liabilities.............................. 351,235 334,677 6,000 691,912
Long-term debt............................................. 428,754 -- 1,635,000(a) 1,763,754
(300,000)(a)
Other long-term liabilities................................ 50,423 18,805 69,228
Program liabilities........................................ -- 154,334 154,334
Minority interest.......................................... 365,355 -- 2,533,473(d) 2,898,828
Stockholders' Equity:
Preferred stock............................................ -- -- --
Common stock............................................... 436 -- 36(a) 472
Common stock--Class B...................................... 122 -- 6(c) 160
32(a)
Additional paid-in capital................................. 1,556,589 333,235 2,511,302(a) 1,858,668
(2,533,473)(d)
24,250(c)
(333,235)(b)
300,000(a)
Deficit.................................................... (106,904) -- (106,904)
Unearned compensation...................................... (3,707) -- (3,707)
Note receivable from key executive for common stock
issuance................................................. (4,998) -- (4,998)
---------- -------------- ----------- ----------
Total stockholders' equity............................. 1,441,538 333,235 (31,082) 1,743,691
---------- -------------- ----------- ----------
Total liabilities and stockholders' equity............. $2,637,305 $841,051 $ 3,843,391 $7,321,747
========= ============ ========== =========
</TABLE>
FINANCIAL & BUSINESS INFORMATION
62
<PAGE> 75
HSNi
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1997
(in thousands, except per share data)
<TABLE>
<CAPTION>
HSNi
TICKETMASTER PRO FORMA PRO FORMA PRO FORMA
HSNi INVESTMENT(l) COMBINED TRANSACTION(k) ADJUSTMENTS COMBINED
-------- ------------ ---------- -------------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
NET REVENUES:
Home Shopping................................. $752,405 $ -- $ 752,405 $ -- $ -- $ 752,405
USAN.......................................... -- -- -- 539,247 539,247
UTV........................................... -- -- -- 454,599 454,599
Ticketing operations.......................... 67,331 186,965 254,296 -- 254,296
Broadcasting and other........................ 51,757 -- 51,757 -- 51,757
-------- ------------ ---------- -------------- --------- -----------
Total net revenues........................ 871,493 186,965 1,058,458 993,846 -- 2,052,304
-------- ------------ ---------- -------------- --------- -----------
Operating costs and expenses:
Cost of sales................................. 464,159 16,504 480,663 -- 480,663
Program costs................................. -- -- -- 669,185 669,185
Other costs................................... 273,316 140,634 413,950 195,158 609,108
Depreciation and amortization................. 67,194 17,355 84,549 7,492 72,064(f) 164,105
-------- ------------ ---------- -------------- --------- -----------
Total operating costs and expenses........ 804,669 174,493 979,162 871,835 72,064 1,923,061
-------- ------------ ---------- -------------- --------- -----------
Operating profit.......................... 66,824 12,472 79,296 122,011 (72,064) 129,243
Interest income (expense), net................ (18,128) (5,018) (23,146) 408 (75,094)(g) (97,832)
Other expense, net............................ (9,283) (304) (9,587) (9,735) (19,322)
-------- ------------ ---------- -------------- --------- -----------
Income (loss) before income taxes and minority
interest........................................ 39,413 7,150 46,563 112,684 (147,158) 12,089
Income tax (expense) benefit...................... (29,753) (5,767) (35,520) (43,400) 56,366(j) (22,554)
Minority interest................................. 98 (2,924) (2,826) -- (6,551)(e) (9,377)
-------- ------------ ---------- -------------- --------- -----------
NET EARNINGS (LOSS)............................... $ 9,758 $ (1,541) $ 8,217 $ 69,284 $ (97,343) $ (19,842)
======== ========== ========= ============ ========= =========
Weighted average shares outstanding............... 54,087 66,061
======== =========
Net earnings (loss) per common share(m)........... $ 0.18 $ (.31)
======== =========
</TABLE>
FINANCIAL & BUSINESS INFORMATION
63
<PAGE> 76
HSNi
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996
(in thousands, except per share data)
<TABLE>
<CAPTION>
HSNi
HSNi TICKETMASTER PRO FORMA PRO FORMA PRO FORMA
ADJUSTED(h) INVESTMENT(i) COMBINED TRANSACTION(k) ADJUSTMENTS COMBINED
----------- --------------- ---------- -------------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
NET REVENUES:
Home Shopping.............................. $1,014,705 $ -- $1,014,705 $ -- $ -- $1,014,705
USAN....................................... -- -- -- 655,278 655,278
UTV........................................ -- -- -- 578,323 578,323
Ticketing operations....................... 257,499 61,843 319,342 -- 319,342
Broadcasting and other..................... 91,825 (38,610) 53,215 -- 53,215
----------- --------------- ---------- -------------- ----------- ----------
Total net revenues....................... 1,364,029 23,233 1,387,262 1,233,601 -- 2,620,863
----------- --------------- ---------- -------------- ----------- ----------
Operating costs and expenses:
Cost of sales............................ 644,070 12,215 656,285 -- 656,285
Program costs............................ -- -- -- 833,821 833,821
Other costs.............................. 555,401 4,691 560,092 224,958 785,050
Depreciation and amortization............ 118,652 3,387 122,039 9,430 96,085(f) 227,554
----------- --------------- ---------- -------------- ----------- ----------
Total operating costs and expenses..... 1,318,123 20,293 1,338,416 1,068,209 96,085 2,502,710
----------- --------------- ---------- -------------- ----------- ----------
Operating profit......................... 45,906 2,940 48,846 165,392 (96,085) 118,153
Interest income (expense), net............... (44,204) (961) (45,165) 1,342 (100,125)(g) (143,948)
Other income (expense), net.................. 6,631 (2,017) 4,614 (11,724) (7,110)
----------- --------------- ---------- -------------- ----------- ----------
Income (loss) before income taxes and
minority interest.......................... 8,333 (38) 8,295 155,010 (196,210) (32,905)
Income tax (expense) benefit................. (29,198) 163 (29,035) (59,800) 71,802(j) (17,033)
Minority interest............................ 1,802 (347) 1,455 -- 3,415(e) 4,870
----------- --------------- ---------- -------------- ----------- ----------
NET EARNINGS (LOSS).......................... $ (19,063) $ (222) $ (19,285) $ 95,210 $(120,993) $ (45,068)
========== ============= ========= ============ ========== =========
Weighted average shares outstanding.......... 58,002 64,752
========== =========
Net earnings (loss) per common share(m)...... $ (0.33) $ (.69)
========== =========
</TABLE>
FINANCIAL & BUSINESS INFORMATION
64
<PAGE> 77
HSNi
NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS
(a) Transaction. Acquisition costs and the preliminary determination of the
unallocated excess of acquisition costs over net assets acquired are set forth
below:
<TABLE>
<S> <C>
Value of 3,190,000 shares of HSNi Class B Common Stock, 3,560,000 shares
of HSNi Common Stock and 54,300,000 LLC Shares to be issued........... $2,511,370
Cash portion............................................................ 1,635,000
Estimated transaction costs............................................. 6,000
-----------
Total acquisition costs............................................ 4,152,370
Net assets acquired..................................................... 333,235
-----------
Unallocated excess of acquisition cost over net assets acquired......... $3,819,135
=========
</TABLE>
In connection with the Transaction, Universal has covenanted that in the
event UTV's EBITDA (as defined in the Investment Agreement) for the
Determination Period is less than $150 million, Universal will pay HSNi the
excess of $150 million over UTV's EBITDA for the Determination Period, subject
to a maximum of $75 million. This payment, if any, will result in an adjustment
to the total acquisition costs.
In connection with the Ticketmaster Investment, HSNi agreed to issue up to
3,257,328 additional shares of HSNi Common Stock to be reserved for contingent
issuance in July 1998 if the average market price of the HSNi Common Stock over
a specified period prior to such date is below $29 per share. The issuance of
these additional shares, if any, would dilute earnings or loss per share.
Following the date of the financial statements, HSNi stock traded at levels that
eliminated the requirement for the contingent issuance referred to herein.
The number of shares of HSNi Common Stock to be issued is stated in the
Investment Agreement. The number of LLC Shares to be issued is determined by
calculating the number of LLC Shares on an as-if converted basis, when taken
together with the stated HSNi Common Stock to be issued, that would effectively
represent a 45.8% equity interest in HSNi. The cash portion of the Transaction
is determined by subtracting the ascribed value of $40.00 per share for the HSNi
stock and LLC Shares to be issued from $4.075 billion. The cash portion has been
adjusted to reflect HSNi's current intention to pay $75.0 million of the cash
portion of the purchase price with LLC Shares valued at $40.00 per share. The
impact on the pro forma financial statements of HSNi electing to pay in cash
$75.0 million of the purchase price would not significantly change the pro forma
presentation.
HSNi expects to incur additional borrowings related to the cash portion of
the Transaction. Estimated transaction costs to be incurred principally include
legal, printing, accounting and financial advisory services.
In connection with the Transaction, Liberty has committed to purchase 7.5
million LLC Shares for $300 million, which will reduce borrowings used to
finance the Transaction.
Liberty may contribute assets, if agreed upon by HSNi and Universal, for
all or a portion of its commitment to purchase 7.5 million LLC Shares for $300
million. In the event Liberty contributes assets in lieu of cash, Universal will
be required to purchase LLC Shares for cash to the extent required to maintain
its equity ownership interest immediately prior to Liberty's contribution of
assets. In addition, Liberty may contribute assets in excess of $300 million and
Universal would have the option to purchase additional LLC Shares for cash to
maintain its equity ownership interest immediately prior to Liberty's
contribution of assets. At this time, the extent of assets to be contributed and
the impact to the pro forma presentation cannot be determined, except to the
extent of Liberty's minimum commitment to purchase $300 million in LLC Shares,
or to the extent Liberty contributes assets, Universal's required purchase of
LLC Shares for cash.
The fair value of HSNi stock and LLC Shares of $41.17 per share was
determined by taking an average of the closing price of HSNi Common Stock for a
short period just before and just after the terms of the Transaction were agreed
to by the parties and announced to the public.
(b) Reflects the elimination of historical equity of the Acquired Businesses.
FINANCIAL & BUSINESS INFORMATION
65
<PAGE> 78
(c) Reflects 589,161 shares of HSN Class B Common Stock to be issued to Liberty
HSN pursuant to its contingent right relating to the Home Shopping Merger using
a fair value of $41.17 per share determined as described in note (a).
(d) Reflects Universal's minority interest in the LLC.
(e) Reflects net adjustment to record Universal's and Liberty's minority
interest in the pro forma results of operations.
(f) Reflects additional amortization expense resulting from the increase in
intangible assets. The unallocated excess of acquisition costs over net assets
acquired has been preliminarily allocated to goodwill, which is being amortized
over 40 years. In connection with finalizing the purchase price allocation, HSNi
is currently evaluating the fair value of assets acquired and liabilities
assumed, specifically including television program rights, commitments to
produce or purchase television programming, contractual commitments to provide
ticketing services and other contractual commitments. Using this information,
HSNi will make a final allocation of the excess purchase price, including
allocation to the intangibles other than goodwill. Accordingly, the purchase
accounting information is preliminary and has been made solely for the purpose
of developing such unaudited pro forma combined condensed financial information.
(g) Reflects the incremental interest expense at a rate of 7.5% resulting from
the net increase in borrowings incurred in connection with the Transaction. The
7.5% represents the interest rate the Company expects to incur under a new
credit agreement which will be utilized to finance the cash portion of the
acquisition cost.
An interest rate variance of 1/8% would cause a corresponding change in
interest expense of $1,668,000 and $1,251,000 for the year ended December 31,
1996 and the nine months ended September 30, 1997, respectively.
(h) Represents the HSNi pro forma combined amounts reflecting the Ticketmaster
Investment. See the unaudited pro forma statements of operations and notes
thereto in Appendix J which give effect to the Mergers and to the acquisition of
a controlling interest in Ticketmaster, including certain acquisitions by
Ticketmaster, as if the transactions had occurred on January 1, 1996.
(i) Reflects adjustments necessary to revise the results of operations described
in note (h) for the acquisitions by Ticketmaster of interests from the
Ticketmaster Northwest and the Southeast venture partners. These acquisitions
were consummated subsequent to the periods included in Appendix J.
(j) Reflects the related income tax effect of the pro forma adjustments.
(k) Universal has contributed the Acquired Businesses to the LLC as part of the
Transaction. The assets contributed at September 30, 1997 and the pro forma
results of operations for the nine months ended September 30, 1997 and twelve
months ended December 31, 1996 are presented herein. See separate Acquired
Businesses Unaudited Pro Forma Adjusted Condensed Balance Sheet and Statements
of Operations and notes thereto.
(l) Reflects the pro forma adjustments to HSNi's historical results of
operations necessary to reflect a full nine months of operations of
Ticketmaster. The historical results include Ticketmaster operations since the
date of HSNi's acquisition of a controlling interest in July 1997.
(m) For the nine months ended September 30, 1997, primary pro forma earnings
(loss) per common share adjusts the 54,087,000 HSNi historical weighted average
shares by 5,224,000 shares, which reflects the additional impact of the shares
issued in connection with the Ticketmaster Investment, and 6,750,000 shares
issued in connection with the Transaction, as if the respective shares were
outstanding for the entire period.
For the year ended December 31, 1996, primary pro forma earnings (loss) per
common share adjusts the 58,002,000 HSNi historical weighted average shares for
the pro forma effect of 6,750,000 shares issued in connection with the
Transaction as if the shares were outstanding for the entire period.
Both calculations give effect to stock options and convertible debt, when
applicable, and the impact of common stock equivalents of Ticketmaster. Pro
forma fully diluted earnings (loss) per common share is considered to be the
same as primary earnings (loss) per common share since the effect of certain
potentially dilutive securities is anti-dilutive in all periods presented.
FINANCIAL & BUSINESS INFORMATION
66
<PAGE> 79
ACQUIRED BUSINESSES
UNAUDITED PRO FORMA ADJUSTED CONDENSED BALANCE SHEET
SEPTEMBER 30, 1997
(in thousands)
<TABLE>
<CAPTION>
UNIVERSAL USAN TOTAL
TELEVISION (INCLUDING SCI-FI PRO FORMA ACQUIRED
GROUP EUROPE) ADJUSTMENTS BUSINESSES
---------- ----------------- ----------- ----------
<S> <C> <C> <C> <C>
ASSETS
Current Assets:
Cash and short-term investments....... $ 16,922 $ 8,165 $ (302)(A) $ 8,165
(16,620)(B)
Accounts and notes receivable......... 223,447 132,792 5,500(F) 160,991
(200,748)(B)
Program inventory..................... 177,430 207,572 (55,224)(B) 329,778
Other................................. 8,738 6,966 (7,723)(B) 7,981
---------- -------- ----------- ---------
Total current assets.......... 426,537 355,495 (275,117) 506,915
Program inventory....................... 240,551 161,596 (198,918)(B) 203,229
Property, plant and equipment, net...... 7,225 30,836 (4,753)(B) 33,308
Intangible assets, net.................. 117,288 34,666 (70,625)(F) 81,329
Long-term investments................... 787,061 -- (787,061)(F) --
Long-term receivables, deferred charges
and other............................. 143,851 16,270 (143,189)(B) 16,270
(662)(A)
---------- -------- ----------- ---------
Total assets.................. $1,722,513 $ 598,863 $(1,480,325) $ 841,051
========== ======== =========== =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable, accrued and other
current liabilities................ $ 175,042 $ 89,195 $ (3,208)(A) $ 111,655
(149,374)(B)
Program liabilities................... -- 196,426 -- 196,426
Deferred revenue...................... 61,672 -- (35,076)(B) 26,596
---------- -------- ----------- ---------
Total current liabilities..... 236,714 285,621 (187,658) 334,677
Other long-term liabilities........... 135,205 10,924 627(A) 18,805
(127,951)(B)
Program liabilities................... -- 154,334 -- 154,334
Equity:
Universal equity investment........... 1,350,594 147,984 1,617(A) 333,235
(314,774)(B)
(852,186)(F)
---------- -------- ----------- ---------
Total equity.................. 1,350,594 147,984 (1,165,343) 333,235
---------- -------- ----------- ---------
Total liabilities and
equity...................... $1,722,513 $ 598,863 $(1,480,325) $ 841,051
========== ======== =========== =========
</TABLE>
FINANCIAL & BUSINESS INFORMATION
67
<PAGE> 80
ACQUIRED BUSINESSES
UNAUDITED PRO FORMA ADJUSTED CONDENSED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
(in thousands)
<TABLE>
<CAPTION>
UNIVERSAL USAN TOTAL
TELEVISION (INCLUDING SCI-FI PRO FORMA ACQUIRED
GROUP EUROPE) ADJUSTMENTS BUSINESSES
---------- ----------------- ----------- ----------
<S> <C> <C> <C> <C>
NET REVENUES:
UTV......................................... $ 534,728 $ -- $ (90,441)(B) $454,599
10,312(D)
USAN........................................ -- 553,292 (14,045)(A) 539,247
-------- -------- -------- --------
Total net revenues..................... 534,728 553,292 (94,174) 993,846
-------- -------- -------- --------
Operating costs and expenses:
Program costs............................... 432,807 315,253 (63,536)(B) 669,185
(15,339)(A)
Other costs including selling, general and
administrative expenses................... 70,855 135,196 (3,460)(C) 195,158
2,097(E)
8,993(D)
(18,523)(A)
Depreciation and amortization............... 13,153 6,480 (207)(A) 7,492
(11,934)(F)
-------- -------- -------- --------
Total operating costs and expenses..... 516,815 456,929 (101,909) 871,835
-------- -------- -------- --------
Operating profit....................... 17,913 96,363 7,735 122,011
Interest income (expense), net.................. (190) 663 (65)(A) 408
Other income (expense), net..................... 33,601 -- (33,601)(F) (9,735)
(9,735)(A)
-------- -------- -------- --------
Earnings before income taxes.................... 51,324 97,026 (35,666) 112,684
Income taxes.................................... 25,900 2,664 18,556(G) 43,400
(3,720)(B)
-------- -------- -------- --------
NET EARNINGS (LOSS)............................. $ 25,424 $ 94,362 $ (50,502) $ 69,284
======== ======== ======== ========
</TABLE>
FINANCIAL & BUSINESS INFORMATION
68
<PAGE> 81
ACQUIRED BUSINESSES
UNAUDITED PRO FORMA ADJUSTED CONDENSED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996
(in thousands)
<TABLE>
<CAPTION>
USAN
UNIVERSAL (INCLUDING TOTAL
TELEVISION SCI-FI PRO FORMA ACQUIRED
GROUP EUROPE) ADJUSTMENTS BUSINESSES
---------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
NET REVENUES:
UTV...................................... $ 724,468 $ -- $(159,897)(B) $ 578,323
13,752(D)
USAN..................................... -- 666,472 (11,194)(A) 655,278
------- ------- --------- ----------
Total net revenues....................... 724,468 666,472 (157,339) 1,233,601
------- ------- --------- ----------
Operating costs and expenses:
Program costs............................ 573,533 358,913 (79,914)(B) 833,821
(18,711)(A)
Other costs including selling, general
and administrative expenses............ 86,755 151,590 (7,886)(C) 224,958
(2,401)(E)
12,297(D)
(15,397)(A)
Depreciation and amortization............ 9,768 8,577 (234)(A) 9,430
(8,681)(F)
------- ------- --------- ----------
Total operating costs and
expenses.......................... 670,056 519,080 (120,927) 1,068,209
------- ------- --------- ----------
Operating profit.................... 54,412 147,392 (36,412) 165,392
Interest income (expense), net................ 605 827 (90)(A) 1,342
Other income (expense), net................... 55,370 -- (55,370)(F) (11,724)
-- -- (11,724)(A)
------- ------- --------- ----------
Earnings before income taxes.................. 110,387 148,219 (103,596) 155,010
Income taxes.................................. 50,500 2,661 (21,708)(B) 59,800
28,347(G)
------- ------- --------- ----------
NET EARNINGS (LOSS)........................... $ 59,887 $ 145,558 $(110,235) $ 95,210
======= ======= ========= ==========
</TABLE>
FINANCIAL & BUSINESS INFORMATION
69
<PAGE> 82
ACQUIRED BUSINESSES
NOTES TO UNAUDITED PRO FORMA ADJUSTED
CONDENSED FINANCIAL STATEMENTS
(A) Adjustment to reflect 50-50 joint venture between LLC and Universal
with respect to the international development of USAN, Sci-Fi Europe and the new
action/suspense channel known as "13th Street".
(B) This adjustment reflects the exclusion of Universal Television Group
assets and liabilities and related revenues and expenses for programming not in
production during the periods presented. See adjustment (D).
(C) Net adjustment to reflect the effect of Universal's exclusive
distribution arrangement for UTV television programs in the pay television and
home video markets and the related merchandising rights.
(D) Adjustment to reflect the effect of LLC's exclusive domestic
distribution arrangement for television programs (including the Universal
Library) and theatrical films for which Universal will retain ownership.
(E) Net adjustment to reflect the effect of Universal's exclusive
international distribution arrangement for television programs that are being
acquired and other productions of UTV and USAN as well as affiliates of HSNi.
(F) Adjustment to eliminate Universal Television Group's investment and
equity income in USAN and Universal Television Group's goodwill and related
amortization.
(G) Adjustment to accrue state and federal income taxes on the additional
50% of USAN partnership pre-tax earnings not reflected by the Universal
Television Group.
FINANCIAL & BUSINESS INFORMATION
70
<PAGE> 83
THE ANNUAL MEETING
BUSINESS TO BE CONDUCTED AT THE ANNUAL MEETING
MATTERS TO BE CONSIDERED
This Proxy Statement is furnished to holders of HSNi Common Stock and HSNi
Class B Common Stock in connection with the solicitation of proxies by the HSNi
Board for use at the Annual Meeting of Stockholders of HSNi (the "ANNUAL
MEETING") to be held for the purposes described in this Proxy Statement. Each
copy of this Proxy Statement mailed to holders of HSNi Common Stock and HSNi
Class B Common Stock is accompanied by a form of proxy for use at the Annual
Meeting. There are two sets of proposals -- one set relates to the Transaction
and the other set relates to general business in connection with the Annual
Meeting.
TRANSACTION PROPOSALS
HSNi stockholders will be asked at the Annual Meeting to approve the
following proposals which relate to the Transaction:
1. Issuance of shares of HSNi Common Stock and HSNi Class B Common
Stock in connection with the Transaction (the "TRANSACTION PROPOSAL").
2. Approval of the terms of the Governance Agreement (the "GOVERNANCE
AGREEMENT PROPOSAL").
3. Amendment of the HSNi Certificate to increase the authorized
shares of HSNi Common Stock from 150,000,000 shares to 800,000,000 shares
and to increase the authorized shares of HSNi Class B Common Stock from
30,000,000 shares to 200,000,000 shares (the "AUTHORIZED CAPITAL STOCK
PROPOSAL").
4. Addition of Article XIII to the HSNi Certificate to restrict total
alien ownership and voting power of HSNi stock each to a maximum of 25% and
to make certain other modifications to facilitate HSNi's continued
compliance with regulations under the Communications Act that limit alien
ownership of HSNi (the "OWNERSHIP PROPOSAL").
5. Amendment of Article I of the HSNi Certificate to change the
corporate name of HSNi to "USA Networks, Inc." in the event that the
Transaction is consummated (the "NAME CHANGE PROPOSAL").
6. Amendment of Article XII of the HSNi Certificate to eliminate the
clause that specifies that the number of directors of HSNi shall be no less
than 3 and no more than 15 and to eliminate certain other provisions which
are duplicative of the DGCL (the "DIRECTOR NUMBER PROPOSAL").
7. Amendment of Article XII of the HSNi Certificate to provide that
HSNi's Chief Executive Officer can only be removed without cause by the
affirmative vote of at least 80% of the entire HSNi Board, the further
amendment of which provision will require the affirmative vote of at least
80% of the entire HSNi Board and of the voting power of HSNi's outstanding
voting securities, which provision will be effective in the event that the
Transaction is consummated and only while Mr. Diller is Chief Executive
Officer (the "REMOVAL PROPOSAL").
ANNUAL MEETING PROPOSALS
In connection with the Annual Meeting, HSNi stockholders will also be
asked:
1. To elect eight members of the HSNi Board, each to hold office for
a one-year term ending on the date of the next succeeding annual meeting of
stockholders and until such director's respective successor shall have been
duly elected and qualified.
2. To approve the adoption of the 1997 Incentive Plan for HSNi's
officers and certain key employees and consultants (the "1997 INCENTIVE
PLAN PROPOSAL").
THE ANNUAL MEETING
71
<PAGE> 84
3. To ratify the appointment of Ernst & Young LLP as the firm of
independent auditors to audit the consolidated financial statements of HSNi
and its subsidiaries for the fiscal years ending December 31, 1997 and
December 31, 1998 (the "RATIFICATION OF AUDITORS PROPOSAL").
DATE, TIME AND PLACE OF MEETING
The Annual Meeting will be held on Wednesday, February 11, 1998 at 10:00
a.m. local time, at the Century Plaza Hotel and Tower, 2025 Avenue of the Stars,
Los Angeles, California 90067.
RECORD DATE; SHARES OUTSTANDING AND ENTITLED TO VOTE
Only holders of record of HSNi Common Stock and HSNi Class B Common Stock
at the close of business on December 30, 1997 (the "RECORD DATE") are entitled
to notice of and will be entitled to vote at the Annual Meeting. HSNi Class B
Common Stock is entitled to ten votes per share and HSNi Common Stock is
entitled to one vote per share on each matter that HSNi Class B Common Stock and
HSNi Common Stock vote together as a single class. At the close of business on
the Record Date, there were 43,701,098 shares of HSNi Common Stock outstanding
and entitled to vote, held of record by 38,290 stockholders, and 12,227,647
shares of HSNi Class B Common Stock outstanding and entitled to vote, held of
record by four stockholders.
VOTING AND REVOCATION OF PROXIES
The HSNi proxy accompanying this Proxy Statement is solicited on behalf of
the HSNi Board for use at the Annual Meeting. You are requested to complete,
date and sign the accompanying proxy and promptly return it in the accompanying
envelope or otherwise mail it to HSNi. All proxies that are properly executed
and returned, and that are not revoked, will be voted at the Annual Meeting in
accordance with the instructions indicated on the proxies. If no instructions
are indicated, such proxies will be voted FOR each of the proposals described in
this Proxy Statement, including election of the director nominees.
The HSNi Board does not presently intend to bring any business before the
Annual Meeting other than the specific HSNi proposals referred to in this Proxy
Statement and specified in the notice of the Annual Meeting. So far as is known
to the HSNi Board, no other matters are to be brought before the Annual Meeting.
If any other business properly comes before the Annual Meeting, however, it is
intended that proxies, in the form enclosed, will be voted on such matters in
accordance with the judgment of the persons voting such proxies, except that
proxies voted against the Authorized Capital Stock Proposal will not be voted
for any motion made for adjournment of the Annual Meeting for purposes of
soliciting additional votes to approve the Authorized Capital Stock Proposal.
An HSNi stockholder who has given a proxy may revoke it at any time before
it is exercised at the Annual Meeting by (i) delivering to The Bank of New York
a written notice, bearing a date later than the proxy, stating that the proxy is
revoked, (ii) signing and so delivering a proxy relating to the same shares and
bearing a later date prior to the vote at the Annual Meeting or (iii) attending
the Annual Meeting and voting in person (although attendance at the Annual
Meeting will not, by itself, revoke a proxy). You should send any written notice
or new proxy card to HSNi c/o The Bank of New York at the following address:
HSN, Inc., P.O. Box 11064, New York, New York 10203-0064. You may request a new
proxy card by calling MacKenzie Partners, Inc. at 1-800-322-2885.
VOTE REQUIRED
GENERAL
Under the NASD rules, the Transaction Proposal must be approved by the
affirmative vote of the holders of a majority of the Total Voting Power
represented at the Annual Meeting, entitled to vote and voting on such matter.
The "TOTAL VOTING POWER" means the total number of votes represented by the
shares of HSNi Common Stock and HSNi Class B Common Stock when voting together
as a single class, with each share of HSNi Common Stock entitled to one vote and
each share of HSNi Class B Common Stock entitled to ten votes.
THE ANNUAL MEETING
72
<PAGE> 85
Approval of the Governance Agreement Proposal requires the affirmative vote
of the holders of a majority of the Total Voting Power, present in person or
represented by proxy at the Annual Meeting and voting on this proposal.
Under the DGCL, approval by the affirmative vote of the holders of a
majority of the outstanding shares of each of HSNi Common Stock and the HSNi
Class B Common Stock, voting as separate classes, is required to amend Article
IV of the HSNi Certificate to increase the number of authorized shares of HSNi
Common Stock and HSNi Class B Common Stock pursuant to the Authorized Capital
Stock Proposal.
Under the DGCL, approval by the affirmative vote of the holders of a
majority of the Total Voting Power outstanding is required to approve the
Ownership Proposal, the Name Change Proposal, the Director Number Proposal and
the Removal Proposal.
Election of six of the director nominees to be elected at the Annual
Meeting requires the affirmative vote of the holders of shares representing a
majority of the Total Voting Power, and election of two of such director
nominees (Messrs. Ramer and Savoy) requires the affirmative vote of the holders
of a majority of the shares of HSNi Common Stock, in each case, represented at
the Annual Meeting and voting on this matter.
Approval of the 1997 Incentive Plan Proposal requires the affirmative vote
of the holders of a majority of the Total Voting Power, present in person or
represented by proxy at the Annual Meeting and voting on this proposal. Approval
of the 1997 Incentive Plan is required pursuant to the rules and bylaws of the
NASD and by the Internal Revenue Code of 1986, as amended (the "CODE").
Approval of the Ratification of Auditors Proposal requires the affirmative
vote of the holders of a majority of the Total Voting Power, present in person
or represented by proxy at the Annual Meeting and voting on this proposal.
VOTING AGREEMENT
Pursuant to the Stockholders Agreement, Liberty and Mr. Diller have agreed
to vote shares of HSNi Common Stock and HSNi Class B Common Stock as to which
they have voting control in favor of each proposal to be presented to
stockholders at the Annual Meeting. As of the Record Date, these shares
represented 1% of the outstanding HSNi Common Stock, 97% of the outstanding HSNi
Class B Stock and 71% of the Total Voting Power.
BASED ON THESE NUMBERS, APPROVAL OF ALL PROPOSALS OTHER THAN THE AUTHORIZED
CAPITAL STOCK PROPOSAL AND THE ELECTION OF THE TWO DIRECTORS TO BE ELECTED BY
THE HOLDERS OF HSNi COMMON STOCK IS ASSURED, REGARDLESS OF THE VOTE OF ANY OTHER
HSNi STOCKHOLDER.
QUORUM; BROKER NON-VOTES
The required quorum for the transaction of business at the Annual Meeting
is a majority of shares of HSNi Common Stock, or 21,850,550 shares, and a
majority of the shares of HSNi Class B Common Stock, or 6,113,824 shares, issued
and outstanding on the Record Date, which shares must be present in person or
represented by proxy at the Annual Meeting. Abstentions and broker non-votes,
although counted for purposes of determining whether there is a quorum at the
Annual Meeting, will not be voted. A non-vote occurs when a nominee holding
shares for a beneficial owner votes on one proposal, but does not vote on
another proposal because the nominee does not have discretionary voting power
and has not received instructions from the beneficial owner.
Approval of the proposed amendments to the HSNi Certificate (Proposal Nos.
3-7 under "-- Matters to be Considered -- Transaction Proposals") requires the
vote of a majority of the Total Voting Power outstanding (except that the
Authorized Capital Stock Proposal requires the vote of a majority of the
outstanding shares of HSNi Common Stock and HSNi Class B Common Stock, voting as
separate classes). Therefore, if you abstain or if your shares become broker
non-votes, such votes have the same effect as votes against these proposals.
With respect to the other proposals, abstentions and broker non-votes will have
no effect on the outcome of such proposals.
THE ANNUAL MEETING
73
<PAGE> 86
If a quorum is not obtained, or if fewer shares of HSNi Common Stock than
the number required therefor are voted in favor of the Authorized Capital Stock
Proposal, it is expected that the Annual Meeting will be postponed or adjourned
in order to permit additional time for soliciting and obtaining additional
proxies or votes, and, at any subsequent reconvening of the Annual Meeting, all
proxies will be voted in the same manner as such proxies would have been voted
at the original convening of the Annual Meeting, except for any proxies that
have theretofore effectively been revoked or withdrawn. Proxies voted against
the Authorized Capital Stock Proposal will not be voted in favor of postponement
or adjournment of the Annual Meeting for purposes of seeking approval of this
proposal.
SOLICITATION OF PROXIES AND EXPENSES
HSNi will bear the cost of the solicitation of proxies from its
stockholders. In addition to solicitation by mail, the directors, officers and
employees of HSNi may solicit proxies from stockholders by telephone, telegram,
letter, facsimile or in person. Following the original mailing of the proxies
and other soliciting materials, HSNi will request brokers, custodians, nominees
and other record holders to forward copies of the proxy and other soliciting
materials to persons for whom they hold shares of HSNi Common Stock and to
request authority for the exercise of proxies. In such cases, HSNi, upon the
request of the record holders, will reimburse such holders for their reasonable
expenses.
HSNi has retained MacKenzie Partners, Inc. to distribute proxy solicitation
materials to brokers, banks and other nominees and to assist in the solicitation
of proxies from HSNi stockholders. The fee for such firm's services is estimated
not to exceed $12,500 plus reimbursement for reasonable out-of-pocket costs and
expenses in connection therewith.
DESCRIPTION OF PROPOSALS AND HSNi BOARD RECOMMENDATIONS
The HSNi Board has considered each of the proposals described in this Proxy
Statement and believes that each proposal is in the best interests of HSNi
stockholders.
THE HSNi BOARD RECOMMENDS, BY THE UNANIMOUS VOTE OF ALL DIRECTORS VOTING,
THAT YOU VOTE FOR EACH PROPOSAL DESCRIBED IN THIS SECTION.
YOUR PROXY WILL BE SO VOTED UNLESS YOU SPECIFY OTHERWISE.
TRANSACTION PROPOSAL
Because the shares of HSNi Common Stock and HSNi Class B Common Stock to be
issued or reserved for issuance to Universal and Liberty in the Transaction
exceed 20% of the number of shares of HSNi stock outstanding, the NASD rules
require that HSNi stockholders approve those issuances. Approval of this
proposal is required to consummate the Transaction.
GOVERNANCE AGREEMENT PROPOSAL
In connection with the Transaction, HSNi has entered into a Governance
Agreement, pursuant to which, among other things, HSNi has agreed that it will
not take certain fundamental actions (e.g., materially amend the HSNi
Certificate or HSNi By-Laws or engage in significant acquisitions or
dispositions) without the prior written approval of Universal, Liberty and Mr.
Diller. The Governance Agreement Proposal provides for the approval by the HSNi
stockholders of the terms of the Governance Agreement. For a summary of the
Governance Agreement, see "The Transaction -- Description of the
Transaction -- Related Agreements -- Governance Agreement." Although the HSNi
Board approved this proposal in connection with the Transaction, approval of
this proposal is not a condition to complete the Transaction.
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AUTHORIZED CAPITAL STOCK PROPOSAL
The Authorized Capital Stock Proposal provides that Article IV of the HSNi
Certificate will be amended to increase the authorized shares of HSNi Common
Stock from 150,000,000 shares to 800,000,000 shares and the authorized shares of
HSNi Class B Common Stock from 30,000,000 shares to 200,000,000 shares. The
remaining shares of authorized but unissued HSNi Common Stock and HSNi Class B
Common Stock may thereafter be used for general corporate purposes, including in
connection with future acquisitions. The Authorized Capital Stock Proposal is
described under, "Summary -- Annual Meeting Proposals -- The Authorized Capital
Stock Proposal." Approval of this proposal is required to consummate the
Transaction.
The full text of the Authorized Capital Stock Proposal is included in
Appendix G attached to this Proxy Statement.
OWNERSHIP PROPOSAL
HSNi, by virtue of its ownership of television broadcasting stations, is
subject to the Communications Act and related FCC regulations. In order to
ensure compliance with such regulations, which generally require that alien
ownership and voting power not exceed 25% of a company that controls broadcast
licenses, HSNi is proposing to amend the HSNi Certificate to add an Article
which restricts total alien equity ownership and voting power of HSNi securities
(regardless of class) each to a maximum of 25%. In addition, the Ownership
Proposal provides for certain other modifications to facilitate HSNi's continued
compliance with such regulations, including by permitting the HSNi Board to
redeem HSNi securities transferred or retained in violation of such Article,
provided that HSNi will not redeem HSNi stock owned by Universal issued at the
Closing, acquired not in violation of the Investment Agreement and otherwise
acquired not in violation of the Communications Act. There are currently no
limitations on alien ownership set forth in the HSNi Certificate. Universal
(which is owned 84% by Seagram, a corporation organized under the laws of
Canada, and 16% by Matsushita, a corporation organized under the laws of Japan)
is an "alien" for purposes of the applicable regulations. Although the HSNi
Board approved this proposal in connection with the Transaction, approval of
this proposal is not a condition to complete the Transaction.
The full text of the Ownership Proposal is included in Appendix G attached
to this Proxy Statement.
NAME CHANGE PROPOSAL
At the Annual Meeting, HSNi stockholders will be requested to consider and
approve the Name Change Proposal. The Name Change Proposal provides that, upon
consummation of the Transaction, Article I of the HSNi Certificate will be
amended to state that the name of HSNi is "USA Networks, Inc." If approved, the
Name Change Proposal will not be effected unless and until the Transaction is
consummated.
The full text of the Name Change Proposal is included in Appendix G
attached to this Proxy Statement.
DIRECTOR NUMBER PROPOSAL
The Director Number Proposal provides that Article XII of the HSNi
Certificate will be amended to eliminate the provision specifying that the
number of directors be no less than three and no more than fifteen. Instead, the
HSNi Board will have the ability to fix the number of directors from time to
time in accordance with the HSNi By-Laws. In addition, the Director Number
Proposal eliminates certain other provisions in Article XII which are
duplicative of the DGCL. Although the HSNi Board approved the Director Number
Proposal in connection with the Transaction, approval of this proposal is not a
condition to complete the Transaction.
The full text of the Director Number Proposal is included in Appendix G
attached to this Proxy Statement.
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REMOVAL PROPOSAL
HSNi stockholders will be asked to approve the Removal Proposal. The
Removal Proposal provides that Article XII of the HSNi Certificate will be
amended to provide that HSNi's Chief Executive Officer can only be removed
without cause by the affirmative vote of at least 80% of the entire HSNi Board.
In addition, the amendment requires the affirmative vote of at least 80% of the
entire HSNi Board and of the voting power of HSNi's outstanding voting
securities. This Certificate amendment will be effective when we complete the
Transaction and only so long as Mr. Diller is Chief Executive Officer of HSNi.
The full text of the Removal Proposal is included in Appendix G attached to
this Proxy Statement.
ELECTION OF HSNi DIRECTORS
Eight directors are to be elected by the stockholders of HSNi to hold
office until the annual meeting of stockholders for fiscal year 1998 or until
their respective successors have been elected. Proxies granted by stockholders
in the form enclosed with this Proxy Statement will be voted, unless otherwise
directed, in favor of electing the following persons as directors: Barry Diller,
Paul G. Allen, James G. Held, Victor A. Kaufman, Bruce M. Ramer, William D.
Savoy, Gen. H. Norman Schwarzkopf and Richard E. Snyder. Messrs. Ramer and Savoy
have been designated by the HSNi Board as nominees for the positions on the HSNi
Board to be elected by holders of HSNi Common Stock voting as a separate class.
Each of these directors must receive the favorable vote of the holders of a
majority of the outstanding shares of HSNi Common Stock present in person or
represented by proxy and entitled to vote thereon at the Annual Meeting.
Election of the remaining six directors requires the favorable vote by the
holders of a majority of the Total Voting Power, present in person or
represented by proxy and entitled to vote thereon at the Annual Meeting. In the
event any nominee named herein for election as a director at the Annual Meeting
is not available or willing to serve when the election occurs, proxies in the
accompanying form may be voted for a substitute as well as for the other persons
named herein. All of the nominees currently serve as directors of HSNi.
Pursuant to the Investment Agreement, upon consummation of the Transaction,
the size of the HSNi Board will be increased to twelve directors and four
designees of Universal, Edgar Bronfman, Jr., Robert W. Matschullat, Frank J.
Biondi, Jr. and Samuel Minzberg are expected to be elected to the HSNi Board.
INFORMATION REGARDING DIRECTORS, NOMINEES FOR ELECTION AS DIRECTORS
AND CERTAIN CONTEMPLATED DIRECTORS
Barry Diller, age 55, has been a director and the Chairman of the Board and
Chief Executive Officer of HSNi since August 24, 1995. He became a director of
Home Shopping on August 24, 1995 and has served as Chairman of the Board since
November 24, 1995. He was Chairman of the Board and Chief Executive Officer of
QVC, Inc. from December 1992 through December 1994. From 1984 to 1992, Mr.
Diller served as the Chairman of the Board and Chief Executive Officer of Fox,
Inc. Prior to joining Fox, Inc., Mr. Diller served for ten years as Chairman of
the Board and Chief Executive Officer of Paramount Pictures Corporation. Mr.
Diller is a director of Ticketmaster and Golden Books Family Entertainment, Inc.
He also serves on the Board of the Museum of Television and Radio and is a
member of the Board of Councilors for the University of Southern California's
School of Cinema-Television. Mr. Diller also serves on the Board of Directors
for AIDS Project Los Angeles, the Executive Board for the Medical Sciences of
University of California, Los Angeles and the Board of the Children's Advocacy
Center of Manhattan. Upon consummation of the Transaction, it is expected that
Mr. Diller will be elected to the Seagram Board.
Paul G. Allen, 44, has been a director of HSNi since July 1997. Mr. Allen
has served as a director and Chairman of the Board of Ticketmaster since
December 1993. Mr. Allen has been a private investor for more than five years,
with interests in a wide variety of companies, many of which focus on multimedia
digital communications such as Asymetrix Corp. and Interval Research
Corporation, of which Mr. Allen is the controlling shareholder and a director.
In addition, Mr. Allen is the Chairman of the Board of Trail Blazers
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Inc. of the National Basketball Association. Mr. Allen currently serves as a
director of Microsoft Corporation and also serves as a director of various
private corporations.
James G. Held, age 48, has been a director of HSNi since December 1996 and
has served as Vice Chairman since January 1997 . He was appointed as a director
of HSNi pursuant to the terms of the Home Shopping Merger. He previously had
served as a director of Home Shopping since February 1996. Since November 1995,
Mr. Held has been President and Chief Executive Officer of Home Shopping. From
January 1995 to November 1995, Mr. Held served as President and Chief Executive
Officer of Adrienne Vittadini, Inc., an apparel manufacturer and retailer.
Between September 1993 and January 1995, Mr. Held was a senior executive of QVC,
Inc., first as Senior Vice President in charge of new business development and
later as Executive Vice President of merchandising, sales, product planning and
new business development. For eleven years prior to that, until September 1993,
Mr. Held was employed in different executive positions at Bloomingdale's, Inc.
Mr. Held currently serves as a director of Ticketmaster.
Victor A. Kaufman, age 54, has been a director of HSNi since December 1996.
Mr. Kaufman has served in the Office of the Chairman for the Company since
January 27, 1997 and as Chief Financial Officer since November 1, 1997. Prior to
that time, he served as Chairman and Chief Executive Officer of Savoy since
March 1992 and as a director of Savoy since February 1992. Mr. Kaufman was the
founding Chairman and Chief Executive Officer of Tri-Star Pictures, Inc.
("TRI-STAR") from 1983 until December 1987, at which time he became President
and Chief Executive Officer of Tri-Star's successor company, Columbia Pictures
Entertainment, Inc. ("COLUMBIA"). He resigned from these positions at the end of
1989 following the acquisition of Columbia by Sony USA, Inc. Mr. Kaufman joined
Columbia in 1974 and served in a variety of senior positions at Columbia and its
affiliates prior to the founding of Tri-Star.
Bruce M. Ramer, age 64, has been a director of HSNi since February 1996 and
has been a principal of the law firm of Gang, Tyre, Ramer & Brown, Inc. for more
than five years. He is Chairman of the Board of Directors of Geffen Playhouse,
Los Angeles and was formerly a member of the Board of Directors of Rebuild L.A.
Mr. Ramer is also Executive Director of the Entertainment Law Institute of the
University of Southern California Law School.
William D. Savoy, 32, has served as a director of HSNi since July 1997. He
has served as a director of Ticketmaster since September 1994. Mr. Savoy
currently serves as Vice President of Vulcan Ventures, Incorporated, a venture
capital fund wholly owned by Paul Allen, and has served as the President of
Vulcan Northwest Inc., a venture capital firm, since January 1990. Mr. Savoy is
a director of CINET, Inc., Harbinger Corporation, Telescan, Inc. and U.S.
Satellite Broadcasting, Inc.
Gen. H. Norman Schwarzkopf, age 63, has been a director of HSNi since
December 1996. He was appointed as a director of HSNi pursuant to the terms of
the Home Shopping Merger. He previously had served as a director of Home
Shopping since May 1996. Since his retirement from the military in August 1991,
Gen. Schwarzkopf has been an author and a participant in several television
specials and is currently working with NBC on additional television programs.
From August 1990 to August 1991, he served as Commander-in-Chief, United States
Central Command and Commander of Operations, Desert Shield and Desert Storm.
General Schwarzkopf has 35 years of service with the military. He is also on the
Board of Governors of the Nature Conservancy, Chairman of the Starbright Capital
Campaign, co-founder of the Boggy Creek Gang, a member of the University of
Richmond Board of Trustees, and serves on the Boards of Directors of Borg Warner
Security Corporation, Remington Arms Company, Kuhlman Corporation and Cap CURE,
Association for the Cure of Cancer of the Prostate.
Richard E. Snyder, age 64, has been a director of HSNi since December 1996.
He has been Chairman and Chief Executive Officer of Golden Books Family
Entertainment, Inc. (formerly Western Publishing Group) since May 1996 and was
President from February to May 1996. Prior to that time, Mr. Snyder had, since
1994, been an independent business consultant and investor. He was the Chief
Executive Officer of Simon & Schuster from 1976 to 1981 and Chairman and Chief
Executive Officer of Simon & Schuster from 1981 to 1994. Mr. Snyder is also a
director of Reliance Group Holdings, Inc. and Children's Blood Foundation. Mr.
Snyder is a member of the Society of Fellows of the American Museum of Natural
History, the Council on Foreign Relations and the Board of Overseers for the
University Libraries of Tufts University.
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* * *
Set forth below is information regarding the directors to be designated by
Universal who are expected to be elected to the HSNi Board following the
Closing.
Edgar Bronfman, Jr., 42, has been President and Chief Executive Officer of
Seagram since June 1994. Previously, he was President and Chief Operating
Officer of Seagram. Mr. Bronfman is a director of Seagram.
Robert W. Matschullat, 50, has been Vice Chairman and Chief Executive
Officer of Seagram since October 1995. Previously, he was Managing Director and
Head of Worldwide Investment Banking for Morgan Stanley & Co., Inc. and a
director of Morgan Stanley Group, Inc., investment bankers. Mr. Matschullat is a
director of Seagram and Transamerica Corporation.
Frank J. Biondi, Jr., 52, has been Chairman and Chief Financial Officer of
Universal since April 1996. Previously, he was President, Chief Executive
Officer and a director of Viacom, Inc., an entertainment and publishing company.
Mr. Biondi is a director of Seagram, The Bank of New York and Vail Resorts Inc.
Samuel Minzberg, 48, has been President and Chief Executive Officer of
Claridge Inc., a management company, since January 1, 1998. Previously, he was
Chairman of Goodman, Phillips and Vineberg, attorneys at law. Mr. Minzberg is a
director of Koor Industries, Ltd.
1997 INCENTIVE PLAN PROPOSAL
INTRODUCTION
The HSNi Board has adopted the 1997 Incentive Plan, effective as of October
19, 1997, subject to approval by HSNi's stockholders. The purpose of the 1997
Incentive Plan is to give HSNi a competitive advantage in attracting, retaining
and motivating officers and employees and to provide HSNi with the ability to
provide incentives more directly linked to the profitability of HSNi's
businesses and increases in stockholder value.
DESCRIPTION
Set forth below is a summary of certain important features of the 1997
Incentive Plan, which summary is qualified in its entirety by reference to the
actual plan attached as Appendix F to this Proxy Statement.
Administration
The 1997 Incentive Plan will be administered by the Compensation/Benefits
Committee or such other committee of the HSNi Board as the HSNi Board may from
time to time designate (the "COMMITTEE"). Among other things, the Committee will
have the authority to select individuals to whom awards may be granted, to
determine the type of award as well as the number of shares of HSNi Common Stock
to be covered by each award, and to determine the terms and conditions of any
such awards.
Eligibility
Persons who serve or agree to serve as officers, employees, non-employee
directors or consultants of HSNi and its subsidiaries and affiliates designated
by the Committee who are responsible for or contribute to the management, growth
and profitability of HSNi are eligible to be granted awards under the 1997
Incentive Plan.
Plan Features
The 1997 Incentive Plan authorizes the issuance of up to 10,000,000 shares
of HSNi Common Stock pursuant to the grant or exercise of stock options,
including incentive stock options ("ISOS"), nonqualified stock options, stock
appreciation rights ("SARS"), restricted stock, performance units and bonus
awards. No single participant may be granted awards pursuant to the 1997
Incentive Plan covering in excess of 8,000,000 shares of HSNi Common Stock over
the life of the 1997 Incentive Plan. The shares subject to grant under the 1997
Incentive Plan are to be made available from authorized but unissued shares or
from treasury shares, as determined from time to time by the HSNi Board. No
awards outstanding on the termination date of the 1997 Incentive Plan shall be
affected or impaired by such termination. Awards generally will not be
transferable, except by will and the laws of descent and distribution and, in
the case of nonqualified stock options, pursuant to a qualified domestic
relations order or, if permitted in the option agreement, pursuant to a gift to
an
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optionee's immediate family or a specified individual (or a trust, partnership
or LLC for such family or individual) or a charitable organization.
As indicated above, several types of stock grants can be made under the
1997 Incentive Plan. A summary of these grants is set forth below:
Stock Options
The exercise price of options cannot be less than 100% of the fair market
value of the stock underlying the options on the date of grant. Optionees may
pay the exercise price in cash or, if approved by the Committee, in HSNi Common
Stock (valued at its fair market value on the date of exercise) or a combination
thereof, or by "cashless exercise" through a broker or by withholding shares
otherwise receivable on exercise. The term of options shall be as determined by
the Committee, but an ISO may not have a term longer than ten years from the
date of grant. The Committee will determine the vesting and exercise schedule of
options, and the extent to which they will be exercisable after the optionee's
employment terminates. Generally, unvested options terminate upon the
termination of employment, and vested options will remain exercisable for one
year after the optionee's death, three years after the optionee's termination
for disability, five years after the optionee's retirement and three months
after the optionee's termination for any other reason. Vested options will also
terminate upon the optionee's termination for Cause (as defined in the 1997
Incentive Plan).
SARs
SARs may be granted in conjunction with an option. An SAR entitles the
holder to receive, upon exercise, the excess of the fair market value of a
specified number of shares of HSNi Common Stock at the time of exercise over a
specified price per share. Such amount will be paid to the holder in stock
(valued at its fair market value on the date of exercise), cash or a combination
thereof, as the Committee may determine. An SAR is exercisable only when the
related option is exercisable. The option will be cancelled to the extent that
its related SAR is exercised, and the SAR will be cancelled to the extent the
option is exercised.
Restricted Stock
Restricted stock may be granted with such restriction periods as the
Committee may designate. The Committee may provide at the time of grant that
restricted stock cannot vest unless applicable performance goals are satisfied.
These performance goals must be based on the attainment of one or any
combination of the following: specified levels of earnings per share from
continuing operations, operating income, revenues, profits, return on operating
assets, return on equity, EBITDA, stock price appreciation and/or total
stockholder return. Such performance goals may be based on the performance of
HSNi or such subsidiary, affiliate, division or department of HSNi for which the
participant performs services, and also may be based on the attainment of
specified levels of HSNi's performance under one or more of the measures
described above relative to the performance of other corporations. Performance
goals based on the foregoing factors are hereinafter referred to as "PERFORMANCE
GOALS." The terms and conditions of restricted stock awards (including any
applicable Performance Goals) need not be the same with respect to each
participant. During the restriction period, the Committee may require that the
stock certificates evidencing restricted shares be held by HSNi. Restricted
stock may not be sold, assigned, transferred, pledged or otherwise encumbered,
and is forfeited upon termination of employment, unless otherwise provided by
the Committee. Other than such restrictions on transfer and any other
restrictions the Committee may impose, the participant will have all the rights
of a stockholder with respect to the restricted stock award.
Performance Units
The Committee may grant performance units payable in cash or shares of HSNi
Common Stock, conditioned upon continued service and/or the attainment of
Performance Goals determined by the Committee. An "AWARD CYCLE" consists of a
period of consecutive fiscal years or portions thereof designated by the
Committee over which performance units are to be earned. At the conclusion of a
particular award cycle, the Committee will determine the number of performance
units granted to a participant that have been earned and will deliver to such
participant (i) the number of shares of HSNi Common Stock equal to the number of
performance units determined by the Committee to have been earned and/or (ii)
cash equal to the fair
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market value of such shares. The Committee may, in its discretion, permit
participants to defer the receipt of payment under performance units.
Bonus Awards
Bonus awards granted to eligible employees of HSNi and its subsidiaries and
affiliates under the 1997 Incentive Plan shall be based upon the attainment of
the Performance Goals established by the Committee for the plan year. Bonus
amounts earned by any individual shall be limited to $10,000,000 for any plan
year. Bonus amounts will be paid in cash or, in the discretion of the Committee,
in HSNi Common Stock, as soon as practicable (but within 90 days) following the
end of the plan year. The Committee may reduce or eliminate a participant's
bonus award in any year notwithstanding the achievement of Performance Goals.
Tax Offset Bonuses
At the time an award is made under the 1997 Incentive Plan or at any time
thereafter, the Committee may grant to the participant receiving such award the
right to receive a cash payment in an amount specified by the Committee to be
paid if the award results in compensation income to the participant.
Change in Capitalization or Change in Control
The 1997 Incentive Plan provides that, in the event of any change in
corporate capitalization, such as a stock split, or a corporate transaction,
such as any merger, consolidation, separation, spinoff or other distribution of
property, or any reorganization or partial or complete liquidation of HSNi, the
Committee or the HSNi Board may make such substitution or adjustment in the
aggregate number and kind of shares reserved for issuance under the 1997
Incentive Plan, in the individual grant limits under the 1997 Incentive Plan, in
the number, kind and option price of shares subject to outstanding stock options
and SARs, and in the number and kind of shares subject to other outstanding
awards granted under the 1997 Incentive Plan as may be determined to be
appropriate by the Committee or the HSNi Board, in its sole discretion. The 1997
Incentive Plan also provides that in the event of a Change in Control (as
defined in the 1997 Incentive Plan) of HSNi (i) any SARs and stock options
outstanding as of the date of the Change in Control, which are not then
exercisable and vested will become fully exercisable and vested, (ii) the
restrictions and deferral limitations applicable to restricted stock will lapse
and such restricted stock will become free of all restrictions and fully vested,
(iii) all performance units will be considered to be earned and payable in full
and any deferral or other restrictions will lapse and such performance units
will be settled in cash or shares of HSNi Common Stock as promptly as
practicable, (iv) stock options may be surrendered, subject to certain
limitations, at any time during the 60-day period following such Change in
Control, for a cash payment (or, in certain circumstances, an equivalent number
of shares of HSNi Common Stock or common stock of an acquiror) equal to the
spread between the exercise price of the option and the Change in Control Price
(as defined in the 1997 Incentive Plan) and (v) bonus awards may be paid out in
whole or in part, in the discretion of the Committee, notwithstanding whether
Performance Goals have been achieved.
Amendment and Discontinuance
The 1997 Incentive Plan may be amended, altered or discontinued by the HSNi
Board, but no amendment, alteration or discontinuance may impair the rights of
an optionee under an option or a recipient of an SAR, restricted stock award,
performance unit award or bonus award previously granted without the optionee's
or recipient's consent. The 1997 Incentive Plan may not be amended without
stockholder approval to the extent such approval is required by law or
agreement.
FEDERAL INCOME TAX CONSEQUENCES
The following discussion is intended only as a brief summary of the federal
income tax rules that are generally relevant to stock options. The laws
governing the tax aspects of awards are highly technical and such laws are
subject to change.
Nonqualified Options
Upon the grant of a nonqualified option, the optionee will not recognize
any taxable income and HSNi will not be entitled to a deduction. Upon the
exercise of such an option or related SAR, the excess of the fair market value
of the shares acquired on the exercise of the option or SAR over the exercise
price or the cash
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paid under an SAR (the "SPREAD"), will constitute compensation taxable to the
optionee as ordinary income. HSNi, in computing its U.S. federal income tax,
will generally be entitled to a deduction in an amount equal to the compensation
taxable to the optionee, subject to the limitations of Code Section 162(m).
ISOs
An optionee will not recognize taxable income on the grant or exercise of
an ISO. However, the spread at exercise will constitute an item includible in
alternative minimum taxable income, and, thereby, may subject the optionee to
the alternative minimum tax. Such alternative minimum tax may be payable even
though the optionee receives no cash upon the exercise of the ISO with which to
pay such tax.
Upon the disposition of shares of stock acquired pursuant to the exercise
of an ISO, after the later of (i) two years from the date of grant of the ISO or
(ii) one year after the transfer of the shares to the optionee (the "ISO HOLDING
PERIOD"), the optionee will recognize long-term capital gain or loss, as the
case may be, measured by the difference between the stock's selling price and
the exercise price. The corporation is not entitled to any tax deduction by
reason of the grant or exercise of an ISO, or by reason of a disposition of
stock received upon exercise of an ISO if the ISO Holding Period is satisfied.
Different rules apply if the optionee disposes of the shares of stock acquired
pursuant to the exercise of an ISO before the expiration of the ISO Holding
Period.
NEW PLAN BENEFITS
The Committee, on October 19, 1997, granted Mr. Diller options to purchase
4,750,000 shares of HSNi Common Stock at an exercise price of $38.625 per share.
Mr. Diller's options will become exercisable with respect to 25% of the total
shares on each of October 19, 1998 and the next three anniversaries of such
date. Upon a Change in Control (as defined in Mr. Diller's option agreement),
all of Mr. Diller's options that have not previously become exercisable or been
terminated will become exercisable.
On October 19, 1997, the Committee also granted Mr. Kaufman options to
purchase 250,000 shares of HSNi Common Stock at an exercise price of $38.625 per
share, on substantially the same terms and conditions as Mr. Diller's options.
The specific benefits or amounts that may be received by or allocated to
various persons or groups of persons under the 1997 Incentive Plan other than
Messrs. Diller and Kaufman cannot be determined at this time.
The following table sets forth the benefits allocated under the 1997
Incentive Plan to (i) each of the HSNi executive officers, (ii) all the HSNi
executive officers as a group, (iii) all directors who are not executive
officers as a group and (iv) all other employees, including HSNi officers who
are not executive officers, as a group. All of the awards set forth in the
following table are subject to adoption of the 1997 Incentive Plan by HSNi's
stockholders and the consummation of the Transaction.
GRANTS UNDER 1997 INCENTIVE PLAN
<TABLE>
<CAPTION>
EXERCISE PRICE NUMBER
NAME AND POSITION PER SHARE ($) OF SHARES
-------------------------------------------------------- -------------- ---------
<S> <C> <C>
Barry Diller............................................ $ 38.625 4,750,000
Chairman and Chief Executive Officer
Victor A. Kaufman....................................... 38.625 250,000
Office of the Chairman and Chief Financial Officer
Executive Group......................................... 38.625 5,000,000
Non-Executive Director Group............................ 0 0
Non-Executive Officer Employee Group.................... 0 0
</TABLE>
RATIFICATION OF AUDITORS PROPOSAL
The HSNi Board, adopting the recommendation of the Audit Committee of the
HSNi Board (the "AUDIT COMMITTEE"), has appointed the certified public
accounting firm of Ernst & Young as HSNi's independent auditors for 1997 and
1998, subject to ratification by the HSNi stockholders at the Annual
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Meeting. Representatives of Ernst & Young LLP ("ERNST & YOUNG") are expected to
be present at the Annual Meeting and will be available to respond to questions
and may make a statement if such representatives so desire.
On February 13, 1996, based upon the recommendation of the Audit Committee,
the HSNi Board approved the retention of Ernst & Young as the principal
accountant to audit HSNi's financial statements for the year ended December 31,
1996. HSNi continued to engage Deloitte & Touche LLP ("DELOITTE & TOUCHE") to
complete the ongoing audit of HSNi's financial statements for the four-month
transitional period ended December 31, 1995.
During HSNi's two fiscal years ended August 31, 1994 and 1995, the
four-month period ended December 31, 1995, and in the subsequent interim period
through July 2, 1996, there were no disagreements with Deloitte & Touche on any
matters of accounting principles or practices, financial statement disclosure,
or auditing scope or procedures which if not resolved to the satisfaction of
Deloitte & Touche would have caused Deloitte & Touche to make a reference to the
subject matter of the disagreement in connection with Deloitte & Touche's Report
on HSNi's financial statements for such periods. During such period, Deloitte &
Touche did not advise HSNi as to the presence of any reportable event as
described in Item 304 of Regulation S-K.
Deloitte & Touche's reports dated July 2, 1996 and November 13, 1995 on
HSNi's financial statements for the year ended August 31, 1995 and for the
four-month transitional period ended December 31, 1995, respectively, did not
contain an adverse opinion or a disclaimer of opinion, nor was it qualified or
modified as to uncertainty, audit scope or accounting principles.
Deloitte & Touche's Report dated November 4, 1994 (the "1994 REPORT") for
the year ended August 31, 1994 did not contain an adverse opinion or a
disclaimer of opinion nor was it qualified or modified as to audit scope or
accounting principles. The 1994 Report was modified, however, due to the
inclusion of an uncertainty paragraph regarding the outcome of pending
litigation brought by HSNi involving payment from a borrower on a promissory
note held by HSNi. On May 22, 1995, the lawsuit was resolved in favor of HSNi.
During HSNi's fiscal years ended August 31, 1994 and 1995, and in the
subsequent interim period through July 2, 1996, HSNi did not consult with Ernst
& Young with regard to the matters described in Item 304 of Regulation S-K.
DIRECTORS AND EXECUTIVE OFFICERS OF HSNi
DIRECTORS AND EXECUTIVE OFFICERS
The following sets forth certain information concerning the persons who
currently serve as HSNi directors and are not included in "-- Description of
Proposals and HSNi Board Recommendations -- Election of HSNi Directors --
Information Regarding Directors and Nominees for Election as Directors and
Certain Contemplated Directors" and executive officers of HSNi who do not serve
on the HSNi Board.
John E. Oxendine, age 54, has been a director of HSNi since December 1996.
He is the founder and, since 1987, has been Chairman of Blackstar Communica-
tions, Inc. ("BCI"), a company that currently owns and operates three television
stations affiliated with HSNi. Since the fall of 1994, he has also served as
Chairman and Chief Executive Officer of Blackstar LLC, the owner of BCI and,
through a subsidiary of station KEVN-TV, Rapid City, South Dakota, and its
satellite station, KIVV-TV, licensed to Lead-Deadwood, South Dakota. From 1981
to 1995, Mr. Oxendine served as President and Chief Executive Officer of
Broadcast Capital Fund, Inc. Mr. Oxendine is also a member of the Board of the
nonprofit Monterey Institute.
Eli J. Segal, age 54, has been a director of HSNi since December 1996. He
was appointed as director pursuant to the terms of the Home Shopping Merger. He
previously had served as a director of Home Shopping since February 1996. Mr.
Segal has served as President of The Welfare to Work Partnership since February
1997. Mr. Segal served as a consultant to Bits & Pieces, Inc., a direct mail
consumer product company, from February 1996 to November 1997; as a consultant
to Sirius Thinking Ltd., an independent television producer, since January 1997;
and as Chairman of the Board of School Sports, Inc., a magazine celebrating the
world of high school sports, since December 1996. Mr. Segal previously served as
Assistant to the President of the United States from January 1993 to February
1996. In that connection, Mr. Segal was
THE ANNUAL MEETING
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<PAGE> 95
also confirmed by the United States Senate as the first Chief Executive Officer
of the Corporation for National Service. Prior to that, Mr. Segal served as
President of Bits & Pieces, Inc. from 1984 to January 1993, and as publisher of
GAMES magazine, a monthly publication from 1990 to January 1993.
Brian J. Feldman, age 38, has served as Controller of HSNi since January
27, 1997 and Vice President and Controller of Home Shopping since March 1996. He
served as Controller, Deputy Controller and Assistant Controller for Home
Shopping from May 1989 to March 1996.
James G. Gallagher, age 39, has served as Vice President, General Counsel
and Secretary of HSNi since January 27, 1997 and as Executive Vice President and
General Counsel of Home Shopping since October 14, 1996. Prior to joining HSNi,
Mr. Gallagher served in a variety of capacities, including most recently as
Group Counsel at American Express Travel Related Services Company, Inc. from
July 1988 to September 1996.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
For the 1997 fiscal year, no person subject to Section 16 of the Exchange
Act failed to file on a timely basis reports required by such Section.
BOARD OF DIRECTORS AND BOARD COMMITTEES
THE HSNi BOARD
The HSNi Board held seven meetings during fiscal year 1997, and acted by
unanimous written consent on two occasions. The HSNi Board does not have a
nominating committee for recommending to stockholders candidates for positions
on the HSNi Board. During a February 13, 1996 HSNi Board meeting, the HSNi Board
took action pursuant to the HSNi By-Laws to increase the size of the HSNi Board
by one, to a total of eight directors. Subsequently, during 1997, the number of
directors was increased to twelve. Currently, ten directors serve on the HSNi
Board.
AUDIT COMMITTEE
The Audit Committee of the HSNi Board, currently consisting of Gen.
Schwarzkopf and Messrs. Ramer and Savoy, is authorized to recommend to the HSNi
Board independent certified public accounting firms for selection as auditors of
HSNi; make recommendations to the HSNi Board on auditing matters; examine and
make recommendations to the HSNi Board concerning the scope of audits; and
review and approve the terms of transactions between HSNi and related party
entities. During the fiscal year 1997, the Audit Committee, as then constituted,
met six times. HSNi retained Ernst & Young LLP to conduct the audit for the
fiscal years ended December 31, 1996 and 1997. None of the members of the Audit
Committee is an employee of HSNi.
COMPENSATION/BENEFITS COMMITTEE
The Compensation/Benefits Committee of the HSNi Board, currently consisting
of Messrs. Segal and Savoy, is authorized to exercise all of the powers of the
HSNi Board with respect to matters pertaining to compensation and benefits,
including, but not limited to, salary matters, incentive/bonus plans, stock
option plans, investment programs and insurance plans. The Compensation/Benefits
Committee is also authorized to exercise all of the powers of the HSNi Board in
matters pertaining to employee promotions and the designation and/or revision of
employee positions and job titles. The Compensation/Benefits Committee, as then
constituted, met five times during the fiscal year 1997.
EXECUTIVE COMMITTEE
The Executive Committee of the HSNi Board, consisting of Messrs. Diller,
Held and Kaufman, has all the power and authority of the HSNi Board, except
those powers specifically reserved to the HSNi Board by Delaware law, the HSNi
Certificate or the HSNi By-Laws. The Executive Committee did not meet during
fiscal year 1997 but acted by unanimous written consent on two occasions.
THE ANNUAL MEETING
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<PAGE> 96
COMPENSATION OF DIRECTORS AND CERTAIN EXECUTIVE OFFICERS OF HSNi
GENERAL
This section of the Proxy Statement sets forth certain information
pertaining to compensation of the Chief Executive Officer of HSNi and HSNi's
four most highly compensated executive officers other than the Chief Executive
Officer and certain other former executive officers during its fiscal year ended
December 31, 1997, as well as information pertaining to the compensation of
members of the HSNi Board.
SUMMARY OF EXECUTIVE OFFICER COMPENSATION
The following sets forth the annual and long-term compensation for services
to HSNi for the years ended December 31, 1997 and December 31, 1996 and the four
months ended December 31, 1995 and the fiscal year ended August 31, 1995 of
those persons who were, at December 31, 1997, (i) the Chief Executive Officer of
HSNi, and (ii) the other four most highly compensated officers of HSNi whose
compensation exceeded $100,000 for fiscal year 1997.
SUMMARY COMPENSATION TABLE(1)
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG TERM COMPENSATION
--------------------------------------------------- ----------------------------------------
OTHER RESTRICTED
FISCAL ANNUAL STOCK STOCK ALL OTHER
YEAR SALARY BONUS COMPENSATION AWARDS OPTIONS COMPENSATION
NAME & PRINCIPAL POSITION (1) ($) ($) ($)(2) ($) (#) ($)
- -------------------------- ------ ------- ----------- ------------ ---------- --------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Barry Diller.............. 1997 0 4,750,000(5) 286,487(9)
Chairman and Chief 1996 0 1,618,722(4) 0 1,280,508(3)(9)
Executive Officer 1995* 0 833,333(4) 0 6,610,000(6) 424,892(3)(9)
1995(7) 0 47,945(4) 1,892,401(8) 0 1,895,847(9) 24,200(3)(9)
James G. Held............. 1997 500,000 650,000 1,500,000(10) 520(3)
Vice Chairman 1996(11) 19,230 150,000 520(3)
Victor A. Kaufman......... 1997 500,000 423,000(13)
Office of the Chairman 1996 19,230
and Chief Financial
Officer(12)
Jed B. Trosper............ 1997 259,134 84,750 129,953(14) 150,000
Former Vice President
and
Chief Financial Officer
James G. Gallagher........ 1997 215,480 33,108(14) 15,750 520(3)
Vice President, General 1996 7,692
Counsel and Secretary
Brian J. Feldman.......... 1997 130,361 10,000 2,500 520(3)
Controller 1996 4,684 520(3)
</TABLE>
- ---------------
(1) Effective January 1, 1996, HSNi's fiscal year end was changed from August
31 to the calendar year end. For purposes of the Summary Compensation
Table, "1997" and "1996" refer to the calendar years 1997 and 1996, "1995*"
refers to the four months ended December 31, 1995, and "1995" refers to the
fiscal year ended August 31, 1995.
(2) Disclosure of perquisites and other personal benefits, securities or
property received by each of the Chief Executive Officer and HSNi's four
most highly compensated executive officers other than the Chief Executive
Officer (collectively, the "HSNI NAMED EXECUTIVE OFFICERS") is only
required where the aggregate amount of such compensation exceeded the
lesser of $50,000 or 10% of the total of the HSNi Named Executive Officer's
salary and bonus for the year.
(3) Includes HSNi's contributions under its 401(k) Retirement Savings Plan (the
"401(k) PLAN"). Pursuant to the 401(k) Plan, the HSNi Board may elect to
match a portion of employee contributions up to a maximum amount of $1,000
per year, which contributions vest in equal installments over a five-year
period.
(4) Pursuant to an equity compensation agreement between Mr. Diller and HSNi
(the "EQUITY COMPENSATION AGREEMENT"), Mr. Diller received a bonus payment
of approximately $2.5 million on August 24, 1996. HSNi accrued seven days
of this bonus in fiscal 1995 and four months for 1995.
(5) This stock option grant includes 4,750,000 shares granted pursuant to the
1997 Incentive Plan.
(6) Includes 625,000 options granted to Mr. Diller as a result of completion of
the Home Shopping Merger and the Savoy Merger and also includes 5,985,000
options to purchase HSNi Common Stock resulting from the conversion of
options to purchase Home
THE ANNUAL MEETING
84
<PAGE> 97
Shopping common stock granted to Mr. Diller in November 1995 as Chairman of
Home Shopping into options to purchase shares of HSNi Common Stock.
(7) Mr. Diller was appointed Chairman of the Board and Chief Executive Officer
of HSNi on August 24, 1995.
(8) This figure includes $966,263 in compensation paid to Mr. Diller to fund
his tax liability in connection with his acquisition of HSNi Common Stock
pursuant to the Equity Compensation Agreement, and $926,138 in non-cash
income to Mr. Diller based upon the difference between the fair market
value of HSNi Common Stock on the date of purchase and the price per share
paid for the HSNi Common Stock by Mr. Diller.
(9) Mr. Diller was granted options in 1995 to purchase 1,895,847 shares of HSNi
Common Stock, vesting over a four-year period, at an exercise price below
the fair market value of HSNi Common Stock on the date of grant. HSNi has
amortized unearned compensation of $19,046 in 1995, $331,038 in 1995*,
$993,135 in 1996 and $995,856 in 1997. In addition, Mr. Diller has an
interest-free, secured, non-recourse promissory note in the amount of
$4,997,779 payable to HSNi which was used to purchase 220,994 shares of
HSNi Common Stock. As a result, Mr. Diller has compensation for imputed
interest of $6,154 in 1995, $93,854 in 1995*, $286,373 in 1996 and $286,487
in 1997.
(10) Includes 375,000 options granted to Mr. Held pursuant to the 1995 Stock
Incentive Plan and 1,125,000 shares granted pursuant to the 1996 Home
Shopping Network, Inc. Employee Stock Option Plan (the "HOME SHOPPING
EMPLOYEE PLAN") and assumed by HSNi pursuant to the terms of the Home
Shopping Merger.
(11) Mr. Held became a Director of HSNi in December 1996 and Vice Chairman of
HSNi in January 1997.
(12) Mr. Kaufman assumed the position of Chief Financial Officer on November 1,
1997.
(13) Includes the conversion of 500,000 shares of Savoy Common Stock and 250,000
shares of Savoy Restricted Stock pursuant to the Savoy Merger. Includes
28,000 vested options to purchase HSNi Common Stock assumed by HSNi
pursuant to the Savoy Merger. Includes 9,000 vested options to purchase
HSNi Common Stock resulting from conversion of options granted pursuant to
the Home Shopping Employee Plan and 25,000 vested options to purchase HSNi
Common Stock granted pursuant to the 1995 Stock Incentive Plan. Includes
75,000 shares of HSNi Common Stock granted pursuant to the 1995 Stock
Incentive Plan and options to purchase 36,000 shares of HSNi Common Stock
resulting from the conversion of options granted pursuant to the Home
Shopping Employee Plan. Also reflects options to purchase 250,000 shares
pursuant to the 1997 Incentive Plan.
(14) Represents relocation reimbursements.
THE ANNUAL MEETING
85
<PAGE> 98
Option Grants
Set forth in the table below is information with respect to options to
purchase HSNi Common Stock granted to the HSNi Named Executive Officers during
the year ended December 31, 1997. The grants were made under the 1995 Stock
Incentive Plan, the Home Shopping Employee Plan and the 1997 Incentive Plan
(subject to stockholder approval) (collectively, the "STOCK INCENTIVE PLANS").
The Stock Incentive Plans are administered by the Compensation/Benefits
Committee, which has the sole discretion to determine the selected officers,
employees and consultants to whom incentive or non-qualified options, SARs,
restricted stock and performance units may be granted. As to such awards, the
Compensation/Benefits Committee also has the sole discretion to determine the
number of shares subject thereto and the type, terms, conditions and
restrictions thereof. The exercise price of an incentive stock option granted
under the Stock Incentive Plans must be at least 100% of the fair market value
of HSNi's Common Stock on the date of grant. In addition, options granted under
the Stock Incentive Plans terminate within ten years of the date of grant. To
date, only non-qualified stock options have been granted under the Stock
Incentive Plans.
OPTION/SAR GRANTS IN LAST FISCAL YEAR(1)
<TABLE>
<CAPTION>
PERCENT POTENTIAL REALIZABLE
OF TOTAL VALUE AT ASSUMED
NUMBER OF OPTIONS TO ANNUAL RATES OF
SECURITIES EMPLOYEES EXERCISE STOCK PRICE APPRECIATION
UNDERLYING GRANTED PRICE FOR OPTION TERMS(3)
OPTIONS IN THE PER SHARE EXPIRATION -------------------------
NAME GRANTED(#) FISCAL YEAR ($/SH) DATE(2) 5%($) 10%($)
- ------------------------------------------------ ---------- ----------- --------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Barry Diller.................................... 4,750,000 83.5 % 38.625 10/20/2007 115,382,511 292,401,937
Chairman and Chief Executive Officer
James G. Held................................... 375,000 6.6 % 33.1875 7/23/2007 7,826,790 19,834,623
Vice Chairman
Victor A. Kaufman............................... 250,000 4.4 % 38.625 10/20/2007 6,072,764 15,389,576
Office of the Chairman and Chief
Financial Officer
Jed B. Trosper.................................. 90,000 1.6 % 20.250 1/27/2007 1,146,160 2,904,596
Former Vice President and Chief Financial 60,000 1.06% 33.1875 7/23/2007 1,252,286 3,173,540
Officer
James G. Gallagher.............................. 0 -- -- -- -- --
Vice President, General Counsel & Secretary
Brian J. Feldman................................ 2,500 .05% 25.750 5/07/2007 40,485 102,597
Controller
</TABLE>
- ---------------
(1) Under the terms of the Stock Incentive Plans, the Compensation/Benefits
Committee retains discretion, subject to plan limits, to modify the terms of
outstanding options and to reprice such options.
(2) Under the Stock Incentive Plans, the Compensation/Benefits Committee
determines the exercise price, vesting schedule and exercise periods for
option grants made pursuant to those Plans. Options granted during the year
ended December 31, 1997, generally become exercisable in four equal, annual
installments commencing on the first anniversary of the grant date. Each
such option expires ten years from the date of grant.
(3) Potential value is reported net of the option exercise price, but before
taxes associated with exercise. These amounts represent certain assumed
rates of appreciation only. Actual gains, if any, on stock option exercises
are dependent on the future performance of HSNi Common Stock, overall stock
market conditions, as well as on the option holders' continued employment
through the vesting period. The amounts reflected in this table may not
necessarily be achieved.
THE ANNUAL MEETING
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<PAGE> 99
Option Exercises
The following table provides information concerning the exercise of stock
options by the HSNi Named Executive Officers during the fiscal year ended
December 31, 1997 and the fiscal year-end value of all unexercised options held
by such persons.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES
<TABLE>
<CAPTION>
NUMBER OF UNEXERCISED VALUE OF UNEXERCISED
OPTIONS HELD AT IN-THE-MONEY OPTIONS AT
VALUE YEAR END (#) YEAR-END($)(1)
ACQUIRED ON REALIZED ------------------------------ ------------------------------
NAME EXERCISE(#) ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------------------------------ ----------- ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Barry Diller(2)............... 0 0 4,252,924 9,002,924 131,444,397 192,600,647
Chairman and Chief
Executive Officer
James G. Held................. 0 0 562,500 937,500 18,343,744 25,210,931
Vice Chairman
Victor A. Kaufman............. 0 0 62,000 361,000 927,250 6,271,500
Office of the Chairman and
Chief Financial Officer
Jed B. Trosper................ 0 0 0 150,000 0 3,911,250
Former Vice President and
Chief Financial Officer
James G. Gallagher............ 0 0 3,150 12,600 92,226 368,903
Vice President,
General Counsel and
Secretary
Brian J. Feldman.............. 0 0 7,200 6,100 217,828 160,775
Controller
</TABLE>
- ---------------
(1) Represents the difference between the $51.50 closing price of HSNi Common
Stock on December 31, 1997 and the exercise price of the options, and does
not include the U.S. federal and state taxes due upon exercise.
(2) Mr. Diller's options consist of options to purchase (i) 625,000 shares of
HSNi Common Stock granted in 1995 pursuant to the 1995 Stock Incentive Plan,
(ii) 1,895,847 shares of HSNi Common Stock granted during 1995 pursuant to
the Equity Compensation Agreement, (iii) 5,985,000 shares of HSNi Common
Stock resulting from the conversion of options to purchase Home Shopping
common stock and (iv) 4,750,000 shares of HSNi Common Stock under the 1997
Incentive Plan (subject to shareholder approval). One half of each of the
options set forth in (i) through (iii) above were exercisable as of December
31, 1997.
COMPENSATION OF OUTSIDE DIRECTORS
Each director who is not an employee of HSNi receives an annual retainer of
$30,000 per year. HSNi also pays each such director $1,000 for each HSNi Board
meeting and each HSNi Board committee meeting attended, plus reimbursement for
all reasonable expenses incurred by such director in connection with such
attendance at any meeting of the HSNi Board or one of its committees.
Under the HSNi Directors' Stock Option Plan (the "DIRECTORS' STOCK OPTION
PLAN"), directors who are not employees of HSNi receive a grant of options to
purchase 5,000 shares of HSNi Common Stock upon initial election to office and
thereafter annually on the date of HSNi's annual meeting of stockholders at
which the director is re-elected. The exercise price per share of HSNi Common
Stock subject to such options is the fair market value of HSNi Common Stock on
the date of grant, which is defined as the mean of the high and low sale price
on such date on any stock exchange on which HSNi Common Stock is listed or as
reported by NASDAQ, or, in the event that HSNi Common Stock is not so listed or
reported, as determined by an investment banking firm selected by the
Compensation/Benefits Committee. Such options vest in increments of 1,667 shares
on each of the first two anniversaries of the date of grant, and 1,666 shares on
the third. The options expire ten years from the date of grant. For directors
who became directors on July 17, 1997, the exercise price per share of the
annual grant was $32.75.
THE ANNUAL MEETING
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<PAGE> 100
Option grants in the amount of 2,250 shares each were made in January 1997
to Gen. Schwarzkopf and Mr. Segal at an exercise price of $25.56 and $21.39 per
share, respectively. These options vest over a two year period and are
exercisable for a period of five years from the date that they vest. The option
grants replace options that were terminated as a result of the Home Shopping
Merger.
EQUITY COMPENSATION AGREEMENTS AND SIMILAR AGREEMENTS
Equity Compensation Agreement; Stock Option Grant Agreements
Mr. Diller. On October 19, 1997, HSNi and Mr. Diller entered into a stock
option grant agreement pursuant to which, in connection with the Transaction,
HSNi granted Mr. Diller options to purchase 4,750,000 shares of HSNi Common
Stock at an exercise price of $38.625 per share. HSNi will not record a
compensation charge related to the grant of options because the options were
issued at fair market value at the date of grant. Mr. Diller's options will
become exercisable with respect to 25% of the total shares on October 19, 1998
and on each of the next three anniversaries of such date. Upon a Change of
Control (as defined in the Stock Option grant agreement), all of Mr. Diller's
options that have not previously become exercisable or been terminated will
become exercisable.
In connection with the Transaction, Mr. Diller has agreed to waive any
acceleration of his current stock options which may have been triggered by the
Transaction. Mr. Diller's equity compensation agreement with HSNi, dated August
24, 1995, provides for a gross-up payment to be made to Mr. Diller, if
necessary, to eliminate the effect of the imposition of the excise tax under
Section 4999 of the Code upon payments made to Mr. Diller and imposition of
income and excise taxes on such gross-up payment.
Mr. Diller and HSNi are also parties to the Equity Compensation Agreement,
which is described in HSNi's 1996 Form 10-K. See "Additional Information --
Where You Can Find More Information."
Mr. Kaufman. On October 19, 1997, HSNi and Mr. Kaufman entered into a
stock option grant agreement pursuant to which, in connection with the
Transaction, HSNi granted Mr. Kaufman options to purchase 250,000 shares of HSNi
Common Stock for an exercise price of $38.625 per share, on substantially the
same terms and conditions as Mr. Diller's options. In connection with the
Transaction, Mr. Kaufman also has agreed to waive any acceleration of his
current stock options which may have been triggered by the Transaction.
Employment Contracts
Home Shopping originally entered into a four-year employment agreement with
James G. Held as of November 24, 1995 providing for an annual base salary of not
less than $500,000 and an annual bonus of at least $150,000. On July 23, 1997,
the Compensation/Benefits Committee of the Board of Directors extended Mr.
Held's employment agreement for an additional two years. The amended employment
agreement provides a bonus structure whereby if the EBITDA for HSNi and its
subsidiaries in any fiscal year exceeds the target EBITDA as set by the HSNi
Board from time to time, the annual bonus is increased to $300,000 (the first
year) or $350,000 (the second year) plus 1.25% of the excess by which the actual
EBITDA exceeds the target EBITDA for such fiscal year. Mr. Held received stock
options for 2,500,000 shares of Home Shopping Network, Inc., which pursuant to
the Home Shopping Merger, were converted into options to purchase 1,125,000
shares of HSNi Common Stock at an exercise price of $18.889 per share. Those
options vest equally over a four-year period and are exercisable until November
24, 2005. On July 23, 1997, Mr. Held was granted additional stock options to
purchase 375,000 shares of HSNi Common Stock at an exercise price of $33.1875
per share, which vest equally over a four-year period and are exercisable until
July 23, 2007. The agreement provides for differing vesting and exercise rights
upon termination of employment. Home Shopping reimbursed Mr. Held for relocation
expenses and agreed to lend him $1,000,000 for the purpose of purchasing a
residence in the Tampa/St. Petersburg area. The loan bears interest at 5% per
annum. On March 31, 1997, $600,000 of the loan was repaid. In the event that Mr.
Held is terminated for any reason, the principal and any accrued and unpaid
interest become due and payable on the first anniversary of such termination or
immediately in the event that the residence is sold or transferred. Mr. Held is
entitled to the use of a luxury automobile supplied to him by HSNi at its
expense.
THE ANNUAL MEETING
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<PAGE> 101
Home Shopping entered into a two-year employment agreement with James G.
Gallagher, dated October 14, 1996, pursuant to which Mr. Gallagher serves as
Executive Vice President, General Counsel and Secretary of Home Shopping and
Vice President, General Counsel and Secretary of HSNi. The agreement with Mr.
Gallagher provides for an annual base salary of $200,000 per year, with
increases in accordance with company policy. If Home Shopping terminates Mr.
Gallagher's employment for cause, Home Shopping will pay his salary until the
date of termination. If Home Shopping terminates his employment without cause
(other than as a result of his death or disability), Home Shopping will pay to
Mr. Gallagher his salary until the date of termination and the amount of salary
he would have received during the remainder of the then current term and will
pay medical and other health insurance benefits previously provided to him
during the remainder of the current term. The agreement contains an 18-month
non-competition provision in the fields of on-line or electronic retailing. The
agreement does not impose any obligations upon a change of control of HSNi.
Home Shopping entered into a three-year employment agreement with Jed B.
Trosper dated January 13, 1997, pursuant to which Mr. Trosper serves as
Executive Vice President-Chief Operating Officer of Home Shopping. Mr. Trosper
served as Vice President and Chief Financial Officer of HSNi from January 27,
1997 through October 31, 1997. Mr. Trosper receives a salary of $300,000 which
will be increased by $25,000 on October 1, 1998. He received a one-time signing
bonus of $50,000. If Home Shopping terminates Mr. Trosper's employment for
cause, Home Shopping will pay his salary until the date of termination. If Home
Shopping terminates his employment without cause (other than as a result of his
death or disability), Home Shopping will pay to Mr. Trosper his salary until the
date of termination and the amount of salary he would have received during the
remainder of the current term, but in any event for a minimum of 12 months and
will maintain medical and other health insurance benefits. The agreement
contains a 12-month non-competition provision in the fields of video and
electronic retailing. The agreement does not impose any obligations upon a
change of control of HSNi.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The members of the Compensation/Benefits Committee currently are Messrs.
Savoy and Segal. Prior to his resignation as a director of HSNi, Sidney J.
Sheinberg also served on the Compensation/Benefits Committee during 1997. None
of these directors was ever an officer or employee of HSNi or its subsidiaries.
COMPENSATION/BENEFITS COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The Compensation/Benefits Committee currently consists of two directors who
are not employees of HSNi: Messrs. Savoy and Segal.
The Compensation/Benefits Committee is responsible for evaluating and
approving HSNi's compensation policies for all of HSNi's executive officers. The
compensation program for executive officers consists of salary, bonuses and
stock options.
In making salary decisions for the fiscal year beginning January 1, 1997,
the Compensation/Benefits Committee reviewed the existing salaries of executive
officers and made salary decisions based upon a variety of considerations
designed to ensure that HSNi is able to attract and retain qualified executives.
The primary criteria followed by the Compensation/Benefits Committee were as
follows: (i) the ability of HSNi to absorb any increases in salary, (ii) the
fairness of individual executive officers' salaries relative to their
responsibilities and the salaries of other executive officers, (iii) the
individual performance of executive officers and an assessment of the value to
HSNi of their services, (iv) the salaries of comparable officers at comparable
companies in the communications industry and (v) HSNi's financial performance.
At different times, depending upon prevailing circumstances, these criteria were
given varying degrees of weight by the Compensation/Benefits Committee.
The Compensation/Benefits Committee also considers awarding bonuses to
executive officers based on management's proven ability to increase stockholder
value over the past year, the ability of HSNi to absorb any such bonuses, the
individual performance of executive officers and an assessment of the value to
HSNi of their services and HSNi's financial performance. At different times,
depending upon prevailing circumstances, these criteria have been given varying
degrees of weight by the Compensation/Benefits Committee. During 1997, the
Compensation/Benefits Committee approved the creation of the 1997 HSNi Bonus
Plan pursuant to
THE ANNUAL MEETING
89
<PAGE> 102
which approximately 100 employees would receive up to 30% or 40% of their annual
base compensation, depending on their position, based on HSNi reaching specified
performance targets for 1997 and depending on the employees' individual
performance. Certain discretionary bonuses may be paid by management on an
individual basis.
The compensation of the Chief Executive Officer, which includes the grant
of certain options to purchase HSNi Common Stock as well as the payment of
certain cash bonuses and reimbursement of expenses incurred in connection with
such officer's activities on behalf of HSNi, was determined based on the
criteria set forth above and based upon such officer's stature in the industry
and compensation package at other companies at which he has served. See "--
Directors and Executive Officers -- Compensation of Directors and Certain
Executive Officers of HSNi -- Equity Compensation Agreements and Similar
Agreements -- Equity Compensation Agreement; Stock Option Grant Agreements."
Stock options are granted to executive officers and other key employees
under HSNi's 1995 Stock Incentive Plan (THE "1995 STOCK INCENTIVE PLAN") and the
Amended and Restated 1996 Home Shopping Employee Plan to align the interests of
executive officers, key employees and stockholders in the enhancement of
stockholder value and long-term growth of HSNi. The plans are administered by
HSNi under the direction of the Compensation/Benefits Committee. Stock options
may be granted either as a condition of employment or to existing employees.
Stock options generally vest in 25% increments commencing on the first
anniversary of the date of grant and annually thereafter, and expire 10 years
after the grant date. The Committee believes that the four-year vesting period
and ten-year option period are consistent with the alignment of interests
between stock option holders and stockholders and will contribute to the
long-term growth of HSNi.
The use of salaries, bonuses and stock option grants consistent with the
policies described above has resulted in an executive officer compensation
program which the Compensation/Benefits Committee believes is fair to the
executive officers and in the best interests of HSNi's stockholders.
Accordingly, in making salary and bonus decisions and in granting stock options,
the Compensation/Benefits Committee intends to continue to follow existing
compensation policies.
Generally, the Compensation/Benefits Committee expects that compensation
packages granted to executives will be consistent with compensation permitted by
Section 162(m) of the Code, which generally limits to $1,000,000 the corporate
tax deduction for compensation paid to certain executive officers.
By the Compensation/Benefits Committee
William D. Savoy
Eli J. Segal
RELATED PARTY TRANSACTIONS
Mr. Diller, the Chairman of the Board and Chief Executive Officer of HSNi,
is the sole holder of the voting stock of the BDTV Entities in accordance with
agreements between Liberty and Mr. Diller. The BDTV Entities own a controlling
interest in HSNi. If the Transaction is not consummated, control on HSNi will
continue to be held by the BDTV Entities.
During April 1996, Home Shopping sold a majority of its interest in HSN
Direct Joint Venture, its infomercial operation, for $5.9 million to certain
entities controlled by Flextech P.L.C., a company controlled by
Tele-Communications, Inc. ("TCI"). Home Shopping received $4.9 million in cash
at closing and $250,000 on February 1, 1997 and is due an additional $750,000
payable in three equal annual installments commencing on February 1, 1998. Home
Shopping retains a 15% interest in the venture and a related corporation.
During 1996, Home Shopping, along with Jupiter Programming Company ("JPC"),
formed Shop Channel, a television shopping venture based in Tokyo. TCI
International, a subsidiary of TCI, owns a 50% interest in JPC, the 70%
shareholder in the venture. Home Shopping owns a 30% interest in Shop Channel.
During 1997, Home Shopping contributed $5.3 million to Shop Channel. In
addition, Home Shopping sold inventory and provided services in the amount of
$5.9 million to Shop Channel during 1997.
THE ANNUAL MEETING
90
<PAGE> 103
In the normal course of business, Home Shopping enters into agreements with
the operators of cable television systems and operators of broadcast television
stations for the carriage of Home Shopping programming. Home Shopping has
entered into agreements with a number of cable operators that are affiliates of
TCI. These long-term contracts provide for a minimum subscriber guarantee and
incentive payments based on the number of subscribers. Payments by Home Shopping
to TCI and certain of its affiliates under these contracts for cable commissions
and advertising were approximately $9.7 million for the calendar year ended
December 31, 1997.
On January 27, 1997, the HSNi Board approved a three-year consulting
arrangement with Leo J. Hindery, Jr., a former member of the Board of Directors
of Home Shopping and the former managing General Partner and Chief Executive
Officer of InterMedia Partners. Mr. Hindery subsequently was appointed President
of TCI. An affiliate of TCI has a 53.583% limited partnership interest in
InterMedia Partners. Home Shopping had entered into cable carriage agreements
with InterMedia Partners on terms and conditions that are consistent with Home
Shopping's other cable agreements. Home Shopping paid InterMedia Partners $.5
million in calendar year 1996 for cable commissions and advertising. Under the
consulting arrangement, Mr. Hindery received fully vested options to purchase
40,500 shares of HSNi Common Stock at an exercise price of $32.78. These options
expire in one third increments in 1998, 1999 and 2000. Mr. Hindery also received
an additional 2,250 options at an exercise price of $25.86. Of those options,
1,500 are vested and 750 vest during May 1998 and will expire five years from
the date of vesting.
As of December 31, 1997, SKTV owned a 31.7654% membership interest in
Blackstar L.L.C. ("BLACKSTAR"). Mr. Oxendine serves as Chairman and Chief
Executive Officer of Blackstar. Home Shopping currently maintains broadcast
affiliation agreements with Stations WBSF-TV, Melbourne, Florida; KBSP-TV,
Salem, Oregon; and WBSX-TV, Ann Arbor, Michigan for which Blackstar is the
parent company. Home Shopping recorded affiliation payments of $4.8 million
relating to the Blackstar stations in calendar year 1997.
As part of the employment agreement entered into by Home Shopping and Mr.
Held, Home Shopping agreed to lend Mr. Held $1.0 million for the purpose of
purchasing a residence in the Tampa/St. Petersburg area. During September 1996,
Mr. Held received that loan from Home Shopping. The loan bears interest at 5%
per annum, and the principal and any accrued and unpaid interest become due and
payable in the event that Mr. Held is terminated for any reason, on the first
anniversary of such termination, or immediately in the event that the residence
is sold or transferred. In the event that, after completion of improvements to
be undertaken within a reasonable period of time following the purchase of the
residence, the fair market value of the residence is less than $800,000, Mr.
Held is required to repay a portion of the principal amount of the loan equal to
the difference. On March 31, 1997, Mr. Held repaid to HSNi $600,000 of the $1.0
million loan.
During 1997, HSNi deferred repayment of a $5.0 million secured,
non-recourse promissory note due from Mr. Diller from September 5, 1997 to
September 5, 2007. Mr. Diller and HSNi also agreed to defer the payment of a
bonus in the amount of $2.5 million that otherwise was to be paid in 1997.
THE ANNUAL MEETING
91
<PAGE> 104
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of the Record Date, information relating
to the beneficial ownership of HSNi Common Stock by (i) each person known by
HSNi to own beneficially more than 5% of the outstanding shares of HSNi Common
Stock, (ii) each director, (iii) the Chief Executive Officer of HSNi and the
other four most highly compensated executive officers of HSNi whose compensation
exceeded $100,000 for fiscal year 1996, and (iv) all executive officers and
directors of HSNi as a group:
<TABLE>
<CAPTION>
PERCENT
NAME AND ADDRESS NUMBER OF OF PERCENT OF VOTES
OF BENEFICIAL OWNER SHARES CLASS (ALL CLASSES)(1)
- ---------------------------------------------------- ---------- ------- ----------------
<S> <C> <C> <C>
Capital Research & Management Co. & The Capital
Group Companies, Inc.(2).......................... 4,107,050 9.3% 2.5%
333 South Hope Street
Los Angeles, CA 90071
Denver Investment Advisers, LLC..................... 3,831,250 8.8% 2.3%
1225 17th St., 26th Floor
Denver, CO 80202
Fidelity Investments(3)............................. 2,825,975 6.4% 1.7%
82 Devonshire Street
Boston, MA 02109-3614
Tele-Communications, Inc.(4)........................ 11,873,332 21.4% 71.5%
5619 DTC Parkway
Englewood, CO
Barry Diller(5)..................................... 16,613,240 27.8% 72.2%
Paul Allen(6)....................................... 7,411,007 17.0% 4.5%
Brian Feldman(7).................................... 7,481 * *
James G. Gallagher(8)............................... 3,150 * *
James G. Held(9).................................... 562,546 1.3% *
Victor A. Kaufman(10)............................... 167,000 * *
John E. Oxendine(11)................................ 1,667 * *
Bruce M. Ramer(11).................................. 1,667 * *
William Savoy(6).................................... 14,500 * *
Gen. H. Norman Schwarzkopf(12)...................... 10,667 * *
Eli J. Segal(13).................................... 3,167 * *
Richard E. Snyder(11)............................... 1,667 * *
All executive officers and directors as a group (15
persons).......................................... 24,817,616 40.7% 76.5%
========= ======= ==============
</TABLE>
- ---------------
* The percentage of shares beneficially owned does not exceed 1% of the
class.
Unless otherwise indicated, beneficial owners listed here may be contacted
at HSNi's corporate headquarters address, 152 West 57th Street, New York,
NY 10019. The percentage of votes listed assumes the conversion of any
shares of HSNi Class B Common Stock owned by such listed person, but does
not assume the conversion of HSNi Class B Common Stock owned by any other
person. Under the rules of the SEC, a person is deemed to be a "beneficial
owner" of a security if that person has or shares "voting power," which
includes the power to vote or to direct the voting of such security, or
"investment power," which includes the power to dispose of or to direct the
disposition of such security. A person is also deemed to be the beneficial
owner of any securities of which that person has the right to acquire
beneficial ownership within 60 days. Under these rules, more than one
person may be deemed to be a beneficial owner of the same securities and a
person may be deemed to be a beneficial owner of securities as to which
that person has no beneficial interest.
(1) The percent of votes for all classes is based on one vote for each share of
HSNi Common Stock and ten votes for each share of HSNi Class B Common
Stock. These figures do not include any unissued Additional Liberty Shares.
(2) Consists of 3,628,250 shares of HSNi Common Stock and 478,800 of HSNi
Common Stock shares as a result of the assumed conversion of $12,769,000
principal amount of the Convertible Subordinated Debentures into HSNi
Common Stock.
THE ANNUAL MEETING
92
<PAGE> 105
(3) Consists of 2,662,849 shares of HSNi Common Stock and 163,126 shares of
HSNi Common Stock as a result of the assumed conversion of $4,350,000
principal amount of the Convertible Subordinated Debentures into HSNi
Common Stock.
(4) Consists of beneficial ownership of 11,811,702 shares of HSNi Class B
Common Stock, which may be converted at any time into an equal number of
shares of HSNi Common Stock, and 61,630 shares of HSNi Common Stock. The
number of shares does not include any shares or vested options to purchase
shares held by Mr. Diller in the BDTV Entities, as to which shares TCI
disclaims beneficial ownership.
(5) Consists of 486,984 shares of HSNi Common Stock owned by Mr. Diller, vested
options to purchase 4,252,924 shares of HSNi Common Stock, 11,811,702
shares of HSNi Class B Common Stock beneficially owned by Mr. Diller, which
shares are convertible into HSNi Common Stock, and 61,630 shares of HSNi
Common Stock with respect to which Mr. Diller may be deemed to be a
beneficial owner. Does not include unvested options to purchase 4,252,924
shares of HSNi Common Stock previously granted to Mr. Diller or unvested
options to purchase 4,750,000 shares of HSNi Common Stock pursuant to the
1997 Incentive Plan.
(6) Does not reflect unvested options to purchase 5,000 shares of HSNi Common
Stock pursuant to the Directors' Stock Option Plan.
(7) Consists of vested options to purchase 7,200 shares of HSNi Common Stock
granted pursuant to the Home Shopping Employee Plan and 281 shares under
the Home Shopping Network, Inc. Retirement Savings Plan (the "RETIREMENT
SAVINGS PLAN"). Does not include unvested options to purchase 2,500 shares
of HSNi Common Stock granted pursuant to the 1995 Stock Incentive Plan and
unvested options to purchase 3,600 shares of HSNi Common Stock granted
pursuant to the Home Shopping Employee Plan.
(8) Consists of vested options to purchase 3,150 shares of HSNi Common Stock
granted pursuant to the Home Shopping Employee Plan. Does not include
unvested options to purchase 12,600 shares of HSNi Common Stock granted
pursuant to the Home Shopping Employee Plan.
(9) Consists of vested options to purchase 562,500 shares of HSNi Common Stock
granted pursuant to the Home Shopping Employee Plan and 46 shares of HSNi
Common Stock under the Retirement Savings Plan. Does not include unvested
options to purchase 937,500 shares of HSNi Common Stock pursuant to the
Home Shopping Employee Plan.
(10) Consists of 70,000 shares of HSNi Common Stock, 35,000 shares of HSNi
restricted stock, vested options to purchase 28,000 shares of HSNi Common
Stock assumed by HSNi pursuant to the Savoy Merger, vested options to
purchase 9,000 shares of HSNi Common Stock resulting from conversion of
options granted pursuant to the Home Shopping Employee Plan and vested
options to purchase 25,000 shares of HSNi Common Stock granted pursuant to
the 1995 Stock Incentive Plan. Does not reflect unvested options to
purchase 75,000 shares of HSNi Common Stock granted pursuant to the 1995
Stock Incentive Plan, unvested options to purchase 36,000 shares of HSNi
Common Stock resulting from conversion of options granted pursuant to the
Home Shopping Employee Plan or unvested options to purchase 250,000 shares
pursuant to the 1997 Incentive Plan.
(11) Does not reflect unvested options to purchase 3,333 shares of HSNi Common
Stock granted pursuant to the Directors' Stock Option Plan.
(12) Consists of 9,000 vested options to purchase shares of HSNi Common Stock
granted under the Home Shopping Employee Plan pursuant to a consulting
agreement with Home Shopping and vested options to purchase 1,667 shares of
HSNi Common Stock granted under the Directors' Stock Option. Does not
include unvested options to purchase 3,333 shares of HSNi Common Stock
pursuant to the Directors' Stock Option Plan, unvested options to purchase
750 shares of HSNi Common Stock under the Home Shopping Directors' Stock
Option Plan which were converted pursuant to the terms of the Home Shopping
Merger or unvested options to purchase 15,000 shares of HSNi Common Stock
granted under the Home Shopping Employee Plan pursuant to a consulting
agreement with Home Shopping.
(13) Consists of vested options to purchase 1,500 shares of HSNi Common Stock
granted under the Home Shopping Directors' Stock Option Plan and vested
options to purchase 1,667 shares of HSNi Common Stock granted under the
Home Shopping Directors' Stock Option Plan. Does not include unvested
options to purchase 3,333 shares of HSNi Common Stock pursuant to the
Directors' Stock Option Plan or unvested options to purchase 750 shares of
HSNi Common Stock under the Home Shopping Directors' Stock Option Plan
which were converted pursuant to the terms of the Home Shopping Merger.
THE ANNUAL MEETING
93
<PAGE> 106
The following table sets forth, as of the Record Date, information relating
to the beneficial ownership of HSNi Class B Common Stock:
<TABLE>
<CAPTION>
PERCENT
NAME AND ADDRESS NUMBER OF OF
OF BENEFICIAL OWNER SHARES(1) CLASS
- ---------------------------------------------------------------------- ---------- -------
<S> <C> <C>
Barry Diller(2)....................................................... 11,811,702 96.6%
1940 Coldwater Canyon
Beverly Hills, CA 90210
Tele-Communications, Inc.(2).......................................... 11,811,702 96.6%
5619 DTC Parkway
Englewood, CO
BDTV Entities(2)...................................................... 11,811,702 96.6%
(includes BDTV Inc., BDTV II Inc. and BDTV III Inc.)
2425 Olympic Boulevard
Santa Monica, CA 90404
</TABLE>
- ---------------
(1) All or any portion of shares of HSNi Class B Common Stock may be converted
at any time into an equal number of shares of HSNi Common Stock.
(2) Liberty, a wholly owned subsidiary of TCI, and Mr. Diller are parties to a
stockholders agreement pursuant to which Liberty and Mr. Diller have formed
BDTV, BDTV II Inc. and BDTV III Inc. (together the "BDTV ENTITIES"). On
August 13, 1996, BDTV exercised an option to acquire 2,000,000 shares of
HSNi Class B Common Stock. On December 20, 1996, Liberty contributed
7,809,111 shares of HSNi Class B Common Stock to BDTV II Inc. Mr. Diller
also owns 486,984 shares of HSNi Common Stock and options to purchase
8,505,847 shares of HSNi Common Stock, 4,252,924 of which are currently
vested representing 8.9% of the issued and outstanding shares of HSNi Common
Stock as of the Record Date. On July 17, 1997, Liberty contributed 2,002,591
Additional Liberty Shares to BDTV III Inc., which shares were issued to
Liberty in connection with the issuance by HSNi of 7,238,507 shares of HSNi
Common Stock to Mr. Allen. Mr. Diller has the right to vote those shares
presently pursuant to a stockholders agreement and, upon consummation of the
Transaction, pursuant to the Stockholders Agreement. Moreover, if the BDTV
Entities converted their beneficially owned HSNi Class B Common Stock into
HSNi Common Stock, such shares would represent approximately 19.4% of the
issued and outstanding shares of HSNi Common Stock. The BDTV Entities may be
issued additional HSNi Class B Common Stock upon issuance of the Additional
Liberty Shares in accordance with the terms of the Home Shopping Merger. TCI
disclaims beneficial ownership of all HSNi securities held by Mr. Diller but
not any of HSNi securities held by the BDTV Entities. Mr. Diller owns all of
the voting stock of BDTV Entities and Liberty owns all of the non-voting
stock, which non-voting stock represents in excess of 99% of the equity of
the BDTV Entities. These figures do not include any unissued Additional
Liberty Shares.
THE ANNUAL MEETING
94
<PAGE> 107
ADDITIONAL INFORMATION
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS
We have made forward-looking statements in this document that are subject
to risks and uncertainties. Forward-looking statements include the information
concerning possible or assumed future results of operations of the combined
company set forth under "Special Considerations" and "The Transaction --
Background -- Reasons for the Transaction" and "-- Opinion of Allen & Company
Incorporated" and those preceded by, followed by or that include the words
"believes," "expects," "anticipates" or similar expressions. Such statements
reflect the current views of HSNi and/or Universal with respect to future
events. For those statements as they relate to HSNi only, we claim the
protection of the safe harbor for forward-looking statements contained in the
Private Securities Litigation Reform Act of 1995, to the extent provided by
applicable law. This safe harbor does not apply to forward-looking statements of
Universal because Universal has never registered securities. You should
understand that the following important factors, in addition to those discussed
elsewhere in this document and in the documents which we incorporate by
reference, could affect the future results of HSNi, and could cause those
results to differ materially from those expressed in our forward-looking
statements: material adverse changes in economic conditions in the markets
served by our companies; a significant delay in the expected date of the
Closing; future regulatory actions and conditions in our companies' operating
areas; competition from others; ability to successfully integrate the Acquired
Businesses' management structures and consolidate activities/operations in HSNi
in order to achieve anticipated cost and revenue synergies; product demand and
market acceptance; the ability to protect proprietary information and technology
or to obtain necessary licenses on commercially reasonable terms; and obtaining
and retaining skilled workers. HSNi does not intend to update these
forward-looking statements.
STOCKHOLDER PROPOSALS
Proposals of stockholders of HSNi which are intended to be presented by
such stockholders at the next Annual Meeting must be received by HSNi no later
than September 14, 1998 in order to be considered for inclusion in the proxy
statement and form of proxy relating to that meeting.
OTHER MATTERS
The HSNi Board knows of no other matters which are likely to be brought
before the Annual Meeting. If any matters are brought before the Annual Meeting,
Victor A. Kaufman, who is Chief Financial Officer of HSNi, or James G.
Gallagher, who is Vice President, General Counsel and Secretary of HSNi, as the
proxy agents named in the enclosed proxy, will vote on such matters in
accordance with their best judgment.
WHERE YOU CAN FIND MORE INFORMATION
HSNi files annual, quarterly and special reports, proxy statements and
other information with the SEC. You may read and copy any reports, statements or
other information that we file at the SEC's public reference rooms in
Washington, D.C., New York, New York and Chicago, Illinois. Please call the SEC
at 1-800-SEC-0330 for further information on the public reference rooms. Our SEC
filings are also available to the public from commercial document retrieval
services and at the Internet web site maintained by the SEC at
"http://www.sec.gov." Reports, proxy statements and other information should
also be available for inspection at the offices of the NASD.
The SEC allows us to "incorporate by reference" information into this Proxy
Statement, which means that we can disclose important information to you by
referring you to another document filed separately with the SEC. The information
incorporated by reference is deemed to be part of this Proxy Statement, except
for any information superseded by information contained directly in this Proxy
Statement. This Proxy Statement incorporates by reference the documents set
forth below that we have previously filed with the SEC. These documents contain
important information about HSNi and its finances.
ADDITIONAL INFORMATION
95
<PAGE> 108
<TABLE>
<CAPTION>
HSNI SEC FILINGS (FILE NO. 0-20570) PERIOD
- ------------------------------------------------ -------------------------------------------
<S> <C>
HSNi 1996 Form 10-K............................. Year ended December 31, 1996
Quarterly Reports on Form 10-Q.................. Quarters ended March 31, 1997, June 30,
1997 and September 30, 1997
Current Reports on Form 8-K..................... Dated July 17, 1997, October 19, 1997 and
February 13, 1996 (as amended on January 9,
1998)
A description of HSNi Common Stock
and HSNi Class B Common Stock
contained in HSNi's Registration
Statement on Form 10.......................... Dated August 27, 1992, as amended
</TABLE>
We are also incorporating by reference additional documents we file with
the SEC from the date of this Proxy Statement to the date of the Annual Meeting.
Any statement in this document or in a document incorporated or deemed to be
incorporated by reference in this document shall be deemed to be modified or
superceded for purposes of this document to the extent that a statement
contained in this document or in any other subsequently filed document which
also is or is deemed to be incorporated by reference in this document modifies
or supercedes such statement. Any such statement so modified or superceded shall
not be deemed to constitute a part of this document, except as so modified or
superceded.
HSNi has supplied all information contained or incorporated by reference in
this Proxy Statement relating to HSNi and Universal and has supplied all such
information relating to the Acquired Businesses. HSNi does not take any
responsibility for the accuracy of the information provided by Universal.
If you are a stockholder, we may have already sent you some of the
documents incorporated by reference, but you can obtain any document
incorporated by reference through us, the SEC or the SEC's Internet web site as
described above. Documents incorporated by reference are available from us
without charge, excluding all exhibits unless we have specifically incorporated
by reference an exhibit in this Proxy Statement. Stockholders may obtain
documents incorporated by reference in this Proxy Statement by requesting them
in writing or by telephone to us at the following address:
HSN, Inc.
Investor Relations Department
152 West 57th Street
New York, New York 10019
Tel. (212) 247-5810
If you would like to request documents from us, please do so by February 4,
1998 to receive them before the Annual Meeting.
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED OR INCORPORATED BY
REFERENCE IN THIS PROXY STATEMENT TO VOTE ON THE TRANSACTION. WE HAVE NOT
AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION THAT IS DIFFERENT FROM WHAT IS
CONTAINED IN THIS PROXY STATEMENT. THIS PROXY STATEMENT IS DATED JANUARY 12,
1998. YOU SHOULD NOT ASSUME THAT THE INFORMATION CONTAINED IN THE PROXY
STATEMENT IS ACCURATE AS OF ANY DATE OTHER THAN THAT DATE, AND NEITHER THE
MAILING OF THIS PROXY STATEMENT TO STOCKHOLDERS NOR THE ISSUANCE OF HSNi COMMON
STOCK OR HSNi CLASS B COMMON STOCK IN THE TRANSACTION SHALL CREATE ANY
IMPLICATION TO THE CONTRARY.
ADDITIONAL INFORMATION
96
<PAGE> 109
INDEX OF DEFINED TERMS
<TABLE>
<CAPTION>
PAGE
NO.
--------
<S> <C>
1994 Report......................... 82
1995 Stock Incentive Plan........... 90
1997 Incentive Plan................. 16
1997 Incentive Plan Proposal........ 71
401(k) Plan......................... 84
Acquired Businesses................. 15
Acts................................ 46
Additional Liberty Shares........... 26
Allen & Company..................... 15
Annual Meeting...................... 71
Antitrust Division.................. 30
ASCAP............................... 50
Assumptions......................... 27
Audit Committee..................... 81
Authorized Capital Stock Proposal... 71
award cycle......................... 79
BCI................................. 82
BDTV Entities....................... 94
Blackstar........................... 91
BMI................................. 50
Cash Amount......................... 26
CEO Termination Date................ 32
Closing............................. 25
Code................................ 73
Columbia............................ 77
Committee........................... 78
Communications Act.................. 12
Compensation/Benefits Committee..... 16
Condensed Statements................ 61
Convertible Subordinated 27
Debentures........................
CPMs................................ 57
Deloitte & Touche................... 82
Determination Period................ 29
DGCL................................ 11
Director Number Proposal............ 71
Directors' Stock Option Plan........ 87
Disabled............................ 32
DMAs................................ 22
EBITDA.............................. 20
Engagement Letter................... 23
Equity Compensation Agreement....... 84
Ernst & Young....................... 82
Exchange Act........................ 46
FCC................................. 11
FTC................................. 30
Fundamental Changes................. 31
fin-syn rules....................... 54
GAAP................................ 24
Goldman, Sachs...................... 15
Governance Agreement................ 11
Governance Agreement Proposal....... 71
Home Shopping....................... 15
Home Shopping Employee Plan......... 85
Home Shopping Merger................ 22
HSNCC............................... 6
HSNi................................ 11
HSNi Board.......................... 11
<CAPTION>
PAGE
NO.
--------
<S> <C>
HSNi By-Laws........................ 35
HSNi Certificate.................... 35
HSNi Class B Common Stock........... 11
HSNi Common Stock................... 11
HSNi Contributed Assets............. 25
HSNi Named Executive Officers....... 84
HSNi Share Option................... 25
HSR Act............................. 29
International Assets................ 20
Investment Agreement................ 15
ISO Holding Period.................. 81
ISOs................................ 78
JPC................................. 90
Latusa.............................. 49
Liberty............................. 11
Liberty Closing..................... 25
LLC................................. Q&A
LLC Exchange Agreement.............. 28
LLC Shares.......................... 11
Mandatory Purchase Event............ 27
Matsushita.......................... 24
Mergers............................. 22
MOW................................. 58
Multimedia.......................... 51
Name Change Proposal................ 71
NASD................................ 24
NASDAQ.............................. 45
Ownership Proposal.................. 71
Performance Goals................... 79
Permitted Business Combination...... 32
Public Stockholders................. 32
Put Event........................... 38
Ratification of Auditors Proposal... 72
Record Date......................... 72
Removal Proposal.................... 71
Retirement Savings Plan............. 93
Sale Transaction.................... 27
SARs................................ 78
Savoy............................... 22
Savoy Merger........................ 22
Sci-Fi Europe....................... 49
Seagram............................. 11
Seagram Board....................... 16
SEC................................. 19
Securities Act...................... 33
Selected Sci-Fi Industry 21
Transactions......................
Selected USA Industry 20
Transactions......................
SKTV Stations....................... 6
Spinoff............................. 29
Spinoff Agreement................... 29
Spinoff Company..................... 29
spread.............................. 81
Standstill Period................... 32
Standstill Termination Date......... 36
Stockholder......................... 34
Stockholders Agreement.............. 11
Stock Incentive Plans............... 86
Telecommunications Act.............. 50
</TABLE>
ADDITIONAL INFORMATION
97
<PAGE> 110
<TABLE>
<CAPTION>
PAGE
NO.
--------
<S> <C>
television films.................... 50
TCI................................. 90
Ticketmaster........................ 22
Ticketmaster Investment............. 61
Ticketmaster Merger................. 45
Total Voting Power.................. 72
Transaction......................... 15
PAGE
NO.
--------
Transaction Agreements.............. 16
Transaction Proposal................ 71
Tri-Star............................ 77
Universal........................... 11
Universal Television Group.......... 8
USAN................................ Q&A
UTV................................. Q&A
</TABLE>
ADDITIONAL INFORMATION
98
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APPENDIX A
================================================================================
INVESTMENT AGREEMENT
AMONG
UNIVERSAL STUDIOS, INC.,
FOR ITSELF AND ON BEHALF OF CERTAIN OF ITS SUBSIDIARIES
HSN, INC.,
HOME SHOPPING NETWORK, INC.
AND
LIBERTY MEDIA CORPORATION,
FOR ITSELF AND ON BEHALF OF CERTAIN OF ITS SUBSIDIARIES
DATED AS OF OCTOBER 19, 1997,
AS AMENDED AND RESTATED AS OF DECEMBER 18, 1997
================================================================================
APPENDIX A
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TABLE OF CONTENTS
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ARTICLE 1. THE TRANSACTIONS
1.1. Formation of LLC...................................................... A-6
1.2. Formation of Investor Newcos.......................................... A-6
1.3. Parent and Sub Contributions.......................................... A-6
1.4. Assumption of Liabilities............................................. A-6
1.5. Closing............................................................... A-6
1.6. Parent Shares......................................................... A-8
1.7. Investor's Preemptive Right........................................... A-8
1.8. Holder's Preemptive Right............................................. A-11
1.9. Holder To Exchange LLC Shares......................................... A-11
1.10. Issuance of LLC Shares to Parent or Sub............................... A-12
1.11. Business of the LLC................................................... A-12
ARTICLE 2. REPRESENTATIONS AND WARRANTIES OF INVESTOR
2.1. Organization, Standing, and Authority................................. A-13
2.2. Authorization and Binding Obligation.................................. A-13
2.3. Absence of Conflicting Agreements; Consents........................... A-13
2.4. Licenses.............................................................. A-14
2.5. Real Property......................................................... A-14
2.6. [Intentionally omitted]............................................... A-14
2.7. Contracts............................................................. A-14
2.8. Intangible Property................................................... A-15
2.9. Financial Statements.................................................. A-15
2.10. Personnel............................................................. A-16
2.11. Claims and Legal Actions.............................................. A-17
2.12. Compliance with Laws.................................................. A-17
2.13. Transactions with Affiliates; Completeness of Assets.................. A-17
2.14. Cable Subscribers..................................................... A-18
2.15. Ownership of the Partnership.......................................... A-18
2.16. Investment............................................................ A-18
2.17. Conduct of Business................................................... A-18
2.18. Brokers............................................................... A-19
ARTICLE 3. REPRESENTATIONS AND WARRANTIES OF PARENT
3.1. Organization and Good Standing........................................ A-19
3.2. Capitalization........................................................ A-19
3.3. Due Authorization; Execution and Delivery............................. A-20
3.4. Absence of Breach; No Conflict........................................ A-21
3.5. Shares to Be Issued................................................... A-21
3.6. Investment Purpose.................................................... A-21
3.7. Brokers............................................................... A-21
3.8. Commission Documents; Financial Information........................... A-21
3.9. Approvals............................................................. A-22
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3.10. Personnel............................................................. A-22
3.11. Conduct of Business................................................... A-23
3.12. Licenses.............................................................. A-24
3.13. Claims and Legal Actions.............................................. A-24
3.14. Compliance with Laws.................................................. A-24
ARTICLE 4. REPRESENTATIONS AND WARRANTIES OF HOLDER
4.1. Organization, Standing, and Authority................................. A-24
4.2. Authorization and Binding Obligation.................................. A-25
4.3. Absence of Conflicting Agreements; Consents........................... A-25
ARTICLE 5. INTERCOMPANY TRANSFER OF FUNDS
5.1. General............................................................... A-25
5.2. Transfers from LLC.................................................... A-25
5.3. Transfers to LLC...................................................... A-25
5.4. Other Transactions.................................................... A-25
5.5. Interest.............................................................. A-26
ARTICLE 6. INVESTOR EXCHANGE OPTIONS; DISTRIBUTIONS;
STOCK DIVIDENDS, SPLITS, ETC.
6.1. Exchange Options...................................................... A-26
6.2. Distributions to LLC Stockholders..................................... A-27
6.3. Tax Treatment......................................................... A-28
6.4. Anti-dilution......................................................... A-28
ARTICLE 7. TRANSFERABILITY; ISSUANCE TO OTHER PARTIES
7.1. No Transfer of Shares of the LLC...................................... A-29
7.2. Transfer by Investor or Holder........................................ A-29
ARTICLE 8. TAX MATTERS
8.1. Tax Representations................................................... A-29
8.2. Tax Indemnification by Investor....................................... A-29
8.3. Tax Indemnification by Parent......................................... A-29
8.4. Allocation of Certain Taxes........................................... A-29
8.5. Filing Responsibility................................................. A-30
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8.6. Refunds............................................................... A-30
8.7. Cooperation and Exchange of Information............................... A-30
8.8. Section 754 Election.................................................. A-31
8.9. Certificate of Non-Foreign Status..................................... A-31
8.10. Definitions........................................................... A-31
ARTICLE 9. ADDITIONAL COVENANTS
9.1. Annual or Special Meeting............................................. A-32
9.2. HSR Filings........................................................... A-32
9.3. Related Agreements.................................................... A-32
9.4. Other Businesses...................................................... A-32
9.5. Information and Access................................................ A-33
9.6. Reservation........................................................... A-33
9.7. Further Action........................................................ A-33
9.8. [Intentionally omitted]............................................... A-33
9.9. Employees............................................................. A-33
9.10. Investor Give-Back Provision.......................................... A-35
9.11. Disclosure Schedules.................................................. A-35
9.12. Financing............................................................. A-36
9.13. Representations and Warranties........................................ A-36
9.14. Spinoff of Regulated Subsidiaries..................................... A-36
9.15. Partnership Interest Purchase Agreement............................... A-36
9.16. USA Network Cash...................................................... A-36
9.17. Consents.............................................................. A-37
9.18. Viacom Non-Competition Covenant....................................... A-37
9.19. Ownership of Licenses................................................. A-37
ARTICLE 10. CONDITIONS
10.1. Conditions to Investor's Obligations.................................. A-37
10.2. Conditions to Parent's Obligations.................................... A-38
10.3. Conditions to Holder's Obligations and Option......................... A-39
ARTICLE 11. SURVIVAL AND INDEMNIFICATION
11.1. Survival.............................................................. A-39
11.2. Indemnification by Investor, Holder or Parent......................... A-40
11.3. Third-Party Claims.................................................... A-41
</TABLE>
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ARTICLE 12. TERMINATION; LIQUIDATION
12.1. Termination by Mutual Written Consent................................. A-41
12.2. Termination by Parent or Investor..................................... A-41
12.3. Termination by Parent................................................. A-42
12.4. Termination by Investor............................................... A-42
12.5. Termination Following Closing......................................... A-42
12.6. Effect of Termination................................................. A-42
ARTICLE 13. GENERAL
13.1. Definitions........................................................... A-43
13.2. Efforts to Proceed Promptly........................................... A-48
13.3. Maintenance of Business............................................... A-49
13.4. Notices............................................................... A-49
13.5. Specific Enforcement.................................................. A-50
13.6. Severability.......................................................... A-50
13.7. Entire Agreement...................................................... A-50
13.8. Amendment; Waiver..................................................... A-50
13.9. Headings; References.................................................. A-50
13.10. Expenses.............................................................. A-50
13.11. Counterparts.......................................................... A-51
13.12. Governing Law......................................................... A-51
13.13. Public Announcement................................................... A-51
13.14. No Third Party Beneficiaries.......................................... A-51
Exhibit A Governance Agreement
Exhibit B LLC Operating Agreement
Exhibit C 1. Domestic and International Distribution Agreements
2. Studio Facilities Agreement
3. Ancillary Business Agreements
4. International Joint Venture Agreement
5. Transition Services Agreement
</TABLE>
APPENDIX A
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INVESTMENT AGREEMENT
INVESTMENT AGREEMENT (the "Agreement") dated as of October 19, 1997, as
amended and restated as of December 18, 1997, among UNIVERSAL STUDIOS, INC., for
itself and on behalf of certain of its Subsidiaries ("Investor"), HSN, INC.
("Parent"), HOME SHOPPING NETWORK, INC. ("Sub"), a direct subsidiary of Parent,
and LIBERTY MEDIA CORPORATION, for itself and on behalf of certain of its
Subsidiaries ("Holder") (Investor, Holder, Parent and Sub, collectively, the
"Parties"). The Parties agree to consummate the following transactions (the
"Transactions") upon the terms and subject to the conditions set forth herein.
Capitalized terms used herein without definition have the meanings ascribed to
such terms in Article 13 hereof.
ARTICLE 1.
THE TRANSACTIONS
1.1. Formation of LLC. On or prior to the Closing Date, Parent agrees to
cause Sub to, and Sub agrees to, organize a new Delaware limited liability
company (the "LLC"). Upon formation of the LLC pursuant to this Section 1.1, the
LLC shall become a party to this Agreement, shall be bound by all the terms and
conditions hereunder and shall constitute a "Party" hereunder.
1.2. Formation of Investor Newcos. On or prior to the Closing Date,
Investor agrees to organize and form one or more holding companies, or to
designate one or more existing companies reasonably acceptable to Parent (each,
an "Investor Newco" and collectively, the "Investor Newcos") solely for the
purpose of acquiring an equity interest in LLC. Investor agrees that except as
contemplated hereby, during the term of this Agreement it shall be the sole
owner of all of the outstanding equity interest of Investor Sub and each
Investor Newco, and it shall cause Investor Sub and each Investor Newco not to
(i) engage in any other business, except the Transactions contemplated hereby,
or (ii) incur any liability.
1.3. Parent and Sub Contributions. On or before the Closing, Parent and
Sub shall, subject to Section 1.11(b), contribute, transfer, assign and convey
(collectively, "Contribute") or cause to be Contributed to the LLC, (i) all of
the assets, rights and businesses owned, held or conducted by Parent and Sub
described on Schedule 1.3 ("Contributed Businesses"), (ii) the portion of the
Acquired Partnership Interest described in Section 1.5(b)(ii) and (iii) an
agreement to contribute the stock or assets of an agreed-upon Subsidiary of
Parent (the "Excluded Sub") as promptly as practicable consistent with tax
efficiencies, in exchange for an aggregate number of LLC Shares to be issued to
Parent or Sub equal to the Parent LLC Shares Number.
1.4. Assumption of Liabilities. On or before the Closing, the LLC will
assume, and agree to pay and discharge, as and when they become due, or
otherwise take subject to, all liabilities of Parent and Sub, other than the
liabilities set forth on Schedule 1.4 (collectively, the "Assumed Liabilities").
1.5. Closing. (a) Subject to the conditions set forth below, the closing
of the transactions contemplated hereby (the "Closing") shall take place at the
offices of Wachtell, Lipton, Rosen & Katz, 51 West 52nd Street, New York, New
York 10019 at 10:00 a.m. on the date three days after satisfaction or waiver of
all of the conditions to the Parties' respective obligations to consummate the
transactions contemplated hereby (other than those requiring the delivery of
documents or the taking of other action at the Closing) or such earlier date as
may be agreed upon by the parties. The date on which the Closing is consummated
is hereinafter called the "Closing Date".
(b) At the Closing, USA Networks Partner, Inc. ("Investor Sub") shall sell
(i) to the LLC a portion of the Acquired Partnership Interest in exchange for
(A) a payment of cash equal to the Cash Amount (but such payment shall not
exceed $1.43 billion) to an account specified by Investor Sub in writing not
less than three days prior to the Closing, and (B) a number of LLC Shares equal
to the Acquired LLC Amount, and (ii) to Parent the remainder of the Acquired
Partnership Interest in exchange for 6.75 million shares of Parent Class B Stock
(provided, however that if FCC Regulations prevent Investor from acquiring 6.75
million shares of Parent Class B Stock, then any amount in excess of such amount
so permitted shall consist of Parent Common Stock, and provided, further, that
Parent shall cooperate with Investor to provide Investor with the
APPENDIX A
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same voting power that it would have in the absence of FCC Regulations at such
time, if any, as FCC Regulations would permit, including, without limitation,
agreeing to exchange Parent Common Stock for Parent Class B Stock) (the "Parent
Stock Number"), issued to Investor Sub.
(c) At the Closing, Investor shall Contribute or cause to be Contributed to
the LLC by the Investor Newcos, (i) the Owned Partnership Interest and (ii) all
of the assets, rights and businesses owned, held or conducted by Investor and
its Subsidiaries in its one-hour as well as certain half-hour domestic
television production business and domestic television distribution business,
including and excluding, as the case may be, those described on Schedule 1.5
(the "UT Contributed Business"), and the LLC will assume, and agree to pay and
discharge, as and when they become due, or otherwise take the UT Contributed
Business subject to, all liabilities of the UT Contributed Business set forth on
Schedule 1.5 excluding any liabilities for Taxes except as provided in Article 8
hereof (the "Assumed UT Liabilities") in exchange for a number of LLC Shares
equal to the Owned LLC Amount and issued in such names and denominations as
Investor shall request in writing not less than three days prior to the Closing.
(d) To the extent that the Cash Amount exceeds the amount of cash paid
under Section 1.5(b), such excess shall be distributed in cash pro rata to the
Investor Newcos in proportion to their LLC Shares and indebtedness of the LLC
shall be allocated to such Investor Newcos in the amount of such distribution
for purposes of Sections 707 and 752 of the Code.
(e) Notwithstanding the foregoing, LLC may, at its option, substitute LLC
Shares valued at $40 per share for up to $75 million in cash payable pursuant to
paragraph (b) above. In addition, at the Closing, the LLC shall reduce the cash
to be paid or distributed to Investor and the Investor Newcos pursuant to
Sections 1.5(b) and 1.5(d) by $300 million, which amount shall be paid or
distributed or applied to reduce any amount payable by Universal in connection
with the exercise of its preemptive rights on or prior to the Holder Closing (as
defined below), as the case may be, together with interest thereon from the date
of the Closing to the date of Payment at a rate per annum equal to the average
rate of borrowing of Investor's ultimate parent company plus 50 basis points,
upon the earlier of the Holder Closing or June 30, 1998, provided that Investor,
in its sole discretion, may elect to waive the interest described in this
sentence after considering various factors that (and to the extent) Investor
deems appropriate. Amounts to be distributed at Closing pursuant to Section
1.5(d) shall be reduced before amounts payable under Section 1.5(b) are reduced.
(f) (i) No later than June 30, 1998, the parties shall consummate a
transaction relating to Holder as follows:
(A) Subject to the provisions of this Section, Holder agrees to
purchase, for cash, 7.5 million in the aggregate of LLC Shares and/or of
Parent Common Shares at an initial purchase price of $40 per share, which
price shall increase by 7.5% per annum from the date of the Closing through
the date of the closing of the Holder transaction described in this
paragraph (the "Holder Closing"). The Holder Closing (with respect to the
cash and shares described in this subparagraph) shall be subject only to
the conditions that (i) the LLC or Parent, as the case may be, delivers
properly evidenced LLC shares and/or Parent Common Shares, duly authorized
and issued against payment therefor; (ii) the condition set forth in
Section 10.1(a) was satisfied as of the Closing; (iii) the conditions
described in Sections 10.1(b)-(j) are satisfied (as applied to the Holder,
the Holder Closing and the transactions described by this Section mutatis
mutandis) and (iv) the Closing has occurred. Holder shall be entitled to
reduce the number of LLC Shares (valued for this purpose at $40 per share)
to be acquired pursuant to this subparagraph (A) by the product of 0.45 and
the Holder Asset Value.
(B) Following the date hereof, Parent and Holder shall discuss the
possibility of a contribution by Holder at the Holder Closing of assets
acceptable to Parent, Holder and Investor in exchange for LLC Shares. If
the Parties (including Investor) reach agreement on the terms of any such
contribution (including on appropriate and reasonable representations,
warranties, covenants or other terms and conditions with respect to such
contribution), this Agreement shall be amended to provide for such
contribution, subject to the conditions so agreed upon. The purchase price
for each LLC Share acquired
APPENDIX A
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by Holder pursuant to this subparagraph (B) shall be $40 (the aggregate
value (at $40 per share) of the LLC Shares issued to Holder pursuant to
this subparagraph being the "Holder Asset Value").
(C) Shares acquired by Holder at the Holder Closing shall be issued in
such names and denominations as Holder shall request in writing not less
than three days prior to the Closing. Holder shall be entitled to acquire
any such LLC Shares through one or more newly-formed Subsidiaries on terms
comparable to the Investor Newcos as set forth in Section 1.2, mutatis
mutandis, above (each, a "Holder Newco"), as agreed upon by Parent and
Holder.
(ii) Investor shall not have any preemptive right with respect to the first
7.5 million LLC Shares and/or Parent Common Shares issued to Holder at the
Holder Closing. Investor shall have a preemptive right (at 45% and at $40 per
LLC Share) with respect to shares issued to Holder in excess of such amount.
Investor's preemptive right shall be mandatory to the extent that Holder elects
to reduce the number of shares purchased under Section 1.5(f)(i)(A), with
respect to the net related asset contribution by Holder under Section
1.5(f)(i)(B) that resulted in such reduction (e.g., if Holder elects with
respect to a nominal $100 million asset contribution to reduce the shares
purchased for cash by $45 million, Investor shall have a mandatory preemptive
right with respect to 1,375,000 shares ($55 million divided by $40)).
(iii) It is contemplated that Holder's total net contribution to the LLC or
Parent pursuant to this Section 1.5 would be in an amount that, assuming
Universal exercises its preemptive right with respect to such contribution,
would result in Holder's aggregate equity beneficial ownership interest
(including all LLC Shares and Parent Common Shares acquired by Holder pursuant
to this Section 1.5) in Parent (based on the Assumptions) not exceeding 25%.
Subject to tax efficiencies and regulatory requirements, Holder agrees to
acquire Parent Common Shares to the extent possible.
1.6. Parent Shares. (a) Nothing set forth in this Agreement shall be
construed to prevent Parent from issuing additional Parent Common Shares or any
other capital stock to any other person or entity.
(b) From and after the Closing Date, at such time that Parent shall issue
any additional Parent Common Shares (including, without limitation, upon
exercise of options or warrants or conversion of convertible securities, other
than shares of Parent Common Stock issued either upon conversion of shares of
Parent Class B Stock or upon issuance of Parent Common Shares pursuant to
Holder's Contingent Shares or Exchange Shares), Parent or Sub shall purchase
from the LLC a number of LLC Shares equal to the number of Parent Common Shares
issued, at a price per share equal to the Issue Price received by Parent for
such Parent Common Shares issued. Parent shall pay the LLC for such LLC Shares
with the same form of consideration as Parent or Sub receives in connection with
the issuance of such Parent Common Shares.
(c) From and after the Closing Date, at such time that Parent shall
repurchase or redeem any Parent Common Shares, Parent or Sub shall sell to the
LLC a number of LLC Shares equal to the number of Parent Common Shares so
repurchased or redeemed, for an amount per share equal to the Redemption Price
per Parent Common Share paid by Parent for the Parent Common Shares so
repurchased or redeemed. The LLC shall pay Parent for such LLC Shares with the
same form of consideration as Parent or Sub pays in connection with the
repurchase or redemption of such Parent Common Shares, or if such form of
consideration is not available to the LLC, with cash.
1.7. Investor's Preemptive Right. (a) (i) In the event that after the
Closing Date (and in addition to the mandatory and optional preemptive rights of
Investor pursuant to Section 1.5(f)(ii)), Parent issues or proposes to issue
(other than pursuant to an Excluded Issuance) (I) any Parent Common Shares
(including Parent Common Shares issued upon exercise, conversion or exchange of
options, warrants and convertible securities, but excluding (w) shares of Parent
Common Stock issued upon conversion of shares of Parent Class B Stock, (x)
Parent Common Shares issued upon exercise of the Exchange Options with respect
to LLC Shares issued to Investor Sub, the Investor Newcos, Holder and the Holder
Newcos, (y) Contingent Shares and Exchange Shares issued in accordance with the
Holder Exchange Agreement and (z) shares of Parent Common Stock issued pursuant
to a public offering described in clause (ii) of the definition of "Stock
Amount") or (II) LLC Shares (other than to Parent and its Affiliates, or to
Investor and its Affiliates), and such issuance in clause (I) or (II), together
with any prior issuances of less than 1% with respect to which
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Investor had no rights under this Section 1.7(a)(i), shall be in excess of 1% of
the total number of Parent Common Shares (based on the Assumptions) outstanding
after giving effect to such issuance, Parent shall give written notice to
Investor not later than five business days after the issuance (an "Additional
Issuance"), specifying the number of Parent Common Shares issued or to be issued
and the Issue Price (if known) per share. Investor shall have the right (but,
subject to the provisions of paragraphs (ii) and (iii) of this Section 1.7(a),
not the obligation) to cause Investor Sub and/or one or more Investor Newcos to
purchase for cash a number (but not less than such number) of shares of Parent
Common Stock, or at the request of the Investor, LLC Shares, or any combination
thereof, so that Investor Sub and the Investor Newcos shall collectively
maintain the identical percentage equity beneficial ownership interest (but not
in excess of 45%) or such other percentage equity beneficial ownership as in
effect from time to time pursuant to the standstill provisions contained in the
Governance Agreement (defined below) (but without giving effect to the
exceptions to the thresholds therein)) (it being agreed that under no
circumstances shall the preemptive rights granted to Investor under this Section
1.7 permit Investor to maintain a percentage equity beneficial ownership
interest in excess of 57.5%) in Parent that Investor Sub and Investor Newcos
collectively owned immediately prior to the notice from Parent to Investor
described in the first sentence of this paragraph (assuming that all Parent
Common Shares issuable upon the exercise of Exchange Options with respect to LLC
Shares have been issued and all Contingent Shares and Exchange Shares not yet
issued are outstanding, with such assumptions being referred to herein as the
"Assumptions") after giving effect to such Additional Issuance and to shares of
Parent Common Stock and/or LLC Shares that are to be issued to the Investor
Newcos pursuant to this Section 1.7(a) and to Holder in accordance with Section
1.8 below by sending an irrevocable written notice to Parent not later than
fifteen business days after receipt of such notice (or, if later, two business
days following the determination of the Issue Price) from Parent that it elects
to cause one or more Investor Newcos to purchase all of such shares of Parent
Common Stock or LLC Shares, as the case may be (the "Additional Shares"). The
closing of the purchase of Additional Shares shall be the later of ten business
days after the delivery of the notice of election by Investor and five business
days after receipt of any necessary regulatory approvals.
(ii) Notwithstanding anything to the contrary contained in paragraph (i) of
this Section 1.7(a), Investor shall be required to exercise its preemptive right
in full (a "Mandatory Purchase Event") for (A) Additional Issuances caused by
the conversion of Sub's 5 7/8% Convertible Subordinated Debentures due March 1,
2006 ("Sub Convertible Debt") into Parent Common Stock, at a cash Issue Price to
Investor of $40 per Additional Share, (B) Additional Issuances within 4 months
of the Closing Date in the aggregate amount of up to $200 million in Parent
Common Stock at a cash Issue Price to Investor of $40 per Additional Share and
(C) the transactions described in Section 1.5(f)(i), to the extent described in
Section 1.5(f)(ii). The closing of the purchase of Additional Shares shall be
the later of (x) ten business days after the delivery to Investor of a written
notice by Parent ("Mandatory Purchase Notice") specifying that an Additional
Issuance has occurred and that such Additional Issuance was caused by a
Mandatory Purchase Event and (y) five business days after receipt of any
necessary regulatory approvals, including under FCC regulations.
(iii) Notwithstanding anything to the contrary contained in paragraph (i)
of this Section 1.7(a), a Mandatory Purchase Event also shall occur by reason of
Additional Issuances in the aggregate amount up to 6.3 million Parent Common
Shares in connection with the purchase of additional equity in the Excluded Sub,
whether by exchange offer, merger or otherwise (a "Merger Transaction"), at a
cash Issue Price to Investor of $40 per Additional Share. If the Company issues
more than 6.3 million Parent Common Shares in the Merger Transaction, such
excess Additional Issuances shall not be deemed to be a Mandatory Purchase
Event, and Investor shall have the right but not the obligation to exercise its
preemptive right in respect of such excess in accordance with paragraph (i) of
this Section 1.7(a). The closing of the purchase referred to in this paragraph
(iii) shall occur on the later to occur of (v) the events specified in clauses
(x) and (y) of paragraph (ii) above and (w) in accordance with paragraph (i)
above.
(iv) Notwithstanding anything to the contrary contained in paragraphs (i)
through (iii) above, in the event that as a result of any Additional Issuance
and the issuance of Parent Common Stock to the Investor Newcos pursuant to
Section 1.7(a) and to Holder pursuant to Section 1.8, Investor's percentage
voting power in Parent (based on the Assumptions) would be below 67 percent, the
Investor Newcos shall have the right to
APPENDIX A
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purchase Parent Class B Stock pursuant to Section 1.7(a) in lieu of the number
of shares of Parent Common Stock permitted to be purchased pursuant to Section
1.7(a) in order to maintain 67 percent voting power in Parent (based on the
Assumptions); provided that if such percentage voting power in Parent has been
reduced due to the failure of Investor to elect to exercise previously its
rights pursuant to Section 1.7(a), Investor Sub and the Investor Newcos shall
only be permitted to maintain such lower percentage voting power.
(v) Subject to subparagraph (vi) below, when calculating the percentage
ownership of Parent that Investor Sub and the Investor Newcos beneficially own
in connection with determining the percentage for a preemptive right event (or
an event covered by paragraph (c) below), (A) prior to the Standstill
Termination Date (as defined in the Governance Agreement)), transfers of Parent
Securities shall be taken into account, but acquisitions by Investor of such
securities shall not be included, other than in the case of acquisitions from
Parent or otherwise pursuant to this Section 1.7, and (B) after the Standstill
Termination Date, acquisitions and dispositions of Parent Securities by Investor
at such times and in such amounts permitted under the Governance Agreement shall
be taken into account in calculating the applicable percentage for the exercise
of the rights under this Section 1.7.
(vi) Notwithstanding any other provision of this Agreement or the
Governance Agreement, Investor's percentage for purposes of the preemptive
rights (and for Parent's ability to redeem or purchase Investor's LLC Shares)
(A) shall be 45% for the period from and after the Closing through the Holder
Closing and (B) shall not take into account the effects of the exercise by
Parent of its option described in Section 1.5(e).
(b) In the event that Parent or any of its Affiliates purchases or redeems,
or proposes to purchase or redeem, any Parent Common Shares (other than shares
of Parent Class B Stock that may be deemed to be purchased or redeemed upon
conversion into shares of Parent Common Stock) following the Closing Date, and
such purchase or redemption, together with any prior purchases or redemptions of
less than 1% with respect to which Investor had no rights under this Section
1.7(b), shall be in excess of 1% of the total number of Parent Common Shares
(based on the Assumptions) outstanding prior to such purchase or redemption,
Parent shall give written notice to Investor not later than five business days
prior to the purchase or redemption, specifying the number of Parent Common
Shares to be purchased or redeemed and the purchase or redemption price (the
"Redemption Price") (if known) per share. Parent shall have the right to cause
the LLC to purchase for cash a number of LLC Shares from, at Investor's Option,
Investor Sub and/or the Investor Newcos so that Investor Sub and the Investor
Newcos shall collectively beneficially own no greater than a 45 percent equity
beneficial ownership (adjusted to reflect Section 1.5(e)) or such other
percentage as in effect from time to time pursuant to the standstill provisions
contained in the Governance Agreement attached hereto as Exhibit A (or any
successor agreement, the "Governance Agreement") (but without giving effect to
the exceptions to the thresholds therein) (based on the Assumptions) after
giving effect to such purchases or redemptions of Parent Common Shares by Parent
and to purchases from Investor Sub and the Investor Newcos pursuant to this
Section 1.7(b), at a price per share equal to the Redemption Price, by sending
an irrevocable written notice to Investor not later than five business days
prior to the purchase or redemption that it elects to cause the LLC to purchase
all of such number of LLC Shares or, at Investor's election or to the extent
required under applicable FCC Regulations (but only to the extent of the
percentage increase in Investor's beneficial ownership of Parent Common Shares
that would otherwise result from such event), Parent Common Shares. The closing
of such purchase of LLC Shares and/or Parent Common Shares, as the case may be,
shall be simultaneous with the purchase or redemption of Parent Common Shares.
(c) In the event that there should occur (i) an event, circumstance or
condition with respect to which Investor has been granted a preemptive right
under Section 1.7(a) hereof but Investor is not permitted by law, rule or
regulation from exercising such right, or (ii) another event, circumstance or
condition (but not of the type included or excluded from the preemptive right in
Section 1.7(a)) occurs (excluding sales or transfers of Parent Common Shares or
LLC Shares by Investor and its Affiliates) that results in the percentage of
equity beneficial ownership in Parent of Investor (based on the Assumptions)
being reduced, then, subject to the last sentence of this paragraph (c), Parent
shall promptly agree to sell, at Investor's election, to Investor Sub and/or one
or more of the Investor Newcos a number (but not less than such number) of
shares of Parent Common Stock or, at the request of Investor, LLC Shares (or a
combination thereof) so that Investor, Investor Sub and the Investor Newcos
shall collectively maintain the identical percentage equity beneficial
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ownership interest described in Section 1.7(a) with respect to an event that
would give rise to a preemptive right. The purchase price for the shares of
Parent Common Stock or LLC Shares shall be the Issue Price (if such event,
circumstance or condition is identifiable and such Issue Price is measurable) or
the Fair Market Value of the Parent Common Stock (or LLC Shares, based on the
Fair Market Value of the Parent Common Stock and the then-applicable Exchange
Rate (as defined in the Exchange Agreement)). The purchase price shall be paid
in cash. The other procedures described in Section 1.7(a) regarding the exercise
and consummation of Investor's preemptive right shall apply to Investor's
purchase under this paragraph. In the event that Parent does not promptly (upon
receipt of any required regulatory approvals or consents so long as there is a
reasonable prospect of such approvals or consents being obtained) sell to
Investor shares of Parent Common Stock or LLC Shares, then Investor shall be
permitted to purchase in the open market, in broker transactions, a number of
shares of Parent Common Stock that Investor would have purchased from Parent
hereunder. If an event, circumstance or condition described in the first
sentence of this paragraph shall occur and Investor elects not to exercise the
purchase right contained herein within a reasonable period of time, then
Investor's preemptive right percentage shall be reduced as though such event
were an event as to which the preemptive right in Section 1.7(a) arose and
Investor elected not to exercise such right.
1.8. Holder's Preemptive Right. (a) Subject to paragraphs (b) and (c) of
this Section 1.8, in the event that Parent issues any Parent Common Shares or
LLC Shares (other than to Parent and its Affiliates or Holder and its
Affiliates) under the circumstances set forth in Section 1.7(a)(i) above
applicable to Investor, Holder shall be entitled to purchase, or cause one or
more Holder Newcos to purchase, for cash a number (but not less than such
number) of shares of Parent Common Stock so that the Holder and the Holder
Newcos shall collectively maintain the identical percentage equity beneficial
ownership interest in Parent that Holder and the Holder Newcos collectively
owned immediately prior to the notice from Parent described in Section 1.7(a)
(which shall be in substance the same as the notice provided to Investor
pursuant to Section 1.7(a) and subject to the terms thereof but shall be
addressed to Holder) of a contemplated Additional Issuance (but not in excess of
the percentage equity beneficial ownership interest in Parent that Holder and
the Holder Newcos collectively owned immediately following the Closing or
following Holder's contribution pursuant to Section 1.5(f)) on the same terms
and conditions specified therein and in Section 1.7(c); provided, that Holder
shall only be entitled to purchase LLC Shares if and to the extent the total
number of Parent Common Shares then owned directly or indirectly by Holder would
exceed the Holder Limit after giving effect to the closing of the purchase of
Parent Common Stock by Holder, in which event at such closing, Holder shall be
entitled to purchase a number of LLC Shares at the Issue Price equal to such
excess in lieu of the purchase of shares of Parent Common Stock.
(b) No Additional Issuance shall be a Mandatory Preemptive Event for
Holder. Additional Issuances in Section 1.7(a)(ii) and (iii), Additional
Issuances (i) caused by the conversion of Sub Convertible Debt as described in
Section 1.7(a)(ii) or (ii) in the aggregate amount up to 6.3 million Parent
Common Shares in connection with a Merger Transaction as described in Section
1.7(a)(iii) shall be governed by the terms applicable to permissive exercise of
the preemptive right under Section 1.7(a)(i), provided that (i) the Issue Price
to Holder shall be $40 per share in cash of Parent Common Stock and (ii) any
such issuance shall, in any event, be subject to the proviso set forth in the
last sentence of Section 1.8(a).
(c) The purchase or redemption of any Parent Common Shares by Parent or any
of its Affiliates shall not result in an increase in the percentage of Parent
equity that Holder may be entitled to acquire pursuant to the preemptive right
in paragraph (a) above. For purposes of exercise of Holder's preemptive right
pursuant to this Secton 1.8 prior to the Holder Closing, Holder shall be deemed
to own (and there shall be deemed to be outstanding) an additional 7.5 million
LLC Shares.
1.9. Holder To Exchange LLC Shares. Following the issuance or expiration
of all Contingent Shares and prior to the exchange of any Exchange Shares
pursuant to Article 2 of the Holder Exchange Agreement, Holder shall be
required, subject to the terms and conditions described in Section 6.1(a) or as
may be set forth in the Exchange Agreement (including the future condition with
respect to a Holder Newco that such exchange is tax-free to Holder on terms
similar to those contained in the Holder Exchange Agreement), to consummate
transactions under the Exchange Agreement having the effect of exchanging that
number of LLC Shares for shares of Parent Common Stock equal to the then
Available Parent Amount (the "Holder
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Mandatory Exchange"); provided, however, (i) if applicable, any such exchange
shall only be exercised as to all shares held by any individual Holder Newco and
(ii) that Parent shall have the option, which may be exercised at any time (or
from time to time) after the issuance or expiration of all Contingent Shares, to
suspend the Holder Mandatory Exchange and/or Holder's right to exchange shares
of Sub for Parent Common Shares under the Holder Exchange Agreement, in either
case in connection with future issuances of Parent Common Shares, in order to
permit Parent to purchase or redeem (in each case in compliance with applicable
law, including without limitation, FCC Regulations) up to 10 million Parent
Common Shares, which suspension shall remain in effect so long as Parent
continues to make diligent efforts to effect such purchase or redemption and to
complete such repurchases as promptly as reasonably practicable. Holder and
Parent agree to take appropriate action to amend the Holder Exchange Agreement
to reflect the provisions of this Section 1.9 (which shall not include a waiver
or consent by Holder of any conditions to an exchange thereunder or of any other
rights of Holder under such agreement other than the re-ordering of the order of
the exchanges contemplated by the Exchange Agreement and the Holder Exchange
Agreement and to reflect the Parent option described above). Capitalized terms
used and not defined in this paragraph shall have the meanings ascribed to them
in the Holder Exchange Agreement.
1.10. Issuance of LLC Shares to Parent or Sub. Neither Parent nor Sub
shall, and Parent and Sub shall cause the LLC not to, issue any LLC Shares to
Parent or Sub or any of their Affiliates, except pursuant to and in accordance
with the terms of this Agreement.
1.11. Business of the LLC. (a) From and after the Closing, Parent and Sub
shall conduct, subject to this clause (a) and clause (b) below, all future
business, whether now existing or hereafter created, in the LLC, other than the
Excluded Businesses, the Excluded Sub (but subject to Section 1.3) or any other
business which Parent reasonably determines should be conducted in a separate
company or corporate entity for regulatory or significant tax reasons (such
business to be deemed an Excluded Business), provided that at such time, if any,
as such regulatory or significant tax restrictions no longer exist (it being
agreed that Parent shall use all reasonable best efforts to (i) avoid businesses
being deemed Excluded Businesses and (ii) eliminate the tax or regulatory
restrictions as soon as practicable with respect to any such Excluded
Businesses), such businesses shall not be Excluded Businesses and shall be
conducted in the LLC as promptly as reasonably practicable following the
elimination of such restrictions and compliance with applicable regulatory
requirements, and provided further that Parent shall not be restricted in any
manner, except as expressly set forth herein, including the Exhibits hereto,
from causing the LLC to engage in any transaction with any third party or Parent
or any subsidiary of Parent, including, without limitation, subsidiaries which
engage in Excluded Businesses (the "Regulated Subsidiaries").
(b) If any consent or approval is required in connection with, or the terms
or operation of law do not permit, the contribution to the LLC of any agreement,
lease, right, permit, franchise, authorization or other property or asset
relating to the Contributed Businesses or the UT Contributed Business, other
than the Regulated Subsidiaries (a "Consent Asset"), each of Parent, Sub,
Investor and each Investor Newco, as the case may be, agrees to use its
reasonable efforts to obtain any necessary consents or approvals for the
transfer of all Consent Assets contemplated to be transferred to the LLC;
provided that notwithstanding such efforts, if such consent or approval is not
obtained prior to the Closing and such Consent Asset is not contributed, each of
Parent, Sub, Investor and the Investor Newcos, as the case may be, in lieu of
contributing (or causing the contribution of) such Consent Asset, may hold such
Consent Asset for the use and benefit of the LLC (any Consent Asset so held is
referred to herein as a "Beneficial Asset"). In such event, Parent, Sub,
Investor or an Investor Newco, as the case may be, shall take all reasonable
actions necessary so that the LLC shall be afforded the full economic benefits
intended to be conferred by such Beneficial Asset, subject to the LLC satisfying
all of the transferor's liabilities in connection with such Beneficial Asset and
all of such transferor's duties, obligations and responsibilities incident
thereto, including without limitation, by assigning to the LLC the right to
receive all cash flow derived from such Beneficial Asset on and after the
Closing, such cash flow to be paid to the LLC as soon as reasonably practicable
but in no event more than 45 days after the end of each fiscal quarter of the
entity holding such Beneficial Asset. Following the Closing, Parent, Sub,
Investor and the Investor Newcos each agrees to continue to use its reasonable
efforts to obtain any consent or approval necessary to effectuate the
contribution to the LLC of any Consent Asset not contributed to the LLC on the
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Closing, and shall take all reasonable action to effectuate the contributions of
such Consent Asset after such consent or approval is obtained.
(c) For purposes of Section 1.11(b), the Excluded Sub shall be treated as a
Beneficial Asset until such time as Parent Contributes the stock or assets of
the Excluded Sub to the LLC in accordance with the terms of Section 1.3.
ARTICLE 2.
REPRESENTATIONS AND WARRANTIES OF INVESTOR
Investor represents and warrants to Parent and the LLC as follows:
2.1. Organization, Standing, and Authority. (a) Each of Investor and
Investor Sub is and, upon formation in accordance with Section 1.2 hereof, each
Investor Newco will be, a corporation duly organized, validly existing, and in
good standing under the laws of their respective jurisdictions of incorporation.
Each of Investor and Investor Sub has and, upon formation in accordance with
Section 1.2 hereof, each Investor Newco will have, all requisite corporate power
and authority (i) to own, lease, and use as now owned, leased, and used by them
all of their respective assets, (ii) to conduct the business and operations of
the UT Contributed Business as now conducted by Investor, and (iii) to execute
and deliver this Agreement and the documents contemplated hereby (to the extent
a party to this Agreement or such documents), and to perform and comply with all
of the terms, covenants, and conditions to be performed and complied with by
them hereunder and thereunder. Investor, Investor Sub and each Investor Newco
are, or will be, qualified to transact business in each jurisdiction in which
the nature of their businesses makes such qualification necessary, except where
failure to be so qualified would not have a Material Adverse Effect on Investor
and its Subsidiaries considered as a whole.
(b) The Partnership is a partnership duly organized, validly existing, and
in good standing under the laws of the State of New York. The partnership
agreement (as amended, and together with all other documents governing the
operation of the Partnership, the "Partnership Agreement") has previously been
provided to Parent, and is in full force and effect. The Partnership has all
requisite power and authority (i) to own, lease, and use as now owned, leased,
and used by it all of its assets, and (ii) to conduct the business and
operations of the Partnership as now conducted by it. The Partnership is
qualified to transact business in each jurisdiction in which the nature of its
business makes such qualification necessary except where failure to be so
qualified would not have a Material Adverse Effect on the Partnership.
2.2. Authorization and Binding Obligation. The execution, delivery, and
performance of this Agreement and the consummation of the transactions
contemplated hereby, and each of the agreements contemplated hereby, by Investor
(with respect to such agreements to which it is a party) have been duly
authorized by all necessary corporate action on the part of Investor. The
performance of this Agreement and the consummation of the transactions
contemplated hereby and each of the agreements contemplated hereby by Investor
Sub and each Investor Newco (with respect to such agreements to which it is a
party) will be duly authorized by all necessary corporate action on the part of
such entity. This Agreement has been duly executed and delivered by Investor and
constitutes the legal, valid, and binding obligation of Investor enforceable
against Investor in accordance with its terms, except to the extent limited by
bankruptcy, insolvency, reorganization, moratorium or other laws relating to or
affecting creditors' rights generally and by general equity principles
regardless of whether such enforceability is considered in a proceeding in
equity or at law.
2.3. Absence of Conflicting Agreements; Consents. Except as set forth on
Schedule 2.3 and except for any filings, notices, applications and other
information as may be required to be made or supplied pursuant to the HSR Act or
the Exchange Act, the execution, delivery, and performance of this Agreement and
the consummation of the transactions contemplated hereby by Investor, Investor
Sub and the Investor Newcos (with or without the giving of notice, the lapse of
time, or both): (a) do not require any notices, reports or other filings with
any public or governmental authority to be made by Investor, Investor Sub, any
Investor Newco or the Partnership; (b) do not require the consent of any third
party (including any governmental or
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regulatory authority) (other than consents that would not, if not given, have a
Material Adverse Effect on the UT Contributed Business and the Partnership
considered as a whole); (c) will not conflict with any provision of the
Certificate of Incorporation, By-Laws, Partnership Agreement or other
organizational document, as the case may be, of Investor, Investor Sub, any
Investor Newco or the Partnership; (d) will not violate or result in a breach
of, or contravene any law, judgment, order, ordinance, injunction, decree, rule,
regulation, or ruling of any court or governmental instrumentality applicable to
any of Investor, Investor Sub, any Investor Newco or the Partnership; (e) will
not violate, conflict with, or result in a breach of any terms of, constitute
grounds for termination of, constitute a default under, or result in the
acceleration of any performance required by the terms of, any mortgage,
indenture, lease, contract, agreement, instrument, license, or permit to which
any of Investor, Investor Sub, any Investor Newco or the Partnership is a party
or by which any of Investor, Investor Sub, any Investor Newco or the Partnership
or their respective properties may be bound; and (f) will not create any claim,
liability, mortgage, lien, pledge, condition, charge, encumbrance, or other
security interest (collectively, "Liens") upon any of the assets owned by
Investor, Investor Sub, any Investor Newco or the Partnership, except, in the
case of clauses (a), (d), (e) or (f), for violations, breaches, contraventions,
conflicts, termination or acceleration or Liens which would not have a Material
Adverse Effect on the Partnership and the UT Contributed Business considered as
a whole, or would impair, in any material respect, the ability of Investor to
perform its obligations under this Agreement and the other documents
contemplated hereby.
2.4. Licenses. Schedule 2.4 is a true and complete list as of the date of
this Agreement of all material Licenses of the Partnership and the UT
Contributed Business. Each material License has been validly issued, and the UT
Contributed Business or the Partnership is the authorized legal holder thereof.
The material Licenses are in full force and effect, and the conduct of the
business and operations of the UT Contributed Business and the Partnership is in
accordance therewith in all material respects. As of the date of this Agreement,
there is no proceeding pending or, to Investor's knowledge, threatened, seeking
the revocation or limitation of any material Licenses. Each of the UT
Contributed Business and the Partnership is the holder of all material Licenses
necessary to enable it to continue to conduct its respective business as now
conducted.
2.5. Real Property. Schedule 2.5 contains a complete and accurate
description of all the Real Property providing individually for annual lease
payments in excess of $1 million (the "Material Real Property") of the UT
Contributed Business and the Partnership, and the respective interests of the UT
Contributed Business and the Partnership therein (including street address,
legal description, owner, and the use thereof). No fee estates are included in
the Material Real Property. Except as set forth on Schedule 2.5, the UT
Contributed Business or the Partnership has good title to all Material Real
Property, free and clear of all Liens or other restrictions on the Material Real
Property, except for Permitted Liens. Except for that portion of the Material
Real Property subject to leases where the Partnership is lessor or sublessor (as
identified on Schedule 2.5), the UT Contributed Business or the Partnership is
in possession of the Material Real Property. As of the date of this Agreement
there are no pending or, to the knowledge of Investor, threatened condemnation
or appropriation proceedings against any of the Material Real Property. The UT
Contributed Business or the Partnership has full legal and practical access to
all Material Real Property. With respect to each leasehold or subleasehold
interest included in the Material Real Property, the UT Contributed Business or
the Partnership has enforceable rights to nondisturbance and quiet enjoyment,
and no third party holds any interest in the leased premises with the right to
foreclose upon the UT Contributed Business' or the Partnership's leasehold or
subleasehold interest.
2.6. [Intentionally omitted]
2.7. Contracts. Schedule 2.7 is a true and complete list of all Contracts
of the UT Contributed Business and the Partnership as of the date of this
Agreement, which (i) at the time entered into, were outside the ordinary course
of business as then conducted by the business comprising the UT Contributed
Business or the Partnership, as applicable, or (ii) are (a) cable television
system affiliation agreements ("Affiliation Agreements") or other Contracts
providing for payments to or from the Partnership to cable television system
operators in excess of $1 million in any twelve month period, (b) Contracts
(other than with writer producers) with respect to the production, development,
broadcast, or distribution, of television programs with respect to which the UT
Contributed Business or the Partnership, as applicable, has a commitment to pay
in excess of
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$10 million ("Programming Agreements"), (c) agreements with writer producers
with respect to which the UT Contributed Business or the Partnership, as
applicable, has a commitment to pay in excess of $2 million per year, and (d)
agreements to buy or sell advertising where the required payments to or from the
UT Contributed Business or the Partnership, as applicable, are in excess of $10
million (the Contracts described in the foregoing clauses (i) and (ii),
collectively the "Material Contracts"). Investor has delivered or made available
to Parent true and complete copies of all Material Contracts. Except as
disclosed on Schedule 2.7, all of the Material Contracts are in full force and
effect and are valid and binding agreements of the Investor and, to the
knowledge of the Investor, the other parties thereto, enforceable in accordance
with their terms. Except as disclosed on Schedule 2.7, to the knowledge of
Investor, no party is in default in any material respect under any of the
Material Contracts, nor does any condition exist that with notice or the lapse
of time or both would constitute such a default. Except for the need to obtain
the consents listed on Schedule 2.3, the transactions contemplated hereby will
not affect the validity or enforceability of any of the Material Contracts.
Except as disclosed on Schedule 2.7, as of the date of this Agreement, no party
to any Material Contract has informed Investor or, to Investor's knowledge, its
Affiliates or the Partnership, of its intention (a) to terminate such Material
Contract or amend the material terms thereof, (b) to refuse to renew the
Material Contract upon expiration of its term, or (c) to renew the Material
Contract upon expiration only on terms and conditions that are more onerous to
the Partnership or the UT Contributed Business, as the case may be, than those
now existing.
2.8. Intangible Property. Schedule 2.8 is a list of (a) any intellectual
property asset (other than such property licensed to the UT Contributed Business
or the Partnership, as applicable), with a value, as reflected on the balance
sheet of the UT Contributed Business or the Partnership of $2.5 million or more
and (b) all material patents, trademarks, trade names, service marks, brand
marks, brand names, proprietary computer programs, proprietary databases,
industrial design, copyrights or any pending application therefor (collectively,
(a) and (b), the "Intangible Property") of the UT Contributed Business and the
Partnership and indicates, with respect to each such item of Intangible
Property, whether it is registered or unregistered, the owner thereof and, if
applicable, the name of the licensor and licensee thereof. Except as set forth
on Schedule 2.8, to the knowledge of Investor, no other person has any claim of
ownership or right of use with respect thereto. The use of such Intangible
Property by the UT Contributed Business or the Partnership does not, and
immediately after the Closing will not, conflict with, infringe upon, violate,
or interfere with or constitute an appropriation of any right, title, interest,
or goodwill, including any intellectual property right, patent, trademark, trade
name, service mark, brand mark, brand name, computer program, database,
industrial design, copyright, or any pending application therefor of any other
Person (except for such conflicts, infringements, violations or appropriations
as would not have a Material Adverse Effect on the Partnership and the UT
Contributed Business considered as a whole), and, to the knowledge of Investor,
there have been no claims made, and the UT Contributed Business or the
Partnership has not received any written notice, that any such item of
Intangible Property is invalid or conflicts with the asserted rights of any
Person (other than such invalidity or conflicts as would not have a Material
Adverse Effect on the Partnership and the UT Contributed Business considered as
whole). Except as set forth on Schedule 2.8, neither the UT Contributed Business
nor the Partnership is party to or bound by any material contract, license, or
other agreements relating to such Intangible Property other than those entered
into in the ordinary course of the business. As of the Closing, none of Investor
or its Affiliates shall have any rights to, or ownership interest in, any of the
trademarks or trade names relating to the "USA Networks," "USA Network,"
"Sci-Fi" and "Sci-Fi Channel" names and the related trade names and trademarks,
logos, brand marks and brandnames, including those listed on Schedule 2.8,
except pursuant to the International Joint Venture Agreement attached hereto as
Exhibit C.4 (or any successor agreement). Prior to the Closing, Investor shall
effect any assignments or other filings in order to satisfy the representation
contained in the preceding sentence.
2.9. Financial Statements. Investor has furnished Parent with true and
complete copies of unaudited balance sheets and income statements for the
Partnership as at and for the fiscal years ended December 31, 1996 and December
31, 1995, and as at and for the eight months ended August 31, 1997
(collectively, the "Investor Financial Statements"). The Investor Financial
Statements present fairly as of their respective dates, in all material
respects, the consolidated financial position of the Partnership as at the dates
thereof and the consolidated results of its operations and its consolidated cash
flows for each of the respective periods, in
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conformity with GAAP, except that the eight-month financial statements referred
to above are subject to normal year-end adjustments, none of which are expected
to be material.
Except as and to the extent expressly set forth in the Investor Financial
Statements, (i) as of August 31, 1997, the Partnership did not have any material
liabilities or obligations (whether absolute, contingent, accrued or otherwise)
and (ii) since the August 31, 1997 balance sheet the Partnership has not
incurred any such material liabilities or obligations other than in the ordinary
course of business.
2.10. Personnel. (a) Schedule 2.10 contains a true and complete list as
of the date of this Agreement of all active employees of the UT Contributed
Business and the Partnership who are currently engaged in the respective
businesses and operations of the UT Contributed Business and the Partnership
(including any employee on vacation, leave of absence, short-term disability, or
layoff with recall rights, but excluding retired employees of the UT Contributed
Business and any employee on long-term disability) (collectively, the "Business
Employees"). Schedule 2.10 also contains a true and complete list of all
material employee benefit plans or arrangements that cover any Business Employee
and any material employee benefit plans or arrangements that cover any former
employee of the Partnership, including any employment, severance, or other
similar contract, arrangement, or policy and each plan or arrangement (written
or oral) providing for insurance coverage (including any self-insured
arrangements), workers' compensation, disability benefits, supplemental
unemployment benefits, vacation benefits, or retirement benefits or for deferred
compensation, profit-sharing, bonuses, stock options, stock appreciation rights,
stock purchases, or other forms of incentive compensation or post-retirement
insurance, compensation, or benefits (collectively, "Benefit Arrangements").
Schedule 2.10 denotes all Benefit Arrangements sponsored or maintained by the
Partnership ("Partnership Plans").
(b) Except as set forth on Schedule 2.10(b), (i) no Benefit Arrangement is
an "employee pension benefit plan," as defined in Section 3(2) of ERISA (a
"Pension Plan"), that is subject to Title IV of ERISA or Section 412 of the
Code, and no Benefit Arrangement provides post-retirement welfare benefits,
except as required by law and (ii) neither Investor nor the Partnership has
incurred or expects to incur any liability or lien under Title IV of ERISA or
Section 412 of the Code, which liability or lien would be reasonably expected to
have a Material Adverse Effect on the Partnership and the UT Contributed
Business considered as a whole.
(c) Without limiting the generality of Section 2.10(b) and except as set
forth on Schedule 2.10(c), no Benefit Arrangement is a "multiemployer pension
plan," as defined in Section 3(37) of ERISA and neither Investor nor the
Partnership has incurred or expects to incur any liability or lien with respect
to any multiemployer pension plan which liability or lien would be reasonably
expected to have a Material Adverse Effect on the Partnership and the UT
Contributed Business considered as a whole.
(d) Except as set forth on Schedule 2.10(d), none of Investor, any of its
Affiliates, the Partnership or any entity required to be combined with any of
the foregoing entities under Section 414(b), Section 414(c), Section 414(m), or
Section 414(o) of the Code (an "ERISA Affiliate") has incurred, or expects to
incur solely as a result of the consummation of the Transactions (including any
termination of employment in connection therewith), any cost, fee, expense,
liability, claim, suit, obligation, or other damage with respect to any Pension
Plan or any Benefit Arrangement that could give rise to the imposition of any
liability, cost, fee, expense, or obligation on the LLC or any of its
Affiliates, which would be reasonably expected to have a Material Adverse Effect
on the Partnership and the UT Contributed Business considered as a whole, and,
to Investor's knowledge, no facts or circumstances exist that could give rise to
any such cost, fee, expense, liability, claim, suit, obligation, or other
damage, which would be reasonably expected to have a Material Adverse Effect on
the Partnership and the UT Contributed Business considered as a whole. Except as
set forth on Schedule 2.10(d), neither the execution and delivery of this
Agreement nor the consummation of the Transactions (including any terminations
of employment in connection therewith) will (i) increase any benefits otherwise
payable under any Benefit Arrangement, which would be reasonably expected to
have a Material Adverse Effect on the Partnership and the UT Contributed
Business considered as a whole or (ii) result in the acceleration of the time of
payment or vesting of any such payment, which would be reasonably expected to
have a Material Adverse Effect on the Partnership and the UT Contributed
Business considered as a whole.
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(e) Investor will deliver or make available to Parent, within ten days
hereafter, true and complete copies of each of the following documents:
(i) Each Benefit Arrangement (and, if applicable, related trust
agreements) and all amendments thereto, and (if applicable) each summary
plan description together with any summary of material modifications;
(ii) Each written Benefit Arrangement and written descriptions thereof
that have been distributed to Business Employees or any former employee of
the Partnership, (including descriptions of the number and level of
employees covered thereby); and
(iii) Each employee handbook or similar document describing any
Benefit Arrangement.
(f) Except as set forth on Schedule 2.10, no controversies, disputes, or
proceedings are pending or, to Investor's knowledge, threatened, between
Investor, any of its Affiliates, or the Partnership and any Business Employee or
any former employee of the Partnership, which would be reasonably expected to
have a Material Adverse Effect on the Partnership and the UT Contributed
Business considered as a whole. Except as set forth on Schedule 2.10(f), no
labor union or other collective bargaining unit represents or, to Investor's
knowledge, claims to represent any of the Business Employees or any former
employees of the Partnership and, to Investor's knowledge, there is no union
campaign being conducted to solicit cards from employees to authorize a union to
request a National Labor Relations Board Certification election with respect to
any of the Business Employees.
(g) Except where any such failure would not be reasonably expected to have
a Material Adverse Effect on the Partnership and the UT Business considered as a
whole, all Benefit Arrangements (i) comply in all material respects with
applicable law, including but not limited to ERISA and the Code, and (ii) have
been administered in all material respects in accordance with their terms, and
all required contributions have been made to such Benefit Arrangements. Except
as set forth on Schedule 2.10(g), all Partnership Plans that are intended to be
qualified under Section 401(a) of the Code have received a favorable
determination letter from the Internal Revenue Service, and neither Investor nor
the Partnership has knowledge of any events that would cause such letter to be
revoked.
2.11. Claims and Legal Actions. Except as set forth in Schedule 2.11,
there are no judicial, administrative or arbitral actions, suits, claims,
inquiries, investigations or proceedings in respect of the UT Contributed
Business or the Partnership (whether of a public or private nature) pending or,
to the knowledge of Investor, threatened against the UT Contributed Business or
the Partnership which, individually or in the aggregate, would have a Material
Adverse Effect on the UT Contributed Business and the Partnership considered as
a whole.
2.12. Compliance with Laws. Each of the UT Contributed Business and the
business of the Partnership has been and is presently being conducted in
compliance with all applicable laws, except for any noncompliance that would not
have a Material Adverse Effect on the UT Contributed Business and the
Partnership considered as a whole, or impair or hinder the ability of Investor,
Investor Sub or any Investor Newco to perform in any material respect their
respective obligations under this Agreement and the documents and agreements
contemplated hereunder.
2.13. Transactions with Affiliates; Completeness of Assets. (a) Except as
set forth on Schedule 2.13(a) or pursuant to agreements on arms-length terms,
there are no material agreements relating to the business or operations of the
UT Contributed Business or the Partnership between the UT Contributed Business
or the Partnership, on the one hand, and Investor or any of its Affiliates, on
the other hand, and (b) except as set forth on Schedule 2.13(b), neither the UT
Contributed Business nor the Partnership has engaged in any material business
arrangement or relationship with Investor or any of its Affiliates. With respect
to the UT Contributed Business, neither Investor nor any of its Affiliates owns
any right, tangible or intangible, relating to the shows listed on Schedule 2.13
and related agreements (other than as expressly contemplated by this Agreement
to be entered into between two or more of the Parties) and, with respect to the
Partnership, neither Investor nor any of its Affiliates owns any asset, property
or right, tangible or
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intangible, that is primarily used in the business or operations of the
Partnership, other than, in each case, such assets, properties and rights that
are being Contributed to the LLC in accordance with this Agreement.
2.14. Cable Subscribers. Schedule 2.14 sets forth, with respect to each
cable television system operator with which the Partnership has an Affiliation
Agreement, under the column "Network Subsidiary" the number of cable system
subscribers to such cable television system operator as most recently reported
to the Partnership. Schedule 2.14 also designates those cable television system
operators that, to Investor's knowledge, make the USA Networks available to
subscribers without an Affiliation Agreement.
2.15. Ownership of the Partnership. Investor owns directly or indirectly
all of the issued and outstanding Owned Partnership Interest and following
Closing of the transactions contemplated by the Partnership Interest Purchase
Agreement (for purposes of this Section 2.15, the term Closing shall have the
meaning set forth in the Partnership Interest Purchase Agreement), Investor Sub
will own, directly or indirectly, all of the issued and outstanding Acquired
Partnership Interest which, together, constitute 100% of the ownership interest
in the Partnership, subject to no Liens. There exist no other outstanding
options, convertible securities or other rights to acquire partnership or other
interests in the Partnership. Immediately upon the Closing, the LLC will own a
100% ownership interest in the Partnership, subject to no Liens other than any
Liens created by Parent or LLC. Except as set forth on Schedule 2.15, the
Partnership has no subsidiaries and owns no interest in any other entity.
2.16. Investment. Each of Investor, Investor Sub and each Investor Newco
(a) understands that the LLC Shares and Parent Common Shares to be issued to it
pursuant to this Agreement have not been, and will not be, registered under the
Securities Act or under any state securities laws, and are being offered and
sold in reliance upon federal and state exemptions for transactions not
involving any public offering, and (b) to the extent it or any of its Affiliates
acquires any of the LLC Shares or Parent Common Shares issued pursuant to this
Agreement, it or such Affiliate will be acquiring such shares solely for its own
account for investment purposes, and not with a view to the distribution
thereof.
2.17. Conduct of Business. Since August 31, 1997, the UT Contributed
Business and the business of the Partnership have been conducted in all material
respects in the ordinary course and there has not occurred any event or
condition having, or that would have, a Material Adverse Effect on the UT
Contributed Business and the business of the Partnership considered as a whole.
Without limiting the generality of the foregoing, other than as is disclosed on
Schedule 2.17 hereto, since August 31, 1997 there has not occurred:
(a) any change or agreement to change the character or nature of the
business of the UT Contributed Business or the Partnership in any material
respect;
(b) any purchase, sale, transfer, assignment, conveyance or pledge of
the assets or properties of the UT Contributed Business or the Partnership,
except in the ordinary course of business and except for the purchase of
the Acquired Partnership Interest pursuant to the Partnership Interest
Purchase Agreement;
(c) any waiver or modification by Investor, the Partnership or any of
their respective Subsidiaries, in respect of the UT Contributed Business or
the Partnership, of any right or rights of substantial value, or any
payment, direct or indirect, in satisfaction of any liability, in each
case, having a Material Adverse Effect on the UT Contributed Business and
the Partnership considered as a whole;
(d) any loan, advance or capital expenditure by the UT Contributed
Business, the Partnership or any of its Subsidiaries, except for loans,
advances and capital expenditures made in the ordinary course of business;
(e) any change in the accounting principles, methods, practices or
procedures followed in connection with the UT Contributed Business or the
Partnership or any change in the depreciation or amortization policies or
rates theretofore adopted in connection with the UT Contributed Business or
the Partnership;
(f) other than sweeping cash in the ordinary course of business, any
declaration or payment of any dividends, or other distributions in respect
of the outstanding equity interest of the Partnership;
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(g) any issuance of any equity interest of the Partnership;
(h) any grant or award of any options, warrants, conversion rights or
other rights to acquire any equity interest of the Partnership by the
Partnership;
(i) except for any changes made as a result of the consummation of the
purchase pursuant to the Partnership Interest Purchase Agreement, which
changes shall be consistent with the methods employed by other
Subsidiaries, any change in the methods of collecting receivables or paying
payables with respect to the Partnership; or
(j) any agreement with respect to any of the foregoing.
2.18. Brokers. No broker, finder or investment banker (other than
Goldman, Sachs & Co., the fees of which shall be the responsibility of Investor)
is entitled to any brokerage, finder's or other fee or commission in connection
with the transactions contemplated by this Agreement based upon arrangements
made by or on behalf of Investor or its Affiliates.
ARTICLE 3.
REPRESENTATIONS AND WARRANTIES OF PARENT
Parent represents and warrants to Investor and the LLC and, to the extent
Holder acquires any additional LLC Shares in accordance with this Agreement,
Holder, as follows:
3.1. Organization and Good Standing. Parent is a corporation duly
organized, validly existing and in good standing under the laws of Delaware, and
is duly qualified to transact business as a foreign corporation and is in good
standing in each jurisdiction in which the nature of the business transacted by
it or the character or location of the properties owned or leased by it requires
such qualification, except where the failure to be so qualified or in good
standing would not have a Material Adverse Effect on Parent and its Subsidiaries
considered as a whole. Each of Parent and Sub has full corporate power and
authority (i) to own, lease and use as now owned, leased and used by it all of
its assets, (ii) to conduct the business and operations of Parent as now
conducted by it, and (iii) to execute and deliver this Agreement and the
documents contemplated hereby (to the extent a party to this Agreement or such
documents), and to perform and comply with all of the terms, covenants and
conditions to be performed and complied with by it hereunder and thereunder. The
copies of Parent's certificate of incorporation (the "Parent Certificate") and
by-laws (as amended and/or restated through the date hereof), heretofore
delivered to Investor, are true, complete and correct copies thereof. Upon
formation, the LLC will be a limited liability company duly organized, validly
existing and in good standing under the laws of Delaware and will be duly
qualified to transact business as a foreign corporation and will be in good
standing in each jurisdiction in which the nature of the business transacted by
it or the character or location of the properties owned or leased by it requires
such qualification, except where the failure to be so qualified or in good
standing would not have a Material Adverse Effect on the LLC. The LLC will have
full corporate power and authority to execute and deliver this Agreement and the
documents contemplated hereby, and to perform and comply with all of the terms,
covenants and conditions to be performed and complied with by it hereunder and
thereunder. Except as set forth on Schedule 3.1, each of the Subsidiaries of
Parent is duly organized, validly existing and in good standing under the laws
of its jurisdiction of incorporation or organization and has the power and
authority to own or lease its properties and to conduct its business as now
conducted, except as would not result in any Material Adverse Effect on Parent
and its Subsidiaries considered as a whole. All outstanding shares of the
capital stock of each of Parent's Subsidiaries have been validly issued and are
fully paid and nonassessable. Except as set forth in the Parent Form 10-K or
Schedule 3.1 or as contemplated by this Agreement, there are no outstanding
options, warrants, rights, agreements or commitments of any nature whatsoever of
any third party to subscribe for or purchase any equity security of any of
Parent's Subsidiaries or to cause any of such Subsidiaries to issue any such
equity security.
3.2. Capitalization. (a) The authorized capitalization of Parent as of
the date hereof consists of: 150,000,000 shares of Common Stock, $.01 par value
per share ("Parent Common Stock"), 30,000,000 shares
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of Parent Class B Common Stock, $.01 par value per share ("Parent Class B
Stock"), and 15,000,000 shares of preferred stock, $.01 par value per share, of
Parent ("Parent Preferred Stock"), of which, as of August 8, 1997, there were
43,526,372 shares of Parent Common Stock outstanding, 12,227,647 shares of
Parent Class B Stock outstanding and no shares of Parent Preferred Stock
outstanding. All such shares outstanding on the date hereof are, duly
authorized, validly issued and fully paid and nonassessable. Other than (a)
options to purchase an aggregate of approximately 11,572,649 shares of Parent
Common Stock issued pursuant to employee benefit plans and agreements of Parent
as of the date hereof and options granted by Parent on the date hereof as set
forth on Schedule 3.2, (b) rights to acquire shares of Parent Class B Stock and
Parent Common Stock under this Agreement, (c) Contingent Shares entitling Holder
to acquire 589,161 shares of Parent Class B Stock and Exchange Shares entitling
Holder to acquire 399,136 shares of Parent Class B Stock and 7,905,016 shares of
Parent Common Stock, each under agreements (the "Holder Agreements") described
in a Joint Proxy Statement/ Prospectus dated November 20, 1996 filed by Parent
with the Commission on Form S-4 (the "Parent Form S-4"), (d) 28,449,846 shares
of Parent Common Stock issuable upon conversion of the Savoy Debentures (each
such term as defined in the Parent Form S-4), and (e) shares of Parent Common
Stock issuable under the Stock Exchange Agreement between Paul Allen and Parent
dated May 20, 1997 and the letter agreement by and between Parent and Fred Rosen
dated May 20, 1997 (the Stock Exchange Agreement and the letter agreement
together, the "TKTM Agreements"), as of the date hereof, there are no
outstanding options, warrants, rights, puts, calls, commitments, or other
contracts, arrangements, or understandings issued by or binding upon Parent
requiring or providing for, and there are no outstanding debt or equity
securities of Parent which upon the conversion, exchange or exercise thereof
would require or provide for, the issuance by Parent of any new or additional
shares of Parent Common Stock (or any other securities of Parent) which, with
notice, lapse of time and/or payment of monies, are or would be convertible into
or exercisable or exchangeable for Parent Common Shares. There are no preemptive
or other similar rights available to the existing holders of Parent Common Stock
or other securities of Parent except as contemplated by this Agreement.
(b) As of the Closing Date, the authorized capitalization of the LLC will
consist of a number of LLC Shares, consisting of one or more classes of
interests as set forth in the LLC Operating Agreement. As of the Closing Date,
other than contemplated by this Agreement, there will be no outstanding or
authorized options, warrants, rights, puts, calls, commitments, or other
contracts, arrangements, or understandings issued by or binding upon the LLC
requiring or providing for, and there are no outstanding debt or equity
securities of the LLC which upon the conversion, exchange or exercise thereof
would require or provide for, the issuance by the LLC of any new or additional
LLC Shares (or any other securities of LLC, which, with notice, lapse of time
and/or payment of monies, are or would be convertible into or exercisable or
exchangeable for LLC Shares). As of the Closing Date, there will be no
preemptive or other similar rights available to the holders of LLC Shares or
other securities of the LLC except as contemplated by this Agreement.
3.3. Due Authorization; Execution and Delivery. The execution, delivery
and performance of this Agreement and the consummation of the transactions
contemplated hereby have been duly authorized by Parent's board of directors
(including such authorization as may be required so that no state anti-takeover
statute or similar statute or regulation including, without limitation, Section
203 of the Delaware General Corporation Law, is or becomes operative with
respect to this Agreement or the transactions contemplated hereby or with
respect to Investor and its affiliates (as defined in Section 203) as of October
19, 1997) and, when authorized by the Requisite Stockholder Vote and the
Certificate Amendment is filed with the Delaware Secretary of State, no other
corporate proceedings on the part of Parent are necessary to authorize this
Agreement and to consummate the transactions contemplated hereby. The
performance of this Agreement and the consummation of the transaction
contemplated hereby by LLC (with respect to such agreements to which it is a
party) will be duly authorized by all necessary corporate action on the part of
LLC. This Agreement has been duly executed and delivered by Parent and Sub and
constitutes the legal, valid and binding obligation of Parent and Sub,
enforceable against Parent and Sub in accordance with its terms, except to the
extent limited by bankruptcy, insolvency, reorganization, moratorium or other
laws relating to or affecting creditors' rights generally and by general equity
principles regardless of whether such enforceability is considered in a
proceeding in equity or at law.
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3.4. Absence of Breach; No Conflict. Except as set forth on Schedule 3.4
hereto, the execution, delivery, and performance of this Agreement by Parent,
and the consummation by Parent of the transactions contemplated hereby, (a) will
not require the consent of any third party (including any governmental or
regulatory authority) (other than consents that would not, if not given, have a
Material Adverse Effect on Parent and its Subsidiaries considered as a whole);
(b) will not conflict with any provision of the Certificate of Incorporation,
By-Laws or limited liability company agreement, as the case may be, of Parent,
Sub or the LLC; (c) will not violate or result in a breach of, or contravene any
law, judgment, order, ordinance, injunction, decree, rule, regulation, or ruling
of any court or governmental instrumentality applicable to any of Parent, Sub or
the LLC; (d) will not violate, conflict with, or result in a breach of any terms
of, constitute grounds for termination of, constitute a default under, or result
in the acceleration of any performance required by the terms of, any mortgage,
indenture, lease, contract, agreement, instrument, license, or permit to which
any of Parent, Sub or the LLC is a party or by which any of Parent, Sub or the
LLC or their respective properties may be bound; and (e) will not create any
Liens upon any of the assets owned by any of Parent, Sub or the LLC, except, in
the case of clause (c), (d) or (e), for violations, breaches, contraventions,
conflicts, termination or acceleration or Liens which would not have a Material
Adverse Effect on Parent and its Subsidiaries considered as a whole, or would
impair, in any material respect, the ability of Parent to perform its
obligations under this Agreement and the other documents contemplated hereby.
3.5. Shares to Be Issued. The LLC Shares and the Parent Common Shares to
be issued pursuant to the transactions contemplated hereby, when authorized by
the Requisite Stockholder Vote and issued in accordance with Articles 1 and 6,
will be duly authorized and legally and validly issued, fully paid and
nonassessable.
3.6. Investment Purpose. Parent is acquiring the Partnership solely for
the purpose of investment and not with view to, or for offer or sale in
connection with, any distribution thereof. Parent acknowledges and understands
that the Partnership may not be sold except in compliance with the registration
requirements of the Securities Act, unless an exemption therefrom is available.
3.7. Brokers. Other than Allen & Company Incorporated, the fees of which
shall be the responsibility of Parent, no broker, finder or investment banker is
entitled to any brokerage, finder's or other fee or commission in connection
with the transactions contemplated by this Agreement based upon arrangements
made by or on behalf of Parent or its Affiliates.
3.8. Commission Documents; Financial Information. The Parent Form 10-K in
respect of the fiscal year ended December 31, 1996 (the "Parent Form 10-K"), and
each report, schedule, proxy, information statement or registration statement
(including all exhibits and schedules thereto and documents incorporated by
reference therein) filed by Parent with the Commission following the date
thereof and on or before the Closing Date are collectively referred to as the
"Parent Commission Documents." As of their respective filing dates, the Parent
Commission Documents complied (or will comply) in all material respects with the
requirements of the Exchange Act and the rules and regulations of the Commission
thereunder applicable to such Parent Commission Documents, and as of their
respective dates none of the Parent Commission Documents contained (or will
contain) any untrue statement of a material fact or omitted (or will omit) to
state a material fact required to be stated therein or necessary in order to
make the statements therein, in light of the circumstances under which they were
made, not misleading. The financial statements of Parent included in the Parent
Commission Documents comply (or will comply) as of their respective dates as to
form in all material respects with applicable accounting requirements and the
published rules and regulations of the Commission with respect thereto (except
as may be indicated in the notes thereto or, in the case of the unaudited
statements, as permitted by Form 10-Q promulgated by the Commission), and
present fairly (or will present fairly) as of their respective dates, in all
material respects, the consolidated financial position of Parent and its
Subsidiaries as at the dates thereof and the consolidated results of their
operations and their consolidated cash flows for each of the respective periods,
in conformity with GAAP, except that interim financial statements are subject to
normal year-end adjustments, none of which are expected to be material. As used
in this Agreement, the consolidated balance sheet of Parent and its Subsidiaries
at June 30, 1997 included in the Parent Form 10-Q filed with the Commission in
respect of the fiscal quarter ended June 30,
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1997 is hereinafter referred to as the "Parent Balance Sheet," and June 30, 1997
is hereinafter referred to as the "Parent Balance Sheet Date."
Except as and to the extent expressly set forth in the Parent Balance
Sheet, (i) as of June 30, 1997, Parent did not have any material liabilities or
obligations (whether absolute, contingent, accrued or otherwise) and (ii) since
the date of the Parent Balance Sheet, Parent has not incurred any material
liabilities or obligations other than in the ordinary course of business or as
contemplated by the transactions contemplated hereby.
3.9. Approvals. Except (a) as set forth on Schedule 3.9(a) hereof, (b)
for any filings, notices, applications and other information as may be required
to be made or supplied pursuant to the HSR Act or the Exchange Act, (c) for
filing of the Certificate Amendment with the Delaware Secretary of State, and
(d) the filing of documents relating to Holder's investment in, and relationship
with, Parent and Mr. Diller, no notices, reports or other filings are required
to be made by Parent, or any of its Subsidiaries (including the LLC) with, nor
are any consents, registrations, applications, approvals, permits, licenses or
authorizations required to be obtained by Parent or any of its Subsidiaries
(including the LLC) from, any public or governmental authority or other third
party in connection with the execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby (other than consents that
would not, if not given, have a Material Adverse Effect on Parent and its
Subsidiaries considered as a whole) or impair the ability of Parent or Sub to
perform its respective obligations under this Agreement and the other documents
contemplated hereby.
3.10. Personnel. (a) Schedule 3.10 contains a true and complete list of
all material employee benefit plans or arrangements that cover any employee of
Parent and its Subsidiaries (the "Parent Employees") including any employment,
severance, or other similar contract, arrangement, or policy and each plan or
arrangement (written or oral) providing for insurance coverage (including any
self-insured arrangements), workers' compensation, disability benefits,
supplemental unemployment benefits, vacation benefits, or retirement benefits or
for deferred compensation, profit-sharing, bonuses, stock options, stock
appreciation rights, stock purchases, or other forms of incentive compensation
or post-retirement insurance, compensation, or benefits (collectively, "Parent
Benefit Arrangements").
(b) No Parent Benefit Arrangement is an "employee pension benefit plan," as
defined in Section 3(2) of ERISA (a "Parent Pension Plan"), that is subject to
Title IV of ERISA or Section 412 of the Code, and no Parent Benefit Arrangement
provides postretirement welfare benefits, except as required by law. Neither
Parent nor any of its Subsidiaries has incurred or expects to incur any
liability or lien under Title IV of ERISA or Section 412 of the Code, which
liability or lien would be reasonably expected to have a Material Adverse Effect
on Parent and its Subsidiaries considered as a whole.
(c) Without limiting the generality of Section 3.10(b) except as set forth
on Schedule 3.10(c), neither Parent nor any of its Subsidiaries nor any entity
required to be combined with Parent or any of its Subsidiaries under Section
414(b), Section 414(c), Section 414(m), or Section 414(o) of the Code (a "Parent
ERISA Affiliate") is a "multiemployer pension plan," as defined in Section 3(37)
of ERISA and neither Parent nor any of its Subsidiaries has incurred or expects
to incur any liability or lien with respect to any multiemployer pension plan
which liability or lien would be reasonably expected to have a Material Adverse
Effect on Parent and its Subsidiaries considered as a whole.
(d) Except as set forth on Schedule 3.10(d), none of Parent, any of its
Subsidiaries, or any Parent ERISA Affiliate has incurred, or expects to incur
solely as a result of the consummation of the Transactions (including any
termination of employment in connection therewith), any cost, fee, expense,
liability, claim, suit, obligation, or other damage with respect to any Parent
Pension Plan, or any Parent Benefit Arrangement that could give rise to the
imposition of any liability, cost, fee, expense, or obligation on the LLC or any
of its Affiliates, which would be reasonably expected to have a Material Adverse
Effect on the Parent and its Subsidiaries considered as a whole, and, to
Parent's knowledge, no facts or circumstances exist that could give rise to any
such cost, fee, expense, liability, claim, suit, obligation, or other damage,
which would be reasonably expected to have a Material Adverse Effect on Parent
and its Subsidiaries considered as a whole. Except as set forth on Schedule
3.10(d), neither the execution and delivery of this Agreement nor the
consummation of the Transactions (including any terminations of employment in
connection therewith) will
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(i) increase any benefits otherwise payable under any Parent Benefit
Arrangement, which would be reasonably expected to have a Material Adverse
Effect on the Parent and its Subsidiaries considered as a whole or (ii) result
in the acceleration of the time of payment or vesting of any such payment, which
would be reasonably expected to have a Material Adverse Effect on Parent and its
Subsidiaries considered as a whole.
(e) Parent will deliver or make available to Investor, within ten days
hereafter true and complete copies of each of the following documents:
(i) Each Parent Benefit Arrangement (and, if applicable, related trust
agreements) and all amendments thereto, and (if applicable) each summary
plan description together with any summary of material modifications;
(ii) Each written Parent Benefit Arrangement and written descriptions
thereof that have been distributed to Parent Employees (including
descriptions of the number and level of employees covered thereby); and
(iii) Each employee handbook or similar document describing any Parent
Benefit Arrangement applicable to Parent Employees.
(f) Except as set forth on Schedule 3.10, no controversies, disputes, or
proceedings are pending or, to Parent's knowledge, threatened, between Parent,
any of its Subsidiaries, or any Parent Employee, which would be reasonably
expected to have a Material Adverse Effect on Parent and its Subsidiaries
considered as a whole. Except as set forth on Schedule 3.10(f), no labor union
or other collective bargaining unit represents or, to Parent's knowledge, claims
to represent any of the Parent Employees and, to Parent's knowledge, there is no
union campaign being conducted to solicit cards from employees to authorize a
union to request a National Labor Relations Board Certification election with
respect to any of the Parent Employees.
(g) Except where any such failure would not be reasonably expected to have
a Material Adverse Effect on Parent and its Subsidiaries considered as a whole,
all Benefit Arrangements (i) comply in all material respects with applicable
law, including but not limited to ERISA and the Code, and (ii) have been
administered in all material respects in accordance with their terms, and all
required contributions have been made to such Parent Benefit Arrangements.
Except as set forth on Schedule 3.10(g), all Parent Pension Plans that are
intended to be qualified under Section 401(a) of the Code have received a
favorable determination letter from the Internal Revenue Service, and Parent has
no knowledge of any events that would cause such letter to be revoked.
3.11. Conduct of Business. Except as disclosed in the Parent Commission
Documents, since the Parent Balance Sheet Date, Parent and its Subsidiaries
have, in all material respects, conducted their business operations in the
ordinary course and there has not occurred any event or condition having or that
would have a Material Adverse Effect on Parent and its Subsidiaries considered
as a whole. Without limiting the generality of the foregoing, other than as is
disclosed in the Parent Commission Documents filed prior to the date hereof or
on Schedule 3.11 hereto, since the Parent Balance Sheet Date there has not
occurred:
(a) any change or agreement to change the character or nature of the
business of Parent or any of its Subsidiaries in any material respects;
(b) any purchase, sale, transfer, assignment, conveyance or pledge of
the assets or properties of Parent or its Subsidiaries;
(c) any waiver or modification by Parent or any Parent Subsidiary of
any right or rights of substantial value, or any payment, direct or
indirect, in satisfaction of any liability, in each case, having a Material
Adverse Effect on Parent and its Subsidiaries considered as a whole;
(d) any loan, advance or capital expenditure by Parent or any of its
Subsidiaries, except for loans, advances and capital expenditures made in
the ordinary course of business;
(e) any change in the accounting principles, methods, practices or
procedures followed by Parent in connection with the business of Parent or
any change in the depreciation or amortization policies or rates
theretofore adopted by Parent in connection with the business of Parent and
its Subsidiaries;
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(f) any declaration or payment of any dividends, or other
distributions in respect of the outstanding shares of capital stock of
Parent or any Parent Subsidiary (other than dividends declared or paid by
wholly-owned Subsidiaries);
(g) other than pursuant to the Holder Agreements, the TKTM Agreements
or in connection with the exercise of employee stock options or the
conversion of outstanding convertible debt instruments, any issuance of any
shares of capital stock of Parent or any Parent Subsidiary or any other
change in the authorized capitalization of the Company or any Parent
Subsidiary, except as contemplated by this Agreement;
(h) any grant or award of any options, warrants, conversion rights or
other rights to acquire any shares of capital stock of Parent or any Parent
Subsidiary, except as contemplated by this Agreement or except pursuant to
employee benefit plans, programs or arrangements in the ordinary course of
business; or
(i) any agreement with respect to any of the foregoing.
3.12. Licenses. Except as set forth on Schedule 3.12, each material
License of Parent and its Subsidiaries has been validly issued, and Parent or
its Subsidiaries are the authorized legal holder thereof. The material Licenses
are in full force and effect, and the conduct of the business and operations of
Parent and its Subsidiaries is in accordance therewith in all material respects.
As of the date of this Agreement, there is no proceeding pending or, to Parent's
knowledge, threatened, seeking the revocation or limitation of any material
Licenses. Each of Parent and its Subsidiaries is the holder of all material
Licenses necessary to enable it to continue to conduct its respective business
as now conducted.
3.13. Claims and Legal Actions. Except as set forth in Schedule 3.13,
there are no judicial, administrative or arbitral actions, suits, claims,
inquiries, investigations or proceedings in respect of Parent or its
Subsidiaries (whether of a public or private nature) pending or, to the
knowledge of Parent, threatened against Parent or its Subsidiaries, which,
individually or in the aggregate, would have a Material Adverse Effect on Parent
and its Subsidiaries considered as a whole.
3.14. Compliance with Laws. Except as set forth on Schedule 3.14, each of
Parent and its Subsidiaries has been and is presently being conducted in
compliance with all applicable laws, except for any noncompliance that would not
have a Material Adverse Effect on Parent and its Subsidiaries considered as a
whole or impair or hinder the ability of Parent and its Subsidiaries to perform
in any material respect their respective obligations under this Agreement and
the documents and agreements contemplated hereunder.
ARTICLE 4.
REPRESENTATIONS AND WARRANTIES OF HOLDER
Holder represents and warrants to Parent, Investor and the LLC as follows:
4.1. Organization, Standing, and Authority. Holder is and, upon formation
in accordance with Section 1.5(f) hereof, each Holder Newco will be, a
corporation duly organized, validly existing, and in good standing under the
laws of its jurisdiction of incorporation. Holder has and, upon formation in
accordance with Section 1.5(f) hereof, each Holder Newco will have, all
requisite corporate power and authority (i) to own, lease, and use as now owned,
leased, and used by them all of their respective assets, (ii) to conduct the
business and operations of Holder as now conducted by Holder, and (iii) to
execute and deliver this Agreement and the documents contemplated hereby (to the
extent a party to this Agreement or such documents), and to perform and comply
with all of the terms, covenants, and conditions to be performed and complied
with by them hereunder and thereunder. Holder and each Holder Newco is qualified
to transact business in each jurisdiction in which the nature of their
businesses makes such qualification necessary except where failure to be so
qualified would not have a Material Adverse Effect on Holder and its
Subsidiaries considered as a whole.
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4.2. Authorization and Binding Obligation. The execution, delivery, and
performance of this Agreement, and each of the agreements contemplated hereby,
and the consummation of the transactions contemplated hereby by Holder (with
respect to such agreements to which it is a party) has been duly authorized by
all necessary corporate action on the part of Holder. The performance of this
Agreement and each of the Agreements contemplated hereby and the consummation of
the transactions contemplated hereby by each Holder Newco, if any (with respect
to such agreements to which it is a party), will be duly authorized by all
necessary corporate action on the part of each Holder Newco. This Agreement has
been duly executed and delivered by Holder and constitutes the legal, valid, and
binding obligation of Holder, enforceable against Holder in accordance with its
terms, except to the extent limited by bankruptcy, insolvency, reorganization,
moratorium or other laws relating to or affecting creditors' rights generally
and by general equity principles regardless of whether such enforceability is
considered in a proceeding in equity or at law.
4.3. Absence of Conflicting Agreements; Consents. Subject to obtaining
the consents listed on Schedule 4.3 and for any filings, notices, applications
and other information as may be required to be made or supplied pursuant to the
HSR Act or the Exchange Act, the execution, delivery, and performance of this
Agreement and the documents contemplated hereby by Holder and the Holder Newcos
(with or without the giving of notice, the lapse of time, or both): (a) do not
require any notices, reports or other filings to be made by Holder or any Holder
Newco with any public or governmental authority; (b) do not require the consent
of any third party (including any governmental or regulatory authority); (c)
will not conflict with any provision of the Certificate of Incorporation or
By-Laws of Holder or any Holder Newco, if any; and (d) will not violate or
result in a breach of, or contravene any law, judgment, order, ordinance,
injunction, decree, rule, regulation, or ruling of any court or governmental
instrumentality applicable to Holder or any Holder Newco except, in the case of
clauses (a), (b) and (d), for violations, breaches, contraventions or conflicts,
which would not have a Material Adverse Effect on Holder or would impair, in any
material respect, the ability of Holder to perform its obligations under this
Agreement and the other documents contemplated hereby.
ARTICLE 5.
INTERCOMPANY TRANSFER OF FUNDS
5.1. General. Parent shall cause the LLC to keep records of all movement
of funds between the LLC, on the one hand, and Parent and its Subsidiaries, on
the other hand. Parent shall cause all Excess Cash held by Parent and its
Subsidiaries from time to time (but not less frequently than the last business
day of each month) to be transferred to LLC in accordance with the terms of this
Article 5.
5.2. Transfers from LLC. Subject to Section 5.4, all transfers of funds
from the LLC to Parent and its Subsidiaries (other than distributions on, or
redemptions of, the LLC Shares or payment of interest on indebtedness owed or
assumed by the LLC) shall either be (i) evidenced by a demand note from the
recipient of such funds payable to LLC or (ii) applied to repay indebtedness
owed by LLC to such recipient.
5.3. Transfers to LLC. Subject to Section 5.4, all transfers of funds
from Parent and its Subsidiaries (other than contributions of capital in
connection with the acquisition of the LLC Shares or payment of interest on
indebtedness owed to the LLC) shall either be (i) evidenced by a demand note
from the LLC payable to the transferor of such funds or (ii) applied to repay
indebtedness owed by such transferor to the LLC.
5.4. Other Transactions. The provisions of Sections 5.2 and 5.3 shall not
apply to the payment of funds in respect of (i) the acquisition or disposition
of rights, property and interests by or to the LLC, on the one hand, and by or
to Parent and its Subsidiaries, on the other hand, (ii) the rights, property and
interests referred to in clause (i) of this Section 5.4, (iii) the Beneficial
Assets (which shall be contributed to the LLC in accordance with Section
1.11(b)) or the Excluded Sub (which shall be contributed to the LLC in
accordance with Section 1.3), or (iv) the issuance of Parent Common Shares in
which case additional LLC Shares shall be issued to Parent at the Issue Price.
Parent shall cause any transactions between the LLC, on the one hand, and the
Regulated Subsidiaries, on the other hand, to be on terms, in the aggregate,
which are
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no less favorable to the LLC than the terms which the LLC would have received in
a transaction with an unaffiliated third party.
5.5. Interest. The outstanding demand notes referred to in Sections 5.2
and 5.3 shall bear interest at the Interest Rate from time to time and interest
shall be payable monthly in arrears.
ARTICLE 6.
INVESTOR EXCHANGE OPTIONS; DISTRIBUTIONS;
STOCK DIVIDENDS, SPLITS, ETC.
6.1. Exchange Options. (a) Subject to the following provisions and, in
the case of Holder, to Section 1.9, Parent hereby grants, effective as of the
Closing, (i) to Investor and Holder the right (the "Exchange Options"),
exercisable from time to time by written notice given to Parent with the number
of Exchange Options to be exercised, to cause the exchange of each outstanding
LLC Share held by Investor Sub, each Investor Newco or Holder or each Holder
Newco, as the case may be, for one Parent Common Share (it being agreed and
understood that as of the Closing Date the Parent Common Shares underlying such
Exchange Options for Investor shall consist of 40 million shares of Parent Class
B Stock (less any shares of Parent Class B Stock issued to Investor pursuant to
Section 1.5(b) and not including any shares of Parent Class B Stock issued to
Investor that are subsequently converted by Investor into shares of Parent
Common Stock in order to acquire additional shares of Parent Common Stock
pursuant to Sections 1.01(b) and (c) of the Governance Agreement or to otherwise
acquire Parent Common Shares permitted to be acquired pursuant to the Governance
Agreement or the Stockholders Agreement), and the remainder in shares of Parent
Common Stock and for Holder shall consist solely of shares of Parent Common
Stock) in accordance with the terms of the Exchange Agreement, it being
understood that the applicable Parties shall negotiate in good faith and enter
into an Exchange Agreement (the "Exchange Agreement") on such terms and
conditions customary to such agreements and with a general view to the terms of
the Holder Exchange Agreement. In lieu of exchanging LLC Shares for Parent
Common Shares, Investor may, at its option, either (a) merge Investor Sub and/or
one or more Investor Newcos with and into Parent (or any wholly owned
Subsidiary) pursuant to which each share of Investor Sub's or each such Investor
Newco's common stock will be converted into a number of Parent Common Shares
equal to the quotient of (i) the number of LLC Shares owned by Investor Sub or
such Investor Newco divided by (ii) the number of shares of common stock of
Investor Sub or such Investor Newco issued and outstanding or (b) cause the
exchange by Parent for each outstanding share of common stock of Investor Sub
and/or one or more Investor Newcos of a number of Parent Common Shares equal to
the quotient of (i) the number of LLC Shares owned by Investor Sub or such
Investor Newco divided by (ii) the number of shares of common stock of Investor
Sub or such Investor Newco issued and outstanding. To the extent applicable,
Holder (and each Holder Newco) shall have the same right described in the
immediately preceding sentence. Exchanges pursuant to the exercise of Exchange
Options shall be consummated within five business days of Parent's reasonable
satisfaction that there have been obtained, received or effected (and all
applicable waiting and termination periods, if any, including any extensions
thereof, under any applicable law, statute, regulation or rule shall have
expired or terminated) all authorizations, consents, approvals, licenses,
franchises, permits and certificates by or of, and shall have made all filings
and effected all notifications, registrations and qualifications with, all
federal, state and local governmental and regulatory authorities necessary for
the consummation of the exchange.
(b) (i) Subject to applicable law, each of Investor Sub, the Investor
Newcos and Holder and the Holder Newcos agree to immediately exercise the
Exchange Options in the manner set forth in Section 6.1(a) with respect to all
LLC Shares held by it simultaneously with the consummation of a merger,
consolidation or amalgamation between Parent and another entity (other than an
Affiliate of Parent) in which Parent is acquired by such other entity or a
person who controls such entity, or a sale of all or substantially all of the
assets of Parent to another entity, other than a subsidiary of Parent (a "Sale
Transaction"); provided that if such Sale Transaction can be effected as a
tax-free exchange involving a merger or exchange of shares of Investor Sub, the
Investor Newcos, Holder or Holder Newcos, as the case may be, the Sale
Transaction shall be structured in such manner in lieu of Investor Sub, the
Investor Newcos, Holder or the Holder Newcos, as
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the case may be, exercising the Exchange Options and, in lieu of receiving
Parent Common Shares upon exercise of the Exchange Options, such persons shall
be entitled to receive the type and amount of consideration that such persons
would have received had they exercised the Exchange Options immediately prior to
the Sale Transaction unless such structure would materially adversely affect the
ability of Parent to consummate such Sale Transaction.
(ii) To the extent that Investor Sub, an Investor Newco, Holder or a Holder
Newco is not permitted by law (including FCC Regulations) to take the actions
described in paragraph (b)(i) above, in connection with a Sale Transaction, the
Exchange Options shall be converted into the right to receive for each Parent
Common Share (the "Exchange Options Shares") issuable under the Exchange
Options, the same consideration per share to be received by the holders of
Parent Common Stock in the Sale Transaction.
(c) If a tender offer has been commenced for Parent Common Stock (other
than by Parent or a subsidiary of Parent) and, to the extent permissible under
the terms of the Governance Agreement, either Investor or Holder wishes to
tender their respective LLC Shares or the stock of Investor Sub, the Investor
Newcos or the Holder Newcos, as the case may be, in such tender offer, Investor
or Holder may at its option, either: (i) simultaneously tender its Exchange
Options Shares to the exchange agent in such tender offer and exercise such
Exchange Options in accordance with the provisions of Section 6.1(a) and the
terms of the Exchange Agreement; provided that any such exercise of the Exchange
Options shall be conditioned on, and subject to, the consummation of such tender
offer; provided, further, that in the event that fewer than all tendered
Exchange Options Shares are purchased in the tender offer, the exchange shall
only occur with respect to such Exchange Options Shares that are purchased in
the tender offer and the remaining Exchange Options Shares shall be returned to
Investor or Holder, as the case may be, or (ii) transfer such LLC Shares or the
stock of Investor Sub, the Investor Newcos or the Holder Newcos, as the case may
be, to a person or entity (the "Transferee") which is not considered to be a
foreign owner for purposes of the Communications Act of 1934, as amended, and
the FCC alien ownership rules and who would otherwise be permitted to lawfully
hold the Parent Common Shares underlying the Exchange Option and who agrees to
be bound by the terms of this Agreement and such Transferee shall exercise such
Exchange Option immediately prior to the closing of the tender offer solely for
purposes of participating in such tender offer and pay the proceeds to Investor
or Holder, as the case may be. In the case of clause (ii) above, in the event
that less than all the LLC Shares are purchased in such tender offer or the
tender offer is not consummated, at Parent's election, either (x) Transferee
shall exchange with Parent the portion of the LLC Shares not purchased in the
tender offer for a number of LLC Shares equal to the number of shares not so
purchased and a new exchange option (which shall have the same terms as the
original Exchange Option) for each such LLC Share and Parent shall deliver such
shares and issue such replacement Exchange Options to Transferee and Transferee
shall transfer such LLC Shares and Exchange Option to Investor or Holder, as the
case may be, or (y) permit Investor or Holder, as the case may be, to hold the
portion of the LLC Shares not purchased in the tender offer.
(d) Except as set forth above and subject to Section 6.1(e), the Exchange
Options shall not be transferable by Investor Sub, any Investor Newco, Holder or
any Holder Newco.
(e) Without limiting the foregoing, Parent shall cooperate with Investor
Sub, the Investor Newcos and the Holder Newcos to ensure that, by virtue of
holding LLC Shares, neither Investor nor Holder is disadvantaged in connection
with a Sale Transaction or tender or exchange offer.
6.2. Distributions to LLC Stockholders. Simultaneously with (or in the
case of clause (b)(ii) below, not later than five business days after the
determination of Fair Market Value of the property distributed) the making of
any distributions of cash or property on the shares of Parent Common Stock or
consummation of a tender offer by Parent or any of its Subsidiaries for shares
of Parent Common Stock (a "Self Tender Offer"), the LLC shall make distributions
on the LLC Shares in the following manner:
(a) for each cash dividend paid by Parent on its Parent Common Shares,
LLC shall pay an identical dividend per share on each LLC Share;
(b) for distributions of property (including, without limitation,
stock, options or other securities of Subsidiaries of Parent), other than
cash, on Parent Common Shares, the LLC shall (i) in the case of
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distributions of property other than distributions of stock, options to
purchase stock or other securities in a Regulated Subsidiary, make an
equivalent distribution of property per share on the LLC Shares and (ii) in
the case of distributions of assets, shares, options or other securities of
Regulated Subsidiaries, distribute in cash to the LLC stockholders for each
LLC Share an amount equal to the Fair Market Value per Parent Common Share
of the distribution made on Parent Common Shares or, if the parties agree,
an appropriate adjustment to the exchange ratio; provided that the
distributions on the LLC Shares pursuant to this clause (b) may be made in
the form of a demand note of the LLC. Notwithstanding the previous
sentence, Parent shall use its best efforts to make such distributions in
cash with respect to LLC Shares; and
(c) in connection with a Self Tender Offer, not later than five
business days after receipt of notice from Parent of a proposed Self Tender
Offer, Investor and Holder shall each give irrevocable written notice of
the number (the "Tender Number") of Exchange Options Shares, if it owned
such shares of Parent Common Stock, it would want to have purchased in such
tender offer (which number shall be no greater than the product of the
percentage of the total outstanding LLC Shares owned by Investor, Investor
Sub and the Investor Newcos or Holder and the Holder Newcos, as the case
may be, and the number of shares of Parent Common Stock offered to be
purchased in such Self Tender Offer), and the LLC shall make a distribution
to the Investor or Holder, as the case may be, on the LLC Shares equal (in
the aggregate) to the Tender Number times the average price per share paid
in the Self Tender Offer in redemption of a number of LLC Shares equal to
its respective Tender Number. In connection with a Self Tender Offer for
shares of Parent Common Stock, simultaneously with the consummation of the
tender offer a number of LLC Shares held by Sub or Parent equal to the
number of shares of Parent Common Stock purchased in the tender offer shall
be redeemed at the average price per share paid in the Self Tender Offer.
(d) The adjustments described in this section shall take into account
(i) any related distributions to holders of LLC Shares in connection with a
distribution by the LLC to Parent related to such event, and (ii) changes
in the exchange rate for the LLC Shares, with the intention being that a
holder of LLC Shares shall receive or be entitled to receive what such
holder would have received had it exchanged LLC Shares for Parent Common
Shares immediately prior to such event (including any related distributions
to holders of LLC Shares).
6.3. Tax Treatment. The Parties intend that LLC be treated as a
partnership for United States federal income tax purposes and agree to take no
actions inconsistent with such treatment.
6.4. Anti-dilution. If Parent: (i) pays a dividend or makes a
distribution on Parent Common Shares in Parent Common Shares; (ii) subdivides
its outstanding shares of Parent Common Shares into a greater number of shares;
(iii) combines its outstanding Parent Common Shares into a smaller number of
shares; (iv) makes a distribution on Parent Common Shares in shares of its
capital stock, other than Parent Common Shares, or rights, options or warrants
to purchase or acquire Parent Common Shares; (v) issues by reclassification of
its common stock any shares of its capital stock; or (vi) takes any other action
not described above (other than actions pursuant to which Investor or Holder has
rights pursuant to Sections 1.7, 1.8, 6.1 and/or 6.2) which would cause Investor
Sub, each Investor Newco, Holder or each Holder Newco (based on the Assumptions)
not to have an identical percentage equity ownership interest of Parent
following such action, then the LLC simultaneously shall effect a comparable
transaction on the LLC Shares or an appropriate adjustment to the Exchange
Options, in which case appropriate adjustments will be made, mutatis mutandis,
to Article 1 and Section 6.1 as well as any other provision of this Agreement
requiring appropriate adjustments, so that after such transaction, Investor Sub,
each Investor Newco, Holder and each Holder Newco, will have an identical
percentage beneficial equity ownership interest of Parent and the LLC as it had
before such transaction (based on the Assumptions).
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ARTICLE 7.
TRANSFERABILITY; ISSUANCE TO OTHER PARTIES
7.1. No Transfer of Shares of the LLC. Except in connection with the
exercise of the Exchange Options (including a transfer pursuant to Section
6.1(b) or 6.1(c)), or the hypothecation, pledge or creation of a lien or
security interest in LLC Shares by Parent, except as specifically contemplated
by this Agreement or the Governance Agreement, none of Parent, Sub, Investor,
Investor Sub, any Investor Newco, Holder or any Holder Newco shall directly or
indirectly transfer, pledge or create a lien or security interest in their
respective LLC Shares to any other person or entity and any attempt to make or
create such transfer, pledge, lien or security interest shall be null and void
and of no force and effect.
7.2. Transfer by Investor or Holder. Except as permitted pursuant to
Section 6.1 hereof, Investor shall not sell or otherwise transfer any of its
shares in Investor Sub or any Investor Newco and Holder shall not sell or
otherwise transfer any of its shares in any Holder Newco. Parent shall not sell
or otherwise transfer any of its shares in Sub.
ARTICLE 8.
TAX MATTERS
8.1. Tax Representations. (a) Investor represents and warrants to Parent
and the LLC that all material Returns required to be filed for taxable periods
ending on or prior to the Closing Date by, or with respect to any activities of
the Partnership and the UT Contributed Business have been or will be filed in
accordance with all applicable laws, and all Taxes due have been or will be
paid, except where the failure to so file or so pay would not, in the aggregate,
have a Material Adverse Effect on the Partnership and the UT Contributed
Business considered as a whole.
(b) Parent represents and warrants to Investor, Holder and the LLC that all
material Returns required to be filed for taxable periods ending on or prior to
the Closing Date by Parent and its Subsidiaries have been or will be filed in
accordance with all applicable laws, and all Taxes due have been or will be
paid, except where the failure to so file or so pay would not, in the aggregate,
have a Material Adverse Effect to Parent and its Subsidiaries considered as a
whole.
8.2. Tax Indemnification by Investor. Investor shall be liable for, and
shall hold Parent and the LLC and any successor thereto or Affiliates thereof
harmless from and against the following Taxes:
(a) any and all Taxes with respect to the Partnership or the UT
Contributed Business for any taxable period ending (or deemed pursuant to
Section 8.4 to end) on or before the Closing Date; and
(b) any several liability under Treasury Regulation Section 1.1502-6
or under any comparable or similar provision under state, local or foreign
laws or regulations for periods ending on or prior to the Closing Date.
8.3. Tax Indemnification by Parent. Parent shall be liable for, and shall
hold Investor harmless from and against, the following Taxes with respect to the
Partnership and the UT Contributed Business: (a) any and all Taxes (other than
Taxes attributable to the transactions contemplated by this Agreement or the
ownership of LLC Shares by Investor or Investor Newco) for any taxable period
beginning (or deemed pursuant to Section 8.4 to begin) on or after the Closing
Date, due or payable with respect to the Partnership or the UT Contributed
Business, and (b) any and all Taxes not incurred in the ordinary course of
business attributable to the acts or omissions of Parent after the Closing.
8.4. Allocation of Certain Taxes. (a) The Parties agree that if any
entity transferred to the LLC is permitted but not required under applicable
foreign, state or local Income Tax laws to treat the day before the Closing Date
or the Closing Date as the last day of a taxable period, such day shall be
treated as the last day of a taxable period.
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(b) For purposes hereof, in the case of any Taxes that are imposed on a
periodic basis and are payable for a period that begins before the Closing Date
and ends after the Closing Date, the portion of such Tax that shall be deemed to
be payable for the portion of the period ending on the Closing Date shall (i) in
the case of any Taxes, other than Taxes based upon or related to income or
receipts, be deemed to be the amount of such Taxes for the entire period (or, in
the case of such Taxes determined on an arrears basis, the amount of such Taxes
for the immediately preceding period), whether actually paid before, during, or
after such period, multiplied by a fraction the numerator of which is the number
of calendar days in the period ending on (and including) the Closing Date and
the denominator of which is the number of calendar days in the entire period,
and (ii) in the case of any Taxes based upon or related to income or receipts
(including but not limited to withholding Taxes), be deemed equal to the amount
which would be payable if the taxable year ended on the close of business on the
Closing Date. Any credits for such a period shall be prorated, based upon the
fraction employed in clause (i) of the preceding sentence. Such clause (i) shall
be applied with respect to Taxes for such period relating to capital (including
net worth or long-term debt) or intangibles by reference to the level of such
items on the Closing Date. In the event that Investor or any of its Affiliates
has prepaid any Taxes referred to herein to the extent that such Taxes exceed
Investor's share of such Taxes under this Section 8.4, Parent shall pay Investor
the amount of such excess within thirty (30) days of the Closing Date upon
receipt from Investor at the Closing of a statement detailing such prepayments.
Such statement and the calculations contained therein shall be reviewed within
such 30-day period by a nationally recognized accounting firm selected by and
paid for by Parent and the determination of such accounting firm shall be final.
8.5. Filing Responsibility. (a) Investor shall prepare and file or shall
cause to be prepared and filed the following Returns (and no other Returns) with
respect to the Partnership and the UT Contributed Business:
(i) all Tax Returns for any taxable period ending on or before the
Closing Date other than Returns subject to Section 8.4(b); and
(ii) all other Returns required to be filed (taking into account
extensions) prior to the Closing Date.
(b) With respect to any Income Tax Return for taxable periods beginning
before the Closing Date and ending after the Closing Date, Parent shall consult
with Investor concerning such Return and shall report all items with respect to
the period ending on the Closing Date in accordance with the instructions of
Investor, unless otherwise agreed by Investor and Parent. Parent shall provide
Investor a copy of its proposed Return at least 30 days prior to the filing of
such Return, and Investor may provide comments to Parent, which comments shall
be delivered to Parent within 15 days of receiving such copies from Parent.
8.6. Refunds. (a) Investor shall be entitled to any refunds or credits of
Taxes attributable to or arising in taxable periods ending (or deemed pursuant
to Section 8.4 to end) on or before the Closing Date with respect to the
Partnership or the UT Contributed Business.
(b) Parent shall promptly forward to Investor or reimburse Investor for any
refunds or credits due Investor (pursuant to the terms of this Article) after
receipt thereof, and Investor shall promptly forward to Parent or reimburse
Parent for any refunds or credits due Parent (pursuant to the terms of this
Article) after receipt thereof.
8.7. Cooperation and Exchange of Information. (a) As soon as practicable,
but in any event within thirty (30) days after Investor's request, from and
after the Closing Date, Parent shall provide Investor with such cooperation and
shall deliver to Investor such information and data concerning the pre-Closing
operations of the Partnership and the UT Contributed Business and make available
such knowledgeable employees of the Partnership and the UT Contributed Business
as Investor may reasonably request, in order to enable Investor to complete and
file all Returns which it may be required to file with respect to the operations
and business of the Partnership and the UT Contributed Business through the
Closing Date or to respond to audits by any Taxing Authorities with respect to
such operations and to otherwise enable Investor to satisfy its internal
accounting, tax and other legitimate requirements. Such cooperation and
information shall include provision of powers of attorney for the purpose of
signing Returns and defending audits and promptly forwarding copies of
appropriate notices and forms or other communications received from or sent to
any
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Taxing Authority which relate to the Partnership and the UT Contributed
Business, and providing copies of all relevant Returns, together with
accompanying schedules and related workpapers, documents relating to rulings or
other determinations by any Taxing Authority and records concerning the
ownership and tax basis of property, which Parent or its Affiliates may possess.
Parent shall make its employees and facilities available on a mutually
convenient basis to provide explanation of any documents or information provided
hereunder.
(b) For a period of seven (7) years after the Closing Date or such longer
period as may be required by law, Parent shall, and shall cause its Affiliates
to, retain, and neither destroy nor dispose of, all Returns, books and records
(including computer files) of, or with respect to the activities of, the
Partnership and the UT Contributed Business for all taxable periods ending on or
prior to the Closing Date. Thereafter, Parent shall not destroy or dispose of
any such Returns, books or records unless it first offers such Returns, books
and records to Investor in writing at Investor's expense and Investor fails to
accept such offer within sixty (60) days of its being made.
(c) Parent and Investor and their respective Affiliates shall cooperate in
the preparation of all Returns relating in whole or in part to taxable periods
ending on or before or including the Closing Date that are required to be filed
after such date. Such cooperation shall include, but not be limited to,
furnishing prior years' Returns or return preparation packages illustrating
previous reporting practices or containing historical information relevant to
the preparation of such Returns, and furnishing such other information within
such party's possession requested by the party filing such Returns as is
relevant to their preparation. In the case of any state, local or foreign joint,
consolidated, combined, unitary or group relief system Returns, such cooperation
shall also relate to any other taxable periods in which one party could
reasonably require the assistance of the other party in obtaining any necessary
information.
(d) Investor shall have the right, at its own expense, to control any audit
or examination by any Taxing Authority ("Tax Audit"), initiate any claim for
refund, contest, resolve and defend against any assessment, notice of
deficiency, or other adjustment or proposed adjustment relating to any and all
Taxes for any taxable period ending on or before the Closing Date with respect
to the Partnership or the UT Contributed Business. Parent shall have the right,
at its own expense, to control any other Tax Audit, initiate any other claim for
refund, and contest, resolve and defend against any other assessment, notice of
deficiency, or other adjustment or proposed adjustment relating to all other
Taxes with respect to the Partnership or the UT Contributed Business. Investor
shall furnish Parent and its Affiliates with its cooperation in a manner
comparable to that described in paragraph (a) of this Section to effect the
purposes of this Section.
8.8. Section 754 Election. Investor shall cause an appropriate Investor
Newco to make an election for the taxable year of the Partnership that includes
the Closing Date under Section 754 of the Internal Revenue Code of 1986, as
amended, and shall not revoke or cause or permit any Investor Newco to revoke
such election.
8.9. Certificate of Non-Foreign Status. The Investor Sub that sells the
Acquired Partnership Interest to the LLC under Section 1.5(b) shall deliver to
the LLC at or prior to the Closing, a certificate of non-foreign status meeting
the requirements of Treasury Regulation Section 1.1445-2(b)(2).
8.10. Definitions. For purposes of this Article, the following terms
shall have the meanings ascribed to them below:
(a) "Income Taxes" means all taxes based upon or measured by income.
(b) "Returns" means returns, reports and forms required to be filed
with any domestic or foreign taxing authority.
(c) "Taxes" means (i) all taxes (whether federal, state, local or
foreign) based upon or measured by income and any other tax whatsoever,
including gross receipts, profits, sales, use, occupation, value added, ad
valorem, transfer, franchise, withholding, payroll, employment, excise, or
property taxes, together with any interest or penalties imposed with
respect thereto and (ii) any obligations under any agreements or
arrangements with respect to any Taxes described in clause (i) above.
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(d) "Taxing Authority" means any government authority having
jurisdiction over the assessment, determination, collection, or other
imposition of Tax.
ARTICLE 9.
ADDITIONAL COVENANTS
9.1. Annual or Special Meeting. (a) As soon as practicable following the
execution of this Agreement, Parent shall prepare and file with the Securities
and Exchange Commission (the "Commission") preliminary proxy materials, in form
and substance reasonably satisfactory to Investor, with respect to the matters
described below. Parent agrees to use its reasonable best efforts, after
consultation with the other Parties hereto, to respond promptly to any comments
of the Commission and to cause the proxy materials approved by the Commission to
be mailed to its stockholders at the earliest practicable time. Parent shall
notify Investor promptly of the receipt of any comments from the Commission or
its staff and of any request by the Commission or its staff for any amendments
or supplements to the proxy materials. The proxy materials shall comply in all
material respects with all applicable requirements of law. Whenever any event
occurs which is required to be set forth in an amendment or supplement to the
proxy statement, Parent shall promptly inform Investor and Holder of such
occurrence and cooperate in filing with the Commission or its staff and/or the
mailing to stockholders of Parent, such amendment or supplement. Such proxy
materials shall include the recommendation of the Transactions of the Board of
Directors of Parent.
(b) Parent shall take all steps necessary in accordance with its
certificate of incorporation and by-laws to call, give notice of, convene and
hold a meeting of its stockholders as soon as practicable after the filing of
definitive proxy materials relating to such meeting, for the purpose of (a)
approving and adopting an amendment to the certificate of incorporation of
Parent (the "Certificate Amendment") reasonably acceptable to Investor to (i)
increase the number of authorized Parent Common Shares necessary to effect the
transactions contemplated hereby, and (ii) avoid the loss or non-renewal of a
broadcast or similar license as a result of shareholder alien ownership in
violation of FCC Regulations or applicable law and (b) authorizing the issuance
of Parent Common Shares in accordance with this Agreement under the Bylaws of
the NASD.
9.2. HSR Filings. Following the date hereof, Investor and Parent shall
file promptly any forms required under applicable law and take any other action
reasonably necessary in connection with obtaining the expiration or termination
of the waiting periods under the HSR Act applicable to the Transactions.
9.3. Related Agreements. Prior to the Closing, the Parties shall in good
faith negotiate, to the extent not already provided for in the attached
definitive agreements and otherwise consistent with the terms therein and in the
stockholders agreement among Investor, Holder and Mr. Diller, dated as of the
date hereof, any additional terms with respect to the Governance Agreement, the
LLC Operating Agreement, the Ancillary Business Agreements, the Stockholders
Agreement and the Exchange Agreement; provided, that the agreements attached
hereto and the stockholders agreement referred to in this sentence shall
otherwise be binding and definitive.
9.4. Other Businesses. (a) Neither anything contained in this Agreement,
nor the ownership of Parent Common Shares, LLC Shares or Exchange Options
Shares, shall (i) restrict Investor or Holder or any of their respective
Affiliates from engaging in or owning an interest in any business which competes
with Parent, any Subsidiaries of Parent, or the LLC, or (ii) restrict Parent,
any Subsidiaries of Parent, or the LLC from engaging in or owning an interest in
any business which competes with Investor or Holder or any of their respective
Affiliates.
(b) Following the date hereof, Parent, LLC and Investor shall negotiate in
good faith the terms of a transition services agreement to the extent not set
forth in Exhibit C.5. (the "Transition Services Agreement") between LLC and
Investor or one of its Affiliates to be executed and delivered on the Closing
Date pursuant to which Investor or such Affiliate will agree to provide LLC with
services currently performed by Investor or its Affiliates and as requested by
Parent on behalf of the Partnership or the UT Contributed Business following the
Closing Date (i) until the 6 month anniversary of the Closing Date, on the basis
of fully allocated cost to Investor or such Affiliate of such services and (ii)
following the 6 month anniversary of the Closing Date, such
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cost plus 5%, and subject to such termination provisions, all as may be agreed
upon by Parent, LLC and Investor. In the event that the parties cannot agree on
the terms of the Transition Services Agreement prior to the Closing, the Closing
shall not be delayed, the term sheet attached hereto shall be definitive and the
parties shall in their good faith promptly reach agreement with respect to such
matters (and in the interim such term sheet shall govern the provision of any
services).
9.5. Information and Access. (a) From the date hereof and continuing
until the Closing, each of Investor, as to itself and its Subsidiaries and
Affiliates, and Parent, as to itself and its Subsidiaries, agrees that it shall
afford and, with respect to clause (b) below, shall cause its independent
auditors to afford, (a) to the officers, independent auditors, counsel and other
representatives of the other reasonable access to its properties, books, records
(including Tax Returns filed and those in preparation) and personnel in order
that the other may have a full opportunity to make such investigation as it
reasonably desires to make of the other, and (b) to the independent auditors of
the other, reasonable access to the audit work papers and other records of its
independent auditors. No investigation pursuant to this Section 9.5 shall affect
or otherwise obviate or diminish any representations and warranties of any party
or conditions to the obligations of any party. Except as required by law or
stock exchange or NASD regulation, any information furnished pursuant to this
Section 9.5 (including any information furnished to the other prior to the date
hereof) shall be held in confidence (except for such information as has
otherwise been made public (other than by reason of a violation of this Section
9.5)).
(b) From and after the Closing, each of LLC and Investor, as to itself and
its Subsidiaries and Affiliates, agrees that it shall afford to the officers,
independent auditors, counsel and other representatives of the other reasonable
access to its books, records and personnel for reasonable business purposes, for
example in order that the party requesting access can prepare tax and other
filings with respect to any periods prior to Closing, or respond to, negotiate,
settle or litigate any claims related to the UT Contributed Business or the
Partnership for which the requesting party has any liability hereunder.
9.6. Reservation. Parent hereby covenants to Investor and Holder that it
shall reserve and keep available out of its authorized but unissued Parent
Common Shares (including any Parent Common Shares held by Parent in its
corporate treasury), such number of its duly authorized Parent Common Shares as
shall be sufficient to issue upon the exercise of all of the Exchange Options,
if any, held by each such party. All Parent Common Shares to be issued pursuant
to this Agreement shall, upon issuance, be duly qualified for quotation for
trading on NASDAQ.
9.7. Further Action. (a) Each of the parties hereto shall use all
reasonable efforts to take, or cause to be taken, all appropriate action, do or
cause to be done all things necessary, proper or advisable under applicable law,
and execute and deliver such documents and other papers, as may be required to
carry out the provisions of this Agreement and consummate and make effective the
transactions contemplated by this Agreement.
(b) In the event that at any time or from time to time (whether prior to or
after the Closing), any Party (or its Affiliates), shall receive or otherwise
possess any asset that is intended to be Contributed, assigned or otherwise
transferred at the Closing to another Party hereto, such Party shall promptly
use all reasonable efforts (but, with respect to matters covered by Section
9.17, such efforts shall not include the expenditure of funds other than for
incidental expenses) to transfer, or cause to be transferred, such asset to the
Party so entitled thereto. Prior to any such transfer, the Party (or its
Affiliates) possessing such asset shall hold such asset (and all earnings
generated by such asset from and after the Closing) in trust for any such other
Party.
9.8. [Intentionally omitted]
9.9. Employees. (a) Except as otherwise agreed to by Parent and Investor,
the active participation of Business Employees in Benefit Arrangements that are
not Partnership Plans shall cease as of the Closing Date, and no additional
benefits shall accrue thereunder for such Business Employees.
(b) From the date hereof to the Closing, except in the ordinary course of
business consistent with past practice or as required by law or other
contractual obligations existing on the date hereof, or as set forth in Schedule
9.9(b), neither the UT Contributed Business nor the Partnership shall (i)
increase the base
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compensation of or enter into any new bonus or incentive arrangement with any of
the Business Employees, (ii) pay or agree to pay any pension, retirement
allowance or similar employee benefit to any Business Employee or former
employees of the Partnership, (iii) enter into any new employment, severance,
consulting, or other compensation agreement with any Business Employee or (iv)
commit itself to any additional employee benefit or compensation arrangement
with respect to Business Employees or former employees of the Partnership.
(c) Following the Closing Date, the LLC shall use its reasonable best
efforts to develop or maintain employee benefit plans which, among other things,
treat similarly situated employees of the Contributed Businesses, the
Partnership and the UT Contributed Business on a substantially equivalent basis,
taking into account all relevant factors, including, without limitation, duties,
geographic location, tenure, qualifications and abilities. In view of the
changed nature of the benefit programs which may be applicable to certain of
such employees after the Closing Date, the LLC shall use its reasonable best
efforts to develop equitable transition rules relating to the benefits to be
provided to one or more groups of such employees.
(d) The parties hereto intend that there shall be continuity of employment
with respect to all of the Business Employees and Parent Employees. LLC shall
offer employment, commencing on the Closing Date, to all Business Employees
(other than employees of the Partnership) and Parent Employees, including any
active employee as of the Closing Date who is hired by Investor and its
Affiliates or Parent and its Affiliates after the date of this Agreement, and
excluding any Business Employee or Parent Employee who is terminated for any
reason from employment with Investor and its Affiliates or Parent and its
Affiliates prior to the Closing Date (any such employee who accepts such offer
is hereinafter referred to as a "Continued Employee"), on substantially the same
terms (including salary, job responsibility and location) as those provided to
such employees immediately prior to the Closing Date.
(e) LLC will (i) waive all limitations as to preexisting conditions,
exclusions and waiting periods with respect to participation and coverage
requirements applicable to Continued Employees under any welfare plan that such
employees may be eligible to participate in after the Closing Date, to the
extent that such conditions would have been waived under the corresponding
welfare plan in which any such employee participated in immediately prior to the
Closing Date, (ii) provide each Continued Employee with credit for any
co-payments and deductibles paid prior to the Closing Date, for the calendar
year in which the Closing Date occurs, in satisfying any applicable deductible
or out-of-pocket requirements under any welfare plans that such employees are
eligible to participate in after the Closing Date, and (iii) provide each
Continued Employee with credit for all service for purposes of eligibility,
vesting and the calculation of severance benefits (but not for benefit accruals
under any other benefit plan) with the Investor and its affiliates or Parent and
its Subsidiaries, as applicable, under each employee benefit plan, program, or
arrangement of the LLC or its affiliates in which such employees are eligible to
participate in after the Closing Date; provided, however, that in no event shall
the employees be entitled to any credit to the extent that it would result in a
duplication of benefits with respect to the same period of service.
(f) Parent and Investor agree to cooperate reasonably and in good faith to
lower any costs that may be borne by Parent, Investor or the LLC as a result of
the contemplated Transactions (e.g., severance costs, and multiemployer
withdrawal liability to the extent agreed by Parent and Investor in good faith)
and to cooperate on other transition matters relating to the Continued Employees
and their benefits; provided, however, that nothing in this provision shall
require the LLC to continue to contribute to any benefit plans or arrangements
that existed prior to the Closing Date.
(g) Notwithstanding anything contained herein to the contrary, from and
after the Closing Date, Investor and its Affiliates shall jointly and severally
indemnify and hold harmless Parent, Parent's Affiliates and the LLC and its
Affiliates (other than Investor and its Affiliates) from any joint and several
"Controlled Group Liability" of Investor or its Affiliates. For this purpose,
"Controlled Group Liability" shall mean any and all claims, losses, expenses,
costs or obligations arising out of or relating to (i) Title IV of ERISA; (ii)
Section 302 of ERISA; (iii) Sections 412 and 4971 of the Code; and (iv) the
continuation coverage requirements of Section 601 et seq. of ERISA and Section
4980B of the Code, with respect to any plan or program of Investor or its
Affiliates which is not a Benefit Arrangement and which becomes a liability of
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Parent, Parent's Affiliates or the LLC solely as a result of the purchase of the
UT Contributed Business pursuant to the Transaction.
9.10. Investor Give-Back Provision. (a) Within 15 business days after the
preparation of the Statement or, if the accuracy of the Statement is contested
by Investor, within 15 business days after any differences have been resolved in
the manner set forth below, Investor shall pay to the LLC, in the manner
described below, an amount, if positive, equal to (i) $150 million minus (ii)
U-TV's EBITDA for the Determination Period; provided, however, that in no event
shall Investor be required to pay more than $75 million pursuant to this
Section. Any payment required to be made pursuant to this Section shall be made
by wire transfer of same day funds to an account or accounts specified in
writing by the LLC to Investor at least two business days prior to the date of
any such payment.
(b) For purposes of this Agreement, "U-TV's EBITDA" shall mean the sum of
(a) the net income of the Current Programs (but excluding Current Programs that
are half-hour situation comedies) and made for television movies included in the
UT Contributed Business (including future made for television movies) (the "U-TV
Assets"), as determined in accordance with generally accepted accounting
principles as applied in the United States as of the date hereof and consistent
with accounting policies and procedures applied historically by Investor, plus
the sum of depreciation, amortization (excluding television production and
distribution amortization) income tax expense and interest expense related to
the U-TV Assets and (b) to the extent not included in the previous clause,
distribution fees received by the LLC pursuant to the Distribution Agreements.
In calculating U-TV's EBITDA, U-TV's EBITDA shall not be reduced by more than
$17 million of marketing costs (which are a "below the contribution line" cost),
$13 million of development costs and $30 million of selling, general and
administrative costs; provided that U-TV's EBITDA shall not be reduced by any
allocated corporate overhead expenses (although selling, general and
administrative costs shall include expenses paid by the corporate office on
behalf of U-TV). For purposes of calculating U-TV's EBITDA, sales by the LLC to
USA Networks, Inc. shall not be eliminated and shall be determined pursuant to
the agreements in effect on the date hereof. U-TV's EBITDA shall be prepared on
a U-TV historical basis excluding the effects of purchase accounting and any
severance costs in connection with the Transactions and shall otherwise be
determined based on the practices and principles used by Investor in the
consolidated audited financial statements as at and for the year ended June 30,
1997. Neither Parent nor the LLC shall (i) amend any Contract existing on the
date of this Agreement relating to the U-TV Assets to cause any revenue that
would otherwise be recognized in the Determination Period to be recognized after
the end of the Determination Period or (ii) prepay, accelerate or incur any
expense that would ordinarily be paid, due or incurred after the end of the
Determination Period to be paid, incurred or accrued during the Determination
Period; provided that in the event that any such Contract were so amended, or
expense so accelerated, for purposes of this Section, U-TV's EBITDA shall
include such revenue as if recognized in such period and shall exclude such
expense or prepayment.
(c) U-TV's EBITDA for the three year periods ending on December 31, 1998,
December 31, 1999 and December 31, 2000 (such three year period, the
"Determination Period") shall be determined annually by Parent and shall be set
forth in a Statement of U-TV's EBITDA (the "Statement"). Each Statement shall be
accompanied by a certificate prepared by Ernst & Young LLP, or another
nationally recognized independent public accountant chosen by Parent, to the
effect that such Statement was prepared in accordance with this Agreement. A
copy of each such Statement and the certificate shall be delivered to Investor
no later than 120 days after the end of such period. Investor shall have the
option, at its expense, to have each Statement reviewed by a different major
independent certified public accounting firm of its choice within 60 calendar
days after receipt thereof. If any material differences exist between such
accounting firms in the determination of the Statement, the items in dispute
shall be submitted to a mutually acceptable third major firm of independent
certified public accountants for its determination, which shall be binding on
Investor and the LLC. The fees of such third accounting firm shall be shared
equally by Investor and the LLC.
9.11. Disclosure Schedules. The parties acknowledge that for business
reasons, none of the parties has been able to deliver to the other party the
final schedules referred to in Articles 1, 2 and 3 of this Agreement. On or
before November 10, 1997, Investor shall deliver to Parent and Parent shall
deliver to Investor such final schedules or any additional schedules that either
party determines shall be necessary or appropriate. Each
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of Parent and Investor shall have five business days to review such final
schedules and to notify the other party in writing of any objections to the
items listed in such schedules. If either Parent or Investor fails to so notify
Investor or Parent of any objections within such five-business-day period, then
such final schedules shall be deemed to have been accepted by Parent and
Investor. After the delivery by Parent or Investor of notice of objection to the
other party, Parent and Investor shall have five days to consult with each other
with respect to any such objections and, during such period, shall negotiate in
good faith to resolve any disagreements with respect to any such objections.
Upon expiration of such five-day period, either objecting party may terminate
this Agreement on five business days' written notice if the Board of Directors
of such objecting party determines in its reasonable good faith judgment that
the net adverse effect of the total mix of the additional information which was
not otherwise known to it prior to the date of this Agreement, individually or
in the aggregate, would materially decrease the economic benefit of the
Transactions to such party (after giving effect to any increases in value that
are attributable to positive aspects of any additional information made known to
such party after the date of this Agreement).
9.12. Financing. Parent shall use its best efforts to cause financing
necessary to consummate the transactions contemplated hereby to be obtained.
9.13. Representations and Warranties. From the date hereof until the
Closing Date, no Party will take any action that would cause a breach of the
representation and warranty of such Party as set forth in Articles 2 or 3, as
the case may be, under the heading "Conduct of Business." In addition, from the
date hereof through the Closing Date, Parent shall not take any action that
would constitute a Fundamental Change pursuant to the Governance Agreement.
9.14. Spinoff of Regulated Subsidiaries. Upon the occurrence of the CEO
Termination Date (as defined in the Governance Agreement) or BD becoming
Disabled (as defined in the Governance Agreement) and as long as Investor has
the right to appoint at least two directors of Parent pursuant to the Governance
Agreement (or would, after such time that Mr. Diller has exercised the Diller
Put, as defined in the Stockholders Agreement, beneficially own at least such
amount of Parent Common Shares including shares subject to the Diller Put), at
the request of Investor, Parent shall, subject to applicable law (including FCC
regulations) and subject to the agreement, dated as of October 19, 1997, among
Holder, Investor and Parent, distribute the Regulated Subsidiaries
(collectively, the "Spinoff Company") in a distribution to the stockholders of
Parent (the "Spinoff"). Upon receipt of such notice, Parent shall effect the
Spinoff as promptly as practicable on terms and conditions that are reasonably
satisfactory to Investor. Prior to effecting the Spinoff, Parent shall enter
into ten-year affiliation agreements with the Spinoff Company that will provide
that the Spinoff Company shall broadcast programming produced by Parent on
customary terms and conditions, including arm's-length payment obligations. The
foregoing provisions shall not be deemed to amend the Holder Exchange Agreement
or waive any rights or obligations of Holder under the Holder Exchange
Agreement.
9.15. Partnership Interest Purchase Agreement. Investor shall perform its
obligations in all material respects under the terms of the Partnership Interest
Purchase Agreement.
9.16. USA Network Cash. Notwithstanding any other provision of this
Agreement, following the date hereof, Investor and its Affiliates shall only
sweep cash and shall manage payables and receivables relating to the business of
the Partnership in the ordinary course of business and consistent with past
practices. At the Closing, Investor shall cause to remain in the Partnership as
of the Closing Date $5 million. If, at the end of the 30-day period following
the Closing (the "Post Closing Period"), the cash flow of the Partnership during
the Post Closing Period (adding back cash expenditures for furniture, fixtures
and equipment and extraordinary items) is (a) less than zero, then Investor
shall contribute to the LLC an additional $5 million, (b) between zero and $5
million, then Investor shall contribute an amount equal to $5 million minus the
cash flow or (c) more than $5 million, then Investor shall have no further
obligation to contribute additional cash to the LLC. During the Post Closing
Period, Parent will operate the Partnership in a manner consistent with past
practice for matters relating to cash and shall not intentionally take or fail
to take any action for purposes of
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affecting the foregoing calculation. In determining the cash flow during the
Post Closing Period, as well as the $5 million to remain in the Partnership as
of the Closing, the following rules shall also govern:
(i) payments (net of attorneys' fees, accountants' fees and other
related costs, if any) received prior to the Closing by the Partnership
relating to that certain settlement of carriage fees between the
Partnership and Comcast Corporation ("Comcast Payments") shall be divided
equally between the Investor and the Partnership, with the Partnership
portion remaining in the Partnership at the Closing but not included for
purposes of the initial $5 million;
(ii) Comcast Payments received after the Closing shall be for the
benefit of the Partnership only and shall not be included in measuring the
cash flow during the Post Closing Period; and
(iii) payments by the Partnership to the former owners of the Sci-Fi
Channel in respect of deferred purchase price pursuant to agreements in
place prior to the date hereof shall (A) be included (to the extent of 50%
of such payments) in determining the initial $5 million and (B) shall not
be deducted in measuring the cash flow during the Post Closing Period.
9.17. Consents. Promptly following the date hereof, Investor shall make
diligent efforts to identify those Material Contracts, assets and other rights
that are included in the UT Contributed Business or the Partnership and the
transfer of which to the LLC pursuant to this Agreement may in the reasonable
judgment of Investor require the consent, approval, waiver or other action by a
third party or otherwise would have been required to have been included as an
exception to Section 2.3(a) ("Consents"). Parent in consultation with Investor
shall thereafter identify those Consents which Parent elects to attempt to
obtain prior to the Closing Date. Investor shall use all reasonable best efforts
to obtain (but shall not be obligated to expend any funds in connection
therewith other than incidental expenses) such Consents.
9.18. Viacom Non-Competition Covenant. Investor shall take all reasonable
efforts to enforce Article 7 ("Article 7") of the Partnership Interest Purchase
Agreement for the benefit of the LLC, including, without limitation, promptly
providing to Viacom Inc., at the written request of Parent or the LLC, a notice
of violation in accordance with Section 7.1(f) thereof, and shall not amend,
reduce, modify or waive any rights of Investor under Article 7 without the prior
written consent of Parent. Investor shall promptly advise Parent of any
knowledge it may have of breaches of Article 7 and shall consult closely with
Parent regarding any actions to be taken in connection therewith. Investor and
Parent shall enter into appropriate agreements regarding the conduct of any
disputes relating to Article 7, including with respect to reimbursement of
expenses and management of the dispute, all of which shall be consistent with
the terms of Article 7 and Investor's rights thereunder. In the event that
Investor merges, consolidates or otherwise effects a transaction with a third
party that results in such party succeeding to Investor's rights under Article
7, Investor shall obtain the written agreement of such party that it will comply
with Investor's obligations under this Section.
9.19. Ownership of Licenses. Parent agrees that, so long as FCC
Regulations or other applicable law prohibits or limits the foreign ownership of
entities that directly hold broadcast licenses (in a manner that differs from
such prohibitions or limitations if held indirectly), it will not directly hold
such licenses and shall do so through subsidiaries or other controlled
affiliates.
ARTICLE 10.
CONDITIONS
10.1. Conditions to Investor's Obligations. The obligations hereunder of
Investor to consummate the Transactions, are subject to the satisfaction, at or
before the Closing, of each of the following conditions. These conditions are
for the sole benefit of Investor and may be waived by Investor (in whole or in
part) at any time in its sole discretion.
(a) Subject to the final disclosure schedules delivered pursuant to
Section 9.11, the representations and warranties of Parent contained in
Article 3 which are not qualified as to materiality shall be true and
correct in all material respects and the representations and warranties
contained in Article 3 which are qualified as to materiality shall be true
and correct, in each case, as of the date when made and as of the
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Closing Date, as though made on such date (except that representations and
warranties made as of a specific date need be true and correct only as of
such date), and Investor shall have received a certificate attesting
thereto signed by a duly authorized officer or agent of Parent.
(b) Each of Parent, Sub and LLC shall have performed, satisfied and
complied with, in all material respects, all covenants, agreements, and
conditions required by this Agreement to be performed, satisfied or
complied with by it on or prior to the Closing Date, and Investor shall
have received a certificate attesting thereto signed by a duly authorized
officer or agent of Parent, Sub and LLC.
(c) The waiting periods under the HSR Act applicable to the
Transactions shall have expired or have been terminated.
(d) No temporary, preliminary or permanent injunction or any order by
any federal or state court of competent jurisdiction shall have been issued
which prohibits or otherwise seeks to prohibit, restrain, enjoin or delay
the consummation of any of the transactions contemplated by this Agreement.
(e) Parent stockholders shall have approved the transactions
contemplated hereunder by the Requisite Stockholder Vote and the
Certificate Amendment shall have been duly filed and become effective.
(f) There shall be no action, suit, investigation or proceeding
pending with, or to the knowledge of Investor, threatened by, any public or
governmental authority, against or affecting Parent or Investor or their
respective properties or rights, before any court, arbitrator or
administrative or governmental body which (a) seeks to restrain, enjoin or
prevent the consummation of the transactions contemplated by this
Agreement, or (b) challenges the validity or legality of any transactions
contemplated by this Agreement or seeks to recover damages or to obtain
other relief in connection with any such transactions.
(g) BD shall not have ceased serving Parent as its Chief Executive
Officer.
(h) Parent shall have duly obtained, received or effected (and all
applicable waiting and termination periods, if any, including any
extensions thereof, under any applicable law, statute, regulation or rule
shall have expired or terminated) all authorizations, consents, approvals,
licenses, franchises, permits and certificates by or of, and shall have
made all filings and effected all notifications, registrations and
qualifications with, all federal, state and local governmental and
regulatory authorities necessary for the consummation of the transactions
contemplated hereby.
(i) All corporate and other proceedings to be taken by Parent and Sub
in connection with the transactions contemplated by this Agreement and all
documents reflecting or evidencing such proceedings shall be reasonably
satisfactory in scope, form and substance to Investor and its legal
counsel, and Investor and its legal counsel shall have received all such
duly executed counterpart originals or certified or other copies of such
documents and instruments as they may reasonably request.
(j) Investor Sub shall have acquired the Acquired Partnership Interest
in accordance with the terms of the Partnership Interest Purchase
Agreement.
10.2. Conditions to Parent's Obligations. The obligations of Parent and
Sub hereunder to consummate the Transactions are subject to the satisfaction, at
or before the Closing, of each of the following conditions. These conditions are
for the sole benefit of Parent and Subsidiary and may be waived (in whole or in
part) at any time in their sole discretion.
(a) Subject to the final disclosure schedules delivered pursuant to
Section 9.11, the representations and warranties of Investor and the
Investor Newcos contained in Article 2 hereof shall be true and correct in
all material respects and the representations and warranties contained in
Article 2 which are qualified as to materiality shall be true and correct,
in each case, as of the date when made and as of the Closing Date, as
though made on such date (except that representations and warranties made
as of a specific date need be true and correct only as of such date), and
Parent shall have received a certificate attesting thereto signed by
Investor.
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(b) Each of Investor and each Investor Newco shall have performed,
satisfied and complied with, in all material respects, all covenants,
agreements and conditions required by this Agreement to be performed,
satisfied or complied with on or prior to the Closing Date, and Parent
shall have received a certificate attesting thereto signed by Investor and
Investor Newco.
(c) There shall be no action, suit, investigation or proceeding
pending with, or to the knowledge of Parent, threatened by, any public or
governmental authority, against or affecting the UT Contributed Business or
the Partnership or their respective properties or rights, before any court,
arbitrator or administrative or governmental body which (a) seeks to
restrain, enjoin or prevent the consummation of the transactions
contemplated by this Agreement, or (b) challenges the validity or legality
of any transactions contemplated by this Agreement or seeks to recover
damages or to obtain other relief in connection with any such transactions.
(d) No temporary, preliminary or permanent injunction or any order by
any federal or state court of competent jurisdiction shall have been issued
which prohibits or otherwise seeks to prohibit, restrain, enjoin or delay
the consummation of any of the transactions contemplated by this Agreement.
(e) Investor and its Subsidiaries and the Partnership, as applicable,
shall have duly obtained, received or effected (and all applicable waiting
and termination periods, if any, including any extensions thereof, under
any applicable law, statute, regulation or rule, shall have expired or
terminated) all authorizations, consents, approvals, licenses, franchises,
permits and certificates by or of, and shall have made all filings and
effected all notifications, registrations and qualifications with, all
federal, state and local governmental and regulatory authorities necessary
for the consummation of the transactions.
(f) The waiting periods under the HSR Act applicable to the
Transactions shall have expired or have been terminated.
(g) Parent's stockholders shall have approved the transactions
contemplated hereunder by the Requisite Stockholder Vote and the
Certificate Amendment shall have been duly filed and become effective.
(h) All corporate and other proceedings to be taken by Investor and
the Investor Newcos in connection with the transactions contemplated by
this Agreement and all documents reflecting or evidencing such proceedings
shall be reasonably satisfactory in scope, form and substance to Parent and
its legal counsel, and Parent and its legal counsel shall have received all
such duly executed counterpart originals or certified or other copies of
such documents and instruments as they may reasonably request.
(i) Debt or equity financing shall have been obtained, on terms
reasonably acceptable to Parent, sufficient to pay the Cash Amount.
10.3. Conditions to Holder's Obligations and Option. Subject to the
provisions of Section 1.5(f)(i)(A) (which specifies the only conditions
applicable to a purchase by Holder of LLC Shares for cash), Holder's obligation
to contribute assets at the Holder Closing shall be subject to the satisfaction,
at or before the closing, of appropriate conditions, to be mutually agreed upon
and based on Sections 10.1 (other than Section 10.1(a)) and 10.2.
ARTICLE 11.
SURVIVAL AND INDEMNIFICATION
11.1. Survival. All representations, warranties and covenants and
agreements (other than those described in the penultimate sentence of this
paragraph) of the parties contained in this Agreement, including indemnity or
indemnification agreements contained herein, or in any Schedule hereto, or any
certificate, document or other instrument delivered in connection herewith shall
survive the Closing until March 31, 1999. No Action or proceeding may be brought
with respect to any of the representations and warranties, or any of the
covenants or agreements which survive until March 31, 1999 unless written notice
thereof, setting forth in reasonable detail the claimed misrepresentation or
breach of warranty or breach of covenant or agreement,
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shall have been delivered to the party alleged to have breached such
representation or warranty or such covenant or agreement prior to March 31,
1999. Notwithstanding the foregoing, Investor's indemnification obligations in
respect of any breach of the representations and warranties set forth in Article
8 hereof, or any related Schedule, or other certificate, document or instrument
delivered in connection therewith, shall survive the Closing until the sixth
anniversary of the Closing. Those covenants or agreements that contemplate or
may involve actions to be taken or obligations in effect after the Closing shall
survive in accordance with their terms. Other than as set forth herein,
indemnification pursuant to this Article shall be the exclusive remedy for any
breach of representations and warranties in this Agreement by either party.
11.2. Indemnification by Investor, Holder or Parent. (a) From and after
the Closing Date, Investor and its Subsidiaries shall jointly and severally
indemnify and hold harmless (i) Parent, Parent's Affiliates, each of their
respective directors, officers, employees and agents, and each of the heirs,
executors, successors and assigns of any of the foregoing (collectively, the
"Parent Indemnified Parties") from and against any and all damages, claims,
losses, expenses, costs, obligations, and liabilities including, without
limiting the generality of the foregoing, liabilities for all reasonable
attorneys' fees and expenses (including, but not limited to, attorney and expert
fees and expenses incurred to enforce the terms of this Agreement) net of tax
benefits and any recovery from any third party including, without limitation,
insurance proceeds and taking into account tax costs (collectively, "Loss and
Expenses") suffered, directly or indirectly (other than through any equity
interest in the LLC) by any Parent Indemnified Party, and (ii) the LLC and its
managers, officers, employees and agents, and each of the heirs, executors,
successors and assigns of any of the foregoing (collectively, the "LLC
Indemnified Parties") from and against any and all Loss and Expenses suffered,
directly or indirectly by any LLC Indemnified Party by reason of, or arising out
of, (x) any breach of representation or warranty (without regard to any
materiality standard contained therein) made by Investor or any Investor Newco
pursuant to this Agreement (but excluding a breach of the representation
contained in Section 2.3(b) relating to a Consent), (y) any failure by Investor
or any Investor Newco to perform or fulfill any of its covenants or agreements
set forth in this Agreement (other than Sections 9.10 and 9.16), or (z) any
failure by Investor and its Subsidiaries to comply with the covenant contained
in Section 9.16 or to pay, perform or discharge any liabilities of the UT
Contributed Business other than the Assumed UT Liabilities but only (with
respect to items described in Sections 11.2(a)(x) and 11.2(a)(y)) to the extent
that the aggregate amount of all such Loss and Expenses of all such Parent
Indemnified Parties exceeds $50 million.
(b) From and after the Closing Date, Holder and its Subsidiaries shall
jointly and severally indemnify and hold harmless (i) the Parent Indemnified
Parties from and against any and all Loss and Expenses suffered, directly or
indirectly (other than through any equity interest in the LLC) by any Parent
Indemnified Party, and (ii) the LLC Indemnified Parties from and against any and
all Loss and Expenses suffered, directly or indirectly by any LLC Indemnified
Party, by reason of, or arising out of, (x) any breach of representation or
warranty (without regard to any materiality standard contained therein) made by
Holder pursuant to this Agreement, or (y) any failure by Holder to perform or
fulfill any of its covenants or agreements set forth in this Agreement but only
to the extent that the aggregate amount of all such Loss and Expenses of all
such Parent Indemnified Parties exceeds $50 million.
(c) From and after the Closing Date, Parent and its Subsidiaries shall
jointly and severally indemnify and hold harmless (i) Investor, Investor's
Affiliates, each of their respective directors, officers, employees and agents,
and each of the heirs, executors, successors and assigns of any of the foregoing
(collectively, the "Investor Indemnified Parties"), and (ii) Holder, Holder's
Affiliates, each of their respective directors, officers, employees and agents
and each of the heirs, executors, successors and assigns of any of the
foregoing, (collectively, the "Holder Indemnified Parties") from and against any
and all Loss and Expenses suffered, directly or indirectly by any Investor
Indemnified Parties, and (ii) the Holder Indemnified Parties from and against
any and all Loss and Expenses suffered, directly or indirectly by any Holder
Indemnified Party, by reason of, or arising out of, (x) any breach of
representation or warranty (without regard to any materiality standard contained
therein) made by Parent pursuant to this Agreement, (y) any failure by Parent to
perform or fulfill any of its covenants or agreements set forth in this
Agreement, or (z) any failure by Parent and its Subsidiaries to pay, perform or
discharge any liabilities (I) of the Contributed Businesses other than the
Assumed Liabilities or (II) of the Regulated Subsidiaries, but only (with
respect to items described in
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Sections 11.2(c)(x) and 11.2(c)(y)) to the extent that the aggregate amount of
all such Loss and Expenses of all such Investor Indemnified Parties and Holder
Indemnified Parties exceeds $50 million.
(d) Except with respect to third-party claims being defended in good faith
or claims for indemnification with respect to which there exists a good faith
dispute, the indemnifying party shall satisfy its obligations hereunder within
30 days of receipt of the indemnified party's notice of a claim under this
Article 11.
(e) The provisions of this Section 11.2 shall not affect the obligations
and benefits of the parties set forth in Sections 8.2 and 8.3 of this Agreement.
11.3. Third-Party Claims. If a claim by a third party is made against an
indemnified party (i.e., a Parent Indemnified Party, Investor Indemnified Party,
Holder Indemnified Party or LLC Indemnified Party), and if such indemnified
party intends to seek indemnity with respect thereto under this Article, such
indemnified party shall promptly notify the indemnifying party in writing of
such claims setting forth such claims in reasonable detail. The indemnifying
party shall have twenty (20) days after receipt of such notice to undertake,
through counsel of its own choosing and at its own expense, the settlement or
defense thereof, and the indemnified party shall cooperate with it in connection
therewith; provided, however, that the indemnified party may participate in such
settlement or defense through counsel chosen by such indemnified party, provided
that the fees and expenses of such counsel shall be borne by such indemnified
party unless the indemnified party shall have reasonably determined that
representation by the same counsel would be inappropriate under the applicable
standards of appropriate conduct due to actual or potential differing interests
between them, and in that event, the fees and expenses of such counsel shall be
paid by the indemnifying party. If the indemnifying party assumes such defense,
the indemnified party shall have the right to participate in the defense thereof
and to employ counsel, at its own expense, separate from the counsel employed by
the indemnifying party, it being understood that the indemnifying party shall
control such defense. In the event that the indemnifying party assumes such
defense, the indemnified party shall cooperate with the indemnifying party in
such defense and make available to the indemnifying party, at the indemnifying
party's expense, all pertinent records, materials and information in its
possession or under its control relating thereto as is reasonably required by
the indemnifying party. The indemnified party shall not pay or settle any claim
which the indemnifying party is contesting without the prior written consent of
the indemnifying party, which consent shall not be unreasonably withheld. The
indemnifying party shall not settle any claim unless it contains an
unconditional release of the indemnified party from any and all liability with
respect to such third party claim without the prior written consent of the
indemnifying party, which consent shall not be unreasonably withheld.
Notwithstanding the foregoing, the indemnified party shall have the right to pay
or settle any such claim, provided that in such event it shall waive any right
to indemnity therefor by the indemnifying party. If the indemnifying party does
not notify the indemnified party within twenty (20) days after the receipt of
the indemnified party's notice of a claim of indemnity hereunder that it elects
to undertake the defense thereof, the indemnified party shall have the right to
contest, settle or compromise the claim but shall not thereby waive any right to
indemnity therefor pursuant to this Agreement.
ARTICLE 12.
TERMINATION; LIQUIDATION
12.1. Termination by Mutual Written Consent. This Agreement may be
terminated and the transactions contemplated hereby may be abandoned, for any
reason, at any time prior to the Closing Date, by the mutual written consent of
the Parties.
12.2. Termination by Parent or Investor. This Agreement may be terminated
and the transactions contemplated hereby may be abandoned by action of Parent or
Investor if and to the extent that (a) the Closing shall not have occurred at or
prior to 5:00 p.m., Eastern time, on June 30, 1998; provided, however, that the
right to terminate this Agreement under this Section 12.2 shall not be available
to any party whose failure to fulfill any obligation under this Agreement has
been the cause of, or resulted in, the failure of the Closing Date to occur on
or before such date; or (b) any court or governmental authority of competent
jurisdiction shall have issued an order, decree, writ or ruling or taken any
other action, or there shall be in
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effect any statute, rule or regulation permanently restraining, enjoining or
otherwise prohibiting the Transactions.
12.3. Termination by Parent. This Agreement may be terminated and the
transactions contemplated hereby may be abandoned by action of Parent, at any
time prior to the Closing Date, if (a) Investor or its Affiliates shall have
failed to comply in any material respect with any of the covenants or agreements
contained in this Agreement to be complied with or performed by Investor and its
Affiliates at or prior to such date of termination, and Investor shall not,
within a reasonable period of time after notice of such failure, have cured or
commenced prompt and diligent measures which would promptly cure such failure,
(b) there shall have been a misrepresentation or breach by Investor with respect
to any representation or warranty made by it in this Agreement which would
entitle Parent not to consummate the Transactions and such misrepresentation or
breach cannot be cured prior to the Closing Date or (c) on or before the close
of business on November 17, 1997 if Parent shall not be reasonably satisfied
with the results of its due diligence investigation of the Partnership and the
UT Contributed Business and shall have determined, in its reasonable good faith
judgment, that the net adverse effect of the total mix of the additional
information not otherwise known to it prior to the date of this Agreement,
individually or in the aggregate, would materially decrease the economic benefit
of the Transactions to Parent (after giving effect to any increases in value
that are attributable to positive aspects of any additional information first
made known to Parent after the date of this Agreement).
12.4. Termination by Investor. This Agreement may be terminated and the
transactions contemplated hereby may be abandoned by action of Investor, at any
time prior to the Closing Date, if (a) Parent or its Subsidiaries shall have
failed to comply in any material respect with any of the covenants or agreements
contained in this Agreement to be complied with or performed by Parent and its
Affiliates at or prior to such date of termination and Parent shall not, within
a reasonable period of time after notice of such failure, have cured or
commenced prompt and diligent measures which would promptly cure such failure,
(b) there shall have been a misrepresentation or breach by Parent with respect
to any representation or warranty made by it in this Agreement which would
entitle Investor not to consummate the Transactions and such misrepresentation
or breach cannot be cured prior to the Closing Date, (c) BD shall have ceased
serving Parent as its Chief Executive Officer, (d) the Fair Market Value (as
defined in the Stock Exchange Agreement, dated May 20, 1997, between Paul Allen
("Allen") and Parent) during any seven out of the nine consecutive trading days
ending on the third trading day immediately prior to the Closing Date would not
have resulted in the extinguishment of Parent's obligation to issue additional
Parent Common Stock to Allen or (e) on or before the close of business on
November 17, 1997 if Investor shall not be reasonably satisfied with the results
of its due diligence investigation of the Contributed Businesses and shall have
determined, in its reasonable good faith judgment, that the net adverse effect
of the total mix of the additional information not otherwise known to it prior
to the date of this Agreement, individually or in the aggregate, would
materially decrease the economic benefit of the Transactions to Investor (after
giving effect to any increases in value that are attributable to positive
aspects of any additional information first made known to Investor after the
date of this Agreement).
12.5. Termination Following Closing. If not earlier terminated, the
provisions of this Agreement (other than Sections 1.6(a), 1.7, 1.8, 1.9, Article
8, Sections 9.4, 9.5, 9.6, 9.7, 9.9(c), (e), (f), (g), 9.10, 9.14, 9.18 and 9.19
and Articles 11 and 13 (other than Sections 13.2 and 13.3)) shall terminate on
the date all of the Exchange Options are exercised.
12.6. Effect of Termination. In the event of termination of this
Agreement as provided herein prior to the Closing, this Agreement shall be of no
further force or effect, except (a) as provided in the last sentence of Section
9.5, this Section 12.6 and Article 13, each of which shall survive termination
of this Agreement, and (b) nothing herein shall relieve any party from liability
for any breach of this Agreement.
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ARTICLE 13.
GENERAL
13.1. Definitions. The capitalized terms used herein shall have the
respective meanings assigned to such terms set forth below (such definitions to
be equally applicable to both the singular and plural forms of the terms
defined) :
(a) "Acquired LLC Amount" shall mean a number of LLC Shares
(if any) equal to 35.75 million less the quotient obtained by dividing the
amount of cash (if any) payable pursuant to Section 1.5(b)(i)(A) by 40;
(b) "Acquired Partnership Interest" shall mean that certain
50% partnership interest in the Partnership acquired by Investor Sub
pursuant to the Partnership Interest Purchase Agreement;
(c) "Additional Issuance" shall have the meaning set forth in
Section 1.7(a)(i);
(d) "Additional Shares" shall have the meaning set forth in
Section 1.7(a)(i);
(e) "Affiliate" shall mean, with respect to any person, any
direct or indirect subsidiary of such person, and any other person that
directly, or through one or more intermediaries, is controlled by or is
under common control with such first person, and, if such a person is an
individual, any member of the immediate family (including parents, spouse
and children) of such individual and any trust whose principal beneficiary
is such individual or one or more members of such immediate family and any
person who is controlled by any such member or trust. As used in this
definition, "control" (including, with correlative meanings, "controlled
by" and "under common control with") shall mean possession, directly or
indirectly, of power to direct or cause the direction of management or
policies (whether through ownership of securities or partnership or other
ownership interests, by contract or otherwise);
(f) "Affiliation Agreements" shall have the meaning set forth
in Section 2.7;
(g) "Agreement" shall have the meaning set forth in the
Preamble;
(h) "Allen" shall have the meaning set forth in Section 12.4;
(i) "Ancillary Business Agreements" shall mean the agreements
attached as Exhibit C hereto (or any successor agreements);
(j) "Assumed Liabilities" shall have the meaning set forth in
Section 1.4;
(k) "Assumed UT Liabilities" shall have the meaning set forth
in Section 1.5;
(l) "Assumptions" shall have the meaning set forth in Section
1.7(a)(i);
(m) "Available Parent Amount" shall mean, as of a given date of
determination, the number equal to the difference between (x) the Holder
Limit, and (y) the number of Parent Common Shares then Owned (for purposes
of the FCC Regulations) by such holder of LLC Shares, giving effect to the
voting power of the stock Owned or to be Owned by such holder (and
including, with respect to Holder, all Parent Common Shares, held by the
entities known as "BDTV Entities");
(n) "BD" shall mean Barry Diller;
(o) "Beneficial Asset" shall have the meaning set forth in
Section 1.11;
(p) "Benefit Arrangements" shall have the meaning set forth in
Section 2.10(a);
(q) "Business Employees" shall have the meaning set forth in
Section 2.10(a);
(r) "Cash Amount" shall mean a dollar amount equal to the
difference between (i) $4,075,000,000 and (ii) the product of (x) $40 and
(y) the Stock Amount;
(s) "Certificate Amendment" shall have the meaning set forth
in Section 9.1(b);
(t) "Closing" shall have the meaning set forth in Section 1.5;
(u) "Closing Date" shall have the meaning set forth in Section
1.5;
(v) "Code" shall mean the Internal Revenue Code of 1986, as
amended;
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(w) "Consent Asset" shall have the meaning set forth in Section
1.11;
(x) "Consents" shall have the meaning set forth in Section
9.17;
(y) "Contingent Shares" shall have the meaning set forth in
the Holder Exchange Agreement;
(z) "Continued Employee" shall have the meaning set forth in
Section 9.9(d);
(aa) "Contracts" shall mean all executory written agreements,
contracts, commitments, understandings and other instruments or
arrangements;
(bb) "Contribute" shall have the meaning set forth in Section
1.3;
(cc) "Contributed Businesses" shall have the meaning set forth
in Section 1.3;
(dd) "Current Programs" shall mean the "Current Programs" as
defined in Schedule 1.5 and, for purposes of Section 9.10, shall include
all other programming included in the UT Contributed Business produced
during the Determination Period (other than half-hour situation comedies)
and derived from, or which continues, a "Current Program" for purposes of
Section 9.10;
(ee) "Determination Period" shall have the meaning set forth in
Section 9.10(c);
(ff) "disabled" shall have the meaning as to be defined in the
definitive Governance Agreement;
(gg) "ERISA" shall mean the Employee Retirement Income Security
Act of 1974, as amended;
(hh) "ERISA Affiliate" shall have the meaning set forth in
Section 2.10(d);
(ii) "Excess Cash" shall mean cash held by an entity
(including from the proceeds of borrowings) on the last business day of
each month which is reasonably determined by such entity not to be needed
by such entity to fund its operations or repay indebtedness owed by such
entity during the immediately succeeding month;
(jj) "Exchange Act" shall mean the Securities Exchange Act of
1934 and the regulations promulgated thereunder, each as amended;
(kk) "Exchange Agreement" shall have the meaning set forth in
Section 6.1(a);
(ll) "Exchange Options" shall have the meaning set forth in
Section 6.1(a);
(mm) "Exchange Options Shares" shall have the meaning set forth
in Section 6.1(b)(ii);
(nn) "Exchange Shares" shall mean the Silver King Exchange
Shares as defined in the Holder Exchange Agreement;
(oo) "Excluded Businesses" shall mean, at any time, the
businesses of Parent and its Subsidiaries other than the Contributed
Businesses;
(pp) "Excluded Issuance" shall mean any issuance of Parent
Common Stock (i) in a Sale Transaction, or (ii) which is "restricted stock"
or the ownership of which is otherwise subject to forfeiture ("Restricted
Stock"), provided that for purposes of this definition any stock covered by
the provisions of clause (ii) shall be deemed to have been issued on the
date (the "Lapse Date") the restrictions on such stock lapse or on which
the stock is no longer subject to forfeiture;
(qq) "Excluded Sub" shall have the meaning set forth in Section
1.3;
(rr) "Fair Market Value" for a security publicly traded in the
over-the-counter market (on either NASDAQ-NMS or NASDAQ) or on a recognized
exchange shall be the average closing price of such security for the three
trading days ending on the applicable day (or, if such day is not a trading
day,
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the trading day immediately preceding the applicable day), and for all
other securities or property "Fair Market Value" shall be determined, by a
nationally recognized investment banking firm which has not been engaged by
Parent, Investor, Holder (if Holder or a Holder Newco then holds LLC
Shares), the holder of stock of any Investor Newco (or Holder Newco, if
applicable) or their Affiliates for the prior three years selected by (i)
Parent and (ii) Investor and Holder (to the extent Holder at such time
holds LLC Shares); provided that, if Parent and Investor (or Investor and
Holder, if applicable) cannot agree on such an investment banking firm
within 10 business days, such investment banking firm shall be selected by
a panel designated in accordance with the rules of the American Arbitration
Association. The fees, costs and expenses of the American Arbitration
Association and the investment banking firm so selected shall be borne
equally by the LLC and Investor (or Investor and Holder, if applicable);
(tt) "FCC" shall mean the U.S. Federal Communications
Commission;
(uu) "FCC Regulations" shall have the meaning set forth in the
Holder Exchange Agreement;
(vv) "GAAP" shall mean United States generally accepted
accounting principles;
(ww) "Governance Agreement" shall have the meaning set forth in
Section 9.3;
(xx) "Holder" shall have the meaning set forth in the Preamble;
(yy) "Holder Agreements" shall have the meaning set forth in
Section 3.2;
(zz) "Holder Exchange Agreement" shall mean the Exchange
Agreement, dated as of December 20, 1996, by and between Parent and Holder;
(aaa) "Holder Indemnified Parties" shall have the meaning set
forth in Section 11.2(c);
(bbb) "Holder Limit" shall mean the maximum number of Parent
Common Shares which the holder of the LLC Shares would, under the FCC
Regulations then in effect, then be permitted to Own (in accordance with
FCC Regulations);
(ccc) "Holder Mandatory Exchange" shall have the meaning set
forth in Section 1.9;
(ddd) "HSR Act" shall mean the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended, and the regulations promulgated
thereunder;
(eee) "Intangible Property" shall have the meaning set forth in
Section 2.8;
(fff) "Interest Rate" shall mean (i) with respect to demand
notes representing loans which were funded from the proceeds of
indebtedness owed to entities other than Parent, its Subsidiaries and the
LLC, the interest rate on such indebtedness, (ii) with respect to demand
notes representing loans the proceeds of which are invested in interest
bearing instruments issued by entities other than Parent, its Subsidiaries
and the LLC, the blended rate on such instruments and (iii) with respect to
demand notes representing all other loans, 30-day LIBOR from time to time
as determined on the first business day of each month in accordance with
the credit agreement of Parent in effect from time to time (or if none is
in effect, the last effective credit agreement) plus the applicable margin
set forth in such credit agreement;
(ggg) "Investor" shall have the meaning set forth in the
Preamble;
(hhh) "Investor Financial Statements" shall have the meaning set
forth in Section 2.9;
(iii) "Investor Indemnified Parties" shall have the meaning set
forth in Section 11.2(c);
(jjj) "Investor Newco" shall have the meaning set forth in
Section 1.2;
(kkk) "Investor Sub" shall have the meaning set forth in Section
1.5;
(lll) "Issue Price" shall mean the price per share equal to (i)
except as otherwise provided in clause (iii) below, in connection with an
underwritten offering of shares of Parent Common Shares, the initial price
at which the stock is offered to the public or other investors, (ii) in
connection with other
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sales of Parent Common Shares for cash (other than sales covered by clause
(iii) below), the cash price paid for such stock, (iii) in connection with
the issuance of Parent Common Shares for cash within 4 months of the
Closing, $40 per share, (iv) in connection with the deemed issuances of
Restricted Stock, the Fair Market Value of the stock on the Lapse Date (as
defined in the definition of "Excluded Issuance" below), (v) in connection
with the issuance of Parent Common Shares as consideration in an
acquisition by Parent (other than a Merger Transaction), the average of the
Fair Market Value of the stock for the five trading days ending on the
third trading day immediately preceding the closing of the acquisition and
in case of a Merger Transaction, $40 per share, (vi) in connection with a
compensatory issuance of shares of Parent Common Stock, in the case of
Parent and its Affiliates, the amount received per share by Parent, and
with respect to Investor and Holder and their respective Affiliates, the
Fair Market Value of the Parent Common Stock, and (vii) in all other cases,
including, without limitation, in connection with the issuance of Parent
Common Shares pursuant to an option, warrant or convertible security (other
than in connection with the conversion of the Sub Convertible Debt, in
which case the Issue Price shall be $40 per share, or in connection with
issuances described in clause (vi) above), the Fair Market Value of the
Parent Common Shares on the date of issuance;
(mmm) "LLC" shall have the meaning set forth in Section 1.1;
(nnn) "LLC Indemnified Parties" shall have the meaning set forth
in Section 11.2(a);
(ooo) "LLC Operating Agreement" shall mean the LLC Operating
Agreement attached as Exhibit B hereto (or any successor agreement);
(ppp) "LLC Shares" shall mean shares representing a proportionate
interest in the capital and profits and losses of the LLC;
(qqq) "Licenses" means all licenses, permits, construction
permits, registrations, and other authorizations issued by any federal,
state, or local governmental authorities for use in connection with the
conduct of the business or operations of the relevant business, and all
applications therefor, together with any renewals, extensions,
modifications, or additions thereto between the date of this Agreement and
the Closing Date;
(rrr) "Liens" shall have the meaning set forth in Section 2.3;
(sss) "Loss and Expenses" shall have the meaning set forth in
Section 11.2(a);
(ttt) "Mandatory Purchase Event" shall have the meaning set
forth in Section 1.7(a)(ii);
(uuu) "Mandatory Purchase Notice" shall have the meaning set
forth in Section 1.7(a)(ii);
(vvv) "Material Adverse Effect" shall mean any event,
occurrence, fact, condition, change or effect that is materially adverse to
the business, operations, results of operations, prospects, condition
(financial or otherwise), properties (including intangible properties),
assets (including intangible assets) or liabilities of the relevant
business, taken as a whole;
(www) "Material Contracts" shall have the meaning set forth in
Section 2.7;
(xxx) "Material Real Property" shall have the meaning set forth
in Section 2.5;
(yyy) "Merger Transaction" shall have the meaning set forth in
Section 1.7(a)(iii);
(zzz) "NASD" shall mean the National Association of Securities
Dealers;
(aaaa) "Owned LLC Amount" shall mean a number of LLC Shares equal
to the difference between (i) the Stock Amount and (ii) 6.75 million plus
the Acquired LLC Amount;
(bbbb) "Owned Partnership Interest" shall mean that certain
partnership interest in the Partnership owned by Investor since the
inception of the Partnership;
(cccc) "Parent" shall have the meaning set forth in the Preamble;
(dddd) "Parent Balance Sheet" shall have the meaning set forth in
Section 3.8;
APPENDIX A
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<PAGE> 157
(eeee) "Parent Balance Sheet Date" shall have the meaning set
forth in Section 3.8;
(ffff) "Parent Benefit Arrangements" shall have the meaning set
forth in Section 3.10;
(gggg) "Parent Certificate" shall have the meaning set forth in
Section 3.1;
(hhhh) "Parent Class B Stock" shall have the meaning set forth in
Section 3.2;
(iiii) "Parent Commission Documents" shall have the meaning set
forth in Section 3.8;
(jjjj) "Parent Common Shares" shall mean shares of Parent Common
Stock and Parent Class B Stock;
(kkkk) "Parent Common Stock" shall have the meaning set forth in
Section 3.2;
(llll) "Parent Employees" shall have the meaning set forth in
Section 3.10(a);
(mmmm) "Parent ERISA Affiliate" shall have the meaning set forth in
Section 3.10(c);
(nnnn) "Parent Form S-4" shall have the meaning set forth in
Section 3.2;
(oooo) "Parent Form 10-K" shall have the meaning set forth in
Section 3.8;
(pppp) "Parent Indemnified Parties" shall have the meaning set
forth in Section 11.2(a);
(qqqq) "Parent LLC Shares Number" shall mean the aggregate number
of outstanding Parent Common Shares as of the fifth business day prior to
the Closing Date (assuming that all Parent Common Shares issuable pursuant
to the Contingent Shares and Exchange Shares have been issued and any
Parent Common Shares issued pursuant to a public offering consummated
between the fifth business day prior to Closing Date and the Closing Date
are outstanding) less 8.25 million;
(rrrr) "Parent Pension Plan" shall have the meaning set forth in
Section 3.10(b);
(ssss) "Parent Preferred Stock" shall have the meaning set forth
in Section 3.2;
(tttt) "Parent Securities" shall mean Parent Common Shares and
LLC Shares;
(uuuu) "Parent Stock Number" shall mean 6.75 million;
(vvvv) "Parties" shall have the meaning set forth in the Preamble;
(wwww) "Partnership" shall mean USA Networks, a New York
partnership;
(xxxx) "Partnership Agreement" shall have the meaning set forth in
Section 2.1;
(yyyy) "Partnership Interest Purchase Agreement" shall mean the
Partnership Interest Purchase Agreement by and among Universal Studios,
Inc., Universal City Studios, Inc., Viacom, Inc. and Eighth Century
Corporation, dated as of September 22, 1997;
(zzzz) "Partnership Plans" shall have the meaning set forth in
Section 2.10(a);
(aaaaa) "Pension Plan" shall have the meaning set forth in Section
2.10(b);
(bbbbb) "Permitted Liens" shall mean, collectively, (1) all
statutory or other liens for taxes or assessments which are not yet due or
the validity of which is being contested in good faith by appropriate
proceedings, (2) all mechanics', materialmen's, carriers', workers' and
repairers' liens, and other similar liens imposed by law, incurred in the
ordinary course of business, which allege unpaid amounts that are less than
30 days delinquent or which are being contested in good faith by
appropriate proceedings, and (3) all other Liens which do not materially
detract from or materially interfere with the marketability, value or
present use of the asset subject thereto or affected thereby;
(ccccc) "Post Closing Period" shall have the meaning set forth in
Section 9.16;
(ddddd) "Programming Agreements" shall have the meaning set forth
in Section 2.7;
APPENDIX A
A-47
<PAGE> 158
(eeeee) "Real Property" shall mean real estate and buildings and
other improvements thereon and leases and leasehold interests, leasehold
improvements, fixtures and trade fixtures;
(fffff) "Redemption Price" shall have the meaning set forth in
Section 1.7(b);
(ggggg) "Regulated Subsidiaries" shall have the meaning set forth
in Section 1.11;
(hhhhh) "Requisite Stockholder Vote" shall mean the affirmative vote
of (x) the holders of a majority of the outstanding shares of Parent Common
Stock and Parent Class B Stock, voting as separate classes, to the
amendment to Parent's certificate of incorporation increasing the
authorized capital stock, and (y) the holders of a majority of the voting
power represented by the outstanding Parent Common Shares, voting together
as a single class, voting at the special meeting (provided a quorum is
present under the NASD by-laws) for the issuance of shares of Parent Common
Stock in accordance with this Agreement;
(iiiii) "Sale Transaction" shall have the meaning set forth in
Section 6.1(b);
(jjjjj) "Securities Act" shall mean the Securities Act of 1933
and the regulations promulgated thereunder, each as amended;
(kkkkk) "Self Tender Offer" shall have the meaning set forth in
Section 6.2;
(lllll) "Spinoff" shall have the meaning set forth in Section
9.14;
(mmmmm) "Spinoff Company" shall have the meaning set forth in Section
9.14;
(nnnnn) "Statement" shall have the meaning set forth in Section
9.10;
(ooooo) "Stock Amount" shall mean an amount equal to 45% of the sum
of (i) the aggregate number of Parent Common Shares outstanding as of the
fifth business day prior to the Closing Date (assuming that all Parent
Common Shares issuable pursuant to the Contingent Shares and Exchange
Shares have been issued), (ii) any shares issued pursuant to a public
offering consummated between the fifth business day prior to the Closing
Date and the Closing Date, (iii) 7.5 million and (iv) the Stock Amount;
(ppppp) "Sub" shall have the meaning set forth in the Preamble;
(qqqqq) "Sub Convertible Debt" shall have the meaning set forth in
Section 1.7(a)(ii);
(rrrrr) "Subsidiaries" shall mean, with respect to any person,
each of the direct or indirect subsidiary of such person;
(sssss) "Tax Audit" shall have the meaning set forth in Section
8.7;
(ttttt) "Tender Number" shall have the meaning set forth in
Section 6.2(c);
(uuuuu) "TKTM Agreements" shall have the meaning set forth in
Section 3.2;
(vvvvv) "Transactions" shall have the meaning set forth in the
Preamble;
(wwwww) "Transferee" shall have the meaning set forth in Section 6.1;
(xxxxx) "Transition Services Agreement" shall have the meaning set
forth in Section 9.4;
(yyyyy) "Unit" shall mean one LLC Share and one Preferred Share;
(zzzzz) "UT Contributed Business" shall have the meaning set forth
in Section 1.5;
(aaaaaa) "U-TV Assets" shall have the meaning set forth in Section
9.10(b);
(bbbbbb) "U-TV's EBITDA" shall have the meaning set forth in Section
9.10(b).
13.2. Efforts to Proceed Promptly. Each of the Parties agrees to use
their respective reasonable best efforts to take all such action (including,
without limitation, executing such other agreements and instruments, and making
such filings, including filings required under the HSR Act) as may be necessary
or appropriate in
APPENDIX A
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<PAGE> 159
order to effectuate the Transactions as promptly as practicable. Each Party to
this Agreement agrees to execute, acknowledge, deliver, file and record such
further certificates, amendments, instruments, agreements and documents and to
do all such other acts and things, as may be required by law or as, in the
opinion of the Parties, may be necessary or advisable to carry out the intent
and purposes of this Agreement. Each Party agrees that it will act diligently
and in good faith to carry out its respective obligations under this Agreement.
13.3. Maintenance of Business. Between the date of this Agreement and the
Closing, Parent and Sub agree that they shall continue to operate their
businesses in the customary and ordinary manner. Between the date of this
Agreement and the Closing, Investor agrees to operate the UT Contributed
Business in the customary and ordinary manner and to cause the Partnership to
operate its business in the customary and ordinary manner.
13.4. Notices. Any notices, requests, demands or other communications to
be given by a Party hereunder shall be in writing and shall be deemed to have
been duly given when delivered personally or by facsimile transmission, in
either case with receipt acknowledged, or three days after being sent by
registered or certified mail, return receipt requested, postage prepaid,
addressed (until another address is supplied by notice duly given hereunder) as
follows:
If given to Parent or Sub:
HSN, Inc.
1 HSN Drive
St. Petersburg, Florida 33729
Attention: General Counsel
Telephone: (813) 572-8585
Facsimile: (813) 573-0866
with a copy to:
Wachtell, Lipton, Rosen & Katz
51 West 52nd Street
New York, New York 10019
Attention: Pamela S. Seymon, Esq.
Telephone: (212) 403-1000
Facsimile: (212) 403-2000
If given to the Holder:
Liberty Media Corporation
8101 East Prentice Avenue
Suite 500
Englewood, Colorado 80111
Attention: President
Telephone: (303) 721-5400
Facsimile: (303) 841-7344
with a copy to:
Baker & Botts, L.L.P.
599 Lexington Avenue
Suite 2900
New York, New York 10022-6030
Attention: Frederick H. McGrath, Esq.
Telephone: (212) 705-5000
Facsimile: (212) 705-5125
APPENDIX A
A-49
<PAGE> 160
If given to Investor or the Investor Newcos:
Universal Studios, Inc.
100 Universal City Plaza
Universal City, California 91608
Attention: Karen Randall, Esq.
Telephone: (818) 777-7100
Facsimile: (818) 866-3444
with a copy to:
Simpson Thacher & Bartlett
425 Lexington Avenue
New York, New York 10017
Attention: John Finley, Esq.
Telephone (212) 455-2000
Facsimile: (212) 455-2502
13.5. Specific Enforcement. The Parties hereto recognize and agree that,
in the event that any of the provisions of this Agreement are not performed in
accordance with their specific terms or otherwise are breached, immediate
irreparable injury would be caused for which there is no adequate remedy at law.
It is accordingly agreed that in the event of a failure by a party to perform
its obligations under this Agreement, the nonbreaching party shall be entitled
to specific performance through injunctive relief to prevent breaches of the
provisions of this Agreement and to enforce specifically the provisions of this
Agreement in any action instituted in any court having subject matter
jurisdiction, in addition to any other remedy to which such party may be
entitled, at law or in equity.
13.6. Severability. Any term or provision of this Agreement which is
invalid or unenforceable in any jurisdiction shall, as to that jurisdiction, be
ineffective to the extent of such invalidity or unenforceability without
rendering invalid or unenforceable the remaining terms and provisions of this
Agreement or affecting the validity or enforceability of any of the terms or
provisions of this Agreement in any other jurisdiction. If any provision of this
Agreement is so broad as to be unenforceable, the provision shall be interpreted
to be only so broad as is enforceable. The exercise of any rights or obligations
hereunder shall be subject to such reasonable delay as may be required to
prevent a party from incurring any liability under the federal securities laws,
and the parties agree to cooperate in good faith in respect thereof.
13.7. Entire Agreement. This Agreement, the schedules and exhibits hereto
and any documents delivered hereunder constitute the entire agreement between
the parties and supersede any prior agreement or understanding between the
parties with respect to the subject matter hereof. Except as specifically set
forth herein, nothing in this Agreement shall constitute a waiver, amendment or
termination of the terms of any Holder Agreement.
13.8. Amendment; Waiver. Except as provided otherwise herein, this
Agreement may not be amended nor may any rights hereunder be waived except by an
instrument in writing signed by Investor and Parent, and Holder (but only to the
extent that any such amendment would adversely affect the rights and obligations
of Holder). Parent hereby agrees with Holder that it will not enter into or
permit any material amendment to, or waiver or modification of material rights
or obligations under, this Agreement (including the exhibits attached hereto)
without the prior written consent of Holder, which shall not be unreasonably
withheld.
13.9. Headings; References. Article headings are inserted for convenience
and reference purposes only, and are not and shall not be deemed to be a part of
this Agreement or affect any meaning or interpretation hereof. References herein
to "the date hereof," "the date of this Agreement," and similar references are
to October 19, 1997.
13.10. Expenses. Each Party shall pay all of its own legal and accounting
fees and other expenses incurred in connection with the negotiation, preparation
and execution of the Transactions and any agreements associated therewith.
APPENDIX A
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<PAGE> 161
13.11. Counterparts. This Agreement may be executed in one or more
counterpart copies and by facsimile; each of which shall be considered an
original, but together shall constitute one agreement.
13.12. Governing Law. This Agreement and all matters collateral hereto
shall be governed by and construed in accordance with the laws of the State of
New York except as and to the extent such laws are superseded by the Federal
laws of the United States, including the rules, regulations and published
policies of the FCC.
13.13. Public Announcement. So long as this Agreement is in effect, each
of Parent and Investor agree to consult with the others before issuing any press
release or otherwise making any public statement with respect to the
Transactions; and neither Parent nor Investor (or their respective Affiliates)
will issue any press release or make any such public statement with respect to
the Transactions without the consent of the other Party, except as may be
required by law (including, without limitation, disclosure required in public
filings required to be made by Parent or any Affiliates of Investor) or the
requirements of any securities exchange.
13.14. No Third Party Beneficiaries. Nothing contained in this Agreement
is intended to or shall confer upon any person other than the Parties any rights
or remedies hereunder.
APPENDIX A
A-51
<PAGE> 162
* * *
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed and delivered by their proper and duly authorized officers as of
the day and year first above written.
HSN, INC.
/s/ BARRY DILLER
--------------------------------------
By: Barry Diller
Title: Chairman of the Board and
Chief Executive Officer
HOME SHOPPING NETWORK, INC.
/s/ JAMES G. HELD
--------------------------------------
By: James G. Held
Title: President and Chief Executive
Officer
UNIVERSAL STUDIOS, INC.,
for itself and on behalf of certain of
its Subsidiaries
/s/ BRIAN C. MULLIGAN
--------------------------------------
By: Brian C. Mulligan
Title: Senior Vice President
LIBERTY MEDIA CORPORATION
/s/ ROBERT R. BENNETT
--------------------------------------
By: Robert R. Bennett
Title: President
APPENDIX A
A-52
<PAGE> 163
APPENDIX B
================================================================================
EXHIBIT A TO THE INVESTMENT AGREEMENT
FORM OF
GOVERNANCE AGREEMENT
AMONG
HSN, INC.,
UNIVERSAL STUDIOS, INC.,
LIBERTY MEDIA CORPORATION
AND
BARRY DILLER
DATED AS OF OCTOBER 19, 1997
================================================================================
APPENDIX B
<PAGE> 164
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
ARTICLE I
STANDSTILL AND VOTING
SECTION 1.01. Acquisition of Voting Securities.............................. B-4
SECTION 1.02. Restrictions on Transfer...................................... B-6
SECTION 1.03. Further Restrictions on Conduct............................... B-7
SECTION 1.04. Reports....................................................... B-7
SECTION 1.05. Transferees................................................... B-8
ARTICLE II
BOARD OF DIRECTORS AND RELATED MATTERS
SECTION 2.01. Initial Composition of Board of Directors..................... B-8
SECTION 2.02. Proportionate Representation.................................. B-8
SECTION 2.03. Management of the Business.................................... B-9
SECTION 2.04. Fundamental Changes........................................... B-10
SECTION 2.05. Notice of Events.............................................. B-11
ARTICLE III
REPRESENTATIONS AND WARRANTIES
SECTION 3.01. Representations and Warranties of the Company................. B-12
SECTION 3.02. Representations and Warranties of the Stockholders............ B-12
ARTICLE IV
DEFINITIONS
SECTION 4.01. "Affiliate"................................................... B-12
SECTION 4.02. "Assumptions"................................................. B-12
SECTION 4.03. "BDTV Entities"............................................... B-12
SECTION 4.04. "Beneficial Ownership" or "Beneficially Own".................. B-12
SECTION 4.05. "CEO"......................................................... B-13
SECTION 4.06. "CEO Termination Date"........................................ B-13
SECTION 4.07. "Commission".................................................. B-13
SECTION 4.08. "Consenting Party"............................................ B-13
SECTION 4.09. "Demand Registration"......................................... B-13
SECTION 4.10. "Disabled".................................................... B-13
SECTION 4.11. "Equity Securities"........................................... B-13
SECTION 4.12. "Exchange Act"................................................ B-13
SECTION 4.13. "Exchange Agreement".......................................... B-13
SECTION 4.14. "FCC Regulations"............................................. B-13
SECTION 4.15. "Independent Director"........................................ B-13
SECTION 4.16. "Liberty Director"............................................ B-14
</TABLE>
APPENDIX B
B-2
<PAGE> 165
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
SECTION 4.17. "Ownership Percentage"........................................ B-14
SECTION 4.18. "Permitted Business Combination".............................. B-14
SECTION 4.19. "Permitted Investment Percentage"............................. B-14
SECTION 4.20. "Permitted Transferee"........................................ B-14
SECTION 4.21. "Person"...................................................... B-14
SECTION 4.22. "Public Stockholder".......................................... B-14
SECTION 4.23. "Right of First Refusal"...................................... B-14
SECTION 4.24. "Satisfactory Nominee"........................................ B-15
SECTION 4.25. "Seagram"..................................................... B-15
SECTION 4.26. "Securities Act".............................................. B-15
SECTION 4.27. "Shares"...................................................... B-15
SECTION 4.28. "Stockholders Agreement"...................................... B-15
SECTION 4.29. "Stockholders Group".......................................... B-15
SECTION 4.30. "Subsidiary".................................................. B-15
SECTION 4.31. "Third Party Transferee"...................................... B-15
SECTION 4.32. "13D Group"................................................... B-15
SECTION 4.33. "Total Equity Securities"..................................... B-15
SECTION 4.34. "Transfer".................................................... B-16
SECTION 4.35. "Universal Director".......................................... B-16
SECTION 4.36. "Voting Securities"........................................... B-16
ARTICLE V
MISCELLANEOUS
SECTION 5.01. Notices....................................................... B-16
SECTION 5.02. Amendments; No Waivers........................................ B-17
SECTION 5.03. Successors and Assigns........................................ B-17
SECTION 5.04. Governing Law; Consent to Jurisdiction........................ B-18
SECTION 5.05. Counterparts; Effectiveness................................... B-18
SECTION 5.06. Specific Performance.......................................... B-18
SECTION 5.07. Registration Rights........................................... B-18
SECTION 5.08. Termination................................................... B-19
SECTION 5.09. Severability.................................................. B-19
SECTION 5.10. Cooperation................................................... B-19
SECTION 5.11. Entire Agreement.............................................. B-19
</TABLE>
APPENDIX B
B-3
<PAGE> 166
GOVERNANCE AGREEMENT
Agreement dated as of October 19, 1997 among HSN, Inc., a Delaware
corporation ("HSNi" or the "Company"), Universal Studios, Inc., for itself and
on behalf of the members of its Stockholders Group ("Universal"), Liberty Media
Corporation, for itself and on behalf of the members of its Stockholders Group
("Liberty"), and Mr. Barry Diller ("Mr. Diller") for himself and on behalf of
the members of his Stockholders Group. Capitalized terms used herein without
definition have the meanings ascribed to such terms in the Transaction Agreement
(as hereinafter defined).
WHEREAS, HSNi, Universal and Liberty are parties to an Investment Agreement
dated as of the date hereof (the "Transaction Agreement") pursuant to which,
among other things, subject to the terms and conditions contained in the
Transaction Agreement, Universal will acquire Beneficial Ownership (as defined
in Article IV hereof) of Parent Common Shares and LLC Shares (together, the
"Shares"), representing 45% (or such greater percentage as may result under
Section 1.5(e) or 1.5(f) of the Transaction Agreement) of the Total Equity
Securities immediately following the Closing (such percentage, the "Initial
Percentage") (the Initial Percentage or such Ownership Percentage as may be
permitted under the terms of this Agreement to be Beneficially Owned by
Universal from time to time being referred to herein as the "Permitted
Investment Percentage"), in exchange for the transfer of the UT Contributed
Business and the Partnership;
WHEREAS, under the terms of the Transaction Agreement, Liberty may at the
Closing (or from time to time thereafter) acquire additional LLC Shares and/or
Parent Common Stock; and
WHEREAS, HSNi, Universal, Liberty and Mr. Diller desire to establish in
this Agreement certain terms and conditions concerning the acquisition and
disposition of securities of the Company by Universal, and certain additional
provisions concerning Universal's, Liberty's and Mr. Diller's relationships with
the Company, none of which shall become effective until the Closing.
NOW, THEREFORE, in consideration of the foregoing and the mutual covenants
and agreements contained herein, and intending to be legally bound hereby, the
Company, Universal, Liberty and Mr. Diller hereby agree, effective as of the
Closing, as follows:
ARTICLE I
STANDSTILL AND VOTING
SECTION 1.01. Acquisition of Voting Securities. (a) Until the fourth
anniversary of the Closing (the "Standstill Termination Date"), Universal
covenants and agrees that, except with the prior approval of the HSNi Board of
Directors (or the CEO so long as Mr. Diller is the CEO), neither Universal nor
its Affiliates will Beneficially Own any Equity Securities except for (i) the
Shares and (ii) additional Equity Securities of the Company acquired in
accordance with Article 1 of the Transaction Agreement. Notwithstanding anything
to the contrary contained in this Agreement (including the definition of
Permitted Investment Percentage), any Equity Securities purchased from Liberty
and Mr. Diller not in violation of the Stockholders Agreement shall be excluded
from the calculation of Universal's Ownership Percentage for purposes of
determining whether the Permitted Investment Percentage has been exceeded.
(b) Following the Standstill Termination Date, subject to applicable law
(including FCC Regulations), the Permitted Investment Percentage shall be
increased to 50.1 percent, and Universal may acquire Beneficial Ownership of an
additional amount of Equity Securities so long as its Ownership Percentage does
not exceed the Permitted Investment Percentage as so increased.
(c) In addition to the foregoing, subject to compliance with applicable law
(including FCC Regulations), (i) on the first anniversary of the Standstill
Termination Date, the Permitted Investment Percentage shall be increased to 57.5
percent, and Universal may acquire Beneficial Ownership of an additional amount
of Equity Securities so long as its Ownership Percentage does not exceed the
Permitted Investment Percentage as so increased (but in no event shall Universal
acquire more than 1.5 percent of the Total Equity Securities in any 12-month
period) and (ii) at any time following the CEO Termination Date, Universal may
propose to the Company's Board of Directors (and, subject to Section 2.04,
thereafter effect) the acquisition by
APPENDIX B
B-4
<PAGE> 167
Universal or its Affiliates of the then outstanding Equity Securities not owned
by Universal in a Permitted Business Combination.
(d) Except as expressly provided herein, neither Universal nor any
Affiliate thereof shall permit any entity in which it Beneficially Owns,
directly or indirectly, in excess of 50% of the outstanding voting securities
(regardless of whether Universal or such Affiliate acquires Beneficial Ownership
of such entity after the date of this Agreement) to Beneficially Own any Equity
Securities. Notwithstanding the foregoing, the acquisition (whether by merger,
consolidation or otherwise) by Universal or an Affiliate thereof of any entity
that Beneficially Owns Equity Securities shall not constitute a violation of the
Permitted Investment Percentage; provided that a significant purpose of any such
transaction is not to avoid the provisions of this Agreement; and provided
further that the provisions of paragraph (e) below are complied with.
(e) Except as set forth in the next sentence, if at any time Universal
becomes aware that it and its Affiliates Beneficially Own more than the
Permitted Investment Percentage (including by virtue of acquisitions referred to
in paragraph (d) above), then Universal shall as soon as is reasonably
practicable (but in no manner that would require Universal to incur liability
under Section 16(b) of the Exchange Act) take all action necessary to reduce the
amount of Equity Securities Beneficially Owned by such Persons to an amount not
greater than the Permitted Investment Percentage. If the Ownership Percentage of
Universal and its Affiliates exceeds the Permitted Investment Percentage solely
by reason of repurchases of Equity Securities by the Company, then, subject to
the provisions of the Transaction Agreement, Universal shall not be required to
reduce the amount of Equity Securities Beneficially Owned by such Persons.
(f) If prior to the Standstill Termination Date, Mr. Diller no longer
serves as CEO (provided that if Mr. Diller no longer serves as CEO but continues
to hold a proxy from Universal in respect of Parent Common Shares under the
Stockholders Agreement, Mr. Diller shall not be deemed to no longer serve as CEO
until the later of (i) such time as he no longer serves as CEO and (ii) such
time as Mr. Diller no longer holds the Universal proxy, with the later of such
times being referred to as the "CEO Termination Date") or becomes Disabled, the
Standstill Termination Date shall be deemed to occur effective as of the CEO
Termination Date or such date that Mr. Diller becomes Disabled.
(g) The restrictions on additional purchases of Equity Securities described
in this Section 1.01 shall terminate: (i) if any Person or group (other than
Universal or its Affiliates) Beneficially Owns more than 33 1/3% of the
outstanding Total Equity Securities; provided that this clause (i) shall not
apply (x) to Beneficial Ownership by Liberty and its Affiliates, if Universal
amends, modifies or waives the standstill obligations of Liberty under Section
2.1 of the Stockholders Agreement in a manner that would cause such Beneficial
Ownership by Liberty and its Affiliates not to be a violation of Liberty's
standstill obligations under Section 2.1 of the Stockholders Agreement or
Universal does not attempt in good faith to enforce such standstill provisions,
(y) to any Equity Securities Beneficially Owned by Mr. Diller but in which he
does not have a pecuniary interest or (z) if such Equity Securities were
acquired from the Company; and provided, however, that in calculating the
33 1/3% of the Total Equity Securities of any Person or group, any Equity
Securities transferred to such Person or group by Universal, Liberty or Mr.
Diller in accordance with the terms of the Stockholders Agreement shall be
disregarded if Universal elected not to purchase such Equity Securities after
being provided a reasonable opportunity to buy such Equity Securities or (ii) if
any Person or group (other than the Company, Universal or its Affiliates)
commences a tender or exchange offer for more than a majority of the outstanding
Total Equity Securities, provided that such termination of the foregoing
restriction shall only occur if (x) the Company's Board of Directors does not
recommend against the tender or exchange offer within the time frame under the
Exchange Act that the Board of Directors must legally respond and (y) in the
case of a tender or exchange offer by Liberty or its Affiliates in breach of its
or their standstill obligations under Section 2.1 of the Stockholders Agreement,
in addition to (x) above, Universal is unsuccessful after good faith efforts in
enforcing its rights against Liberty under Section 2.1 of the Stockholders
Agreement and, then, the foregoing restriction shall terminate only to the
extent necessary to permit Universal to commence a competing tender or exchange
offer; provided that if Universal has used such good faith efforts, such
restriction shall terminate no later than six business days prior to the
expiration date of a tender offer or exchange offer that has a reasonable
possibility of being consummated.
APPENDIX B
B-5
<PAGE> 168
(h) The Company agrees that to the extent that regulatory restrictions
prevent Universal from acquiring the levels of ownership permitted under Article
I of this Agreement, the Company will cooperate in good faith with Universal in
order to permit Universal to increase its Ownership Percentage. Such cooperation
may include without limitation exchanging additional LLC Shares with Universal
for Parent Common Shares. Notwithstanding the foregoing, the Company shall not
be required to take any action that would or could reasonably be expected to
have substantial adverse tax, accounting or financial consequences to the
Company or its Subsidiaries (including the LLC).
SECTION 1.02. Restrictions on Transfer. (a) Prior to the Standstill
Termination Date, subject to the terms of the Stockholders Agreement, Universal
will not Transfer any Equity Securities except for: (i) Transfers of Parent
Common Stock in a widely dispersed public offering pursuant to exercise of the
registration rights set forth in Section 5.07 hereof; (ii) Transfers of Parent
Common Stock pursuant to Rule 144 under the Securities Act, provided that no
such Transfers under this clause (ii) are made to any Person (including its
Affiliates and any Person or entities which are, to Universal's knowledge after
inquiry of the Company, part of any 13D Group that includes such transferee or
any of its Affiliates) that, after giving effect to such Transfer, would, to the
knowledge of Universal, Beneficially Own Equity Securities representing more
than 5% of the Total Equity Securities (other than a Permitted Transferee);
(iii) Transfers of Equity Securities and/or LLC Shares (x) in accordance with
Sections 6.1(c) and 6.1(e) of the Transaction Agreement or the terms of the
Exchange Agreement pursuant to any tender or exchange offer to acquire Parent
Common Stock that the Company's Board of Directors does not recommend against
within the time frame under the Exchange Act that the Board of Directors must
legally respond or (y) as contemplated by Section 6.1(b) of the Transaction
Agreement or the terms of the Exchange Agreement; (iv) Transfers of Parent
Common Stock to Matsushita Electric Industrial Co., Ltd. and to the public
stockholders of Seagram by means of a pro rata dividend or other pro rata
distribution; (v) Transfers of Parent Common Stock to any Permitted Transferee;
(vi) Transfers of Parent Common Stock in an aggregate amount up to 5% of the
Total Equity Securities to any institutional or financial investors, not
exercisable more often than on two occasions in any six-month period, under an
exemption from the Securities Act or pursuant to registration rights from the
Company; (vii) Transfers of Equity Securities and/or LLC Shares to the Company
or a Subsidiary of the Company pursuant to a self tender offer or otherwise by
the Company; (viii) pledges of (or granting security interests in) Parent Common
Stock in connection with bona fide financings with a financial institution
(provided that such financial institution agrees that, upon exercise of its
rights, the Parent Common Stock would continue to be subject to the restrictions
on transfer contained herein); and (ix) Transfers of Equity Securities and/or
LLC Shares by Universal to any of its controlled Affiliates, provided that such
Affiliate becomes a signatory to this Agreement.
(b) If the CEO Termination Date has occurred or Mr. Diller becomes
Disabled, the Universal transfer restrictions set forth in paragraph (a) of this
Section 1.02 shall terminate immediately, subject to a Right of First Refusal in
favor of the Company (which Right of First Refusal shall apply so long as
Universal Beneficially Owns, directly or indirectly, Equity Securities
representing 20% or more of the Total Equity Securities irrespective of the
occurrence of the Standstill Termination Date and Mr. Diller's status with the
Company but secondary to the rights of first refusal provided for in the
Stockholders Agreement), provided that the Right of First Refusal shall not be
applicable to any Transfers that would be permitted prior to the Standstill
Termination Date.
(c) No Transfers of the LLC Shares by Universal or Liberty to
non-Affiliates thereof shall be permitted, except as permitted pursuant to
Section 6.1 of the Transaction Agreement and the Exchange Agreement or between
each other and their respective Affiliates (subject to the terms of the
Stockholders Agreement). Universal and Liberty, as the case may be, must
exchange LLC Shares for Parent Common Shares prior to permitted Transfers,
except (i) as permitted pursuant to Section 6.1 of the Transaction Agreement and
the terms of the Exchange Agreement and (ii) for Transfers between Liberty and
Universal and their respective Affiliates not in violation of the Stockholders
Agreement to the extent that the applicable Transferee could not in accordance
with applicable law directly own the Parent Common Shares into which such LLC
Shares are exchangeable. To the extent provided for by the Stockholders
Agreement, (x) so long as the CEO Termination Date has not occurred and Mr.
Diller has not become Disabled, prior to permitted Transfers,
APPENDIX B
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Universal and Liberty must offer Mr. Diller (or his designee) the opportunity to
exchange Parent Class B Stock owned by Universal or Liberty, as the case may be,
for Parent Common Stock, and (y) to the extent that, in accordance with the
Stockholders Agreement or otherwise, Mr. Diller (or his designee) does not
exchange Parent Common Stock for Parent Class B Stock (or if the CEO Termination
Date has occurred or Mr. Diller is Disabled), Parent Class B Stock to be
transferred by Universal must be converted into Parent Common Stock unless the
transferee agrees to be bound by the restrictions contained in Article I herein
then applicable to Universal to the extent that the transferee Beneficially Owns
at least 10% of the voting power of the outstanding Voting Securities.
SECTION 1.03. Further Restrictions on Conduct. Universal covenants and
agrees that until the CEO Termination Date or such time as Mr. Diller becomes
Disabled:
(a) except by virtue of Universal's representation on the Board of
Directors of the Company and as otherwise contemplated under this Agreement
and the other agreements contemplated by the Transaction Agreement or as
otherwise permitted by the Board of Directors of the Company or the CEO so
long as Mr. Diller is CEO, neither Universal nor any Affiliate thereof will
otherwise act, alone or in concert with others, to seek to affect or
influence the control of the management or Board of Directors of the
Company or the business, operations or policies of the Company (it being
agreed that this paragraph shall not prohibit Universal, its Affiliates and
their respective employees from engaging in ordinary course business
activities with the Company);
(b) other than to a Permitted Transferee, neither Universal nor any
Affiliate thereof shall deposit any Equity Securities or LLC Shares in a
voting trust or subject any Equity Securities or LLC Shares to any proxy,
arrangement or agreement with respect to the voting of such securities or
other agreement having similar effect, except for agreements or
arrangements with a Permitted Designee reasonably acceptable to the other
Stockholders and not inconsistent with or for the purpose of evading the
terms of this Agreement or the Stockholders Agreement;
(c) other than as is permitted by this Agreement, neither Universal
nor any Affiliate thereof shall propose any merger, tender offer or other
business combination involving the Company or any of its Affiliates
(including the LLC); provided, that discussions relating to the possibility
of such a proposal in which Mr. Diller participates shall not be deemed to
be a breach of this covenant;
(d) neither Universal nor any Affiliate thereof shall initiate or
propose any stockholder proposal or make, or in any way participate in,
directly or indirectly, any "solicitation" of "proxies" to vote, or seek to
influence any Person with respect to the voting of, any Equity Securities,
or became a "participant" in a "solicitation" (as such terms are defined in
Regulation 14A under the Exchange Act) in opposition to the recommendation
of the majority of the directors of the Company with respect to any matter
except (i) in response to a solicitation by a third party and (ii) to
facilitate a tender or exchange offer by Universal or an Affiliate
permitted under Section 1.01(g)(ii) of this Agreement;
(e) other than as is contemplated by this Agreement, the Transaction
Agreement, the Stockholders Agreement and the other agreements contemplated
by the Transaction Agreement, neither Universal nor any Affiliate thereof
shall join a partnership, limited partnership, syndicate or other group, or
otherwise act in concert with any other Person (other than a Permitted
Transferee), for the purpose of acquiring, holding, voting or disposing of
Equity Securities or LLC Shares, or otherwise become a "person" within the
meaning of Section 13(d)(3) of the Exchange Act; and
(f) neither Universal nor any Affiliate thereof shall, directly or
indirectly, request that the Company or its Board of Directors amend or
waive any of the provisions of this Section 1.03.
SECTION 1.04. Reports. Universal shall deliver to the Company, promptly
after any acquisition or Transfer of Equity Securities representing more than a
1% change in the Ownership Percentage, an accurate written report specifying the
amount and class of Equity Securities acquired or Transferred in such
transaction and the amount of each class of Equity Securities owned by Universal
and its Affiliates after giving effect to such transaction; provided, however,
that no such report need be delivered with respect to any such acquisition or
Transfer of Equity Securities by Universal or its Affiliates that is reported in
a statement on Schedule 13D
APPENDIX B
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filed with the Commission and delivered to the Company by Universal in
accordance with Section 13(d) of the Exchange Act. The Company shall be entitled
to rely on such reports and statements on Schedule 13D for all purposes of this
Agreement.
SECTION 1.05. Transferees. No Third Party Transferee shall have any
rights or obligations under this Agreement, except as specifically provided for
in this Agreement and except that if such Third Party Transferee shall acquire
Beneficial Ownership of more than 5% of the outstanding Total Equity Securities
upon consummation of any Transfer or series of related Transfers from a
Stockholder, to the extent such Stockholder assigns such right in connection
with a Transfer, such Third Party Transferee shall have the right to initiate
one or more Demand Registrations pursuant to Section 5.07 or any registration
rights agreement that replaces or supersedes Section 5.07 (and shall be entitled
to such other rights that a Stockholder would have applicable to such Demand
Registration), subject to the obligations of such Stockholder applicable to such
demand (and the number of Demand Registrations to which such Stockholder is
entitled under Section 5.07 hereof shall be correspondingly decreased).
ARTICLE II
BOARD OF DIRECTORS AND RELATED MATTERS
SECTION 2.01. Initial Composition of Board of Directors. Prior to the
Closing, the HSNi Board of Directors shall take such action as is required under
applicable law to cause to be elected to the HSNi Board of Directors, effective
upon the Closing, four Satisfactory Nominees, of whom no more than one shall be
an Independent Director proposed by Universal and the remainder of whom shall be
Universal Directors, each of whom shall be identified by Universal prior to the
mailing of the proxy statement referred to in Section 9.1 of the Transaction
Agreement.
SECTION 2.02. Proportionate Representation. (a) Following the Closing,
the Company shall use its best efforts to cause the composition of the HSNi
Board to continue to reflect the proportionate representation of Universal
Directors and Independent Director set forth in Section 2.02(b).
(b) Following the Closing, the Company shall take such action as may be
required under applicable law to include in the slate of nominees recommended by
the HSNi Board of Directors and to otherwise cause to be elected to the HSNi
Board of Directors the number of Satisfactory Nominees that Universal shall be
entitled to nominate pursuant to this paragraph (b). The number of Satisfactory
Nominees which Universal shall be entitled to nominate at any annual meeting of
the Company's stockholders following the Closing shall be as follows:
X = the amount of Equity Securities Beneficially Owned by Universal
and its controlled Affiliates as of the record date for such
annual meeting
Y = Total Equity Securities as of such date
<TABLE>
<CAPTION>
NUMBER OF
SATISFACTORY
NOMINEES
------------
<S> <C> <C>
If X is equal to or more than .40Y = 4
If X is less than .40Y but equal to or more than .30Y = 3
If X is less than .30Y but equal to or more than .20Y = 2
If X is less than .20Y but equal to or more than .10Y = 1
If X is less than .10Y = 0
</TABLE>
; provided that, following the CEO Termination Date or such time as Mr. Diller
becomes Disabled, the number of Satisfactory Nominees (without regard to the
proviso in the definition thereof) that Universal shall have the right to
nominate at any meeting of the Company's stockholders at which directors are to
be elected shall be at least the number of Satisfactory Nominees (without regard
to the proviso in the definition thereof) resulting from the provisions set
forth above.
APPENDIX B
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Whenever necessary to maintain the proportionality required by the formulas
set forth above, one or more, as appropriate, Satisfactory Nominees who would
otherwise stand for election at the next annual meeting of the Company's
stockholders (as agreed to by Universal and HSNi) shall not be included as a
nominee on the HSNi Board of Directors' slate of directors.
(c) Other than as set forth in paragraph (b) above, the Company shall cause
each Satisfactory Nominee to be included in the slate of nominees recommended by
the Board of Directors to the Company's stockholders for election as directors
at each annual meeting of the stockholders of the Company and shall use all
reasonable efforts to cause the election of each such Satisfactory Nominee,
including soliciting proxies in favor of the election of such persons. Within a
reasonable time prior to the filing with the Commission of its proxy statement
or information statement with respect to each meeting of stockholders at which
directors are to be elected, the Company shall, to the extent such Person is
entitled to representation on the Company's Board of Directors in accordance
with this Agreement, provide Universal and Liberty, as applicable, with the
opportunity to review and comment on the information contained in such proxy or
information statement applicable to the director nominees designated by such
Person.
(d) In the event that a vacancy is created at any time by the death,
disability, retirement, resignation or removal (with or without cause) of any
Satisfactory Nominee or Liberty Director, Universal or Liberty, as the case may
be, shall have the right to designate a replacement Satisfactory Nominee or
Liberty Director to fill such vacancy, and the Company agrees to use its best
efforts to cause such vacancy to be filled with the replacement Satisfactory
Nominee or Liberty Director so designated. Upon the written request of Universal
or Liberty, each Stockholder shall vote (and cause each of the members of its
Stockholders Group (as defined in the Stockholders Agreement) to vote, if
applicable), or act by written consent with respect to, all Equity Securities
Beneficially Owned by it and otherwise take or cause to be taken all actions
necessary to remove the director designated by such requesting party and to
elect any replacement director designated by such party as provided in the first
sentence of this Section 2.02(d).
(e) Except as permitted by the HSNi Board of Directors, the parties agree
that the HSNi directors who are Satisfactory Nominees shall not participate in
any action taken by the HSNi Board of Directors or the Company relating to any
business transaction between the Company and Universal (including its
Affiliates), or relating to this Agreement or the Transaction Agreement,
including, without limitation, any amendment, modification or waiver hereof or
thereof.
(f) Following the Closing, the parties agree that, at such time as
representation on the HSNi Board of Directors by representatives of Liberty is
not prohibited, the Company shall take such action as may be required under
applicable law and the HSNi Certificate of Incorporation and By-laws to include
two Liberty Directors in the slate of nominees recommended by the Board of
Directors and to otherwise cause to be elected to the HSNi Board of Directors
two Liberty Directors and, thereafter, to use all reasonable efforts to cause
the election of two Liberty Directors, with the provisions of paragraphs (c) and
(d) of this Section 2.02 applicable to Universal to apply, mutatis mutandis, to
Liberty. Liberty shall have the right to nominate up to two Liberty Directors so
long as the number of Equity Securities Beneficially Owned by Liberty is at
least equal to 100% of the number of Equity Securities Beneficially Owned by
Liberty immediately prior to the Closing (appropriately adjusted to reflect any
stock splits and the like) (so long as the Ownership Percentage of Liberty is at
least equal to the lesser of (x) 17% of the Total Equity Securities and (y) the
percentage that is five percentage points less than the percentage of the Total
Equity Securities Beneficially Owned by Liberty immediately following the
Closing). Liberty shall have the right to nominate one Liberty Director so long
as Liberty Beneficially Owns a number of Equity Securities at least equal to
two-thirds of the number of Equity Securities Beneficially Owned by it
immediately prior to the Closing (appropriately adjusted to reflect any stock
splits and the like) (so long as Liberty's Ownership Percentage is at least
equal to 5% of the Total Equity Securities).
SECTION 2.03. Management of the Business. Following the Closing and
except as indicated in Section 2.04 below, as required by Delaware law or the
Certificate of Incorporation of the Company and the By-Laws or as contemplated
by the Transaction Agreement and the agreements contemplated thereby, Mr.
Diller, so long as he is CEO and has not become Disabled, will continue to have
full authority to operate
APPENDIX B
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<PAGE> 172
the day-to-day business affairs of the Company to the same extent as prior to
the Closing. The Executive Committee (or any similar committee) of the Board
will not be used in a manner that usurps the overall responsibility of the
Company's Board of Directors under Delaware law to manage or direct the business
and affairs of the Company.
SECTION 2.04. Fundamental Changes. So long as (a) in the case of
Universal, the Ownership Percentage of Universal is at least 20 percent (or, in
the event that Universal has not transferred to a non-Affiliate Equity
Securities representing more than one-half of the Initial Percentage, 15
percent), (b) in the case of Liberty, Liberty Beneficially Owns at least
two-thirds of the number of Equity Securities Beneficially Owned by it
(including the Contingent Shares, the Exchange Shares and through its equity
ownership of BDTV Entities) immediately prior to the Closing (appropriately
adjusted to reflect any stock splits and the like) (so long as such Ownership
Percentage equals at least 5% of the Total Equity Securities), and (c) in the
case of Mr. Diller, Mr. Diller Beneficially Owns at least five million Parent
Common Shares with respect to which he has a pecuniary interest (appropriately
adjusted to reflect any stock splits and the like) and the CEO Termination Date
has not occurred and Mr. Diller has not become Disabled, neither the Company nor
any Subsidiary (including the LLC) shall take any of the actions set forth below
without the prior approval of Mr. Diller, Universal and/or Liberty (each, a
"Stockholder"), as applicable:
(i) Any transaction not in the ordinary course of business, launching
new or additional channels or engaging in any new field of business, in any
case, which will result in, or will have a reasonable likelihood of
resulting in, such Stockholder or any Affiliate thereof being required
under law to divest itself of all or any part of its Equity Securities or
LLC Shares, or interests therein, or any other material assets of such
Person, or which will render such Person's continued ownership of such
securities, shares, interests or assets illegal or subject to the
imposition of a fine or penalty or which will impose material additional
restrictions or limitations on such Person's full rights of ownership
(including, without limitation, voting) thereof or therein.
(ii) Acquisition or disposition (including pledges), directly or
indirectly, by the Company or any of its Subsidiaries (including the LLC)
of any assets (including debt and/or equity securities) or business (by
merger, consolidation or otherwise), provided that the transactions
contemplated by the Transaction Agreement, including the matters
contemplated by Section 9.14 thereof (to the extent conducted in all
material respects in accordance with the letter agreement relating to such
matters dated as of the date hereof among Liberty, Universal and the
Company, as such agreement may be amended or modified), shall not require
the prior approval of Liberty pursuant to this Section 2.04, the grant or
issuance of any debt or equity securities of the Company or any of its
Subsidiaries (including the LLC, other than, in any of the foregoing, as
contemplated by the Transaction Agreement and the Exchange Agreement or the
Contingent Shares and the Exchange Shares), the redemption, repurchase or
reacquisition of any debt or equity securities of the Company or any of its
Subsidiaries (including the LLC, other than as contemplated by the
Transaction Agreement and the Exchange Agreement or the Contingent Shares
and the Exchange Shares) by the Company or any such Subsidiary (including
the LLC), or the incurrence of any indebtedness, or any combination of the
foregoing, in any such case, in one transaction or a series of transactions
in a six-month period, with a value of 10% or more of the market value of
the Total Equity Securities at the time of such transaction, provided that
the prepayment, redemption, repurchase or conversion of prepayable,
callable, redeemable or convertible securities (including LLC Shares) in
accordance with the terms thereof shall not be a transaction subject to
this paragraph.
(iii) For a five-year period following the Closing, disposition of any
interest in the Partnership or, other than in the ordinary course of
business, its assets, directly or indirectly (by merger, consolidation or
otherwise), provided that matters set forth in this clause (iii) will not
constitute a "Fundamental Change" with respect to Liberty and shall not
require its approval unless it otherwise would constitute a "Fundamental
Change" under one of the other items of this Section 2.04 with respect to
which Liberty's consent is required.
APPENDIX B
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<PAGE> 173
(iv) Disposition or issuance (including pledges), directly or
indirectly, by the Company of any LLC Shares except as contemplated by the
Transaction Agreement, the Governance Agreement, the Stockholders Agreement
and the Exchange Agreement or pledges in connection with financings.
(v) Voluntarily commencing any liquidation, dissolution or winding up
of the Company or any material Subsidiary (including the LLC).
(vi) Any material amendments (other than as contemplated by the
Transaction Agreement and the Stockholders Agreement) to the Certificate of
Incorporation or Bylaws of the Company (including the issuance of blank
check preferred stock containing super voting rights or class votes on any
matter (except to the extent such class vote is required by Delaware law or
to the extent the holder of such preferred stock may have the right to
elect directors upon the occurrence of a default in payment of dividends or
a redemption price)) or to the operating agreement or bylaws of the LLC.
(vii) Engagement by the Company or the LLC in any line of business
other than media, communications and entertainment products, services and
programming, and electronic retailing, or other businesses engaged in by
the Company as of the date hereof or as contemplated by the Transaction
Agreement, provided, that neither the Company nor the LLC shall engage in
theme park, arcade or film exhibition businesses so long as Universal is
restricted from competing in such lines of business under non-compete or
similar agreements in effect on the date hereof and such agreements would
be applicable to the Company and/or the LLC, as the case may be, by virtue
of Universal's ownership therein, provided that the matters set forth in
the foregoing proviso shall not constitute a "Fundamental Change" with
respect to Liberty and shall not require its approval.
(viii) Settlement of any litigation, arbitration or other proceeding
which is other than in the ordinary course of business and which involves
any material restriction on the conduct of business by the Company or such
Stockholder or any of their respective Affiliates or the continued
ownership of assets by the Company or such Stockholder or any of their
respective Affiliates.
(ix) Engagement in any transaction (other than those contemplated by
the Transaction Agreement) between the Company and its Affiliates
(excluding Mr. Diller, Universal and Liberty), on the one hand, and Mr.
Diller, Universal or Liberty, and their respective Affiliates, on the other
hand, subject to exceptions relating to the size of the proposed
transaction and except for those transactions which are otherwise on an
arm's-length basis.
(x) Adopting any stockholder rights plan (or any other plan or
arrangement that could reasonably be expected to disadvantage any
stockholder on the basis of the size or voting power of its shareholding)
that would adversely affect such Stockholder.
(xi) Entering into any agreement with any holder of Equity Securities
or LLC Shares in such stockholder's or interest holder's capacity as such,
as the case may be, which grants such stockholder approval rights similar
in type and magnitude to those set forth in this Section 2.04.
(xii) Entering into any transaction that could reasonably be expected
to impede the Company's ability to engage in the Spinoff or cause it to be
taxable.
SECTION 2.05. Notice of Events. In the event that (a) the Company intends
to engage in a transaction of a type that is described in any of paragraphs (i)
through (xii) of Section 2.04, and (b) the Company does not intend to seek
consent from those parties that are required to consent to a Fundamental Change
(a "Consenting Party") due to the Company's good faith belief that the specific
provisions of such paragraphs do not require such consent but that reasonable
people acting in good faith could differ as to whether consent is required
pursuant to such paragraphs, the Company shall notify the Consenting Parties as
to the material terms of the transaction (including the Company's estimate of
the timing thereof) by written notice delivered as far in advance of engaging in
such transaction as is reasonably practicable unless such transaction was
previously publicly disclosed.
APPENDIX B
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ARTICLE III
REPRESENTATIONS AND WARRANTIES
SECTION 3.01. Representations and Warranties of the Company. The Company
represents and warrants to Mr. Diller, Universal and Liberty that (a) the
Company is a corporation duly organized, validly existing and in good standing
under the laws of the State of Delaware and has the corporate power and
authority to enter into this Agreement and to carry out its obligations
hereunder, (b) the execution and delivery of this Agreement by the Company and
the consummation by the Company of the transactions contemplated hereby have
been duly authorized by all necessary corporate action on the part of the
Company and no other corporate proceedings on the part of the Company are
necessary to authorize this Agreement or any of the transactions contemplated
hereby, (c) this Agreement has been duly executed and delivered by the Company
and constitutes a valid and binding obligation of the Company, and, assuming
this Agreement constitutes a valid and binding obligation of each Stockholder,
is enforceable against the Company in accordance with its terms, (d) neither the
execution, delivery or performance of this Agreement by the Company constitutes
a breach or violation of or conflicts with the Company's Certificate of
Incorporation or By-laws or any material agreement to which the Company is a
party and (e) none of such material agreements would impair in any material
respect the ability of the Company to perform its obligations hereunder.
SECTION 3.02. Representations and Warranties of the Stockholders. Each
Stockholder, as to itself (and, in the case of Mr. Diller, as applicable),
represents and warrants to the Company and the other Stockholders that (a) it is
a corporation duly organized, validly existing and in good standing under the
laws of its jurisdiction of organization and he or it, as the case may be, has
the power and authority (corporate or otherwise) to enter into this Agreement
and to carry out his or its obligations hereunder, (b) the execution and
delivery of this Agreement by such Stockholder and the consummation by such
Stockholder of the transactions contemplated hereby have been duly authorized by
all necessary action on the part of such Stockholder and no other proceedings on
the part of such Stockholder are necessary to authorize this Agreement or any of
the transactions contemplated hereby, (c) this Agreement has been duly executed
and delivered by the Stockholder and constitutes a valid and binding obligation
of the Stockholder, and, assuming this Agreement constitutes a valid and binding
obligation of the Company, is enforceable against the Stockholder in accordance
with its terms, (d) neither the execution, delivery or performance of this
Agreement by such Stockholder constitutes a breach or violation of or conflicts
with its certificate of incorporation or by-laws (or similar governing
documents) or any material agreement to which such Stockholder is a party and
(e) none of such material agreements would impair in any material respect the
ability of such Stockholder to perform its obligations hereunder.
ARTICLE IV
DEFINITIONS
For purposes of this Agreement, the following terms shall have the
following meanings:
SECTION 4.01. "Affiliate" shall have the meaning set forth in Rule 12b-2
under the Exchange Act (as in effect on the date of this Agreement). For
purposes of this definition, Matsushita Electric Industrial Co., Ltd. ("MEI" )
shall not be considered an Affiliate of Universal or any Subsidiary of Universal
so long as MEI does not materially increase its influence over Universal
following the date hereof, and natural persons (other than, in the case of
Universal, any descendant of Samuel Bronfman who is a director or executive
officer of Seagram) shall not be deemed to be Affiliates.
SECTION 4.02. "Assumptions" shall have the meaning set forth in the
definition of Total Equity Securities.
SECTION 4.03. "BDTV Entities" shall have the meaning specified in the
Stockholders Agreement.
SECTION 4.04. "Beneficial Ownership" or "Beneficially Own" shall have the
meaning given such term in Rule 13d-3 under the Exchange Act and a Person's
Beneficial Ownership of Parent Common Shares or
APPENDIX B
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<PAGE> 175
LLC Shares shall be calculated in accordance with the provisions of such Rule;
provided, however, that for purposes of determining Beneficial Ownership, (a) a
Person shall be deemed to be the Beneficial Owner of any Equity Securities
(including any Contingent Shares or Exchange Shares) which may be acquired by
such Person (disregarding any legal impediments to such Beneficial Ownership),
whether within 60 days or thereafter, upon the conversion, exchange or exercise
of any warrants, options (which options held by Mr. Diller shall be deemed to be
exercisable), rights or other securities (including LLC Shares) issued by the
Company or any Subsidiary thereof, (b) no Person shall be deemed to Beneficially
Own any Equity Securities solely as a result of such Person's execution of this
Agreement (including by virtue of holding a proxy with respect to such Equity
Securities), the Transaction Agreement or the Stockholders Agreement, or with
respect to which such Person does not have a pecuniary interest, and (c) Liberty
shall be deemed to be the Beneficial Owner of the proportionate number of Parent
Common Shares represented by Liberty's equity interest in a BDTV Entity (as
defined in the Stockholders Agreement); provided, further, that for purposes of
calculating Beneficial Ownership, the number of outstanding Parent Common Shares
shall be deemed to include the number of Parent Common Shares that would be
outstanding if all outstanding LLC Shares were exchanged for Parent Common
Shares pursuant to the Exchange Agreement and all Contingent Shares and Exchange
Shares were issued.
SECTION 4.05. "CEO" shall mean the Chief Executive Officer of HSNi or any
successor entity.
SECTION 4.06. "CEO Termination Date" shall have the meaning specified in
Section 1.01(f) of this Agreement.
SECTION 4.07. "Commission" shall mean the Securities and Exchange
Commission.
SECTION 4.08. "Consenting Party" shall have the meaning set forth in
Section 2.05 of this Agreement.
SECTION 4.09. "Demand Registration" shall have the meaning set forth in
Section 5.07(b) of this Agreement.
SECTION 4.10. "Disabled" shall mean the disability of Mr. Diller after the
expiration of more than 180 consecutive days after its commencement which is
determined to be total and permanent by a physician selected by Universal (or,
if the Universal Termination Date has occurred, by Liberty) and reasonably
acceptable to Mr. Diller, provided that Mr. Diller shall be deemed to be
disabled only following the expiration of 90 days following receipt of a written
notice from the Company and such physician specifying that a disability has
occurred if within such 90-day period he fails to return to managing the
business affairs of the Company. Total disability shall mean mental or physical
incapacity that prevents Mr. Diller from managing the business affairs of the
Company.
SECTION 4.11. "Equity Securities" shall mean the equity securities of the
Company calculated on a Parent Common Stock equivalent basis, including the
Parent Common Shares, the Contingent Shares and the Exchange Shares and those
shares issuable upon exchange of the LLC Shares and upon exercise, conversion or
redemption of other securities of the Company not otherwise included in this
definition.
SECTION 4.12. "Exchange Act" shall mean the Securities Exchange Act of
1934, as amended, and the rules and regulations of the Commission promulgated
thereunder.
SECTION 4.13. "Exchange Agreement" shall mean the Exchange Agreement dated
as of October 19, 1997 by and among the Company, Universal and Liberty.
SECTION 4.14. "FCC Regulations" shall mean as of any date, all applicable
federal communications statutes and all rules, regulations, orders, decrees and
written policies (including opinions and orders of the Federal Communications
Commission applicable to the stockholder or the Company and its subsidiaries) as
then in effect, and any interpretations or waivers thereof or modifications
thereto.
SECTION 4.15. "Independent Director" shall mean a person independent of
and not an affiliate of Universal or Seagram, who is not an officer or director
of Universal or Seagram. No person proposed as an
APPENDIX B
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Independent Director shall serve as a director unless such individual has such
business or technical experience, stature and character as is commensurate with
service on the board of a publicly held enterprise.
SECTION 4.16. "Liberty Director" shall mean (a) any officer or director of
either Telecommunications, Inc. ("TCI") or Liberty designated by Liberty to
serve on the Company's Board of Directors, provided that the Company's Board of
Directors is not unable, in the exercise of its fiduciary responsibilities, to
recommend that the Company's stockholders elect such individual to serve on the
Company's Board of Directors, or (b) any other Person designated by Liberty who
is reasonably acceptable to the Company.
SECTION 4.17. "Ownership Percentage" means, with respect to any
Stockholder, at any time, the ratio, expressed as a percentage, of (i) the Total
Equity Securities Beneficially Owned by such Stockholder (disregarding any legal
impediments to such Beneficial Ownership) and its Affiliates to (ii) the sum of
(x) the Total Equity Securities and (y) with respect to such Stockholder, any
Parent Common Shares included in clause (i) that are issuable upon conversion,
exchange or exercise of Equity Securities that are not included in clause (x).
SECTION 4.18. "Permitted Business Combination" shall mean (x) a tender or
exchange offer by Universal or an Affiliate for all Parent Common Shares that is
accepted by a majority of the Company's Public Stockholders or (y) a merger
(other than a merger following a tender or exchange offer complying with (x)
above) involving the Company and Universal or any Affiliate thereof or successor
thereto that is approved, in addition to any vote required by law, by a majority
of the Company's Public Stockholders so long as, in the case of (x) and (y)
above, a committee of HSNi directors (excluding any Persons who are Satisfactory
Nominees and Liberty Directors pursuant to the terms of this Agreement, as it
may be amended, modified or waived from time to time, and any other directors
who have a conflict of interest) determines that the tender offer, exchange
offer or merger, as the case may be, is fair to the Company's stockholders
(other than Universal and its Affiliates).
SECTION 4.19. "Permitted Investment Percentage" shall have the meaning set
forth in the preambles to this Agreement.
SECTION 4.20. "Permitted Transferee" shall mean Liberty or Mr. Diller and
the members of their respective Stockholder Groups.
SECTION 4.21. "Person" shall mean any individual, partnership, joint
venture, corporation, trust, unincorporated organization, government or
department or agency of a government.
SECTION 4.22. "Public Stockholder" shall mean any stockholder of the
Company that, together with its Affiliates (a) has sole or shared voting power
with respect to Voting Securities representing no more than 10% of the voting
power on the applicable vote or (b) has sole or shared power to dispose of
Equity Securities representing no more than 10% of the Equity Securities to be
tendered or exchanged in any applicable tender or exchange offer, as the case
may be.
SECTION 4.23. "Right of First Refusal" shall mean the right of the Company
(or its designee) to purchase Equity Securities Beneficially Owned by Universal
under the circumstances and upon the terms described below and in Section
1.02(b) of this Agreement. In the event that Universal desires to sell Equity
Securities Beneficially Owned by it to which the Right of First Refusal applies
and it has received a bona fide offer from a third party to purchase such Equity
Securities, Universal shall provide the Company with written notice (the "Sales
Notice") of the terms of such third party offer (including price, conditions,
the identity of such third party and the written contract providing for such
sale). The Company (or its designee) shall be entitled to, by written notice
delivered by the Company to Universal within 10 business days following receipt
of the Sales Notice (or in the case of a third party tender offer or exchange
offer, not later than five business days prior to the expiration date of such
offer, provided that all conditions to such offer (other than with respect to
the number of Equity Securities tendered) shall have been satisfied or waived
and the Sales Notice shall have been provided at least ten business days prior
to the expiration date of such offer), agree to purchase the Equity Securities
that are the subject of the Sales Notice for cash on the terms of the third
party offer if such offer is for cash or, if not for cash, the Fair Market Value
of the consideration to be paid pursuant to such third party offer, which notice
shall include the date scheduled for the closing of such purchase, which date
APPENDIX B
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shall be no later than 60 days following delivery of such election notice. If
the Company does not deliver to Universal the written notice required hereunder,
agreeing to the purchase of the Equity Securities subject to the Sales Notice,
Universal shall be entitled to consummate the sale to the third party identified
in, and on the terms and subject to the conditions set forth in, the Sales
Notice, provided such sale is consummated within 90 days after the latest of (a)
the expiration of the foregoing response time periods or (b) the receipt by
Universal of the election notice or, in the case of (a) or (b), if later (i)
five business days following receipt of all required regulatory approvals;
provided that the closing shall only be delayed pending receipt of required
regulatory approvals if (x) Universal and the proposed third party transferee
are using all reasonable efforts to obtain the required regulatory approvals and
(y) there is a reasonable prospect of receiving such regulatory approvals or
(ii) the expiration or termination of a third party tender or exchange offer if
the intended method of sale set forth in the Sales Notice were such third party
tender or exchange offer.
SECTION 4.24. "Satisfactory Nominee" shall mean each person who is either
a Universal Director or an Independent Director proposed by Universal, provided
that in no case shall there be more than one Independent Director.
SECTION 4.25. "Seagram" shall mean The Seagram Company Ltd.
SECTION 4.26. "Securities Act" shall mean the Securities Act of 1933, as
amended, and the rules and regulations of the Commission promulgated thereunder.
SECTION 4.27. "Shares" shall have the meaning set forth in the preambles
to this Agreement.
SECTION 4.28. "Stockholders Agreement" shall mean the stockholders
agreement dated as of the date hereof among Liberty, Universal and Mr. Diller.
SECTION 4.29. "Stockholders Group" shall mean (a) in respect of Universal,
the Universal Stockholders Group (as defined in the Stockholders Agreement), (b)
in respect of Liberty, the Liberty Stockholders Group (as defined in the
Stockholders Agreement) and (c) in respect of Diller, the Diller Stockholders
Group (as defined in the Stockholders Agreement).
SECTION 4.30. "Subsidiary" shall mean, as to any Person, any corporation
at least a majority of the shares of stock of which having general voting power
under ordinary circumstances to elect a majority of the Board of Directors of
such corporation (irrespective of whether or not at the time stock of any other
class or classes shall have or might have voting power by reason of the
happening of any contingency) is, at the time as of which the determination is
being made, owned by such Person, or one or more of its Subsidiaries or by such
Person and one or more of its Subsidiaries.
SECTION 4.31. "Third Party Transferee" shall have the meaning ascribed to
such term in the Stockholders Agreement.
SECTION 4.32. "13D Group" shall mean any group of Persons acquiring,
holding, voting or disposing of Voting Securities which would be required under
Section 13(d) of the Exchange Act and the rules and regulations thereunder (as
in effect, and based on legal interpretations thereof existing, on the date
hereof) to file a statement on Schedule 13D with the Commission as a "person"
within the meaning of Section 13(d)(3) of the Exchange Act if such group
Beneficially Owned Voting Securities representing more than 5% of any class of
Voting Securities then outstanding.
SECTION 4.33. "Total Equity Securities" at any time shall mean, subject to
the next sentence, the total number of the Company's outstanding equity
securities calculated on a Parent Common Stock equivalent basis (assuming (the
"Assumptions") that all Contingent Shares, Exchange Shares and Parent Common
Shares issuable in respect of the LLC Shares have been issued). Any Equity
Securities Beneficially Owned by a Person that are not outstanding Voting
Securities but that, upon exercise, conversion or exchange, would become Voting
Securities (other than the Contingent Shares, the Exchange Shares and the LLC
Shares, which shall be deemed to be outstanding Equity Securities for all
purposes), shall be deemed to be outstanding for the purpose of computing Total
Equity Securities and the percentage of the Equity Securities owned by such
Person but shall not be deemed to be outstanding for the purpose of computing
Total Equity Securities and the percentage of the Equity Securities owned by any
other Person.
APPENDIX B
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<PAGE> 178
SECTION 4.34. "Transfer" shall mean, directly or indirectly, to sell,
transfer, assign, pledge, encumber, hypothecate or similarly dispose of, either
voluntarily or involuntarily, or to enter into any contract, option or other
arrangement or understanding with respect to the sale, transfer, assignment,
pledge, encumbrance, hypothecation or similar disposition of, any Parent Common
Shares Beneficially Owned by such Stockholder or any interest in any Parent
Common Shares Beneficially Owned by such Stockholder, provided, however, that, a
merger or consolidation in which a Stockholder is a constituent corporation
shall not be deemed to be the Transfer of any Parent Common Shares Beneficially
Owned by such Stockholder (provided, that a significant purpose of any such
transaction is not to avoid the provisions of this Agreement). For purposes of
this Agreement, the conversion of Parent Class B Stock into Parent Common Stock
shall not be deemed to be a Transfer.
SECTION 4.35. "Universal Director" shall mean any officer or director of
Universal or Seagram designated by Universal to serve on the Company's Board of
Directors, provided that the Company's Board of Directors is not unable, in the
exercise of its fiduciary responsibilities to the Company's stockholders, to
recommend that the Company's stockholders elect such individual to serve on the
Company's Board of Directors.
SECTION 4.36. "Voting Securities" shall mean at any particular time the
shares of any class of capital stock of the Company which are then entitled to
vote generally in the election of directors.
ARTICLE V
MISCELLANEOUS
SECTION 5.01. Notices. All notices, requests and other communications to
any party hereunder shall be in writing (including telecopy) and shall be given,
if to Universal, to:
Universal Studios, Inc.
100 Universal City Plaza
Universal City, California 91608
Attention: Karen Randall
Telephone: (818) 777-7100
Facsimile: (818) 866-3444
with a copy to:
Simpson Thacher & Bartlett
425 Lexington Avenue
New York, New York 10017
Attention: John G. Finley
Telephone: (212) 455-2000
Facsimile: (212) 455-2502
if to Liberty, to:
Liberty Media Corporation
8101 East Prentice Avenue
Suite 500
Englewood, Colorado 80111
Attention: President
Telephone: (303) 721-5400
Facsimile: (303) 841-7344
APPENDIX B
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<PAGE> 179
with a copy to:
Baker & Botts, L.L.P.
599 Lexington Avenue
Suite 2900
New York, New York 10022-6030
Attention: Frederick H. McGrath
Telephone: (212) 705-5000
Facsimile: (212) 705-5125
if to Mr. Diller, to:
Barry Diller
1940 Coldwater Canyon Drive
Beverly Hills, California 90210
Telephone: (310) 246-1411
Facsimile: (310) 247-9153
if to the Company, to:
HSN, Inc.
1 HSN Drive
St. Petersburg, Florida 33729
Attention: General Counsel
Telephone: (813) 572-8585
Facsimile: (813) 573-0866
with a copy to:
Wachtell, Lipton, Rosen & Katz
51 West 52nd Street
New York, New York 10019
Attention: Pamela S. Seymon
Telephone: (212) 403-1000
Facsimile: (212) 403-2000
or such address or facsimile number as such party may hereafter specify for the
purpose by notice to the other parties hereto. Each such notice, request or
other communication shall be effective when delivered personally, telegraphed,
or telecopied, or, if mailed, five business days after the date of the mailing.
SECTION 5.02. Amendments; No Waivers. (a) Any provision of this Agreement
may be amended or waived if, and only if, such amendment or waiver is in writing
and signed, in the case of an amendment, by the party whose rights or
obligations hereunder are affected by such amendment, or in the case of a
waiver, by the party or parties against whom the waiver is to be effective.
Approval by Liberty of any amendment to this Agreement (or any waiver of any
provision hereof) shall be required only if it relates to Section 1.05, Article
II or, provided Liberty Beneficially Owns at least 12 1/2% of the Total Equity
Securities, Sections 1.01 and 1.03(c) of this Agreement, or if such amendment or
waiver would adversely affect any rights of Liberty provided hereunder or under
the Stockholders Agreement. Any amendment or waiver by the Company shall be
authorized by a majority of the Board of Directors (excluding for this purpose
any director who is a Satisfactory Nominee or Liberty Director as provided for
in this Agreement).
(b) No failure or delay by any party in exercising any right, power or
privilege hereunder shall operate as a waiver thereof nor shall any single or
partial exercise thereof preclude any other or further exercise thereof or the
exercise of any other right, power or privilege. The rights and remedies herein
provided shall be cumulative and not exclusive of any rights or remedies
provided by law.
SECTION 5.03. Successors and Assigns. Except as provided in Section 1.05,
neither this Agreement nor any of the rights or obligations under this Agreement
shall be assigned, in whole or in part (except by
APPENDIX B
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<PAGE> 180
operation of law pursuant to a merger of Universal or Liberty with another
Person a significant purpose of which is not to avoid the provisions of this
Agreement), by any party without the prior written consent of the other parties
hereto. Subject to the foregoing, the provisions of this Agreement shall be
binding upon and inure to the benefit of the parties hereto and their respective
successors and permitted assigns.
SECTION 5.04. Governing Law; Consent to Jurisdiction. This Agreement
shall be construed in accordance with and governed by the internal laws of the
State of Delaware, without giving effect to the principles of conflicts of laws.
Each of the parties hereto hereby irrevocably and unconditionally consents to
submit to the non-exclusive jurisdiction of the courts of the State of Delaware,
for any action, proceeding or investigation in any court or before any
governmental authority ("Litigation") arising out of or relating to this
Agreement and the transactions contemplated hereby and further agrees that
service of any process, summons, notice or document by U.S. mail to its
respective address set forth in this Agreement shall be effective service of
process for any Litigation brought against it in any such court. Each of the
parties hereto hereby irrevocably and unconditionally waives any objection to
the laying of venue of any Litigation arising out of this Agreement or the
transactions contemplated hereby in the courts of the State of Delaware, and
hereby further irrevocably and unconditionally waives and agrees not to plead or
claim in any such court that any such Litigation brought in any such court has
been brought in an inconvenient forum. Each of the parties irrevocably and
unconditionally waives, to the fullest extent permitted by applicable law, any
and all rights to trial by jury in connection with any Litigation arising out of
or relating to this Agreement or the transactions contemplated hereby.
SECTION 5.05. Counterparts; Effectiveness. This Agreement may be signed
in any number of counterparts, each of which shall be an original, with the same
effect as if the signatures thereto and hereto were upon the same instrument.
This Agreement shall become effective when each party hereto shall have received
counterparts thereof signed by the other parties hereto.
SECTION 5.06. Specific Performance. The Company, Mr. Diller, Universal
and Liberty each acknowledges and agrees that the parties' respective remedies
at law for a breach or threatened breach of any of the provisions of this
Agreement would be inadequate and, in recognition of that fact, agrees that, in
the event of a breach or threatened breach by the Company, Universal or Liberty
of the provisions of this Agreement, in addition to any remedies at law, Mr.
Diller, Universal, Liberty and the Company, respectively, without posting any
bond shall be entitled to obtain equitable relief in the form of specific
performance, a temporary restraining order, a temporary or permanent injunction
or any other equitable remedy which may then be available.
SECTION 5.07. Registration Rights. (a) Universal, Liberty and Mr. Diller
shall be entitled to customary registration rights relating to Parent Common
Stock (including the ability to transfer registration rights in connection with
the sale or other disposition of Parent Common Stock as set forth in this
Agreement).
(b) If requested by a Stockholder, the Company shall be required promptly
to cause the Parent Common Stock owned by such Stockholder or its Affiliates to
be registered under the Securities Act in order to permit such Stockholder or
such Affiliate to sell such shares in one or more (but not more than (i) in the
case of Universal, six, (ii) in the case of Liberty, four and (iii) in the case
of Mr. Diller, two) registered public offerings (each, a "Demand Registration").
Each Stockholder shall also be entitled to customary piggyback registration
rights. If the amount of shares sought to be registered by a Stockholder and its
Affiliates pursuant to any Demand Registration is reduced by more than 25%
pursuant to any underwriters' cutback, then such Stockholder may elect to
request the Company to withdraw such registration, in which case, such
registration shall not count as one of such Stockholder's Demand Registrations.
If a Stockholder requests that any Demand Registration be an underwritten
offering, then such Stockholder shall select the underwriter(s) to administer
the offering, provided that such underwriter(s) shall be reasonably satisfactory
to the Company. If a Demand Registration is an underwritten offering and the
managing underwriter advises the Stockholder initiating the Demand Registration
in writing that in its opinion the total number or dollar amount of securities
proposed to be sold in such offering is such as to materially and adversely
affect the success of such offering, then the Company will include in such
registration, first, the securities of the initiating Stockholder, and,
APPENDIX B
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<PAGE> 181
thereafter, any securities to be sold for the account of others who are
participating in such registration (as determined on a fair and equitable basis
by the Company). In connection with any Demand Registration or inclusion of a
Stockholder's or its Affiliate's shares in a piggyback registration, the
Company, such Stockholder and/or its Affiliates shall enter into an agreement
containing terms (including representations, covenants and indemnities by the
Company and such Stockholder), and shall be subject to limitations, conditions,
and blackout periods, customary for a secondary offering by a selling
stockholder. The costs of the registration (other than underwriting discounts,
fees and commissions) shall be paid by the Company. The Company shall not be
required to register such shares if a Stockholder would be permitted to sell the
Parent Common Stock in the quantities proposed to be sold and at such time
within a three-month period under Rule 144 of the Securities Act or under
another comparable exemption therefrom.
(c) If the Company and a Stockholder cannot agree as to what constitutes
customary terms within 10 days of such Stockholder's request for registration
(whether in a Demand Registration or a piggyback registration), then such
determination shall be made by a law firm of national reputation mutually
acceptable to the Company and such Stockholder.
SECTION 5.08. Termination. Except as otherwise provided in this Section,
this Agreement shall terminate (a) prior to the Closing upon any termination of
the Transaction Agreement in accordance with its terms and (b) thereafter, (i)
as to Universal, at such time that Universal Beneficially Owns Equity Securities
representing less than 10% of the Total Equity Securities, (ii) as to Liberty,
at such time that Liberty Beneficially Owns Equity Securities representing less
than 5% of the Total Equity Securities and (iii) as to Mr. Diller, at such time
that the CEO Termination Date has occurred or at such time as he becomes
Disabled. In respect of "Fundamental Changes," such provisions shall terminate
as to Mr. Diller, Universal and Liberty as set forth therein, and a
Stockholder's registration rights shall terminate when such Stockholder can sell
all its shares under Rule 144 under the Securities Act, except as provided in
Section 1.05 of this Agreement.
SECTION 5.09. Severability. If any term, provision, covenant or
restriction of this Agreement is held by a court of competent jurisdiction to be
invalid, void or unenforceable, the remainder of the terms, provisions,
covenants and restrictions of this Agreement shall remain in full force and
effect and shall in no way be affected, impaired or invalidated, provided that
the parties hereto shall negotiate in good faith to attempt to place the parties
in the same position as they would have been in had such provision not been held
to be invalid, void or unenforceable.
SECTION 5.10. Cooperation. Each of Universal, Liberty and Mr. Diller
covenants and agrees with the other to use its reasonable best efforts to cause
the Company to fulfill the Company's obligations under this Agreement.
SECTION 5.11. Entire Agreement. Except as otherwise expressly set forth
herein, this Agreement, the Stockholders Agreement, the Liberty Exchange
Agreement, the agreement relating to the Contingent Shares, the Transaction
Agreement and each of the other agreements contemplated by the Transaction
Agreement (including the letter agreement referenced in Section 2.04 hereof)
embody the complete agreement and understanding among the parties hereto with
respect to the subject matter hereof and supersede and preempt any prior
understandings, agreements or representations by or among the parties, written
or oral, that may have related to the subject matter hereof in any way
(including, without limitation, effective upon the Closing, all stockholders
agreements relating to HSNi (other than the Stockholders Agreement) between
Liberty and Mr. Diller). Without limiting the generality of the foregoing, to
the extent that any of the terms hereof are inconsistent with the rights or
obligations of any party under any other agreement with any other party, the
terms of this Agreement shall govern.
APPENDIX B
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<PAGE> 182
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed as of the day and year first above written.
HSN, INC.
By:
--------------------------------------
Title:
UNIVERSAL STUDIOS, INC.
By:
--------------------------------------
Title:
LIBERTY MEDIA CORPORATION
By:
--------------------------------------
Title:
--------------------------------------
Barry Diller
APPENDIX B
B-20
<PAGE> 183
APPENDIX C
================================================================================
EXHIBIT B TO THE INVESTMENT AGREEMENT
FORM OF
STOCKHOLDERS AGREEMENT
AMONG
UNIVERSAL STUDIOS, INC.,
LIBERTY MEDIA CORPORATION,
BARRY DILLER,
HSN, INC.
AND
THE SEAGRAM COMPANY LTD.
DATED AS OF OCTOBER 19, 1997
================================================================================
APPENDIX C
<PAGE> 184
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
ARTICLE I
DEFINITIONS
SECTION 1.1 Certain Defined Terms............................................... C-4
SECTION 1.2 Other Defined Terms................................................. C-9
SECTION 1.3 Other Definitional Provisions....................................... C-11
ARTICLE II
STANDSTILL
SECTION 2.1 Liberty Standstill with Universal................................... C-11
ARTICLE III
CORPORATE GOVERNANCE
SECTION 3.1 Liberty Board Representation........................................ C-12
SECTION 3.2 Certain Restrictions................................................ C-12
SECTION 3.3 Voting on Certain Matters........................................... C-13
SECTION 3.4 Restrictions on Other Agreements.................................... C-14
SECTION 3.5 Irrevocable Proxy of Universal...................................... C-14
SECTION 3.6 Irrevocable Proxy of Liberty........................................ C-15
SECTION 3.7 Cooperation......................................................... C-16
ARTICLE IV
TRANSFER OF COMMON SHARES
SECTION 4.1 Restrictions on Transfer by Liberty and Diller...................... C-16
SECTION 4.2 Universal Purchase of Liberty Equity................................ C-17
SECTION 4.3 Going-Private Transaction........................................... C-21
SECTION 4.4 Diller Right to Put Shares.......................................... C-21
SECTION 4.5 Tag-Along for Diller and Liberty for Transfers by Universal......... C-24
SECTION 4.6 Tag-Along for Liberty for Transfers by Diller to Universal.......... C-25
SECTION 4.7 Tag-Along for Liberty for Transfers by Diller to a Third Party...... C-26
SECTION 4.8 Right of First Refusal between Universal and Diller................. C-27
SECTION 4.9 Right of First Refusal between Liberty and Diller................... C-29
SECTION 4.10 Right of First Refusal of Universal................................. C-31
SECTION 4.11 Transfers of Class B Shares......................................... C-31
SECTION 4.12 Transferees......................................................... C-31
SECTION 4.13 Notice of Transfer.................................................. C-33
SECTION 4.14 Compliance with Transfer Provisions................................. C-33
ARTICLE V
BDTV ENTITY ARRANGEMENTS
SECTION 5.1 Management.......................................................... C-33
SECTION 5.2 Treatment of Contingent Shares and Exchange Shares.................. C-33
SECTION 5.3 Changes to BDTV Structures.......................................... C-33
SECTION 5.4 Transfers of BDTV Interests......................................... C-34
</TABLE>
APPENDIX C
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<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
ARTICLE VI
MISCELLANEOUS
SECTION 6.1 Conflicting Agreements.............................................. C-34
SECTION 6.2 Duration of Agreement............................................... C-34
SECTION 6.3 Further Assurances.................................................. C-35
SECTION 6.4 SCL Agreement to Cooperate.......................................... C-35
SECTION 6.5 Amendment and Waiver................................................ C-35
SECTION 6.6 Severability........................................................ C-35
SECTION 6.7 Effective Date...................................................... C-35
SECTION 6.8 Entire Agreement.................................................... C-35
SECTION 6.9 Successors and Assigns.............................................. C-36
SECTION 6.10 Counterparts........................................................ C-36
SECTION 6.11 Liabilities Under Federal Securities Laws........................... C-36
SECTION 6.12 Remedies............................................................ C-36
SECTION 6.13 Notices............................................................. C-36
SECTION 6.14 Governing Law; Consent to Jurisdiction.............................. C-38
SECTION 6.15 Interpretation...................................................... C-38
</TABLE>
APPENDIX C
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<PAGE> 186
FORM OF STOCKHOLDERS AGREEMENT
FORM OF STOCKHOLDERS AGREEMENT dated as of October 19, 1997 among Universal
Studios, Inc., a Delaware corporation ("Universal"), for itself and on behalf of
the members of the Universal Stockholders Group, Liberty Media Corporation, a
Delaware corporation ("Liberty"), for itself and on behalf of the members of the
Liberty Stockholders Group, Barry Diller ("Diller"), for himself and on behalf
of the members of the Diller Stockholders Group, HSN, Inc., a Delaware
corporation (the "Company") (solely for purposes of Sections 4.4(g), 4.5(d) and
6.3) and The Seagram Company Ltd., a Canadian corporation ("SCL") (solely for
purposes of Sections 4.2(f) and 6.4). Capitalized terms used herein without
definition have the meanings ascribed to such terms in the Investment Agreement.
WHEREAS, Universal, Liberty, the Company and Home Shopping Network, Inc.
have entered into an Investment Agreement, dated as of October 19, 1997 (as
amended and restated, as of December 18, 1997, the "Investment Agreement"),
pursuant to which (i) Universal will contribute certain domestic production and
distribution television production assets, and certain other television assets
to a newly formed subsidiary of the Company (the "LLC") in exchange for cash and
securities of the Company and the LLC, (ii) Liberty has the right under certain
circumstances to contribute assets to the LLC in exchange for securities of the
Company or the LLC and/or to purchase additional securities of the Company
and/or the LLC for cash, and (iii) Universal, Liberty, Diller and the Company
will enter into certain other agreements and arrangements referred to in the
Investment Agreement (collectively, the "Transactions");
WHEREAS, the parties under the Investment Agreement have agreed that
Universal, Liberty, Diller, the Company (solely for purposes of Sections 4.4(g),
4.5(d) and 6.3) and SCL (solely for purposes of Sections 4.2(f) and 6.4) shall
enter into this Agreement in order to specify certain of their respective rights
and obligations; and
WHEREAS, the parties hereto desire to enter into certain arrangements
relating to the Company, to be effective as of the Closing, except that the
agreements in Section 3.3(e) shall be effective as of the date hereof.
NOW, THEREFORE, in consideration of the premises and of the mutual
covenants and obligations hereinafter set forth, the parties hereto hereby agree
as follows:
ARTICLE I
DEFINITIONS
SECTION 1.1 Certain Defined Terms. As used herein, the following terms
shall have the following meanings:
"Affiliate" means, with respect to any Person, any other Person that
directly, or indirectly through one or more intermediaries, controls, is
controlled by or is under common control with, such specified Person, for so
long as such Person remains so associated to the specified Person. For purposes
of this definition, (i) Matsushita Electric Industrial Co., Ltd. ("MEI") shall
not be considered an Affiliate of Universal or any Subsidiary of Universal so
long as MEI does not materially increase its influence over Universal or any
such Subsidiary following the date hereof and (ii) natural persons shall not be
deemed to be Affiliates (other than, in the case of Universal, any descendant of
Samuel Bronfman who is a director or executive officer of SCL).
"Agreement" means this Stockholders Agreement as it may be amended,
supplemented, restated or modified from time to time.
"Approved Shares" has the meaning ascribed to such term in Exhibit A to the
Merger Agreement.
"beneficial owner" or "beneficially own" has the meaning given such term in
Rule 13d-3 under the Exchange Act and a Person's beneficial ownership of Common
Shares, LLC Shares or Voting Securities shall be calculated in accordance with
the provisions of such Rule; provided, however, that for purposes of determining
beneficial ownership, (i) a Person shall be deemed to be the beneficial owner of
any equity (including all Contingent Shares and Exchange Shares) which may be
acquired by such Person (disregarding
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any legal impediments to such beneficial ownership), whether within 60 days or
thereafter, upon the conversion, exchange or exercise of any warrants, options
(which options held by Diller shall be deemed to be exercisable, other than with
respect to the Diller Put), rights or other securities (including LLC Shares)
issued by the Company or any Subsidiary thereof, (ii) no Person shall be deemed
to beneficially own any equity solely as a result of such Person's execution of
this Agreement (including by virtue of holding a proxy with respect to any
shares or having a put obligation or call right with respect to any shares) or
any other Transaction Agreement, (iii) Liberty shall be deemed to be the
beneficial owner of the proportionate number of Common Shares represented by
Liberty's equity interest in a BDTV Entity, other than for purposes of Articles
III and V of this Agreement and (iv) Universal shall be deemed to be the
beneficial owner of any shares subject to an option pursuant to Section 4.1(d);
provided, further, that for purposes of calculating beneficial ownership, the
number of outstanding Common Shares of the Company shall be deemed to include
the number of Common Shares that would be outstanding if all outstanding LLC
Shares were exchanged for Common Shares pursuant to the Exchange Agreement and
all Contingent Shares and Exchange Shares were issued. Notwithstanding the
foregoing, for purposes of calculating the Minimum Stockholder Amount, a person
shall be deemed to be the beneficial owner only of outstanding Common Shares.
"BDTV I" means BDTV, Inc., a Delaware corporation.
"BDTV II" means BDTV II, Inc., a Delaware corporation.
"BDTV III" means BDTV III, Inc., a Delaware corporation.
"BDTV Entities" means, collectively, the BDTV Limited Entities and the BDTV
Unrestricted Entities.
"BDTV Limited Entities" means, collectively, BDTV I and BDTV II.
"BDTV Unrestricted Entities" means BDTV III and each other BDTV Entity that
may be formed subsequent to the date hereof; provided that each of Liberty and
Diller acknowledges and agrees that any corporation, partnership, limited
liability company or other business association hereafter formed by Diller and
Liberty to hold Common Shares will be a BDTV Unrestricted Entity and will be a
corporation, partnership, limited liability company or other business
association having a capital structure and governance rights substantially
similar to that of BDTV III.
"Board" means the Board of Directors of the Company.
"Business Day" shall mean any day that is not a Saturday, a Sunday or other
day on which banks are required or authorized by law to be closed in The City of
New York.
"Capital Stock" means, with respect to any Person at any time, any and all
shares, interests, participations or other equivalents (however designated,
whether voting or non-voting) of capital stock, partnership interests (whether
general or limited) or equivalent ownership interests in or issued by such
Person.
"Cause" means (i) the conviction of, or pleading guilty to, any felony, or
(ii) the wilful, continued and complete failure to attend to managing the
business affairs of the Company, after written notice of such failure from the
Board and reasonable opportunity to cure.
"CEO" means the Chief Executive Officer of the Company.
"CEO Termination Date" means the later of (i) such time as Diller no longer
serves as CEO and (ii) such time as Diller no longer holds the Universal Proxy.
"Class B Common Stock" means the Class B common stock, par value $.01 per
share, of the Company and any securities issued in respect thereof, or in
substitution therefor, in connection with any stock split, dividend or
combination, or any reclassification, recapitalization, merger, consolidation,
exchange or other similar reorganization (other than Common Stock).
"Closing" has the meaning ascribed to such term in the Investment
Agreement.
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"Commission" means the Securities and Exchange Commission, and any
successor commission or agency having similar powers.
"Common Shares" means, collectively, the Common Stock and the Class B
Common Stock.
"Common Stock" means the common stock, par value $.01 per share, of the
Company and any securities issued in respect thereof, or in substitution
therefor, in connection with any stock split, dividend or combination, or any
reclassification, recapitalization, merger, consolidation, exchange or other
similar reorganization.
"Contingent Right" means the right of Liberty HSN to receive the Contingent
Shares pursuant to the Merger Agreement.
"Contingent Shares" means the shares of Class B Common Stock (or other
securities) which the Company is obligated to issue to Liberty HSN following the
Effective Time (as defined in the Merger Agreement) pursuant to Exhibit A to the
Merger Agreement.
"control" (including the terms "controlled by" and "under common control
with"), with respect to the relationship between or among two or more Persons,
means the possession, directly or indirectly, of the power to direct or cause
the direction of the affairs or management of a Person, whether through the
ownership of voting securities, as trustee or executor, by contract or
otherwise.
"Current Market Value" means, with respect to any security, the average of
the daily closing prices on the Nasdaq National Market (or the principal
exchange or market on which such security may be listed or may trade) for such
security for the 20 consecutive trading days commencing on the 22nd trading day
prior to the date as of which the Current Market Value is being determined. The
closing price for each day shall be the closing price, if reported, or, if the
closing price is not reported, the average of the closing bid and asked prices
as reported by the Nasdaq National Market (or such principal exchange or market)
or a similar source selected from time to time by the Company for such purpose.
In the event such closing prices are unavailable, the Current Market Value shall
be the Fair Market Value of such security established by independent investment
banking firms in accordance with the procedures specified in Section 4.2(d). For
purposes of this Agreement, the Current Market Value of a share of Class B
Common Stock shall be equal to the Current Market Value of a share of Common
Stock.
"Diller Interest Purchase Price" means the cash amount (or cash value of
equity) invested by Diller in a BDTV Entity plus interest, from the date of such
contribution to the date of purchase, on such amount at the rate of interest per
annum in effect from time to time and publicly announced by The Bank of New York
as its prime rate of interest, compounded annually. For purposes of BDTV I, BDTV
II and BDTV III, the cash amount (or cash value of equity) invested by Diller is
$100.
"Diller Note" means the promissory note by Diller in favor of the Company,
dated as of August 24, 1995.
"Diller Stockholder Group" means Diller and Diller's 90% owned and
controlled Affiliates.
"Director" means any member of the Board.
"Disabled" means the disability of Diller after the expiration of more than
180 consecutive days after its commencement which is determined to be total and
permanent by a physician selected by Universal (or if the Universal Termination
Date has occurred, Liberty) and reasonably acceptable to Diller; provided that
Diller shall be deemed to be disabled only following the expiration of 90 days
following receipt of a written notice from the Company and such physician
specifying that a disability has occurred if within such 90-day period he fails
to return to managing the business affairs of the Company. A total disability
shall mean mental or physical incapacity that prevents Diller from managing the
business affairs of the Company.
"Eligible Stockholder Amount" means, in the case of Diller, the equivalent
of 1,100,000 Common Shares and, in the case of Liberty (including, in the case
of Liberty, the proportionate number of Common Shares represented by Liberty's
equity interest in any BDTV Entity and Common Shares issuable to Liberty or a
member of the Liberty Stockholder Group pursuant to the Contingent Rights and
the Holder Exchange
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Agreement), 1,000,000 shares of Common Stock, in each case determined on a fully
diluted basis (taking into account, in the case of Diller, all unexercised
Options, whether or not then exercisable).
"Equity" means any and all shares of Capital Stock of the Company,
securities of the Company convertible into, or exchangeable for, such shares
(including, without limitation, the Contingent Shares, the Exchange Shares and
the LLC Shares), and options, warrants or other rights to acquire such shares.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Exchange Agreement" means the exchange agreement, of even date herewith,
among Universal, Liberty and the Company, as it may be amended, supplemented,
restated or modified from time to time.
"Exchange Shares" means the Silver King Exchange Shares as defined in the
Holder Exchange Agreement.
"Fair Market Value" means, as to any securities or other property, the cash
price at which a willing seller would sell and a willing buyer would buy such
securities or property in an arm's-length negotiated transaction without time
constraints.
"FCC" means the Federal Communications Commission or its successor.
"FCC Regulations" means, as of any date, all federal communications
statutes and all rules, regulations, orders, decrees and policies of the FCC as
then in effect, and any interpretations or waivers thereof or modifications
thereto.
"Fundamental Changes" shall have the meaning ascribed to such term in the
Governance Agreement.
"Governance Agreement" means the Governance Agreement, among the Company,
Diller, Universal and Liberty, dated as of even date herewith, as it may be
amended, supplemented, restated or modified from time to time.
"Group" shall have the meaning assigned to it in Section 13(d)(3) of the
Exchange Act.
"Holder Exchange Agreement" means the Exchange Agreement, dated as of
December 20, 1996, by and between the Company and Liberty.
"HSR Act" means the Hart-Scott-Rodino Antitrust Improvements Act of 1976,
as amended.
"Independent Investment Banking Firm" means an investment banking firm of
nationally recognized standing that is, in the reasonable judgment of the Person
engaging such firm, qualified to perform the task for which it has been engaged.
"Initial Interest" means, with respect to any Stockholder, all of the
Common Shares beneficially owned by such Stockholder and its Permitted
Transferees immediately following the Closing.
"Liberty HSN" means Liberty HSN, Inc., a Colorado corporation.
"Liberty Stockholder Group" means Liberty and those Subsidiaries of Liberty
or TCI that, from time to time, hold Equity subject to this Agreement.
"Liquid Securities" means (i) common equity securities of the Universal
Parent Company which are publicly traded on a national securities exchange or
quoted on the Nasdaq National Market of the class or series with the largest
public float of any class or series of such securities or (ii) securities of
Universal (or any holding company of Universal that directly or indirectly
beneficially owns 100% of the equity of Universal (Universal or any such holding
company being hereinafter referred to as the "Issuer")) which are publicly
traded on a national securities exchange or quoted on the Nasdaq National
Market; provided that the aggregate market value of the Universal Liquid
Securities received by Liberty pursuant to Section 4.2 or 4.3 shall, on the date
of receipt, represent not more than one-third of the aggregate market value of
all such outstanding securities on such date (other than the securities
beneficially owned by any Affiliate of the Issuer or Liberty) (such securities
of the Issuer, the "Universal Liquid Securities").
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"LLC" means USANi, LLC, a Delaware limited liability company and a
subsidiary of the Company, and any of its successors.
"LLC Shares" means shares representing a proportionate interest in the
capital and profits and losses of the LLC.
"Market Sale" means a "brokers' transaction" within the meaning of Section
4(4) of the Securities Act.
"Merger Agreement" means the Agreement and Plan of Exchange and Merger,
dated as of August 25, 1996, among the Company (formerly Silver King
Communications, Inc.), House Acquisition Corp., Liberty HSN and Home Shopping
Network, Inc.
"Minimum Stockholder Amount" means Common Shares representing at least
50.1% of the outstanding voting power of the outstanding Common Shares.
"Non-Liquid Securities" means securities of the Issuer other than Liquid
Securities.
"Options" means options to acquire capital stock of the Company granted by
the Company to Diller and outstanding from time to time.
"Permitted Business Combination" shall mean (x) a tender or exchange offer
by Universal or an Affiliate for all the Common Shares of the Company that is
accepted by a majority of the Company's Public Stockholders or (y) a merger
(other than a merger following a tender or exchange offer complying with (x)
above) involving the Company and Universal or an Affiliate that is approved, in
addition to any vote required by law, by a majority of the Company's Public
Stockholders so long as, in the case of (x) and (y) above, a committee of the
Directors (excluding any Directors designated by Universal or Liberty pursuant
to the terms of the Governance Agreement, as it may be amended, modified or
waived from time to time, and any other directors who have a conflict of
interest) determines that the tender offer, exchange offer or merger, as the
case may be, is fair to the Company's stockholders (other than Universal and its
Affiliates).
"Permitted Designee" means any Person designated by a Stockholder, who
shall be reasonably acceptable to the other Stockholders, to exercise such
Stockholder's rights pursuant to Section 4.2, 4.4, 4.8 or 4.9.
"Permitted Transferee" means (i) with respect to Liberty, any of its
Subsidiaries or any Subsidiary of TCI, (ii) with respect to Universal, the
Universal Parent Company and any Subsidiary of the Universal Parent Company, and
(iii) with respect to Diller, any of his 90% owned and controlled Affiliates. In
addition, each of Liberty, Universal and Diller shall each be a Permitted
Transferee of its respective Permitted Transferees.
"Person" means any individual, corporation, limited liability company,
limited or general partnership, joint venture, association, joint-stock company,
trust, unincorporated organization, government or any agency or political
subdivisions thereof or any Group comprised of two or more of the foregoing.
"Public Stockholders" means any stockholder of the Company that, together
with its Affiliates (a) has sole or shared voting power with respect to Voting
Securities representing no more than 10% of the voting power on the applicable
vote or (b) has sole or shared power to dispose of Equity representing no more
than 10% of the Equity to be tendered or exchanged in any applicable tender or
exchange offer, as the case may be.
"Put Provision" means the right of Liberty to cause Universal to purchase
Non-Liquid Securities described in Section 4.2(f).
"Reference Rate" means, for any day, a fixed rate per annum equal to the
yield, expressed as a percentage per annum, obtained at the official auction of
90-day United States Treasury Bills most recently preceding the date thereof
plus 100 basis points.
"Securities Act" means the Securities Act of 1933, as amended.
"Spin-Off Agreement" means the agreement, dated as of October 19, 1997,
among Universal, Liberty and the Company relating to the disposition of certain
businesses of the Company in certain circumstances, as it may be amended,
supplemented, restated or modified from time to time.
"Stockholder" means each of Universal, Liberty and Diller.
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"Stockholder Group" means one or more of the Diller Stockholder Group, the
Liberty Stockholder Group and the Universal Stockholder Group. For purposes of
this Agreement, (i) prior to the time that Liberty acquires Diller's interest in
a BDTV Entity, each BDTV Entity shall be deemed to be a member of the Liberty
Stockholder Group except as otherwise expressly set forth herein and (ii) a
Permitted Designee shall be deemed to be a member of a Stockholder's Stockholder
Group (other than for purposes of Section 4.1(a)(x)).
"Subsidiary" means, with respect to any Person, any corporation or other
entity of which at least a majority of the voting power of the voting equity
securities or equity interest is owned, directly or indirectly, by such Person.
"TCI" means Tele-Communications, Inc., a Delaware corporation and the
parent of Liberty.
"Third Party Transferee" means any Person to whom a Stockholder (including
a Third Party Transferee subject to this Agreement pursuant to Sections 4.12(b)
and 4.12(c)) or a Permitted Transferee Transfers Common Shares, other than a
Permitted Transferee of such Stockholder or a member of another Stockholder
Group.
"Transaction Agreements" means each of the agreements specified in or
contemplated by Sections 9.3 and 9.4(b) of the Investment Agreement.
"Transfer" means, directly or indirectly, to sell, transfer, assign,
pledge, encumber, hypothecate or similarly dispose of, either voluntarily or
involuntarily, or to enter into any contract, option or other arrangement or
understanding with respect to the sale, transfer, assignment, pledge,
encumbrance, hypothecation or similar disposition of, any Common Shares
beneficially owned by a Stockholder or any interest in any Common Shares
beneficially owned by a Stockholder, provided, however, that a merger or
consolidation in which a Stockholder is a constituent corporation shall not be
deemed to be the Transfer of any Common Shares beneficially owned by such
Stockholder (provided, that a significant purpose of any such transaction is not
to avoid the provisions of this Agreement). For purposes of this Agreement, the
conversion of shares of Class B Common Stock into shares of Common Stock shall
not be deemed to be a Transfer.
"Universal Parent Company" means SCL and any of its successors.
"Universal Standstill Termination Date" means the Standstill Termination
Date as defined in the Governance Agreement.
"Universal Stockholder Group" means Universal, together with the Universal
Parent Company and any Subsidiary of the Universal Parent Company that, from
time to time, hold Equity subject to this Agreement.
"Voting Securities" means at any time shares of any class of capital stock
of the Company which are then entitled to vote generally in the election of
Directors.
SECTION 1.2 Other Defined Terms. The following terms shall have the
meanings defined for such terms in the Sections set forth below:
<TABLE>
<CAPTION>
TERM SECTION
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<S> <C>
Aggrieved Stockholder............................... Section 6.11(c)
Appraisal........................................... Section 4.2(d)
Appraised Value..................................... Section 4.2(c)
Call Notice......................................... Section 4.2(a)
Call Right.......................................... Section 4.2(a)
Cash Consideration.................................. Section 4.2(g)
Company............................................. Preamble
Covered Market Sale................................. Section 4.8(a)
Diller.............................................. Preamble
Diller Departure.................................... Section 4.2(c)
</TABLE>
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<TABLE>
<CAPTION>
TERM SECTION
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<S> <C>
Diller Loan Amount.................................. Section 4.1(f)
Diller Put.......................................... Section 4.4(a)
Diller Put Closing Date............................. Section 4.4(d)
Diller Put Event.................................... Section 4.4(a)
Diller Put Event Date............................... Section 4.4(a)
Diller Put Event Shares............................. Section 4.4(a)
Diller Put Notice................................... Section 4.4(a)
Diller Put Shares................................... Section 4.4(a)
Diller Share Put Price.............................. Section 4.4(b)
Diller Tag-Along Notice............................. Section 4.7(a)
Diller Tag-Along Sale............................... Section 4.7(a)
Diller Tag-Along Shares............................. Section 4.7(a)
Diller Termination Date............................. Section 6.2(a)
Escrow.............................................. Section 4.4(f)
Excess Interest..................................... Section 4.3
Exchange Notice..................................... Section 4.11(a)
Investment Agreement................................ Recitals
L/D Offer Notice.................................... Section 4.9(b)
L/D Offer Price..................................... Section 4.9(c)
L/D Other Party..................................... Section 4.9(b)
L/D Transferring Party.............................. Section 4.9(a)
Liberty............................................. Preamble
Liberty Proxy....................................... Section 3.6(a)
Liberty Proxy Shares................................ Section 3.6(a)
Liberty Purchase Price.............................. Section 4.2(c)
Liberty Put Right................................... Section 4.2(b)
Liberty Termination Date............................ Section 6.2(b)
Litigation.......................................... Section 6.12
Market Value........................................ Section 4.2(f)
Net Proceeds........................................ Section 4.2(g)
Non-Liquid Purchase Price........................... Section 4.2(f)
Non-Transferring Stockholder........................ Section 4.11(a)
Offer Notice........................................ Section 4.8(b)
Offer Price......................................... Section 4.8(c)
Other Stockholder................................... Section 4.8(b)
Ownership Percentage................................ Section 2.1
Permitted Ownership Percentage...................... Section 2.1
Prime Rate.......................................... Section 4.4(f)
Publicly Traded..................................... Section 4.2(f)
Put Notice.......................................... Section 4.2(b)
Put Provision....................................... Section 4.2(f)
Put Provision Notice................................ Section 4.2(f)
Sale Period......................................... Section 4.2(g)
SCL Threshold....................................... Section 4.2(f)
Shortfall Amount.................................... Section 4.2(g)
Shortfall Provisions................................ Section 4.2(g)
Specified Votes..................................... Section 4.1(c)
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<TABLE>
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TERM SECTION
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Standstill Termination Date......................... Section 2.1
Stockholder Tag-Along Notice........................ Section 4.6(b)
Stockholder Tag-Along Sale.......................... Section 4.6(b)
Stockholder Tag-Along Shares........................ Section 4.6(b)
Tag-Along Offeree................................... Section 4.5(a)
Transactions........................................ Preamble
Transferring Party.................................. Section 4.8(a)
Transferring Stockholders........................... Section 4.11(a)
Universal........................................... Preamble
Universal Proxy..................................... Section 3.5(a)
Universal Proxy Shares.............................. Section 3.5(a)
Universal Tag-Along Notice.......................... Section 4.5(a)
Universal Tag-Along Sale............................ Section 4.5(a)
Universal Tag-Along Shares.......................... Section 4.5(a)
Universal Termination Date.......................... Section 6.2(a)
Weighted Average Market Price....................... Section 4.4(b)
</TABLE>
SECTION 1.3 Other Definitional Provisions. (a) The words "hereof",
"herein" and "hereunder" and words of similar import when used in this Agreement
shall refer to this Agreement as a whole and not to any particular provision of
this Agreement, and Article and Section references are to this Agreement unless
otherwise specified.
(b) The meanings given to terms defined herein shall be equally applicable
to both the singular and plural forms of such terms.
(c) For purposes of calculating the amount of outstanding Common Shares or
Equity as of any date and the number of Common Shares or Equity beneficially
owned by any Person as of any date, (i) any Common Shares held in the Company's
treasury or owned by any Subsidiaries of the Company shall be disregarded, (ii)
all LLC Shares beneficially owned by Universal and Liberty shall be assumed to
have been converted into Common Shares in accordance with the provisions of the
Exchange Agreement and (iii) all Contingent Shares and Exchange Shares and any
other securities of the Company issued to Liberty or Universal in accordance
with the exercise of its respective preemptive rights pursuant to Section 1.8 or
1.7 of the Investment Agreement, respectively, shall be assumed to have been
converted into Common Shares. Notwithstanding the foregoing, for purposes of
calculating the Minimum Stockholder Amount and the voting power for purposes of
Section 4.4(f) (other than clause (B)(x) thereof) and 4.5(a) (other than clause
(ii)(x) thereof), only the number of Common Shares actually outstanding shall be
included in such calculation.
ARTICLE II
STANDSTILL
SECTION 2.1 Liberty Standstill with Universal. Liberty covenants and
agrees with Universal that, from and after the Closing and until the earlier to
occur of (i) the Liberty Termination Date and (ii) such date as Universal
beneficially owns fewer Common Shares than Liberty beneficially owns (the
"Standstill Termination Date"):
(a) neither Liberty nor any of its Affiliates will (x) acquire,
directly or indirectly, the beneficial ownership of any additional Equity
of the Company such that the Common Shares beneficially owned by Liberty
and its Affiliates (the "Ownership Percentage") following such acquisition
would represent in the aggregate more than the greater of (A) 20% and (B)
the percentage of Common Shares beneficially owned by Liberty following any
Holder Closing (as defined in Section 1.5(f) of the Investment Agreement)
up to 25% (the "Permitted Ownership Percentage") of all outstanding Common
Shares;
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provided that if Liberty (i) fails to elect to exercise its preemptive
rights pursuant to Section 1.8 of the Investment Agreement or (ii) prior to
the Universal Standstill Termination Date, Transfers any Equity, the
Permitted Ownership Percentage shall be reduced to reflect such lower
Ownership Percentage of Liberty following such failure to elect or such
Transfer (provided, that if Liberty's initial Ownership Percentage is less
than 20%, such reduction shall be calculated as if Liberty's initial
Ownership Percentage were 20%) or (y) propose to the Board the acquisition
by Liberty and its Affiliates of the then outstanding Equity not owned by
Liberty in a merger, tender offer or other business combination.
(b) Notwithstanding anything to the contrary herein, (i) except as
expressly provided herein, neither Liberty nor any Affiliate thereof shall
permit any entity in which it beneficially owns, directly or indirectly, in
excess of 50% of the outstanding voting securities (regardless of whether
Liberty or such Affiliate acquires beneficial ownership of such entity
after the date of this Agreement) to beneficially own any Common Shares.
Notwithstanding the foregoing, the acquisition (whether by merger,
consolidation or otherwise) by Liberty or any Affiliate thereof of any
entity that beneficially owns Common Shares shall not constitute a
violation of the Permitted Ownership Percentage; provided that a
significant purpose of any such transaction is not to avoid the provisions
of this Agreement; and provided, further, that the provisions of clause
(ii) below are complied with and (ii) except as set forth in the next
sentence, if at any time Liberty becomes aware that it and its Affiliates
beneficially own more than the Permitted Ownership Percentage (including by
virtue of acquisitions referred to in clause (i) above), then Liberty,
subject to the next sentence, shall as soon as is reasonably practicable
(but in no manner that would require Liberty to incur liability under
Section 16(b) of the Exchange Act) take all action necessary to reduce the
amount of Common Shares beneficially owned by such Persons to an amount not
greater than the Permitted Ownership Percentage. If the Ownership
Percentage of Liberty and its Affiliates exceeds the Permitted Ownership
Percentage solely by reason of repurchases of Common Shares by the Company,
then Liberty shall not be required to reduce the amount of the Common
Shares beneficially owned by such Persons (except that Liberty shall not
exercise its preemptive rights under the Investment Agreement to maintain
such higher Ownership Percentage).
ARTICLE III
CORPORATE GOVERNANCE
SECTION 3.1 Liberty Board Representation. From and after the Closing and
until the Standstill Termination Date, Liberty shall not be entitled to
designate for nomination more than two directors for election to the Board,
subject to applicable law, including FCC Regulations.
SECTION 3.2 Certain Restrictions. Except as set forth in the Investment
Agreement and the Transaction Agreements, without the prior written consent of
Universal, prior to the earlier of the Liberty Termination Date and the
Standstill Termination Date, Liberty agrees not to, and to cause each of its
Affiliates not to, directly or indirectly, alone or in concert with others:
(a) seek election to, seek to place a representative on, or seek the
removal (other than for cause) of any member of, the Board, act alone or in
concert with others to seek to affect or influence the control of the
management or Board or the business, operations or policies of the Company
except by virtue of Liberty's representation on the Board of the Company or
LLC Board pursuant to Section 2.02(e) of the Governance Agreement and as
otherwise contemplated by the Governance Agreement (including the right to
consent to Fundamental Changes pursuant to Section 2.04 of the Goverance
Agreement) and the other Transaction Agreements (it being agreed that this
paragraph shall not prohibit Liberty, its Affiliates and their respective
employees from engaging in ordinary course business activities with the
Company);
(b) other than to a Permitted Transferee or pursuant to this
Agreement, deposit any Equity in a voting trust or subject any Equity to
any proxy, arrangement or agreement with respect to the voting of such
securities or other agreement having a similar effect, except for
agreements or arrangements with a Permitted Designee reasonably acceptable
to the other Stockholders and not inconsistent with or for the purpose of
evading the terms of this Agreement;
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(c) other than as is permitted by this Agreement, propose any
acquisition of the Company (whether by merger, tender offer or otherwise);
(d) except as permitted by Section 4.3, initiate or propose any
stockholder proposal or make, or in any way participate in, directly or
indirectly, any "solicitation" of "proxies" to vote, or seek to influence
any Person with respect to the voting of, any Equity, or become a
"participant" in a "solicitation" (as such terms are defined in Regulation
14A under the Exchange Act) in opposition to the recommendation of the
majority of the Directors with respect to any matter except (x) in response
to a solicitation by a third party and (y) to facilitate a tender or
exchange offer by Liberty or an Affiliate permitted under the Governance
Agreement in response to a third party tender or exchange offer for more
than a majority of the outstanding Common Shares, provided such third party
tender or exchange offer is being recommended against by the Board;
(e) other than as is contemplated by this Agreement, the Governance
Agreement, the Investment Agreement and the Transaction Agreements, join a
partnership, limited partnership, syndicate or other Group, or otherwise
act in concert with any other Person (other than a Permitted Transferee or
Universal or Diller), for the purpose of acquiring, holding, voting or
disposing of Equity, or otherwise become a "person" within the meaning of
Section 13(d)(3) of the Exchange Act; or
(f) request that the Company or the Board amend or waive any of the
provisions of this Section 3.2;
provided, that Liberty will not be deemed to be in violation of this Section 3.2
as a result of any action by Diller (including by a BDTV Entity as a result of
an action by Diller) that is not within Liberty's control.
SECTION 3.3 Voting on Certain Matters. (a) In connection with any vote or
action by written consent of the stockholders of the Company relating to any
matter that constitutes a Fundamental Change, subject to Section 4.2 hereof,
each Stockholder agrees (and agrees to cause each member of its Stockholders
Group, if applicable), with respect to any Common Shares with respect to which
it or he has the power to vote (whether by proxy, the ownership of voting
securities of a BDTV Entity or otherwise) (including all shares held by any BDTV
Entity), to vote against (and not act by written consent to approve) such
Fundamental Change (including not voting or not executing a written consent with
respect to the Common Shares beneficially owned by a BDTV Entity) if any
Stockholder has not consented to such Fundamental Change in accordance with the
provisions of the Governance Agreement and to take or cause to be taken all
other reasonable actions required, to the extent permitted by law, to prevent
the taking of any action by the Company with respect to a Fundamental Change
without the consent of each such Stockholder who has the right to consent to
such Fundamental Change pursuant to the terms of the Governance Agreement.
(b) Each of Liberty and Diller agrees to vote (and cause each member of its
or his Stockholder Group to vote, if applicable), or act by written consent with
respect to any Common Shares with respect to which it or he has the power to
vote (whether by proxy, the ownership of voting securities of a BDTV Entity or
otherwise) (including all shares held by any BDTV Entity) in favor of each of
the designees of Universal which Universal has a right to designate pursuant to
the Governance Agreement. At such time as Liberty shall be entitled to designate
directors to the Board pursuant to the terms of the Governance Agreement, each
of Universal and Diller agrees to vote (and cause each member of its or his
Stockholders Group to vote, if applicable), or act by written consent with
respect to, any Common Shares with respect to which it or he has the power to
vote (whether by proxy, the ownership of voting securities of a BDTV Entity or
otherwise) (including all shares held by any BDTV Entity) in favor of each of
the designees of Liberty.
(c) Upon the written request of Universal or Liberty, each Stockholder, in
such Stockholder's capacity as a stockholder only, agrees to vote (and cause
each member of its Stockholders Group to vote, if applicable), or act by written
consent with respect to any Common Shares with respect to which it or he has the
power to vote (whether by proxy, the ownership of voting securities of a BDTV
Entity or otherwise) (including all shares held by any BDTV Entity) and
otherwise take or cause to be taken all actions necessary to remove any Director
designated by such requesting party and to elect any replacement Director
designated by such party as provided in the Governance Agreement. Unless all the
Stockholders otherwise agree, no Stockholder or any member of its Stockholders
Group shall take any action to cause the removal of any
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Director designated by Universal or any Director designated by Liberty except
(i) in the case of a Director designated by Universal, upon the written request
of Universal, and (ii) in the case of a Director designated by Liberty, upon the
written request of Liberty; provided, however, that any required approval of the
FCC shall have been obtained prior to so doing.
(d) Subject to applicable law, Universal and Diller agree that following
the CEO Termination Date or such date that Diller becomes Disabled and so long
as Diller beneficially owns Voting Securities representing at least 7.5% of the
outstanding Voting Securities (excluding Voting Securities beneficially owned by
Liberty and Universal), Diller shall vote (and cause each member of his
Stockholders Group to vote, if applicable), or act by written consent with
respect to any Common Shares beneficially owned by him or with respect to which
he has the power to vote (whether by proxy, ownership of voting securities of a
BDTV Entity or otherwise), at Universal's option exercised by written notice to
Diller delivered at least 5 Business Days prior to the date of the meeting
applicable to the vote or the date by which consents in writing must be
delivered, either (i) in his own discretion or (ii) in the same proportion as
the Public Stockholders vote their shares of Common Stock. In the event that
Universal elects clause (ii) of this paragraph (d), it shall be Universal's
responsibility to coordinate with the Company's tabulation agent so that
Diller's vote in accordance with such clause shall be given effect. The rights
and obligations of Universal and Diller under this Section 3.3(d) shall
terminate when Universal is no longer entitled to designate at least two
Directors. In addition to the foregoing, Diller agrees, subject to his
Disability, to use his reasonable efforts to facilitate any FCC approvals
required in connection with the transactions or events contemplated by the
Spin-Off Agreement or this Agreement in the event of the CEO Termination Date or
his Disability.
(e) For purposes of Sections 3.3 and 3.6 and Article V of this Agreement as
well as the stockholders agreement in effect as of the date hereof between
Liberty and Diller, each of Liberty and Diller hereby consents and agrees to the
taking of any action by any of Diller, a BDTV Entity or Liberty, which action is
reasonably necessary or appropriate to approve and consummate the transactions
pursuant to the Investment Agreement (other than a Spin-off in accordance with
Section 9.14 of the Investment Agreement) and the Transaction Agreements (and
including the additional incentive compensation arrangements relating to
Diller). Neither Diller nor Liberty shall enter into, or permit any material
amendment to, or waiver or modification of material rights or obligations under
the Investment Agreement or the Transaction Agreements (including by the
Company) without the prior written consent of the other Stockholder. The consent
granted by the first sentence of this paragraph is intended to be specifically
limited by the foregoing sentence.
(f) Liberty will not be deemed to be in violation of paragraphs (a), (b) or
(c) of this Section 3.3 as a result of any action by Diller (including by a BDTV
Entity as a result of an action by Diller) that is not within Liberty's control.
SECTION 3.4 Restrictions on Other Agreements. No Stockholder or any of
its or his Permitted Transferees shall enter into or agree to be bound by any
stockholder agreements or arrangements of any kind with any Person with respect
to any Equity (including, without limitation, the deposit of any Common Shares
in a voting trust or forming, joining or in any way participating in or
assisting in the formation of a Group with respect to any Common Shares, other
than any such Group consisting exclusively of Liberty, Universal and Diller and
any of their respective Affiliates and Permitted Transferees) and no Stockholder
(other than Universal or Liberty or any of their respective Permitted
Transferees) or any of its or his Permitted Transferees shall enter into or
agree to be bound by any agreements or arrangements of any kind with any Person
to incur indebtedness for purposes of purchasing Equity (other than to exercise
Options or to purchase Common Shares pursuant to Section 4.8 or 4.9 of this
Agreement), except (i) for such agreements or arrangements as are now in effect
or as are contemplated by the Transaction Agreements, (ii) as contemplated by or
in connection with the Stock Exchange Agreement, dated May 20, 1997, between
Paul G. Allen and the Company, (iii) in connection with a proposed sale of BDTV
Entity securities or Common Shares otherwise permitted hereunder or (iv) for
such agreements or arrangements with a Permitted Designee reasonably acceptable
to the other Stockholders and not inconsistent with or for the purpose of
evading the terms of this Agreement.
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SECTION 3.5 Irrevocable Proxy of Universal. (a) Subject to paragraphs (b)
and (c) below, until the earlier of the date that (x) Diller is no longer CEO or
(y) Diller is Disabled, Diller shall be entitled to exercise voting authority
and authority to act by written consent over all Common Shares beneficially
owned by each member of the Universal Stockholder Group (the "Universal Proxy
Shares") on all matters submitted to a vote of the Company's stockholders or by
which the Company's stockholders may act by written consent pursuant to a
conditional proxy (which proxy is irrevocable and coupled with an interest for
purposes of Section 212 of the Delaware General Corporation Law) (the "Universal
Proxy"); provided, that in the event that Diller is removed by the Board as CEO
for any reason other than Cause, Diller shall be deemed to continue to be CEO
hereunder and shall be entitled to exercise the Universal Proxy set forth herein
until the earlier of (A) such time as he has abandoned efforts to cause his
reinstatement as CEO and (B) the next stockholders meeting of the Company at
which he had an adequate opportunity to nominate and elect his slate of
directors (unless at such stockholders meeting Diller's slate of directors is
elected and Diller is promptly thereafter reinstated as CEO).
(b) Notwithstanding the foregoing, the Universal Proxy shall not be valid
with respect to any of the Universal Proxy Shares in connection with any vote
for (or consent to approve) any matter that is a Fundamental Change which
Universal has the right to consent to pursuant to the terms of the Governance
Agreement and with respect to which Universal has not consented.
(c) The Universal Proxy shall terminate as provided for in Section 3.5(a)
or, if earlier, (i) immediately upon a material breach by Diller of the terms of
Section 3.3(a), the first sentence of Section 3.3(b), Section 3.3(c) (as
applicable to Universal) or Section 3.5(b) of this Agreement, (ii) at such time
as Diller has been convicted of, or has pleaded guilty to, any felony involving
moral turpitude or (iii) at such time as Diller ceases to beneficially own
5,000,000 Common Shares with respect to which he has a pecuniary interest;
provided, in the case of clauses (ii) and (iii) above, that Universal sends
notice of such termination to Diller within 30 days after the event giving rise
to such termination, in which case the Universal Proxy shall terminate
immediately upon the receipt of such notice.
(d) Notwithstanding anything to the contrary set forth in this Agreement,
the Universal Proxy is personal to Diller and may not be assigned by Diller by
operation of law or otherwise and shall not inure to Diller's successors without
the prior written consent of Universal.
SECTION 3.6 Irrevocable Proxy of Liberty. (a) Until the earlier of such
time as Diller ceases to be entitled to exercise rights under this Section 3.6
pursuant to Section 6.2(c) or the Liberty Termination Date, Diller shall be
entitled to exercise voting authority and authority to act by written consent
over all Common Shares beneficially owned by each member of the Liberty
Stockholder Group (the "Liberty Proxy Shares"), on all matters submitted to a
vote of the Company's stockholders or by which the Company's stockholders may
act by written consent pursuant to a conditional proxy (which proxy is
irrevocable and coupled with an interest for purposes of Section 212 of the
Delaware General Corporation Law) (the "Liberty Proxy"); provided, that in the
event that Diller is removed by the Board as CEO for any reason other than
Cause, Diller shall be deemed to continue to be CEO hereunder and shall be
entitled to the Liberty Proxy set forth herein until the earlier of (A) such
time as he has abandoned efforts to cause his reinstatement as CEO and (B) the
next stockholders meeting of the Company at which he had an adequate opportunity
to nominate and elect his slate of directors (unless at such stockholders
meeting Diller's slate of directors is elected and Diller is promptly thereafter
reinstated as CEO).
(b) Notwithstanding the foregoing, the Liberty Proxy shall not be valid
with respect to any of the Liberty Proxy Shares in connection with any vote for
(or consent to approve) any matter that is a Fundamental Change which Liberty
has the right to consent to pursuant to the terms of the Governance Agreement
with respect to which Liberty has not consented.
(c) Notwithstanding the foregoing, so long as Liberty holds its Eligible
Stockholder Amount and after termination of Liberty's consent right with respect
to Fundamental Changes as provided in the Governance Agreement, Diller, with
respect to matters that constitute Fundamental Changes, will vote the Liberty
Proxy Shares in the manner directed by Liberty.
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(d) The Liberty Proxy shall terminate as provided for in Section 3.6(a) or,
if earlier, (i) immediately upon a material breach by Diller of the terms of
Section 3.3(a), the second sentence of Section 3.3(b), Section 3.3(c) (as
applicable to Liberty) or Section 3.6(b) of this Agreement, (ii) at such time as
Diller has been convicted of, or has pleaded guilty to, any felony involving
moral turpitude or (iii) at such time as Diller ceases to beneficially own
5,000,000 Common Shares with respect to which he has a pecuniary interest;
provided, in the case of clauses (ii) and (iii) above, that Liberty sends notice
of such termination to Diller within 30 days after receiving notice of the event
giving rise to such termination, in which case the Liberty Proxy shall terminate
immediately upon the receipt of such notice.
(e) Notwithstanding anything to the contrary set forth herein, the Liberty
Proxy is personal to Diller and may not be assigned by Diller and shall not
inure to Diller's successors without the prior written consent of Liberty.
SECTION 3.7 Cooperation. Each Stockholder shall vote (or act or not act
by written consent with respect to) all of its Common Shares (and any Common
Shares with respect to which it has the power to vote (whether by proxy or
otherwise) and shall, as necessary or desirable, attend all meetings in person
or by proxy for purposes of obtaining a quorum, and execute all written consents
in lieu of meetings, as applicable, to effectuate the provisions of this Article
III.
ARTICLE IV
TRANSFER OF COMMON SHARES
SECTION 4.1 Restrictions on Transfer by Liberty and Diller. (a) Until the
CEO Termination Date or such time as Diller becomes Disabled, subject to the
other provisions of this Agreement, neither Liberty nor Diller shall Transfer or
otherwise dispose of (including pledges), directly or indirectly, any Common
Shares beneficially owned by its Stockholder Group other than (w) Transfers of
Common Shares by Diller in order to pay taxes arising from the granting, vesting
and/or exercise of the Options and/or the payment of bonuses on repayment of the
Diller Note, (x) Transfers of Common Shares by Liberty to members of the Liberty
Stockholder Group or by Diller to members of the Diller Stockholder Group, (y) a
pledge or grant of a security interest in vested Common Shares (other than the
pledge of certain Common Shares pursuant to prior arrangements between Diller
and the Company) or pledges by a member of the Liberty Stockholder Group of
securities of a BDTV Entity that Liberty is entitled to Transfer under (b)(iii)
below in connection with bona fide indebtedness in which the pledgee of the
applicable Common Shares (or securities of such BDTV Entity) agrees that, upon
any default or exercise of its rights under such pledge or security arrangement,
it will offer to sell the pledged Common Shares (or securities of such BDTV
Entity) to the non-pledging Stockholder(s) (or its or his designee) for an
amount equal to the lesser of the applicable amount of such indebtedness and the
fair market value of such pledged Common Shares (or securities of such BDTV
Entity), and (z) Transfers of Options or Common Shares to the Company by Diller
or his Affiliates in connection with a "cashless" exercise of the Options
(including Options granted to Diller on the date hereof or in the future).
(b) Notwithstanding the restrictions contained in subsection (a) above (and
in addition to the foregoing exceptions, but subject to the right of first
refusal described in Section 4.9 on behalf of Diller (or his designee) with
respect to Transfers by members of the Liberty Stockholder Group and to a right
of first refusal on behalf of Liberty (or its designee) with respect to
Transfers by members of the Diller Stockholder Group (which rights shall be
assignable)): (i) following August 24, 2000 either Liberty or Diller may
Transfer all or any portion of the Common Shares beneficially owned by its
Stockholder Group (and, in the case of Liberty only, its entire interest in the
BDTV Entities) to an unaffiliated third party, provided, however, that a
Transfer by Diller to a third party or to Universal (other than in connection
with the Diller Put) shall be subject to the Diller Tag-Along Right pursuant to
Section 4.7, (ii) following the CEO Termination Date or such time as Diller
becomes Disabled, Diller may, Transfer all or any portion of the Common Shares
held by his Stockholder Group to an unaffiliated third party, and (iii) either
Liberty or Diller may Transfer any portion of the Common Shares (including, in
the case of Liberty, all or a portion of a BDTV Entity interest) held by its
Stockholder Group to an unaffiliated third party, provided that, (a) following
such Transfer such Stockholder
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Group retains its Eligible Stockholder Amount of Common Shares and (b) in the
case of the Transfer of an interest in or Common Shares held by a BDTV Limited
Entity as of the date hereof, following such Transfer, Liberty, Diller and
Universal and each of their respective Stockholder Groups collectively
beneficially own the Minimum Stockholder Amount. Notwithstanding the previous
sentence and the restrictions contained in paragraph (a) above and subject to
the requirement, with respect to a Transfer by Liberty of an interest in or
Common Shares held by a BDTV Limited Entity as of the date hereof, that the
Stockholders and their respective Stockholder Groups collectively beneficially
own the Minimum Stockholder Amount, either Liberty or Diller may transfer any of
its Common Shares in one or more transactions that comply with the requirements
of Rule 144 or 145 (as applicable) under the Securities Act.
(c) Until August 24, 2000, Universal shall not voluntarily Transfer any
Common Shares or convert any shares of Class B Common Stock into shares of
Common Stock such that it directly or indirectly owns a number of Common Shares
having an aggregate number of votes that is less than the number of votes
represented by the Common Shares it so owns immediately following the Closing
(the "Specified Votes"); provided that this restriction shall not prohibit
Universal from converting any shares of Class B Common Stock into shares of
Common Stock so long as, within 60 days of such conversion, Universal purchases
a number of shares of Common Stock such that it directly or indirectly owns a
number of Common Shares having the Specified Votes; provided, further, that this
restriction shall not be applicable to a Transfer of all Common Shares that
Universal beneficially owns.
(d) With respect to any Transfer by Liberty with respect to which Diller
would have a right pursuant to Section 4.9 that would result, after giving
effect to such Transfer, in the Stockholders and their respective Stockholder
Groups beneficially owning less than the Minimum Stockholder Amount, and with
respect to which Diller does not elect to exercise his right to purchase the
Liberty Common Shares proposed to be Transferred, Diller shall not fail to
respond to the L/D Offer Notice or elect not to exercise his rights under such
Section prior to offering Universal the opportunity to cause Diller to purchase
such shares, subject to the terms and conditions described below. If Universal
(or, at Universal's option, a member of its Stockholder Group) shall elect to
cause Diller to purchase the Liberty Common Shares proposed to be Transferred,
Universal shall loan Diller an amount of cash equal to the purchase price for
the Liberty Common Shares proposed to be Transferred and Diller shall purchase
such Common Shares in accordance with the terms of Section 4.9. Such loan shall
be represented by a non-recourse note which shall be secured by the Liberty
Common Shares to be purchased and shall contain such other terms and conditions
as shall be reasonably satisfactory to Diller and Universal. Diller shall grant
to Universal an option to acquire such Common Shares, exercisable at Universal's
option at any time at an exercise price equal to the purchase price for such
shares, which exercise price may be satisfied by the cancellation of the note
referred to above and which option shall be transferable to the same extent as
the Common Shares underlying the option would be transferable; provided that
Universal shall not Transfer the option so long as Diller retains the Universal
Proxy if it is necessary to retain such shares in order to maintain the Minimum
Stockholder Amount (except that Universal may Transfer the option or the
underlying Common Shares in connection with a Transfer of all Common Shares that
Universal beneficially owns). Diller shall vote such shares as if they were
subject to the Universal Proxy. To the extent that applicable law prohibits
Universal and Diller from entering into the arrangements described above, Diller
and Universal shall cooperate in good faith and use commercially reasonable
efforts to enter into alternative arrangements to maintain the Minimum
Stockholder Amount in a manner that provides for minimal disruption to the
existing governance arrangements and fairly balances each Stockholder's
interest.
SECTION 4.2 Universal Purchase of Liberty Equity. (a) Universal, or, at
Universal's option, its Permitted Designee, may elect to purchase from Liberty
all (but not less than all) of Liberty's Equity (it being understood that, for
purposes of this Section 4.2, Liberty's Equity shall not include the Contingent
Rights) (the "Call Right") (i) prior to the CEO Termination Date or such time as
Diller becomes Disabled, if (x) Diller and Universal consent to the taking of
any action by the Company which would constitute a Fundamental Change described
in Section 2.04(ii) of the Governance Agreement, and (y) Liberty has the right
to consent to but does not consent to such Fundamental Change pursuant to the
terms of the Governance Agreement (other than a merger or similar business
combination between the Company and Universal or any
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of their respective Affiliates so long as the Liberty Stockholder Group
collectively beneficially owns more than 12.5% of the outstanding Common Shares)
and (ii) at any time on or after the CEO Termination Date or such time as Diller
becomes Disabled. Universal may exercise the Call Right by, in the case of
clause (a)(i), requesting Diller to, and Diller shall, upon Universal's request,
deliver written notice (a "Call Notice") to Liberty or, in the case of clause
(a)(ii), by delivering a Call Notice to Liberty. Such Call Notice shall state
that Universal has elected to exercise its Call Right and, subject to paragraph
(e) below, shall set forth the form of consideration proposed to be used by
Universal to pay the Liberty Purchase Price. Universal's right to use a
Permitted Designee shall be subject to Universal's obligations under the first
sentence of paragraphs (e) and (f) hereof.
(b) In the event that the CEO Termination Date has occurred or Diller has
become Disabled, Liberty may elect to require Universal or, at Universal's
option, its designee, to purchase all (but not less than all) of Liberty's
Equity (except for the Contingent Rights) (the "Liberty Put Right") at any time,
by delivering a written notice (a "Put Notice") to Universal stating that
Liberty elects to exercise the Liberty Put Right.
(c) The purchase price (the "Liberty Purchase Price") to be paid by
Universal to Liberty for Liberty's Equity pursuant to paragraph (a) or (b) above
shall equal the Appraised Value (plus, in the event the closing is delayed
pursuant to the second sentence of paragraph (h), accrued interest at the
Reference Rate from the date that is 20 Business Days following the date of the
Put Notice or the Call Notice through the date of the closing), determined as of
the date of that the Call Notice or the Put Notice is delivered, and shall be
payable in the form of consideration specified in paragraphs (e) or (f), as
applicable, below. The "Appraised Value" shall be determined on the basis of the
private market value of the Company and shall take into account Liberty's
significant influence in the Company at the time of such purchase, including
consent rights on Fundamental Changes pursuant to the Governance Agreement
(regardless of whether such rights have terminated under Section 4.3 or clause
(e)(ii) below), entitlement to representation on the LLC Board of Directors and
the Board and similar governance rights; provided that such basis shall not
assume (and the Independent Investment Banking Firms described in paragraph (d)
making the Appraisal will be instructed not to consider) the value of the
Company in an "auction" proceeding; provided, further that the Appraised Value
shall be modified to reflect any consideration received or receivable in respect
of any distribution to Liberty in connection with a Spin-off contemplated by
Section 9.14 of the Investment Agreement. If such payment occurs in connection
with the CEO Termination Date or Diller becoming Disabled (the "Diller
Departure"), the impact of the Diller Departure shall be taken into account by
the Independent Investment Banking Firms.
(d) Promptly upon receipt by Universal of the Put Notice or by Liberty of
the Call Notice, each of Universal and Liberty shall select an Independent
Investment Banking Firm each of which shall promptly make a determination (each
such determination, an "Appraisal") of the Appraised Value of Liberty's Equity
in accordance with the provisions of paragraph (c) above. If the higher of such
Appraisals is less than or equal to 110% of the lower of such Appraisals, then
the Appraised Value shall be equal to the average of such Appraisals. If the
higher of such Appraisals is greater than 110% of the lower of such Appraisals,
then a third Independent Investment Banking Firm (which shall be an Independent
Investment Banking Firm that shall not have been engaged by the Company, Liberty
or Universal for the three years prior to the date of such selection) shall be
selected by the first two Independent Investment Banking Firms, which third
Independent Investment Banking Firm shall promptly make a determination of the
Appraised Value. The Appraised Value shall equal the average of the two of such
three Appraisals closest in value (or if there are no such two, then of all
three Appraisals).
(e) If Universal elects to exercise its Call Right, Universal shall use its
best efforts to make tax-free consideration consisting of Liquid Securities
available to Liberty in a tax-free transaction; provided that Universal may
provide, in lieu of Liquid Securities, Non-Liquid Securities the receipt of
which constitutes tax-free consideration and that are subject to the Put
Provision described in Section 4.2(f). If, notwithstanding Universal's best
efforts, such a tax-free transaction is not available, (i) Universal shall not
be entitled to exercise the Call Right, (ii) Liberty shall cease to have any
right to consent to any action that constitutes a Fundamental Change described
in Section 2.04(ii) of the Governance Agreement (other than a merger or similar
business combination between the Company and Universal or any of their
respective Affiliates so long
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as the Liberty Stockholder Group collectively beneficially owns more than 12.5%
of the outstanding Common Shares) and if any such failure to consent to any such
Fundamental Change (other than a Fundamental Change described in the
parenthetical in clause (ii) above) triggered Universal's Call Right pursuant to
clause (a)(i) of this Section 4.2, Liberty shall be deemed to have consented to
the Fundamental Change, and (iii) Liberty shall be entitled to exercise the
Liberty Put Right on the terms described in paragraph (b) above, notwithstanding
whether or not the CEO Termination Date has occurred or Diller has become
Disabled.
(f) In the event that Universal provides Non-Liquid Securities to Liberty,
Liberty may at any time or from time to time elect to require Universal (or, if
Universal is not the Issuer of such securities, the Issuer) to purchase all (but
not less than all) of such Non-Liquid Securities (the "Put Provision") at any
time by delivering a written notice (a "Put Provision Notice") to Universal
stating that Liberty elects to exercise the Put Provision; provided that
Universal shall guarantee any obligation of the Issuer hereunder and shall not
be relieved of any of its obligations hereunder as a result of any Issuer being
required to purchase such Non-Liquid Securities; provided, further, that in no
event shall Liberty be entitled to exercise the Put Provision on more than two
occasions). The purchase price (the "Non-Liquid Purchase Price") to be paid by
Universal to Liberty for Liberty's Non-Liquid Securities shall equal the Market
Value, determined as of the date that the Put Provision Notice is delivered, and
shall be payable in cash. The "Market Value" shall be determined on the basis of
(i) if the Non-Liquid Securities are publicly traded on a national securities
exchange or quoted on the Nasdaq National Market ("Publicly Traded"), the
average of the daily closing prices for such securities on the principal
exchanges or market on which such securities may be listed or may be traded at
such time for the five trading days prior to the date of the Put Provision
Notice or (ii) if the Non-Liquid Securities are not Publicly Traded, the
appraised value of such securities determined in accordance with the procedures
set forth in Section 4.2(d) on the basis of what a willing buyer would pay for
such securities in an arm's-length transaction with a willing seller, taking
into account, among other factors, an appropriate minority discount. In the
event that the Non-Liquid Securities are Publicly Traded and Liberty has
delivered the Put Provision Notice, Universal may elect, in lieu of satisfying
all or a portion of the Put Provision, to have Liberty sell the Non-Liquid
Securities over a reasonable period to be mutually agreed upon by Universal and
Liberty and otherwise in accordance with the Shortfall Provisions, with the term
"Market Value" substituted for the term "Liberty Purchase Price" for such
purposes. In the event that Universal lacks sufficient funds (or is otherwise
unable) to satisfy the Put Provision, SCL agrees, subject to the existing MEI
arrangements and applicable law, that so long as SCL beneficially owns, directly
or indirectly, at least 66 2/3% of the Equity of Universal (excluding any Equity
beneficially owned by Liberty or its Affiliates) (the "SCL Threshold" ), SCL
shall provide funds to Universal (for debt or equity securities of Universal on
commercially reasonable terms) in an amount sufficient to satisfy the Non-Liquid
Purchase Price or, at SCL's option, purchase from Liberty (on terms and
conditions reasonably satisfactory to the parties) the applicable Non-Liquid
Securities in exchange for the Non-Liquid Purchase Price; provided that if
neither Universal nor SCL satisfies the Put Provision and the Issuer of the
Non-Liquid Securities has outstanding a class of Publicly Traded securities,
Liberty may cause the Issuer to register the Non-Liquid Securities to be sold
over a reasonable period to be mutually agreed upon by Universal and Liberty and
otherwise in accordance with the Shortfall Provisions, with the term "Market
Value" substituted for the term "Liberty Purchase Price" for such purposes. In
lieu of providing all or a portion of the cash to Universal or to Liberty, SCL
may substitute a number of Liquid Securities of SCL determined in the manner set
forth in paragraph 4.2(h) and subject to sale by Liberty in accordance with the
Shortfall Provisions, with the term "Market Value" substituted for the term
"Liberty Purchase Price" for such purposes. The obligation of SCL set forth in
the preceding sentence with respect to any outstanding Non-Liquid Securities
shall terminate upon 10 Business Days' notice to Liberty that SCL's beneficial
ownership of the Equity Securities of Universal will decrease below the SCL
Threshold, which notice shall include reasonable detail of the transaction which
will cause such decrease.
(g) If Liberty exercises the Liberty Put Right, Universal shall use its
reasonable best efforts to make tax-free consideration consisting of Liquid
Securities available to Liberty in a tax-free transaction; provided that
Universal may provide, in lieu of Liquid Securities, Non-Liquid Securities that
are subject to the Put Provision described in Section 4.2(f). If,
notwithstanding Universal's reasonable best efforts, such consideration cannot
be made available, the consideration payable in respect of the Liberty Purchase
Price shall consist solely of cash ("Cash Consideration") and/or Liquid
Securities in respect of which Liberty shall receive
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customary registration rights. If Liberty receives Liquid Securities pursuant to
this paragraph (f) in connection with a taxable transaction, and, within three
months of the receipt of such Liquid Securities (or within such shorter period
as Liberty shall elect by giving written notice of such election to Universal
pursuant to the final sentence of this paragraph (f)) (any such period, the
"Sale Period"), Liberty shall sell such Liquid Securities and shall receive in
consideration therefor aggregate cash proceeds on a per share basis (net of any
underwriting discounts or commissions or other reasonable out-of-pocket selling
expenses) (the "Net Proceeds") which, together with any Cash Consideration, are
less on a per share basis than the Liberty Purchase Price, Universal shall pay
to Liberty, within ten Business Days of the receipt by Universal of written
notice from Liberty of the amount of such Net Proceeds, at Universal's option,
an amount of cash by wire transfer of same day funds and/or additional Liquid
Securities equal to the difference between (x) the Liberty Purchase Price on a
per share basis and (y) the sum of the Net Proceeds and the Cash Consideration
on a per share basis (such difference, the "Shortfall Amount"). Liberty shall in
good faith seek to minimize the Shortfall Amount. If Universal elects to pay all
or any part of the Shortfall Amount with Liquid Securities, Liberty shall have
the rights with respect to such Liquid Securities set forth in the immediately
preceding sentence to the extent that the Net Proceeds from the sale of such
Liquid Securities within the Sale Period applicable thereto, together with any
cash received in respect of the Shortfall Amount, do not equal the Shortfall
Amount. If the Net Proceeds from the sale of any Liquid Securities during the
applicable Sale Period (including any Liquid Securities received in respect of
the Shortfall Amount) received by Liberty pursuant to this paragraph (f) are
greater than the Liberty Purchase Price on a per share basis, Liberty shall
promptly pay to Universal, by wire transfer of same day funds, an amount equal
to the difference between the Net Proceeds and the Liberty Purchase Price. To
the extent Liberty only sells a portion of the Liquid Securities during any
applicable Sale Period, the provisions of this paragraph (f) with respect to
Liquid Securities shall be applied on a pro rata basis to the portion of the
Liquid Securities that are so sold. Notwithstanding the foregoing, Liberty shall
be entitled by written notice to Universal on the date Liberty receives the
Liquid Securities to terminate the Sale Period as to any or all Liquid
Securities received by Liberty pursuant to this paragraph (f) in which event
neither Liberty nor Universal shall have any obligation to the other under this
paragraph (f) to the extent that the Net Proceeds on a per share basis from the
sale of any such Liquid Securities as to which Liberty has so terminated the
Sale Period is greater or less than the applicable Liberty Purchase Price on a
per share basis. The provisions of this paragraph (g) (other than the first two
sentences) are referred to herein as the "Shortfall Provisions."
(h) Subject to the next succeeding sentence, the closing of any purchase of
Liberty's Equity pursuant to the Call Right or the Liberty Put Right shall occur
no later than two Business Days following the later to occur of (i) the
determination of the Appraised Value and (ii) the receipt of any necessary
approvals (including, without limitation, any required approval of the
stockholders of Universal or the Universal Parent Company or any applicable
regulatory approvals) with respect to the purchase of Liberty's Equity or the
issuance of Liquid Securities or the purchase thereof by Liberty. If Liberty
exercises the Liberty Put Right or Universal exercises the Call Right during the
60-day period described in Section 2 of the Spin-Off Agreement (and Universal
elects to require the Company to effect the Spin-off within such period) or
following Universal's election within such period to effect the Spin-off but
prior to the consummation of such Spin-off, then, notwithstanding anything to
the contrary set forth herein, Universal may delay the closing of such purchase
until the earlier to occur of (i) the fourteen month anniversary of the CEO
Termination Date and (ii) consummation of such Spin-off. The number of Liquid
Securities or publicly traded Non-Liquid Securities to be delivered to Liberty
at the closing of the Call Right or the Liberty Put Right shall be determined
based upon weighted average daily closing prices of such securities on the
principal exchange or market on which such shares may be listed or may be traded
at such time for the 60 trading days immediately prior to the second trading day
prior to such closing date. For purposes of determining such weighted average
market price, the closing price for each day shall be the closing price, if
reported, or, if the closing price is not reported, the average of the high and
low sales prices as reported by such principal exchange or market or a similar
source selected from time to time by the Company for such purpose. In the case
of Non-Liquid Securities which are not Publicly Traded, the number of securities
to be delivered shall be the appraised value of such securities determined in
accordance with the procedures set forth in Section 4.2(d) on the basis of
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what a willing buyer would pay for such securities, in an arm's length
transaction with a willing seller, taking into account, among other factors, an
appropriate minority discount.
(i) Universal shall only be required to purchase shares of a BDTV Entity or
any other Person holding Equity in connection with the exercise of the Call
Right or the Liberty Put Right if such BDTV Entity or such other Person is a
wholly-owned Subsidiary of Liberty (or its applicable Affiliate) and Universal
receives representations and warranties, reasonably satisfactory in form and
substance to Universal, that such BDTV Entity or such other Person does not own
assets or liabilities other than the Equity and customary indemnities with
respect thereto.
SECTION 4.3 Going-Private Transaction. If Universal (i) proposes to
purchase all of the shares of Common Stock held by the Public Stockholders of
the Company in a Permitted Business Combination, (ii) agrees to acquire all of
Liberty's Equity in exchange for the Liberty Purchase Price described in Section
4.2(c) and calculated in the manner described in Section 4.2(d) and (iii) shall
have used its best efforts to make tax-free consideration consisting of Liquid
Securities available to pay the Liberty Purchase Price in a tax-free transaction
to Liberty (provided that Universal may provide, in lieu of Liquid Securities,
Non-Liquid Securities that are subject to the Put Provision described in Section
4.2(f), mutatis mutandis), then Liberty shall consent to such transaction if
such transaction constitutes a Fundamental Change and shall not dissent from,
abstain from voting with respect to or vote its Common Shares against the
proposed transaction; provided in the event that Liberty's stock ownership were
such as to qualify Liberty as a Public Stockholder, for purposes of the vote
required under the definition of Permitted Business Combination, Liberty's vote
shall be disregarded for the Public Stockholder vote required pursuant thereto.
If, notwithstanding Universal's best efforts, such a tax-free transaction is not
available, Liberty shall be permitted to retain its Equity in the Company (or
the surviving entity of such Permitted Business Combination) and its rights
under the Governance Agreement (other than the right described in Section 2.04
(ii) thereof (other than with respect to a merger or similar business
combination between the Company and Universal or any of their respective
Affiliates so long as the Liberty Stockholder Group collectively beneficially
owns more than 12.5% of the outstanding Common Shares)) in connection with such
Permitted Business Combination; provided that, if Liberty would beneficially own
20% or more of the outstanding Equity (such excess being the "Excess Interest"))
after giving effect to such Permitted Business Combination, then Universal shall
purchase, and Liberty shall sell to Universal, the Excess Interest on terms and
conditions reasonably acceptable to Liberty and which shall be no less favorable
to Liberty than the price paid to the Public Stockholders in such Permitted
Business Combination; provided, further, that Universal shall reimburse Liberty
for 50% of any actual tax liability incurred or payable (including to TCI under
Liberty's tax-sharing agreement with TCI) by Liberty in connection with
Universal's acquisition of the Excess Interest. To the extent that Liberty would
own 20% or less of the outstanding equity representing a greater percentage of
voting power, Liberty shall convert such number of shares of Class B Common
Stock into shares of Common Stock in order to reduce its voting power to an
equivalent percentage of the outstanding Equity. Universal shall continue to
have the rights described in Section 4.2(a) (mutatis mutandis) and Liberty shall
continue to have the rights described in Section 4.2(b) (mutatis mutandis) with
respect to any Equity in the Company (or such surviving entity) that is retained
by Liberty following any such Permitted Business Combination and Universal's
purchase of any Excess Interest; provided that Universal makes tax-free
consideration consisting of Liquid Securities available to Liberty in a tax-free
transaction.
SECTION 4.4 Diller Right to Put Shares. (a) Following the CEO Termination
Date or such time as Diller becomes Disabled (each such event, a "Diller Put
Event"), Diller shall have the right (the "Diller Put") to require Universal or,
at Universal's option, its designee, to purchase for cash all (but not less than
all) of the Common Shares beneficially owned by Diller that were acquired from
the Company (other than securities of any BDTV Entity) in which he has a
pecuniary interest (the "Diller Put Shares"), for the Diller Share Put Price as
is specified in paragraphs (b) and (c) below. Diller may exercise the Diller Put
by delivering a written notice (the "Diller Put Notice") at any time following
the date of the applicable Diller Put Event (the "Diller Put Event Date") and on
or prior to the first anniversary of the Diller Put Event Date to Universal
stating that Diller elects to exercise the Diller Put, and upon receipt of such
Diller Put Notice, Universal, or at Universal's option, its designee, shall
purchase such Diller Put Shares, subject to the terms of
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this Section 4.4. So long as Diller is not disadvantaged, as determined in his
good faith judgment, with respect to any options to be exercised by Diller in
connection with his exercise of the Diller Put, Universal shall be permitted to
determine whether Diller shall exercise such options through "cashless" exercise
of the option.
(b) If the Diller Put Event occurs at any time prior to the fourth
anniversary of the Closing, the purchase price per Diller Put Share (the "Diller
Share Put Price") shall be equal to the weighted average daily closing prices of
a share of the Common Stock on the Nasdaq National Market (or such principal
exchange or market on which such shares may be listed or may be traded at such
time) (the "Weighted Average Market Price") for the five trading days
immediately following the date on which a public announcement of the Diller Put
Event is made. For purposes of determining the Weighted Average Market Price,
the closing price for each day shall be the closing price, if reported, or, if
the closing price is not reported, the average of the high and low sales prices
as reported by the Nasdaq National Market (or such principal exchange or market)
or a similar source selected from time to time by the Company for such purpose.
In the event such prices are unavailable, the Weighted Average Market Price
shall be the Fair Market Value of such security established by Independent
Investment Banking Firms in accordance with the procedures specified in Section
4.2(d) (with Diller having the rights of Liberty in such Section, mutatis
mutandis).
(c) If the Diller Put Event occurs at any time on or after the fourth
anniversary of the Closing, the Diller Share Put Price shall be equal to (i) if
the Diller Put is exercised no later than 10 Business Days after the Diller Put
Event Date, the Weighted Average Market Price for the five trading days
immediately preceding public announcement of the Diller Put Event or (ii) if the
Diller Put is exercised after the tenth Business Day following the Diller Put
Event Date and on or prior to the first anniversary of the Diller Put Event
Date, the Weighted Average Market Price for the five trading days immediately
prior to the exercise of the Diller Put.
(d) Subject to the receipt of applicable regulatory approvals and subject
to paragraph (f) below, the closing of the sale of the Diller Put Shares shall
occur as soon as reasonably practicable, and in any case no later than 20
Business Days following receipt of the Diller Put Notice (such date or such
later date as set forth in paragraph (f) below, the "Diller Put Closing Date").
The aggregate Diller Share Put Price shall be payable by wire transfer of same
day funds to an account specified by Diller no less than two Business Days prior
to the Diller Put Closing Date. Prior to the Diller Put Closing Date, Diller
shall exercise any Options (whether on a cashless exercise basis or otherwise)
necessary in order to deliver Common Shares to Universal (or such any other
transferee pursuant to paragraph (f) below) in connection with the Diller Put.
In the event of any stock split, stock dividend or similar distribution
following the date of determination of the Diller Share Put Price, the Diller
Share Put Price shall be appropriately adjusted.
(e) In the case, prior to the Diller Put Event Date, Universal or a
Permitted Transferee of Universal Transfers to a Third Party Transferee (A) more
than 50% of Universal's Initial Interest or (B) an amount of Equity such that
(x) the percentage voting power of the Common Shares beneficially owned by the
Third Party Transferee and its Affiliates after giving effect to such
transaction or transactions would be greater than that beneficially owned by
Universal and its Stockholder Group after giving effect to such transaction or
transactions, (y) the percentage voting power of the Common Shares beneficially
owned by the Third Party Transferee and its Affiliates after giving effect to
such transaction or transactions would be greater than that beneficially owned
by Liberty and the members of its Stockholder Group or any other stockholder and
(z) the percentage voting power of the Common Shares beneficially owned by the
applicable transferee and its Affiliates after giving effect to such transaction
would be greater than 15% of the voting power of the outstanding Common Shares
of the Company, such Third Party Transferee shall have, and such Transfer shall
be conditioned upon such Third Party Transferee expressly assuming in writing
(which shall be reasonably satisfactory to Diller), the obligations of Universal
set forth in Section 4.4 and Universal shall cease to have any obligations
pursuant to Section 4.4. Notwithstanding the foregoing, Universal shall cease to
have any obligation pursuant to Section 4.4 if, prior to the Diller Put Event
Date, it ceases to beneficially own more than 10% of the Common Shares.
Transfers of Common Shares by Universal or its Permitted Transferees on or after
the Diller Put Event Date shall not affect the obligations of such parties
pursuant to this Section.
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(f) In the event that regulatory restrictions prevent or could be
reasonably expected to prevent Universal from acquiring Diller Put Shares at
such time as Diller exercises the Diller Put, Universal and Diller each agrees
as follows:
(i) Upon receipt of the Diller Put Notice, Universal shall use its
reasonable best efforts, including promptly making all required regulatory
filings, so that the Diller Put can be consummated as promptly as
reasonably practicable.
(ii) Upon receipt of the Diller Put Notice, Universal shall use its
best efforts to enter into an escrow arrangement (the "Escrow") (subject to
applicable law and the availability of a suitable escrow agent on
commercially reasonable terms and conditions) pursuant to which Diller
would deposit the Diller Put Shares in an escrow account and title to the
Diller Put Shares would be transferred to the escrow agent, for the benefit
of Universal (provided that such shares would continue to be subject to the
Universal Proxy in accordance with Section 3.5). The escrow arrangements
shall further provide that the Diller Put Shares shall be released to
Universal, at the option of Universal, at any time and subject to
applicable law, without the consent of Diller, whether for sale to a third
party or otherwise. Any dividends or distributions on the Diller Put Shares
from and after the time that the Diller Put Shares are deposited in the
escrow account shall be similarly held for the benefit of Universal. At the
time the Diller Put Shares are deposited in an escrow account, Universal
shall pay to Diller the aggregate Diller Share Put Price in the manner set
forth in paragraph (d) above). Diller agrees to cooperate in good faith
with Universal to the extent necessary to facilitate the escrow
arrangements described herein.
(iii) In the event that Universal is not able to arrange the Escrow in
accordance with clause (ii) above within 20 Business Days of the date of
the Diller Put Notice (which period may be extended at Diller's option),
(x) Universal shall, subject to applicable law, use its reasonable best
efforts to make a non-recourse loan (the "Diller Loan Amount") to Diller in
an aggregate amount not to exceed 45% of the aggregate Diller Share Put
Price, which loan shall be secured by the Diller Put Shares (including any
distributions with respect thereto) and which shall contain other terms and
conditions subject to applicable law and otherwise reasonably satisfactory
to Universal and Diller and (y) Universal shall begin to pay to Diller
interest on the amount equal to the difference between the aggregate Diller
Share Put Price and the Diller Loan Amount at the prime rate in effect from
time to time as announced by The Chase Manhattan Bank (the "Prime Rate")
which interest rate shall be increased by 100 basis points on each of the
six month and one year anniversary of the date of the Diller Put Notice;
provided that such interest rate shall not exceed the greater of (x) the
Prime Rate and (y) 10%. Interest shall cease to accrue and become payable
at any such time as Universal is able to either consummate the Escrow
(including paying Diller the remainder of the Diller Share Put Price) or
otherwise pays to Diller the remainder of the Diller Share Put Price.
Interest shall be paid monthly, on each monthly anniversary of the date on
which interest begins to accrue, with any remaining accrued interest paid
at the closing. The Diller Share Put Price payable at the closing shall be
reduced by the amount of any loan pursuant to this paragraph (iii).
(iv) To the extent that Universal is unable to consummate the Diller
Put within eighteen months of the date of the Diller Put Notice, Universal
shall make arrangements for a financial institution to sell the Diller Put
Shares to a third party, within 10 trading days following such
eighteen-month period, with the net proceeds thereof to be paid to Diller;
provided that if such net proceeds are less than the Diller Put Price
(including any interest accrued but unpaid to the date of payment to
Diller), Universal shall pay to Diller, in cash, an amount equal to such
deficiency; provided, further, that if such net proceeds are greater than
the Diller Put Price (including any interest accrued but unpaid to the date
of payment to Diller), Diller shall pay to Universal, in cash, an amount
equal to such excess.
(v) If the Escrow is not effected and the Spin-off occurs, Diller and
Universal shall cooperate in good faith to enter into appropriate
arrangements to ensure that the Diller Put Price reflects the value of the
shares of the regulated subsidiary being spun off and any other dividend or
distribution, as appropriate, without Diller taking market risk on the
spun-off shares (and without having the benefit of any increase in the
value of the spun-off shares). Diller and Universal will cooperate in good
faith to enter
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into any agreement with respect to such arrangements and voting
arrangements with respect to the spun-off shares prior to the Closing.
(vi) Diller shall in good faith cooperate with Universal to consummate
the Diller Put and, subject to the foregoing obligations of Universal, to
provide a means of consummating the Diller Put which, to the extent
reasonably practicable, would permit Universal to own and vote the Diller
Put Shares to the extent permitted by law.
In connection with the foregoing, the Company agrees to cooperate in good faith
with Universal in order to permit Universal to acquire beneficial ownership of
the Diller Put Shares which may include, without limitation, exchanging
additional LLC Shares with Universal for the Diller Put Shares or granting an
option to purchase shares of Common Stock in a number equal to the number of
Diller Put Shares; provided that the Company shall not be required to take any
action that would or could reasonably be expected to have substantial adverse
tax, accounting or financial consequences to the Company or its Subsidiaries
(including the LLC). In addition, each of Diller and the Company agree that, so
long as there would not be any substantial adverse tax or accounting
consequences to the Company or Diller, at Universal's option, they will use
their reasonable best efforts to transfer options to Universal in lieu of Common
Shares.
(g) Liberty acknowledges and agrees that Transfers by Diller to Universal
pursuant to this Section 4.4 shall not result in any right of first refusal by
Liberty pursuant to Section 4.9.
SECTION 4.5 Tag-Along for Diller and Liberty for Transfers by
Universal. (a) Subject to prior compliance by Universal with Section 4.8, if
Universal or any members of its Stockholder Group shall desire to Transfer in
one transaction or a series of related transactions either
(i) more than 50% of Universal's Initial Interest or
(ii) an amount of Equity such that (x) the percentage voting power of
the Common Shares beneficially owned by the applicable transferee and its
Affiliates after giving effect to such transaction or transactions would be
greater than that beneficially owned by Universal and its Affiliates after
giving effect to such transaction or transactions, (y) the percentage
voting power of the Common Shares beneficially owned by the applicable
transferee and its Affiliates after giving effect to such transaction or
transactions would be greater than that held by Liberty and its Stockholder
Group or any other stockholder and (z) the percentage voting power of the
Common Shares beneficially owned by the applicable transferee and its
Affiliates after giving effect to such transaction would be greater than
25% of the voting power of the outstanding Equity of the Company
to any Person (including any Group), other than to a Person that was a Permitted
Transferee of Universal prior to the occurrence of such transaction and other
than pursuant to Section 4.8 to the extent that Liberty previously received a
Universal Tag-Along Notice pursuant to this Section 4.5 (with respect to the
transaction which gave rise to the proposed transaction pursuant to Section 4.8)
and did not exercise its rights thereunder (either such transaction or series of
related transactions, a "Universal Tag-Along Sale"), Universal shall give prior
written notice of such intended Transfer to Liberty and Diller (each, a
"Tag-Along Offeree") no later than the date on which Universal gives the Offer
Notice to Diller pursuant to Section 4.8(b). Such notice (the "Universal
Tag-Along Notice") shall set forth the terms and conditions of such proposed
Transfer, including the name of the proposed transferee, the amount of Equity
proposed to be Transferred (including the number of securities previously or
proposed to be Transferred to the applicable transferee or its Affiliates in a
related transaction) (the "Universal Tag-Along Shares"), the purchase price per
Common Share on an equivalent basis proposed to be paid therefor and the payment
terms and type of Transfer to be effectuated.
(b) Within 10 Business Days after delivery of the Universal Tag-Along
Notice by Universal to the Tag-Along Offerees, each Tag-Along Offeree shall, by
written notice to Universal, each have the opportunity and right to sell to the
transferee in such proposed Transfer (upon the same terms and conditions as
Universal or the most favorable terms and conditions to Universal provided for
in any one of a series of related transactions) up to that number of Common
Shares beneficially owned by such Tag-Along Offeree as shall equal the product
of (x) a fraction, the numerator of which is the number of Universal Tag-Along
Shares and the denominator of which is the aggregate number of Common Shares
beneficially owned as of the date of the
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Universal Tag-Along Notice by Universal and its Stockholder Group, multiplied by
(y) the number of Common Shares beneficially owned by such Tag-Along Offeree and
its Stockholder Group as of the date of the Universal Tag-Along Notice. In the
event that the proposed transferee is unwilling to purchase all of the Common
Shares that Universal, Diller and Liberty propose to Transfer hereunder, the
number of Common Shares that a Stockholder, including Universal, may sell
pursuant to Section 4.5(a) shall be determined by multiplying the maximum number
of Common Shares that the proposed transferee of the Universal Tag-Along Shares
is willing to purchase on the terms set forth in the Universal Tag-Along Notice
by a fraction, the numerator of which is the number of Common Shares that such
Stockholder and its Stockholder Group proposes to sell hereunder (subject to the
maximum amount for each Stockholder calculated pursuant to the preceding
sentence) and the denominator of which is the aggregate number of Common Shares
that all Stockholders exercising rights under this Section 4.5, including
Universal, and the members of their respective Stockholder Groups propose to
sell hereunder.
(c) At the closing of any proposed Transfer in respect of which a Universal
Tag-Along Notice has been delivered, each Tag-Along Offeree shall deliver, free
and clear of all liens, to the proposed transferee certificates evidencing the
Common Shares to be sold thereto duly endorsed with Transfer powers and shall
receive in exchange therefore the consideration to be paid by the proposed
transferee in respect of such Common Shares. No transferee shall be required to
purchase shares of a BDTV Entity (or any form of Equity other than Common
Shares) in connection with the Universal Tag-Along Sale and each of Liberty and
Diller shall cooperate so that any transferor will be able to purchase directly
any Common Shares held by a BDTV Entity and not the shares of any BDTV Entity.
(d) The Company shall cooperate with Universal and Liberty to deliver
Common Shares upon exchange by Universal or Liberty or any member of their
respective Stockholder Groups of LLC Shares or Exchange Shares in connection
with any such Transfer.
(e) This Section 4.5 shall not be applicable to any Transfer pursuant to
Section 4.8 to the extent that Liberty previously received a Universal Tag-Along
Notice pursuant to this Section 4.5 (with respect to the transaction which gave
rise to the proposed transaction pursuant to Section 4.8) and did not exercise
its rights thereunder).
(f) No Transfer or Transfers by Universal or any member of its Stockholder
Group constituting a Universal Tag-Along Sale shall be effected absent
compliance with this Section 4.5.
SECTION 4.6 Tag-Along for Liberty for Transfers by Diller to
Universal. (a) If Universal or any member of its Stockholder Group shall desire
to purchase from Diller or any member of his Stockholder Group, and Diller or
any member of his Stockholder Group shall desire to Transfer to Universal or any
member of its Stockholder Group, any Common Shares beneficially owned by him,
other than as set forth in paragraph (e) below, (a "Stockholder Tag-Along
Sale"), Universal shall give not less than 10 Business Days' prior written
notice to Liberty of such intended Transfer. Such notice (the "Stockholder
Tag-Along Notice") shall set forth the terms and conditions of such proposed
Transfer, including the number of Common Shares proposed to be Transferred (the
"Stockholder Tag-Along Shares"), the purchase price per Common Share proposed to
be paid therefor and the payment terms and type of Transfer to be effectuated.
(b) Within 10 days after delivery of the Stockholder Tag-Along Notice by
Universal to Liberty, Liberty shall, by written notice to Universal, have the
opportunity and right to sell to Universal or its designee in such proposed
Transfer (upon the same terms and conditions as Diller) up to that number of
Common Shares beneficially owned by Liberty (including Liberty's pro rata
portion of any shares held by a BDTV Entity) as shall equal the product of (x) a
fraction, the numerator of which is the number of Stockholder Tag-Along Shares
and the denominator of which is the aggregate number of Common Shares
beneficially owned as of the date of the Stockholder Tag-Along Notice by Diller
and his Stockholder Group (excluding shares held by any BDTV Entity that were
not contributed by Diller), multiplied by (y) the number of Common Shares
beneficially owned by Liberty and its Stockholder Group (including Liberty's pro
rata portion of any shares held by a BDTV Entity) as of the date of the
Stockholder Tag-Along Notice. The number of Common Shares that Diller or Liberty
may sell to Universal pursuant to Section 4.6(a) shall be determined by
multiplying the maximum number of Stockholder Tag-Along Shares that Universal is
willing to purchase on the terms set
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forth in the Stockholder Tag-Along Notice by a fraction, the numerator of which
is the number of Common Shares that such Stockholder and its Stockholder group
proposes to sell hereunder (subject to the maximum amount for Liberty calculated
pursuant to the preceding sentence) and the denominator of which is the
aggregate number of Common Shares that Diller and Liberty and their respective
Stockholder Groups propose to sell hereunder.
(c) At the closing of any proposed Transfer in respect of which a
Stockholder Tag-Along Notice has been delivered, Liberty shall deliver, free and
clear of all liens, to Universal certificates evidencing the Common Shares to be
sold thereto duly endorsed with Transfer powers and shall receive in exchange
therefore the consideration to be paid by Universal in respect of such Common
Shares as described in the Stockholder Tag-Along Notice. Neither Universal nor
any member of its Stockholder Group shall be required to purchase shares of a
BDTV Entity in connection with the Universal Tag-Along Sale and each of Liberty
and Diller shall cooperate so that any transferee will be able to purchase
directly any Common Shares held by a BDTV Entity and not the shares of any BDTV
Entity.
(d) Diller and the members of his Stockholders Group shall not effect any
Transfer or Transfers constituting a Stockholder Tag-Along Sale absent
compliance with this Section 4.6.
(e) This Section 4.6 shall not be applicable to (i) any Transfer by Diller
to Universal pursuant to the exercise of the Diller Put Right, (ii) any Transfer
by Diller to Universal of an aggregate of not more than 1,000,000 Common Shares
within any rolling twelve-month period (including any shares Transferred
pursuant to Section 4.7(e)(i)), (iii) any Transfer by Diller to Universal in
connection with Section 4.8 to the extent that Liberty received a Diller
Tag-Along Notice pursuant to Section 4.7 and did not exercise its rights
thereunder, (iv) any Transfer by Diller to Universal of any Common Shares
acquired by Diller from Liberty or (v) pursuant to Section 4.1(a)(w) or
4.1(a)(z).
SECTION 4.7 Tag-Along for Liberty for Transfers by Diller to a Third
Party. (a) If Diller shall desire to Transfer to any third party other than
Universal and the members of its Stockholder Group any of the Common Shares
beneficially owned by him or any member of his Stockholder Group (other than as
set forth in paragraph (e) below or other than as covered by Section 4.6), in
one transaction or a series of related transactions (the "Diller Tag-Along
Sale"), Diller shall give prior written notice to Liberty of such intended
Transfer no later than the date on which Diller gives the Offer Notice to
Universal pursuant to Section 4.8(b). Such notice (the "Diller Tag-Along
Notice") shall set forth the terms and conditions of such proposed Transfer,
including the number of Common Shares proposed to be Transferred (the "Diller
Tag-Along Shares"), the purchase price per Common Share proposed to be paid
therefor and the payment terms and type of Transfer to be effectuated.
(b) Within 10 days after delivery of the Diller Tag-Along Notice by Diller
to Liberty, Liberty shall, by written notice to Diller, have the opportunity and
right to sell to such third party in such proposed Transfer (upon the same terms
and conditions as Diller) up to that number of Common Shares beneficially owned
by Liberty (including Liberty's pro rata portion of any shares held by a BDTV
Entity) as shall equal the product of (x) a fraction, the numerator of which is
the number of Diller Tag-Along Shares and the denominator of which is the
aggregate number of Common Shares beneficially owned as of the date of the
Diller Tag-Along Notice by Diller and his Affiliates (excluding shares held by
any BDTV Entity that were not contributed by Diller), multiplied by (y) the
number of Common Shares beneficially owned by Liberty (including Liberty's pro
rata portion of any shares held by a BDTV Entity) as of the date of the Diller
Tag-Along Notice. The number of Common Shares that Diller or Liberty may sell to
a third party pursuant to Section 4.7(a) shall be determined by multiplying the
maximum number of Diller Tag-Along Shares that such third party is willing to
purchase on the terms set forth in the Diller Tag-Along Notice by a fraction,
the numerator of which is the number of Common Shares that such Stockholder
proposes to sell hereunder (subject to the maximum amount for Liberty calculated
pursuant to the preceding sentence) and the denominator of which is the
aggregate number of Common Shares that Diller and Liberty propose to sell
hereunder.
(c) At the closing of any proposed Transfer in respect of which a Diller
Tag-Along Notice has been delivered, Liberty shall deliver, free and clear of
all liens, to such third party certificates evidencing the Common Shares to be
sold thereto duly endorsed with Transfer powers and shall receive in exchange
therefore
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the consideration to be paid by such third party in respect of such Common
Shares as described in the Diller Tag-Along Notice. No transferee shall be
required to purchase shares of a BDTV Entity in connection with the Diller
Tag-Along Sale and each of Liberty and Diller shall cooperate so that any
transferee will be able to purchase directly any Common Shares held by a BDTV
Entity and not the shares of any BDTV Entity.
(d) Diller and the members of his Stockholders Group shall not effect any
Transfer or Transfers constituting a Diller Tag-Along Sale absent compliance
with this Section 4.7.
(e) This Section 4.7 shall not be applicable to the Transfer by Diller or
any member of his Stockholder Group (i) of an aggregate of not more than
1,000,000 Common Shares within any rolling twelve-month period (including any
shares Transferred pursuant to Section 4.6(e)(ii)), (ii) pursuant to Section
4.1(a)(w) or 4.1(a)(z), (iii) in a Market Sale or (iv) following such time as
Diller is no longer CEO other than any Transfer made in connection with Diller
ceasing to be CEO.
SECTION 4.8 Right of First Refusal between Universal and Diller. (a) Any
Transfer of Common Shares by Universal or Diller or members of each of their
respective Stockholder Groups (the "Transferring Party") will be subject to the
right of first refusal provisions of this Section 4.8 other than a Transfer (i)
between Universal and any member of the Universal Stockholder Group or between
members of the Universal Stockholder Group, (ii) by Diller permitted by Section
4.1(a) hereof, (iii) in connection with any Market Sale (other than any Market
Sale (a "Covered Market Sale") involving the Transfer of 250,000 or more Common
Shares in any rolling twelve month period) or (iv) a Transfer of an aggregate of
not more than 1,000,000 Common Shares within any rolling twelve-month period
(including any shares Transferred pursuant to Section 4.6(e)(ii) and Section
4.7(e)(i)).
(b) Prior to effecting any Transfer described in Section 4.8(a), the
Transferring Party shall deliver a written notice (the "Offer Notice") to
Diller, if the Transferring Party is Universal or an Affiliate thereof, or to
Universal, if the Transferring Party is Diller or an Affiliate thereof (the
recipient of such notice, the "Other Stockholder"), which Offer Notice shall
specify (i) the Person to whom the Transferring Party proposes to make such
Transfer or the proposed manner of Transfer in the case of a public offering or
a Covered Market Sale, (ii) the number or amount and description of the Common
Shares to be Transferred, (iii) except in the case of a public offering or a
Covered Market Sale, the Offer Price (as defined below), and (iv) all other
material terms and conditions of the proposed Transfer, including a description
of any non-cash consideration sufficiently detailed to permit valuation thereof,
and which Offer Notice shall be accompanied by any written offer from the
prospective transferee to purchase such Common Shares, if available and
permitted pursuant to the terms thereof. The Offer Notice shall constitute an
irrevocable offer to the Other Stockholder or its designee, for the period of
time described below, to purchase all (but not less than all) of such Common
Shares upon the same terms specified in the Offer Notice, subject to Section
4.8(g) and as otherwise set forth in this Section 4.8. The Other Stockholder may
elect to purchase all (but not less than all) of the Common Shares at the Offer
Price (or, if the Offer Price includes property other than cash, the equivalent
in cash of such property as determined in accordance with Section 4.8(g)) and
upon the other terms and conditions specified in the Offer Notice.
(c) For purposes of this Section 4.8, "Offer Price" shall be defined to
mean on a per share or other amount of Common Shares basis (i) in the case of a
third party tender offer or exchange offer, the tender offer or exchange offer
price per Common Share taking into account any provisions thereof with respect
to proration and any proposed second step or "back-end" transaction, (ii) in the
case of a public offering or a Covered Market Sale, the Current Market Value per
Common Share as of the date the election notice of the Other Stockholder
hereinafter described is delivered and (iii) in the case of a
privately-negotiated transaction, the proposed sale price per Common Share.
(d) If the Other Stockholder elects to purchase the offered Common Shares,
it shall give notice to the Transferring Party within 10 Business Days of its
receipt of the Offer Notice of its election (or in the case of a third party
tender offer or exchange offer, not later than five Business Days prior to the
expiration date of such offer, provided that all conditions to such offer (other
than with respect to the number of Common Shares tendered) shall have been
satisfied or waived and the Offer Notice shall have been provided at least ten
Business Days prior to the expiration date of such offer), which shall
constitute a binding obligation, subject to
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standard terms and conditions for a stock purchase contract between two
significant stockholders of an issuer (provided that the Transferring Party
shall not be required to make any representations or warranties regarding the
business of the Company), to purchase the offered Common Shares, which notice
shall include the date set for the closing of such purchase, which date shall be
no later than 20 Business Days following the delivery of such election notice,
or, if later, five Business Days after receipt of all required regulatory
approvals; provided that the closing shall only be delayed pending receipt of
required regulatory approvals if (i) the Other Stockholder is using reasonable
efforts to obtain the required regulatory approvals, (ii) there is a reasonable
prospect of receiving such regulatory approvals and (iii) if such closing is
delayed more than 90 days after the date of the Other Stockholder's notice of
election to purchase, then the Other Stockholder agrees to pay interest at the
Reference Rate to the Transferring Party from such date to the closing date.
Notwithstanding the foregoing, such time periods shall not be deemed to commence
with respect to any purported notice that does not comply in all material
respects with the requirements of this Section 4.8(d). The Other Stockholder may
assign its rights to purchase under this Section 4.8 to any Person who is a
Permitted Designee.
(e) Subject to Section 4.8(f) in the case of a Covered Market Sale, if the
Other Stockholder does not respond to the Offer Notice within the required
response time period or elects not to purchase the offered Common Shares, the
Transferring Party shall be free to complete the proposed Transfer (to the same
proposed transferee, in the case of privately-negotiated transaction) on terms
no less favorable to the Transferring Party or its Affiliate, as the case may
be, than those set forth in the Offer Notice, provided that (x) such Transfer is
closed within (I) 90 days after the latest of (A) the expiration of the
foregoing required response time periods, or (B) the receipt by the Transferring
Party of the foregoing election notice or, in the case of (A) or (B), if later,
five Business Days following receipt of all required regulatory approvals;
provided that the closing shall only be delayed pending receipt of required
regulatory approvals if (i) the Transferring Stockholder is using reasonable
efforts to obtain the required regulatory approvals and (ii) there is a
reasonable prospect of receiving such regulatory approvals or, (II) in the case
of a public offering, within 20 days of the declaration by the Commission of the
effectiveness of a registration statement filed with the Commission pursuant to
this Agreement, and (y) the price at which the Common Shares are transferred
must be equal to or higher than the Offer Price (except in the case of a public
offering, in which case the price at which the Common Shares are sold (before
deducting such approvals underwriting discounts and commissions) shall be equal
to at least 90% of the Offer Price).
(f) If the Other Stockholder does not respond to the Offer Notice with
respect to a Covered Market Sale within the required response time period or
elects not to purchase the offered Common Shares, the Transferring Party shall
be free to complete the proposed Covered Market Sale in one or more transactions
during the 90-day period commencing on the latest of (i) the expiration of the
required response time period described in Section 4.8(d) or (ii) receipt by the
Transferring Party of the election notice described in Section 4.8(d), provided
that the price at which each Common Share is transferred (excluding brokerage
commissions) shall be at least equal to 90% of the Offer Price.
(g) If (i) the consideration specified in the Offer Notice consists of, or
includes, consideration other than cash or a publicly traded security for which
a closing market price is published for each Business Day, or (ii) any property
other than Common Shares is proposed to be transferred in connection with the
transaction to which the Offer Notice relates, then the price payable by the
Other Stockholder under this Section 4.8 for the Common Shares being transferred
shall be equal to the Fair Market Value of such consideration which shall be
determined in the manner set forth in Section 4.2(d) (with Diller or Universal
having the rights of Liberty in such Section, mutatis mutandis). Notwithstanding
anything to the contrary contained in this Section 4.8, the time periods
applicable to an election by the Other Stockholder to purchase the offered
securities set forth in Section 4.8(a) shall not be deemed to commence until the
Fair Market Value has been determined, provided that, in the case of a third
party tender offer or exchange offer, in no event shall any such election be
permitted later than five Business Days prior to the latest time by which Common
Shares shall be tendered in order to be accepted pursuant to such offer or to
qualify for any proration applicable to such offer if all conditions to such
offer (other than the number of shares tendered) have been satisfied or waived.
Each of Diller and Universal agrees to use its best efforts to cause the Fair
Market Value to be determined as promptly
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as practicable but in no event later than 10 Business Days after the receipt by
the Other Stockholder of the Offer Notice.
(h) Liberty acknowledges and agrees that Transfers by Diller to Universal
pursuant to this Section 4.8 shall not result in any right of first refusal by
Liberty pursuant to Section 4.9.
SECTION 4.9 Right of First Refusal between Liberty and Diller. (a) Any
Transfer of Common Shares by a member of the Liberty Stockholder Group or a
member of the Diller Stockholder Group (the "L/D Transferring Party") will be
subject to the right of first refusal provisions of this Section 4.9, other than
a Transfer by a member of the Liberty Stockholder Group or the Diller
Stockholder Group permitted by Section 4.1(a) hereof, a Transfer by Liberty
pursuant to Section 4.2, 4.3, 4.5 hereof, a Transfer by Diller with respect to
which Liberty has a right pursuant to Section 4.6, a Transfer that is a sale
described in Sections 4.6(e)(ii) and 4.7(e)(i) or a Market Sale that is not a
Covered Market Sale.
(b) Prior to effecting any Transfer referred to in Section 4.9(a), the L/D
Transferring Party shall deliver written notice (the "L/D Offer Notice") to
Diller, if the L/D Transferring Party is a member of the Liberty Stockholder
Group, or to Liberty, if the L/D Transferring Party is a member of the Diller
Stockholder Group (the recipient of such notice, the "L/D Other Party"), which
Offer Notice shall specify (i) the Person to whom the L/D Transferring Party
proposes to make such Transfer or the proposed manner of Transfer in the case of
a public offering or a Covered Market Sale, (ii) the number or amount and
description of the Common Shares to be Transferred, (iii) except in the case of
a public offering or a Covered Market Sale, the L/D Offer Price (as defined
below), and (iv) all other material terms and conditions of the proposed
Transfer, including a description of any non-cash consideration sufficiently
detailed to permit valuation thereof, and which Offer Notice shall be
accompanied by any written offer from the prospective transferee to purchase
such Common Shares, if available and permitted pursuant to the terms thereof.
The L/D Offer Notice shall constitute an irrevocable offer to the L/D Other
Party, for the period of time described below, to purchase all (but not less
than all) of such Common Shares.
(c) For purposes of this Section 4.9, "L/D Offer Price" shall mean the
purchase price per Common Share to be paid to the L/D Transferring Party in the
proposed transaction (as it may be adjusted in order to determine the net
economic value thereof). In the event that the consideration payable to the L/D
Transferring Party in a proposed transaction consists of securities, the
purchase price per share shall equal the fair market value of such securities
divided by the number of Common Shares to be Transferred. Such fair market value
shall be the market price of any publicly traded security and, if such security
is not publicly traded, the fair market value shall be equal to the appraised
value (calculated in accordance with the method described in Section 4.2(d)) of
such security.
(d) If the L/D Other Party elects to purchase the offered Common Shares, it
shall give notice to the L/D Transferring Party within ten Business Days after
receipt of the L/D Offer Notice of its election (or in the case of a third party
tender offer or exchange offer, not later than five Business Days prior to the
expiration date of such offer, provided that all conditions to such offer (other
than with respect to the number of Common Shares tendered) shall have been
satisfied or waived and the L/D Offer Notice shall have been provided at least
ten Business Days prior to the expiration date of such offer), which shall
constitute a binding obligation, subject to standard terms and conditions for a
stock purchase contract between two significant stockholders of an issuer
(provided that the L/D Transferring Party shall not be required to make any
representations or warranties regarding the business of the Company), to
purchase the offered Common Shares, which notice shall include the date set for
the closing of such purchase, which date shall be no later than 20 Business Days
following the delivery of such election notice, or, if later, five Business Days
after receipt of all required regulatory approvals; provided that the closing
shall only be delayed pending receipt of required regulatory approvals if (i)
the L/D Other Party is using reasonable efforts to obtain the required
regulatory approvals, (ii) there is a reasonable prospect of receiving such
regulatory approvals and (iii) if such closing is delayed more than 90 days
after the date of the L/D Other Party's notice of election to purchase, then the
L/D Other Party agrees to pay interest at the Reference Rate to the L/D
Transferring Party from such date to the closing date. Notwithstanding the
foregoing, such time periods shall not be deemed to commence with respect to any
purported notice that does not comply in all material respects with the
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requirements of this Section 4.9(d). Liberty and Diller may assign their
respective rights to purchase under this Section 4.9 to any Person who is a
Permitted Designee.
(e) Subject to Section 4.9(f) in the case of a Covered Market Sale, if the
L/D Other Stockholder does not respond to the L/D Offer Notice within the
required response time period or elects not to purchase the offered Common
Shares, the L/D Transferring Party shall be free to complete the proposed
Transfer (to the same proposed transferee, in the case of a privately-negotiated
transaction) on terms no less favorable to the L/D Transferring Party or its
Affiliate, as the case may be, than those set forth in the L/D Offer Notice,
provided that (x) such Transfer is closed within (I) 90 days after the latest of
(A) the expiration of the foregoing required response time periods, or (B) the
receipt by the L/D Transferring Party of the foregoing election notice or, in
the case of (A) or (B), if later, five Business Days following receipt of all
required regulatory approvals; provided that the closing shall only be delayed
pending receipt of required regulatory approvals if (i) the L/D Transferring
Stockholder is using reasonable efforts to obtain the required regulatory
approvals and (ii) there is a reasonable prospect of receiving such regulatory
approvals, or (II) in the case of a public offering, within 20 days of the
declaration by the Commission of the effectiveness of a registration statement
filed with the Commission pursuant to this Agreement, and (y) the price at which
the Common Shares are transferred must be equal to or higher than the L/D Offer
Price (except in the case of a public offering, in which case the price at which
the Common Shares are sold (before deducting underwriting discounts and
commissions) shall be equal to at least 90% of the L/D Offer Price).
(f) If the L/D Other Stockholder does not respond to the L/D Offer Notice
with respect to a Covered Market Sale within the required response time period
or elects not to purchase the offered Common Shares, the L/D Transferring Party
shall be free to complete the proposed Covered Market Sale in one or more
transactions during the 90-day period commencing on the latest of (i) the
expiration of the required response time period described in Section 4.9(d) or
(ii) receipt by the L/D Transferring Party of the election notice described in
Section 4.9(d), provided that the price at which each Common Share is
transferred (excluding brokerage commissions) shall be at least equal to 90% of
the L/D Offer Price.
(g) If the L/D Other Party elects to exercise its right of first refusal
under this Section 4.9, the L/D Other Party shall pay the L/D Offer Price in
cash (by wire transfer of immediately available funds) or by the delivery of
marketable securities having an aggregate fair market value equal to the L/D
Offer Price, provided, that if the securities to be so delivered by the L/D
Other Party would not, in the L/D Transferring Party's possession, have at least
the same general degree of liquidity as the securities the L/D Transferring
Party was to receive in such proposed transaction (determined by reference to
the L/D Transferring Party's ability to dispose of such securities (including,
without limitation, the trading volume of such securities and the L/D Other
Party's percentage ownership of the issuer of such securities)), then the L/D
Other Party shall be required to deliver securities having an appraised value
(calculated in accordance with the method described in Section 4.2(d)) equal to
the L/D Offer Price. If the L/D Other Party delivers securities in payment of
the L/D Offer Price, it will cause the issuer of such securities to provide the
L/D Transferring Party with customary registration rights related thereto (if,
in the other transaction, the L/D Transferring Party would have received cash,
cash equivalents, registered securities or registration rights). Each of Diller
and Liberty agrees to use his or its commercially reasonable efforts (but not to
expend any money) to preserve for the other Stockholder, to the extent possible,
the tax benefits available to it in such proposed transaction, and to otherwise
seek to structure such transaction in the most tax efficient method available.
Notwithstanding the foregoing, if Diller pays the L/D Offer Price in securities,
such securities must be securities that Liberty is permitted to own under
applicable FCC Regulations.
(h) Notwithstanding anything to the contrary contained in this Section 4.9,
the time periods applicable to an election by the L/D Other Party to purchase
the offered securities shall not be deemed to commence until the fair market
value has been determined, provided that, in the case of a third party tender
offer or exchange offer, in no event shall any such election be permitted later
than five Business Days prior to the latest time by which Common Shares shall be
tendered in such offer if all conditions to such offer (other than the number of
shares tendered) have been satisfied or waived. Each of Diller and Liberty
agrees to use his and its best efforts to cause the fair market value to be
determined as promptly as practicable, but in no event later than ten Business
Days after the receipt by the L/D Other Stockholder of the L/D Offer Notice.
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SECTION 4.10 Right of First Refusal of Universal. (a) Subject to the
right of first refusal of Diller pursuant to Section 4.9, any direct or indirect
Transfer of Common Shares by a member of the Liberty Stockholder Group prior to
August 24, 2000 with respect to which Diller would have a right of first refusal
pursuant to Section 4.9 will be subject to a right of first refusal by Universal
on the same terms and conditions as are applicable to Diller pursuant to Section
4.9, mutatis mutandis.
(b) Universal acknowledges and agrees that its right of first refusal
pursuant to this Section 4.10 is subject to the right of first refusal by Diller
pursuant to Section 4.9.
(c) This Section 4.10 shall only be applicable to the initial Transfer by
Liberty of a number of Common Shares having an aggregate number of votes equal
to the Specified Votes.
SECTION 4.11 Transfers of Class B Shares. (a) Subject to the rights of
first refusal pursuant to Sections 4.8, 4.9 and 4.10 and subject to paragraph
(c) below, in the event that any Stockholder (the "Transferring Stockholder")
proposes to Transfer any shares of Class B Common Stock, such Stockholder shall
send a written notice (which obligation may be satisfied by the delivery of the
applicable Offer Notice) (the "Exchange Notice") to each other Stockholder (the
"Non-Transferring Stockholders"), that such Transferring Stockholder intends to
Transfer shares of Class B Common Stock, including the number of such shares
proposed to be Transferred. Each Non-Transferring Stockholder shall give notice
to the Transferring Stockholder within 20 days of its receipt of the Exchange
Notice of its desire to exchange some or all of such shares of Class B Common
Stock proposed to be Transferred for an equivalent number of shares of Common
Stock. If each of the Non-Transferring Stockholders desires to exchange some or
all of such shares and to the extent that such shares are not otherwise
Transferred to any Stockholder (or its Permitted Designee) pursuant to Section
4.8, 4.9 or 4.10, such shares of Class B Common Stock shall be exchanged (i) if
the Transferring Stockholder is other than Diller, first with Diller (to the
extent he elects to exchange), second, with respect to any remaining shares,
with Universal (to the extent that Universal elects to exchange) (if Universal
is not the Transferring Stockholder) and third, with Liberty and (ii) if the
Transferring Stockholder is Diller, then with Universal (to the extent that
Universal elects to exchange), with any remaining shares of Class B Common Stock
exchanged with Liberty (to the extent that Liberty elects to exchange). Except
to the extent necessary to avoid liability under Section 16(b) of the Exchange
Act and subject to applicable law, any such exchange shall be consummated
immediately prior to the consummation of any such Transfer.
(b) If any shares of Class B Common Stock proposed to be Transferred are
not exchanged pursuant to the provisions of paragraph (a) above, prior to any
such Transfer, the Transferring Stockholder shall convert, or cause to be
converted, such shares of Class B Common Stock into shares of Common Stock (or
such other securities of the Company into which such shares are then
convertible).
(c) The provisions of Section 4.11(a) and 4.11(b) shall not be applicable
to any Transfers (i) to a member of such Stockholder's Stockholder Group, (ii)
by Universal to a Permitted Designee of Universal; provided that (x) Universal
and all members of its Stockholder Group were precluded by FCC Regulations from
purchasing the shares purchased by such Permitted Designee and (y) such
Permitted Designee is reasonably satisfactory to Diller, (iii) pursuant to a
pledge or grant of a security interest in compliance with clause (y) of Section
4.1(a), (iv) from one Stockholder or its Stockholder Group to the other
Stockholder or its Stockholder Group subject to the terms of this Agreement, (v)
any sale by Universal that would constitute a Universal Tag-Along Sale, (vi) any
sale by Liberty in connection with a Universal Tag-Along Sale or following the
Standstill Termination Date or (vii) by Universal following the CEO Termination
Date.
SECTION 4.12 Transferees. (a) Any Permitted Transferee or Permitted
Designee of a Stockholder shall be subject to the terms and conditions of this
Agreement as if such Permitted Transferee or Permitted Designee were Universal
(if Universal or a Permitted Transferee of Universal is the transferor), Liberty
(if Liberty or a Permitted Transferee of Liberty is the transferor) or Diller
(if Diller or a Permitted Transferee of Diller is the transferor). Prior to the
initial acquisition of beneficial ownership of any Common Shares by any
Permitted Transferee (or a Permitted Designee), and as a condition thereto, each
Stockholder agrees (i) to cause its respective Permitted Transferees or
Permitted Designees to agree in writing with the other parties hereto to be
bound by the terms and conditions of this Agreement to the extent described in
the preceding sentence and (ii) that such Stockholder shall remain directly
liable for the performance by its respective
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Permitted Transferees or Permitted Designees of all obligations of such
Permitted Transferees or Permitted Designees under this Agreement. Except as
otherwise contemplated by this Agreement (i) each of Universal, Diller and
Liberty agrees not to cause or permit any of its respective Permitted
Transferees to cease to qualify as a member of such Stockholder's Stockholders
Group so long as such Permitted Transferee beneficially owns any Common Shares,
and if any such Permitted Transferee shall cease to be so qualified, such
Permitted Transferee shall automatically upon the occurrence of such event cease
to be a "Permitted Transferee" for any purpose under this Agreement and (ii)
each Stockholder agrees not to Transfer any Common Shares to any Affiliate other
than a Permitted Transferee of such Stockholder.
(b) No Third Party Transferee shall have any rights or obligations under
this Agreement, except:
(i) in the case of a Third Party Transferee of Liberty (or any member
of the Liberty Stockholder Group) who acquires shares of Common Stock and
who (together with its Affiliates) would not be a Public Stockholder if at
such time Universal proposed a Permitted Business Combination (provided
that for purposes of this clause, the percentage referred to in the
definition of Public Stockholder shall be 15% in lieu of 10%), such Third
Party Transferee shall be subject to the obligations of Liberty (but
subject to the other terms and conditions of this Agreement) pursuant to
Article II (but only for 18 months following the acquisition of such
shares), Section 3.2 (but only for 18 months following the acquisition of
such shares), Section 3.3(a) (but shall not have the right to consent to
any Fundamental Changes), the first sentence of Section 3.3(b), Section
3.3(c), Section 3.7, as applicable, this Section 4.12 and Article VI;
provided that notwithstanding any time periods set forth above, such Third
Party Transferee shall only be subject to such obligations for so long as
it would not be a Public Stockholder determined in the manner set forth
above;
(ii) in the case of a Third Party Transferee of Universal (or any
member of the Universal Stockholder Group) who (together with its
Affiliates) upon consummation of any Transfer would not be a Public
Stockholder if at such time Universal proposed a Permitted Business
Combination (provided that for purposes of this clause, the percentage
referred to in the definition of Public Stockholder shall be 15% in lieu of
10%), such Third Party Transferee shall be subject to the obligations of
Universal (but subject to the other terms and conditions of this Agreement)
pursuant to Section 3.3(a) (but shall not have the right to consent to any
Fundamental Changes), Section 3.3(c), Section 3.4 (but only for 18 months
following the acquisition of such shares), Section 3.7, Section 4.4 (to the
extent provided in Section 4.4(f), this Section 4.12 and Article VI;
provided that notwithstanding any time periods set forth above, such Third
Party Transferee shall only be subject to such obligations for so long as
it would not be a Public Stockholder determined in the manner set forth
above; and
(iii) in the case of a Third Party Transferee of Diller (or any member
of the Diller Stockholder Group) who (together with its Affiliates) upon
consummation of any Transfer would not be a Public Stockholder if at such
time Universal proposed a Permitted Business Combination (provided that for
purposes of this clause, the percentage referred to in the definition of
Public Stockholder shall be 15% in lieu of 10%), such Third Party
Transferee shall be subject to the obligations of Diller (but subject to
the other terms and conditions of this Agreement) pursuant to Section
3.3(a) (but shall not have the right to consent to any Fundamental
Changes), the first sentence of Section 3.3(b), Section 3.3(c), Section
3.7, this Section 4.12 and Article VI and the obligations under Article II
as if Diller had the obligations of Liberty under such Article (but only
for 18 months following the acquisition of such shares) and the obligations
under Section 3.2 as if Diller had the obligations of Liberty under such
Section (but only for 18 months following the acquisition of such shares);
provided that notwithstanding any time periods set forth above, such Third
Party Transferee shall only be subject to such obligations for so long as
it would not be a Public Stockholder determined in the manner set forth
above.
(c) Prior to the consummation of a Transfer described in Section 4.12(b) to
the extent rights and obligations are to be assigned, and as a condition
thereto, the applicable Third Party Transferee shall agree in writing with the
other parties hereto to be bound by the terms and conditions of this Agreement
to the extent described in Section 4.12(b). To the extent the Third Party
Transferee is not an "ultimate parent entity" (as defined in the HSR Act), the
ultimate parent entity of such Third Party Transferee shall agree in writing to
be
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directly liable for the performance of the Third Party Transferee to the same
extent Universal or Liberty would be liable for their respective Permitted
Transferees.
SECTION 4.13 Notice of Transfer. To the extent any Stockholder and its
Permitted Transferees shall Transfer any Common Shares, such Stockholder shall,
within three Business Days following consummation of such Transfer, deliver
notice thereof to the Company and the other Stockholders, provided, however,
that no such notice shall be required to be delivered unless the aggregate
Common Shares transferred by such Stockholder and its Permitted Transferees
since the date of the last notice delivered by such Stockholder pursuant to this
Section 4.13 exceeds 1% of the outstanding Common Shares.
SECTION 4.14 Compliance with Transfer Provisions. Any Transfer or
attempted Transfer of Common Shares in violation of any provision of this
Agreement shall be void.
ARTICLE V
BDTV ENTITY ARRANGEMENTS
SECTION 5.1 Management. The business and affairs of each BDTV Entity will
be managed by a Board of Directors elected by the holders of a majority of the
voting equity interests in such BDTV Entity. Notwithstanding the foregoing, the
taking of any action by a BDTV Entity with respect to (i) to the extent
permitted by applicable law, any Fundamental Change (as applied to such BDTV
Entity, mutatis mutandis) or (ii) any acquisition or disposition (including
pledges) of any Common Shares held by such BDTV Entity, in either case, will
require the unanimous approval of the holders of all voting and non-voting
equity interests in such BDTV Entity.
SECTION 5.2 Treatment of Contingent Shares and Exchange Shares. If as a
result of any issuance of shares of Class B Common Stock to Liberty HSN pursuant
to its Contingent Right, Liberty HSN would otherwise Own (for purpose of the FCC
Regulations) Common Shares (other than any such shares held by a BDTV Limited
Entity or, to the extent Liberty HSN is not deemed to have an "attributable
interest" therein, a BDTV Unrestricted Entity) which would represent an
"attributable interest" in the Company under applicable FCC Regulations, (i)
Liberty HSN will contribute to a newly-formed BDTV Unrestricted Entity all such
Contingent Shares in exchange for non-voting equity securities of such BDTV
Entity (in an amount based on the market price of the Common Stock as of the
date of such contribution) and (ii) Diller will contribute to such BDTV
Unrestricted Entity a number of whole shares of Common Stock equal to (A) $100,
divided by (B) the market price of the Common Stock as of the date of such
contribution, rounded up to the nearest whole number.
In the event that a holder of Exchange Securities would be entitled to hold
directly shares of Class B Common Stock issuable upon an exchange of shares of
Liberty Surviving Class B Stock but for the limitation imposed by the FCC
Regulations relating to a person's aggregate voting power in the Company, and if
such person would, under the FCC Regulations, be permitted to hold directly a
number of shares of Common Stock equal to the number of shares of Class B Common
Stock so issuable, then in connection with such exchange, such holder will be
required to offer to exchange such shares of Class B Common Stock so receivable
by it for Class B Common Stock owned by the Diller Stockholder Group and, if
Diller does not accept such offer to exchange, or if such exchange with the
Diller Stockholder Group cannot be accomplished on a tax-free basis (and the
exchange of such Exchange Securities for Common Shares would not otherwise be
taxable), then such holder shall be entitled to exchange such Exchange
Securities for shares of Class B Common Stock and thereafter convert such shares
of Class B Common Stock into shares of Common Stock.
Nothing in this Agreement shall obligate Liberty HSN to contribute any
Common Shares received pursuant to the Investment Agreement, the Holder Exchange
Agreement or upon exchange or other conversion of LLC Shares pursuant to the
Investment Agreement to a BDTV Entity.
SECTION 5.3 Changes to BDTV Structures. Liberty and Diller agree, subject
to applicable law and FCC Regulations, to take such actions as may be reasonably
necessary, including but not limited to amending the certificate of
incorporation of the BDTV Entities, in order to provide Liberty with the ability
to transfer,
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directly or indirectly, such amounts of Common Shares Liberty is permitted to
sell pursuant to Section 4.1(b)(iii).
SECTION 5.4 Transfers of BDTV Interests. Except as otherwise specifically
provided in this Agreement (including Section 4.1(b)), no transfers or other
dispositions (including pledges), directly or indirectly, of any interest in (a)
any BDTV Limited Entity by Liberty or (b) any BDTV Entity by Diller will be
permitted without the consent of the other; provided, that (i) Liberty shall be
entitled to transfer all or part of its interest in a BDTV Entity to members of
the Liberty Stockholder Group, (ii) at such time Liberty becomes the owner of
any voting securities of any BDTV Limited Entity, such BDTV Limited Entity shall
be deemed to be a BDTV Unrestricted Entity, and (iii) in connection with any
sale by Universal or Diller entitling Liberty to a right pursuant to Section
4.5, 4.6 or 4.7, an exercise of the Liberty Put Right or the Call Right by
Universal, to the extent Liberty elects to exercise its right pursuant to such
Section or is otherwise selling Common Shares to Universal pursuant to Section
4.2, Liberty and Diller shall take such reasonable action as may be required in
order for such interest in a BDTV Limited Entity to be sold in any such
transaction. Without the prior written consent of Liberty, Diller shall not
Transfer any interest in a BDTV Entity (other than to Liberty or, subject to
Liberty's reasonable consent, a member of the Diller Stockholder Group).
For purposes of determining whether Liberty is permitted to transfer the
Common Shares held by a BDTV Unrestricted Entity, (i) such BDTV Unrestricted
Entity shall be deemed to be a member of the Liberty Stockholder Group and the
restrictions on transfers of interests in BDTV Entities shall not apply to
Liberty (subject, however, to the other restrictions on transfer of Common
Shares set forth herein, including the Right of First Refusal) and (ii) in
connection with any proposed sale by Liberty HSN of the Common Shares held by a
BDTV Entity (or its equity interest in such BDTV Entity), Liberty shall be
entitled to purchase Diller's entire interest in such BDTV Entity for an amount
in cash equal to the Diller Interest Purchase Price (formerly the "Dodgers
Interest Purchase Price") or, at its election, require Diller to sell his
interest in such BDTV Entity to any such transferee for a pro rata portion of
the consideration to be paid by the applicable transferee in such transaction.
At such time as (i) the CEO Termination Date has occurred or Diller becomes
Disabled or (ii) the Diller Stockholder Group ceases to own its Eligible
Stockholder Amount of Common Shares, Diller shall be required to sell his entire
interest in the BDTV Entities to Liberty (or Liberty's designee) at a price
equal to the Diller Interest Purchase Price.
ARTICLE VI
MISCELLANEOUS
SECTION 6.1 Conflicting Agreements. Each of the Stockholders and the
Company represents and warrants that such party has not granted and is not a
party to any proxy, voting trust or other agreement that is inconsistent with or
conflicts with any provision of this Agreement.
SECTION 6.2 Duration of Agreement. Except as otherwise provided in this
Agreement, the rights and obligations of a Stockholder under this Agreement
shall terminate as follows:
(a) Universal shall cease to be entitled to exercise any rights and
shall cease to have any obligations under this Agreement as of the date
that it ceases to have the right under the Governance Agreement to
designate any directors to the Board (the "Universal Termination Date").
(b) Subject to Section 4.4 which shall survive until the termination
of the period for exercise (and, if exercised, until consummation) of the
Diller Put specified in Section 4.4, each of Liberty and Diller shall cease
to be entitled to exercise any rights and shall cease to have any
obligations under this Agreement as of the date that its Stockholder Group
collectively ceases to own its Eligible Stockholder Amount of Common
Shares; provided that Liberty shall cease to be entitled to exercise any
rights and shall cease to have any obligations under Sections 4.2, 4.3,
4.5, 4.6 and 4.7 at such time as the Liberty
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Stockholder Group ceases to beneficially own at least 5% of the outstanding
Common Shares (the "Liberty Termination Date").
(c) Diller and each member of his Stockholder Group shall cease to be
entitled to exercise any rights (other than the Diller Put Right) under
this Agreement if the CEO Termination Date has occurred or Diller has
become Disabled (the "Diller Termination Date").
In addition, at such time as the CEO Termination Date has occurred or
Diller has become Disabled, neither the Diller Stockholder Group nor the Liberty
Stockholder Group shall have any obligation under this Agreement with respect to
the matters covered under Sections 3.6, 4.1 and 4.9.
SECTION 6.3 Further Assurances. At any time or from time to time after
the date hereof, the parties agree to cooperate with each other, and at the
request of any other party, to execute and deliver any further instruments or
documents and to take all such further action as the other party may reasonably
request in order to evidence or effectuate the consummation of the transactions
contemplated hereby and to otherwise carry out the intent of the parties
hereunder. Without limiting the generality of the foregoing, if, in connection
with the purchase of any Equity by Universal or Liberty pursuant to Article IV,
to the extent that Universal shall be restricted by FCC Regulations from owning
Common Shares, the Stockholders agree to cooperate, and cause the Company to
cooperate, and the Company agrees to cooperate in structuring the purchase so
that Universal shall acquire LLC Shares (in lieu of Common Shares) in the
transaction; provided that the transferee shall not be required to suffer
adverse tax consequences as a result of the foregoing.
SECTION 6.4 SCL Agreement to Cooperate. SCL agrees to cooperate in good
faith with Universal to satisfy Universal's obligation with respect to providing
Liquid Securities to Liberty pursuant to Sections 4.2 and 4.3 with SCL common
stock, subject to (i) SCL continuing to beneficially own, directly or
indirectly, at least 80% of the Equity of Universal, (ii) existing MEI
arrangements, and (iii) fiduciary duties of SCL directors.
SECTION 6.5 Amendment and Waiver. Except as otherwise provided herein, no
modification, amendment or waiver of any provision of this Agreement shall be
effective against any Stockholder unless such modification, amendment or waiver
is approved in writing by each Stockholder; provided that with respect to any
provision containing an agreement between only two Stockholders, such provision
may be modified or waived by approval in writing by such Stockholders, without
the consent of the third Stockholder unless such modification or waiver
adversely affects the rights of such third Stockholder as provided under this
Agreement or the Governance Agreement; provided, further, each amendment,
modification or waiver of the provisions of Section 2.1 by Universal without the
consent of the Company shall be subject to the terms and conditions of the
Governance Agreement. The failure of any party to enforce any of the provisions
of this Agreement shall in no way be construed as a waiver of such provisions
and shall not affect the right of such party thereafter to enforce each and
every provision of this Agreement in accordance with its terms.
SECTION 6.6 Severability. Whenever possible, each provision of this
Agreement shall be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Agreement is held to be invalid,
illegal or unenforceable in any respect under any applicable law or rule in any
jurisdiction, such invalidity, illegality or unenforceability shall not affect
any other provision or any other jurisdiction, but this Agreement shall be
reformed, construed and enforced in such jurisdiction as if such invalid,
illegal or unenforceable provision had never been contained herein.
SECTION 6.7 Effective Date. Other than with respect to Section 3.3(e)
which shall be effective as of the date hereof, this Agreement shall become
effective immediately upon the Closing.
SECTION 6.8 Entire Agreement. Except as otherwise expressly set forth
herein, this document and the Transaction Agreements embody the complete
agreement and understanding among the parties hereto with respect to the subject
matter hereof and supersede and preempt any prior understandings, agreements or
representations by or among the parties, written or oral, that may have related
to the subject matter hereof in any way. Without limiting the generality of the
foregoing, to the extent that any of the terms hereof are inconsistent with the
rights or obligations of any Stockholder under any other agreement with any
other Stockholder or the Company, the terms of this Agreement shall govern. Upon
the Closing, the stockholders
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agreements between Liberty and Diller, dated as of August 24, 1995 and August
25, 1996 shall terminate and shall be superseded by this Agreement.
SECTION 6.9 Successors and Assigns. Neither this Agreement nor any of the
rights or obligations under this Agreement shall be assigned, in whole or in
part (except by operation of law pursuant to a merger whose purpose is not to
avoid the provisions of this Agreement), by any party without the prior written
consent of the other parties hereto. Subject to the foregoing, this Agreement
shall bind and inure to the benefit of and be enforceable by the parties hereto
and their respective successors and assigns.
SECTION 6.10 Counterparts. This Agreement may be executed in separate
counterparts each of which shall be an original and all of which taken together
shall constitute one and the same agreement.
SECTION 6.11 Liabilities Under Federal Securities Laws. The exercise by
any Stockholder (or its Affiliates or Stockholder Group, if applicable) (and
including, in the case of the Liberty Stockholder Group, its exercise of the
rights relating to the Contingent Right or the Holder Exchange Agreement) of any
rights under this Agreement shall be subject to such reasonable delay as may be
required to prevent any Stockholder or its respective Stockholder Group from
incurring any liability under the federal securities laws and the parties agree
to cooperate in good faith in respect thereof.
SECTION 6.12 Remedies. (a) Each party hereto acknowledges that money
damages would not be an adequate remedy in the event that any of the covenants
or agreements in this Agreement are not performed in accordance with its terms,
and it is therefore agreed that in addition to and without limiting any other
remedy or right it may have, the non-breaching party will have the right to an
injunction, temporary restraining order or other equitable relief in any court
of competent jurisdiction enjoining any such breach and enforcing specifically
the terms and provisions hereof.
(b) All rights, powers and remedies provided under this Agreement or
otherwise available in respect hereof at law or in equity shall be cumulative
and not alternative, and the exercise or beginning of the exercise of any
thereof by any party shall not preclude the simultaneous or later exercise of
any other such right, power or remedy by such party.
SECTION 6.13 Notices. Any notice, request, claim, demand or other
communication under this Agreement shall be in writing, shall be either
personally delivered, delivered by facsimile transmission, or sent by reputable
overnight courier service (charges prepaid) to the address for such Person set
forth below or such other address as the recipient party has specified by prior
written notice to the other parties hereto and shall be deemed to have been
given hereunder when receipt is acknowledged for personal delivery or facsimile
transmission or one day after deposit with a reputable overnight courier
service.
If to Universal:
Universal Studios, Inc.
100 Universal City Plaza
Universal City, CA 91608
Attention: Karen Randall, Esq.
Telephone: (818) 777-1000
Facsimile: (818) 866-3444
with a copy to:
Simpson Thacher & Bartlett
425 Lexington Avenue
New York, NY 10017-3909
Attention: John G. Finley, Esq.
Telephone: (212) 455-2000
Facsimile: (212) 455-2502
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If to Liberty:
Liberty Media Corporation
8101 East Prentice Avenue
Suite 500
Englewood, Colorado 80111
Attention: President
Telephone: (303) 721-5400
Facsimile: (303) 841-7344
with a copy to:
Baker & Botts LLP
599 Lexington Avenue
Suite 2900
New York, New York 10022-6030
Attention: Frederick H. McGrath, Esq.
Telephone: (212) 705-5000
Facsimile: (212) 705-5125
If to Diller:
c/o HSN, Inc.
1 HSN Drive
St. Petersburg, Florida 33729
Attention: General Counsel
Telephone: (813) 572-8585
Facsimile: (813) 573-0866
with a copy to:
Wachtell, Lipton, Rosen & Katz
51 West 52nd Street
New York, New York 10019
Attention: Pamela S. Seymon, Esq.
Telephone: (212) 403-1000
Facsimile: (212) 403-2000
If to SCL:
The Seagram Company Ltd.
1430 Peel Street
Montreal, Quebec
H3A 1S9 Canada
Attention: Vice President, Legal and Environmental Affairs
Telephone: (514) 987-5000
Facsimile: (514) 987-5232
with copies to:
Joseph E. Seagram & Sons, Inc.
375 Park Avenue
New York, NY 10152
Attention: Vice President-Legal Affairs, General Counsel
Telephone: (212) 572-7000
Facsimile: (212) 572-1398
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<PAGE> 220
Simpson Thacher & Bartlett
425 Lexington Avenue
New York, NY 10017-3909
Attention: John G. Finley, Esq.
Telephone: (212) 455-2000
Facsimile: (212) 455-2502
SECTION 6.14 Governing Law; Consent to Jurisdiction. This Agreement shall
be governed by and construed in accordance with the laws of the State of
Delaware without giving effect to the principles of conflicts of law. Each of
the parties hereto hereby irrevocably and unconditionally consents to submit to
the non-exclusive jurisdiction of the courts of the State of Delaware for any
action, proceeding or investigation in any court or before any governmental
authority ("Litigation") arising out of or relating to this Agreement and the
transactions contemplated hereby and further agrees that service of any process,
summons, notice or document by U.S. mail to its respective address set forth in
this Agreement shall be effective service of process for any Litigation brought
against it in any such court. Each of the parties hereto hereby irrevocably and
unconditionally waives any objection to the laying of venue of any Litigation
arising out of this Agreement or the transactions contemplated hereby in the
courts of the State of Delaware, and hereby further irrevocably and
unconditionally waives and agrees not to plead or claim in any such court that
any such Litigation brought in any such court has been brought in an
inconvenient forum. Each of the parties irrevocably and unconditionally waives,
to the fullest extent permitted by applicable law, any and all rights to trial
by jury in connection with any Litigation arising out of or relating to this
Agreement or the transactions contemplated hereby.
SECTION 6.15 Interpretation. The table of contents and headings contained
in this Agreement are for reference purposes only and shall not affect in any
way the meaning or interpretation of this Agreement. Whenever the words
"include", "includes" or "including" are used in this Agreement, they shall be
deemed to be followed by the words "without limitation". Whenever it is
necessary for purposes of this Agreement to determine whether an exchange is
tax-free or taxable, such determination shall be made without regard to any
interest imputed pursuant to Section 483 of the Code.
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<PAGE> 221
IN WITNESS WHEREOF, the parties hereto have executed this Stockholders
Agreement as of the date first written above.
UNIVERSAL STUDIOS, INC.
By:
--------------------------------------
Name:
Title:
LIBERTY MEDIA CORPORATION
By:
--------------------------------------
Name:
Title:
BARRY DILLER
--------------------------------------
HSN, INC. (with respect to Sections
4.4(g), 4.5(d) and 6.3)
By:
--------------------------------------
Name:
Title:
THE SEAGRAM COMPANY LTD (with respect
to Sections 4.2(f) and 6.4)
By:
--------------------------------------
Name:
Title:
APPENDIX C
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APPENDIX D
FORM OF SPINOFF AGREEMENT
AGREEMENT, dated as of October 19, 1997, between Liberty Media Corporation,
a Delaware corporation ("Liberty") and Universal Studios, Inc., a Delaware
corporation ("Universal"). Capitalized terms used herein without definition have
the meanings ascribed to such terms in the Stockholders Agreement (as defined
below).
WHEREAS, Liberty and Universal are parties to that certain Investment
Agreement, dated as of October 19, 1997 (as amended and restated as of December
18, 1997, the "Investment Agreement"), among Universal, Liberty, HSN, Inc. (the
"Company") and Home Shopping Network, Inc., the Governance Agreement, dated as
of October 19, 1997 (the "Governance Agreement"), among Universal, Liberty,
Barry Diller ("Diller") and the Company, and the Stockholders Agreement, dated
as of October 19, 1997 (the "Stockholders Agreement"), among Universal, Liberty,
Diller and the Company;
WHEREAS, pursuant to the Investment Agreement, the Governance Agreement,
the Stockholders Agreement and the other agreements contemplated by the
Investment Agreement, Liberty and Universal have specified certain of their
respective rights and obligations with respect to the Company and each other;
and
WHEREAS, in furtherance of the foregoing, and consistent with FCC
requirements, Liberty and Universal desire to confirm certain agreements
relating to the Company to become effective at such time as Diller is no longer
Chief Executive Officer ("CEO") of the Company or has become Disabled (as
defined in the Governance Agreement);
NOW, THEREFORE, in consideration of the premises and of the mutual
covenants and obligations hereinafter set forth, the parties hereto hereby agree
as follows:
1. Interim Arrangements. Following the CEO Termination Date or such time
as Diller becomes Disabled, subject to any required FCC approvals, Liberty and
Universal shall cooperate in good faith and use their respective reasonable best
efforts to appoint an interim CEO (the "Interim CEO") of the Company who shall
be mutually acceptable to them and shall be independent of each of Liberty and
Universal. If Universal elects, within the time period set forth in Section 2
below, to effect the Station Divestiture pursuant to Section 2 below, subject to
the receipt of any required FCC approvals, Liberty shall grant such interim CEO
a proxy to vote its Common Shares pending the completion of the Station
Divestiture (whereupon such proxy would be automatically revoked). Liberty shall
cause the Interim CEO to vote its Common Shares, at Universal's option (or, if
Liberty Beneficially Owns (as defined in the Governance Agreement) a greater
percentage of the Total Equity Securities (as defined in the Governance
Agreement) than Universal, at Liberty's option), (i) at his discretion or (ii)
in the same proportion as the public stockholders. Liberty and Universal shall
cooperate to cause the Company not to present any matters for a vote of
stockholders (or request its stockholders to vote by written consent) pending
completion of the Station Divestiture, except as may be necessary to complete
the Station Divestiture in accordance with paragraph 2 below.
2. Station Divestiture. Following the CEO Termination Date or such time
as Diller becomes Disabled, if Universal so elects by written notice (the
"Divestiture Notice") to the Company and Liberty within 60 days following the
first to occur of either such date, subject to applicable law, the Company shall
cause a divestiture of the Company's television stations (the "Station
Divestiture") to occur as promptly as practicable as provided under Section 9.14
of the Investment Agreement. In such event, the Company, Liberty and Universal
agree to use their respective best efforts to cause the Station Divestiture to
be structured as a pro rata distribution (the "Spin-Off") of 100% of the common
equity interests in the Regulated Subsidiary (as defined in the Investment
Agreement) to the holders of the Common Shares as of the record date for such
distribution which would be tax-free to the stockholders of the Company and in
which the stockholders of the Company would receive, subject to applicable law,
common equity securities having equivalent voting rights to their respective
shares of the Parent Common Stock and the Parent Class B Stock. If
notwithstanding such best efforts such distribution cannot be accomplished on a
tax-free basis to the stockholders of the Company, the Company will use its best
efforts to sell the Regulated Subsidiary; provided that if the Board of
Directors
APPENDIX D
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of the Company (other than any directors who are nominees of Universal or
Liberty) determines that a taxable Spin-Off of the Regulated Subsidiary, when
compared with a sale, would represent a superior alternative based upon, among
other factors, the advice from an independent investment banking firm that a
taxable Spin-Off would represent a superior alternative from a financial point
of view, the Company shall consummate a taxable Spin-Off. In connection with any
taxable Spin-Off, (i) Universal agrees to reimburse Liberty for any actual tax
liability incurred or payable by Liberty (including to TCI under Liberty's tax
sharing agreement with TCI) as a result of the Spin-Off with respect to the
equity interest in the Regulated Subsidiary received by Liberty held by Liberty
in an amount not to exceed $50 million and (ii) the Company, Universal and
Liberty will use their reasonable best efforts to minimize the tax liability
incurred by stockholders of the Company as a result of such Spin-Off. In
connection with the Station Divestiture, the Company will enter into a ten-year
affiliation agreement with the Regulated Subsidiary which, subject to clause
(ii) of the preceding sentence, will provide that the Regulated Subsidiary will
broadcast programming produced by the Company on customary terms and conditions,
including arm's-length payment obligations. If required in order to accomplish
the Station Divestiture as a Spin-Off, Liberty agrees to, at its election, do
one or more of the following in order to facilitate such distribution: (i)
accept regular voting common equity securities of the Regulated Subsidiary in
respect of its shares of the Parent Class B Stock, (ii) grant a proxy to the CEO
of the Regulated Subsidiary to vote its shares of the Regulated Subsidiary, or
(iii) contribute all or part of its shares of the Regulated Subsidiary to an
entity similar to a BDTV Unrestricted Entity of which the CEO of the Regulated
Subsidiary would have voting control; provided that if Liberty takes any of the
actions specified in clauses (i), (ii) or (iii) of this Section 2, the CEO of
the Regulated Subsidiary shall be mutually acceptable to Liberty and Universal,
notwithstanding Section 4(i) to the contrary. In making its selection among the
actions described in clauses (i), (ii) and (iii) of the preceding sentence,
Liberty shall balance in good faith the benefits and burdens of such action or
inaction to Liberty, the Company and Universal.
3. Transfer. If Universal elects to effect the Station Divestiture within
the time period set forth in Section 2, Liberty agrees not to Transfer, directly
or indirectly, any Common Shares for fourteen months following the CEO
Termination Date or such date as Diller becomes Disabled if such Transfer would
result in Universal and Liberty (and their respective Stockholder Groups)
ceasing to own the Minimum Stockholder Amount so long as Universal does not
voluntarily Transfer at any time following the Closing in one or more
transactions an aggregate of more than 3% of the outstanding Common Shares
(determined as of the date of the consummation of the closing pursuant to
Section 1.5(f) of the Investment Agreement).
4. Post-Spin-Off Arrangements with Respect to the Regulated
Subsidiary. Following the Spin-Off, there will be no voting agreement, rights
or obligations between Universal and Liberty with respect to the Regulated
Subsidiary except Universal and Liberty agree that: (i) they will cooperate in
good faith and use their reasonable best efforts to select the person who shall
initially become the CEO of the Regulated Subsidiary immediately following the
Spin-Off and who shall be mutually acceptable to them; provided that if (x) one
party Beneficially Owns less than 15% of the Total Equity Securities and (y) the
other party Beneficially Owns (a) more than 15% of the Total Equity Securities
and (b) at least 5% more of Total Equity Securities than the party described in
(x), then the party described in (y) shall select the CEO who shall be
reasonably satisfactory to the party described in (x), (ii) the veto rights with
respect to the Regulated Subsidiary shall be substantially similar to the
Fundamental Changes contained in the Governance Agreement, provided that if
either party's Beneficial Ownership of equity in the Regulated Subsidiary is
less than 10%, such party will cease to have veto rights, (iii) they will each
have the right to nominate directors of the Regulated Subsidiary on a pro rata
basis with their equity ownership, subject to applicable law, provided that if
either party's Beneficial Ownership of equity in the Regulated Subsidiary is
less than 5%, such party will cease to have the right to nominate any directors,
(iv) they will each have registration rights with respect to the equity
securities of the Regulated Subsidiary that they receive in the Spin-Off on a
basis consistent with the registration rights that they have with respect to the
Common Stock of the Company in Section 5.07 of the Governance Agreement and (v)
they will each have preemptive rights with respect to the equity securities of
the Regulated Subsidiary on a consistent basis with the preemptive rights set
forth in the Investment Agreement. Calculations of all Beneficial Ownership
amounts in this Section 4(i) and in Sections 8 and 9 below shall be determined
in accordance with the terms of the Governance Agreement. The rights specified
in clauses (ii), (iii) and (v) shall not be transferable. Calculations of all
Beneficial Ownership amounts in
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Section 4(ii) and (iii) shall be determined in accordance with Rule 13d-3 under
the Exchange Act, except that Universal or Liberty, as the case may be, shall be
deemed to be the beneficial owner of any equity securities which may be acquired
by it, whether within 60 days or thereafter, upon the conversion, exchange or
exercise of any warrants, options, rights or other securities issued by the
Company or any Subsidiary thereof.
5. Post-Spin-Off Arrangements with Respect to the Company. Following the
Spin-Off, Liberty and Universal agree that they shall continue to have the same
respective rights and obligations under the Stockholders Agreement, subject to
Section 6.2 thereof. In addition, each of Liberty and Universal shall continue
to be entitled to the same number of Board seats as they are entitled to under
the Governance Agreement from time to time following the CEO Termination Date.
6. Preservation of FCC Licenses. Each of Liberty and Universal agree that
they will not take any action pursuant to this Agreement that would not be
permitted by applicable law or would cause the loss or termination of the
Company's FCC licenses or cause the FCC to fail to renew such licenses; provided
that Liberty and Universal will use their commercially reasonable efforts to
enter into alternative arrangements to preserve such licenses for the Company.
7. Arrangements Absent Station Divestiture. If Universal has not given
the Divestiture Notice within the 60-day period set forth in Section 2, that it
intends to effect the Station Divestiture, Liberty and Universal shall, at the
request of Universal, negotiate in good faith, based on their respective equity
interests and with a view toward their respective rights under the Stockholders
Agreement and the Governance Agreement, mutually satisfactory arrangements and
agreements with respect to each other and the Company, consistent with FCC
requirements, it being understood that, the party with a greater equity interest
in the Company shall be entitled to relatively more influence with respect to
the business and affairs of the Company.
8. Reasonable Best Efforts by the Company. Subject to Section 2 and the
Company's obligations under the Investment Agreement, so long as either (i)
Universal and the members of its Stockholder Group Beneficially Own at least 40%
of the Total Equity Securities of the Company and no other stockholder of the
Company Beneficially Owns a greater percentage of the Total Equity Securities of
the Company than Universal or (ii) Liberty and Universal and the respective
members of their Stockholder Groups collectively Beneficially Own at least 50.1%
of the Total Equity Securities of the Company, the Company agrees to use its
reasonable best efforts to enable the parties to achieve the purposes of this
Agreement.
9. Duration of Agreement. (a) Universal shall cease to be entitled to any
rights and shall cease to have any obligations under this Agreement upon the
earlier to occur of (i) such time as Universal no longer has rights under
Section 9.14 of the Investment Agreement or (ii) such time as Universal shall
cease to Beneficially Own Equity Securities representing at least 7.5% of the
voting power of the Total Equity Securities.
(b) Liberty shall cease to be entitled to any rights and shall cease to
have any obligations under this Agreement upon the earlier to occur of (i) the
Liberty Termination Date or (ii) such time as Liberty shall cease to
Beneficially Own Equity Securities representing at least 7.5% of the voting
power of the Total Equity Securities.
(c) The Company shall cease to have any obligations under this Agreement at
such time as Universal and Liberty no longer have any rights or obligations
under this Agreement in accordance with (a) and (b) above.
11. Definitive Agreements. Universal, Liberty and the Company agree that,
in connection with implementing the Spin-Off, they will cooperate in good faith
to prepare definitive documents containing the terms set forth herein and other
terms as they may mutually agree to the extent not inconsistent with the terms
set forth herein; provided that if definitive agreements are not executed, this
Agreement shall continue to be binding in all respects.
11. Severability. Whenever possible, each provision of this Agreement
shall be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Agreement is held to be invalid,
illegal or unenforceable in any respect under any applicable law or rule in any
jurisdiction, such
APPENDIX D
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<PAGE> 225
invalidity, illegality or unenforceability shall not affect any other provision
or any other jurisdiction, but this Agreement shall be reformed, construed and
enforced in such jurisdiction as if such invalid, illegal or unenforceable
provision had never been contained herein.
12. Counterparts. This Agreement may be executed in separate counterparts
each of which shall be an original and all of which taken together shall
constitute one and the same agreement.
13. Remedies. Each party hereto acknowledges that money damages would not
be an adequate remedy in the event that any of the covenants or agreements in
this Agreement are not performed in accordance with its terms, and it is
therefore agreed that in addition to and without limiting any other remedy or
right it may have, the non-breaching party will have the right to an injunction,
temporary restraining order or other equitable relief in any court of competent
jurisdiction enjoining any such breach and enforcing specifically the terms and
provisions hereof. All rights, powers and remedies provided under this Agreement
or otherwise available in respect hereof at law or in equity shall be cumulative
and not alternative, and the exercise or beginning of the exercise of any
thereof by any party shall not preclude the simultaneous or later exercise of
any other such right, power or remedy by such party.
13. Notices. Any notice, request, claim, demand or other communication
under this Agreement shall be in writing, shall be either personally delivered,
delivered by facsimile transmission, or sent by reputable overnight courier
service (charges prepaid) to the address for such Person set forth below or such
other address as the recipient party has specified by prior written notice to
the other parties hereto and shall be deemed to have been given hereunder when
receipt is acknowledged for personal delivery or facsimile transmission or one
day after deposit with a reputable overnight courier service.
If to Universal:
Universal Studios, Inc.
100 Universal City Plaza
Universal City, CA 91608
Attention: Karen Randall, Esq.
Telephone: (818) 777-1000
Facsimile: (818) 866-3444
with a copy to:
Simpson Thacher & Bartlett
425 Lexington Avenue
New York, NY 10017-3909
Attention: John G. Finley, Esq.
Telephone: (212) 455-2000
Facsimile: (212) 455-2502
If to Liberty:
Liberty Media Corporation
8101 East Prentice Avenue
Suite 500
Englewood, Colorado 80111
Attention: President
Telephone: (303) 721-5400
Facsimile: (303) 841-7344
APPENDIX D
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with a copy to:
Baker & Botts LLP
599 Lexington Avenue
Suite 2900
New York, New York 10022-6030
Attention: Frederick H. McGrath, Esq.
Telephone: (212) 705-5000
Facsimile: (212) 705-5125
If to the Company:
c/o HSN, Inc.
1 HSN Drive
St. Petersburg, Florida 33729
Attention: General Counsel
Telephone: (813) 572-8585
Facsimile: (813) 573-0866
with a copy to:
Wachtell, Lipton, Rosen & Katz
51 West 52nd Street
New York, New York 10019
Attention: Pamela S. Seymon, Esq.
Telephone: (212) 403-1000
Facsimile: (212) 403-2000
14. Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of Delaware without giving effect to the
principles of conflicts of law.
IN WITNESS WHEREOF, the parties hereto have executed this Stockholders
Agreement as of the date first written above.
UNIVERSAL STUDIOS, INC.
By:
------------------------------------
Name:
Title:
LIBERTY MEDIA CORPORATION
By:
------------------------------------
Name:
Title:
HSN, INC. (with respect to Sections 2
and 8)
By:
------------------------------------
Name:
Title:
APPENDIX D
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APPENDIX E
[ALLEN & COMPANY LOGO]
[ADDRESS]
October 19, 1997
The Board of Directors
HSN, Inc.
152 W. 57th Street
New York, NY 10019
Members of the Board of Directors:
You have requested our opinion, as of this date, as to the fairness, from a
financial point of view, to HSN, Inc., a Delaware corporation ("HSNi"), of the
terms of the Proposed Transactions referred to hereinafter.
Pursuant to the proposed Investment Agreement (the "Investment Agreement")
dated as of the date hereof, to be entered among HSNi, Home Shopping Network,
Inc., Universal Studios, Inc., for itself and on behalf of certain of its
subsidiaries ("Universal"), and Liberty Media Corporation, for itself and on
behalf of certain of its subsidiaries ("Liberty"), the parties thereto are to
effect a business combination transaction pursuant to which, on the terms and
subject to the conditions set forth in the Investment Agreement (the "Proposed
Transactions"): (i) HSNi, through a subsidiary, will acquire from Universal and
its affiliates the equity interests in USA Networks ("USAN") and certain assets
and liabilities of the domestic production and distribution business of
Universal Television Group ("UTV"), and (ii) subject to the terms of the
Investment Agreement, Liberty will make an additional investment, in certain
circumstances, in HSNi in exchange for HSNi common equivalent securities. Unless
otherwise specifically defined herein, all capitalized terms used herein shall
have the meanings ascribed to such terms in the Investment Agreement.
We understand that all approvals required for the consummation of the
Proposed Transactions have been or, prior to consummation of the Proposed
Transactions will be, obtained. As you know, Allen & Company Incorporated
("Allen") has from time to time provided various investment banking and
financial advisory services to HSNi and its affiliates, including in connection
with HSNi's acquisition of approximately 49.6% of the then outstanding common
stock of Ticketmaster Group, Inc. ("TKTM") in July 1997, and has acted as its
financial advisor in connection with the Proposed Transactions pursuant to the
letter agreement dated October 19, 1997. In addition, as you know, Allen served
as lead underwriter in connection with the initial public offering of TKTM
common stock in November 1996, and acted as financial advisor to Matsushita
Electric Industrial Co. Ltd. ("Matsushita") in connection with its purchase of
80% of MCA INC. (presently Universal) in January 1991, and in connection with
its sale of MCA INC. to The Seagram Company Ltd. ("Seagram") in June 1995. Allen
also advised Seagram with respect to its purchase of an approximately 15%
interest in Time Warner, Inc. in May 1993. Paul A. Gould, a managing director of
Allen, serves as a director of Tele-Communications, Inc., an affiliate of
Liberty. Also, Allen and certain of its officers and directors own securities of
HSNi and other parties involved in the Proposed Transactions. From time to time
in the ordinary course of its business as a broker-dealer, Allen may also hold
positions and trade in securities of HSNi and such other parties.
In arriving at our opinion, we have among other things:
(i) reviewed the terms and conditions of the Proposed Transactions,
including the draft Investment Agreement and the draft agreements
ancillary thereto (none of which prior to the delivery of this
opinion has been executed by the parties);
(ii) analyzed certain financial aspects of the Proposed Transactions and
consideration to be paid by HSNi in connection with the Proposed
Transactions;
(iii) reviewed and analyzed publicly available historical business and
financial information relating to HSNi and Seagram, as presented in
documents filed with the Securities and Exchange Commission;
APPENDIX E
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The Board of Directors
HSN, Inc.
October 19, 1997
Page 2
(iv) analyzed selected summary non-public financial and operating
results of operations of HSNi, USAN and UTV;
(v) analyzed the financial conditions and prospects of HSNi, USAN and
UTV;
(vi) reviewed and analyzed public information, including certain stock
market data and financial information relating to selected
companies with operating statistics and dynamics similar to those
of HSNi, USAN and UTV;
(vii) reviewed the trading history of HSNi's Common Stock, including such
stocks' performance in comparison to market indices and to selected
companies with operating statistics and dynamics similar to those
of HSNi;
(viii) conferred with the management teams of each of HSNi, Seagram and
Universal;
(ix) reviewed public financial and transaction information relating to
premiums and multiples paid in certain merger and acquisition
transactions similar to the Proposed Transactions or relevant
portions thereof; and
(x) conducted such other financial analyses and investigations as we
deemed necessary or appropriate for the purposes of the opinion
expressed herein.
We have also given consideration to the fact that HSNi has advised us that
it is considering an offer to acquire the remaining outstanding shares of TKTM
which it does not currently own (the "Offer"). We understand that the
consummation of the Proposed Transactions is not conditioned upon a successful
completion of the Offer. While we understand that the definitive terms of the
Offer have not yet been formulated, we have been asked to take into account
certain assumptions regarding the Offer in certain of the analyses utilized by
us in rendering our opinion.
In rendering our opinion, we have assumed and relied upon the accuracy and
completeness of the financial and other information respecting HSNi, USAN and
UTV and any other information provided to us by the parties, and we have not
assumed any responsibility for any independent verification of such information
or any independent valuation or appraisal of any of the assets of HSNi, USAN and
UTV. With respect to selected summary financial and operating results referred
to above, we have assumed they were reasonably prepared on a basis reflecting
the best currently available information and the good faith estimates and
judgments of the management of HSNi as to the future financial performance of
HSNi and management of Seagram as to the future financial performance of USAN
and UTV.
In addition to our review and analysis of the specific information set
forth above, our opinion herein reflects and gives effect to our assessment of
general economic, monetary and market conditions existing as of the date hereof
as they may affect the business and prospects of HSNi, USAN and UTV.
Our engagement and the opinion expressed herein are for the benefit of the
Board of Directors of HSNi in its evaluation of the Proposed Transactions and
may not be used for any other purpose without our prior written consent, except
that this opinion may be included in its entirety and referred to in any filing
made by HSNi with the Securities and Exchange Commission with respect to the
Proposed Transactions. Furthermore, the opinion rendered herein does not
constitute a recommendation that HSNi pursue the Proposed Transactions over any
other alternative transactions which may be available to HSNi or that any
stockholder of HSNi vote to approve the Proposed Transactions.
APPENDIX E
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<PAGE> 229
The Board of Directors
HSN, Inc.
October 19, 1997
Page 3
Based on and subject to the foregoing, we are of the opinion that, as of
this date, the terms of the Proposed Transactions are fair, from a financial
point of view, to HSNi.
Very truly yours,
ALLEN & COMPANY INCORPORATED
By: /s/ NANCY B. PERETSMAN
------------------------------------
Nancy B. Peretsman
Managing Director
APPENDIX E
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<PAGE> 230
APPENDIX F
HSN, INC.
1997 STOCK AND ANNUAL INCENTIVE PLAN
SECTION 1. PURPOSE; DEFINITIONS
The purpose of the Plan is to give the Corporation a competitive advantage
in attracting, retaining and motivating officers and employees and to provide
the Corporation and its subsidiaries with a stock plan providing incentives more
directly linked to the profitability of the Corporation and increases in
shareholder value.
For purposes of the Plan, the following terms are defined as set forth
below:
(a) "Affiliate" means a corporation or other entity controlling, controlled
by or under common control with the Corporation.
(b) "Award" means a Stock Appreciation Right, Stock Option, Restricted
Stock, Performance Unit or Bonus Award.
(c) "Award Cycle" shall mean a period of consecutive fiscal years or
portion thereof designated by the Committee over which Performance Units are to
be earned.
(d) "Board" means the Board of Directors of the Corporation.
(e) "Bonus Award" means an annual bonus award made pursuant to Section 10.
(f) "Cause" means, except as otherwise determined by the Committee pursuant
to an Award agreement, the willful and continued failure on the part of a
participant substantially to perform his employment duties in any material
respect, or such other events as shall be determined by the Committee. The
Committee shall have the sole discretion to determine whether "Cause" exists,
and its determination shall be final.
(g) "Change in Control" and "Change in Control Price" have the meanings set
forth in Sections 11(b) and (c), respectively.
(h) "Code" means the Internal Revenue Code of 1986, as amended from time to
time, and any successor thereto.
(i) "Commission" means the Securities and Exchange Commission or any
successor agency.
(j) "Committee" means the Committee referred to in Section 2.
(k) "Common Stock" means common stock, par value $.01 per share, of the
Corporation.
(l) "Corporation" means HSN, Inc., a Delaware corporation.
(m) "Covered Employee" means a participant designated prior to the grant of
shares of Restricted Stock, Performance Units or Bonus Awards by the Committee
who is or may be a "covered employee" within the meaning of Section 162(m)(3) of
the Code in the year in which Restricted Stock or Performance Units are expected
to be taxable to such participant.
(n) "Disability" means, except as otherwise determined by the Committee in
an Award Agreement, permanent and total disability as determined under
procedures established by the Committee for purposes of the Plan.
(o) "Early Retirement" means retirement from active employment with the
Corporation, a subsidiary or Affiliate pursuant to the early retirement
provisions of the applicable pension plan of such employer.
(p) "EBITDA" means for any period, the consolidated earnings (losses) of
the Corporation before extraordinary items and the cumulative effect of
accounting changes, as determined by the Corporation in accordance with GAAP,
and before interest (expenses or income), taxes, depreciation, amortization,
non-cash gains and losses from sales of assets other than in the ordinary course
of business and non-cash expense charged against earnings resulting from the
application of accounting for business combinations in accordance with
Accounting Principles Board Opinion No. 16 ("APB No. 16").
APPENDIX F
<PAGE> 231
(q) "Exchange Act" means the Securities Exchange Act of 1934, as amended
from time to time, and any successor thereto.
(r) "Fair Market Value" means, as of any given date, the last reported
sales price of the Common Stock in the over-the-counter market, as reported by
NASDAQ (or, if the Common Stock is listed on a national securities exchange, as
reported in the principal consolidated transaction reporting system with respect
to securities listed on the principal national security exchange on which the
Common Stock is listed or admitted to trading) on the last preceding date or, if
there are no reported sales on that date, on the last day prior to that date on
which there are such reported sales.
(s) "Incentive Stock Option" means any Stock Option designated as, and
qualified as, an "incentive stock option" within the meaning of Section 422 of
the Code.
(t) "Nonqualified Stock Option" means any Stock Option that is not an
Incentive Stock Option.
(u) "Normal Retirement" means retirement from active employment with the
Corporation, a subsidiary or Affiliate at or after age 65.
(v) "Performance Goals" means the performance goals established by the
Committee in connection with the grant of Restricted Stock, Performance Units or
Bonus Awards. In the case of Qualified-Performance Based Awards, (i) such goals
shall be based on the attainment of one or any combination of the following:
specified levels of earnings per share from continuing operations, EBITDA,
operating income, revenues, return on operating assets, return on equity,
profits, total shareholder return (measured in terms of stock price appreciation
and/or dividend growth), and/or stock price, with respect to the Corporation or
such subsidiary, division or department of the Corporation for or within which
the participant performs services and that are intended to qualify under Section
162(m)(4)(c) of the Code and (ii) such Performance Goals shall be set by the
Committee within the time period prescribed by Section 162(m) of the Code and
related regulations. Such Performance Goals also may be based upon the attaining
of specified levels of Corporation performance under one or more of the measures
described above relative to the performance of other corporations.
(w) "Performance Units" means an award made pursuant to Section 8.
(x) "Plan" means the HSN, Inc. 1997 Stock and Annual Incentive Plan, as set
forth herein and as hereinafter amended from time to time.
(y) "Plan Year" means the calendar year or, with respect to Bonus Awards,
the Corporation's fiscal year if different.
(z) "Qualified Performance-Based Award" means an Award designated as such
by the Committee at the time of grant, based upon a determination that (i) the
recipient is or may be a "covered employee" within the meaning of Section
162(m)(3) of the Code in the year in which the Company would expect to be able
to claim a tax deduction with respect to such Awards and (ii) the Committee
wishes such Award to qualify for the Section 162(m) Exemption.
(aa) "Restricted Stock" means an award granted under Section 7.
(bb) "Retirement" means Normal or Early Retirement.
(cc) "Section 162(m) Exemption" means the exemption from the limitation on
deductibility imposed by Section 162(m) of the Code that is set forth in Section
162(m)(4)(C) of the Code.
(dd) "Stock Appreciation Right" means a right granted under Section 6.
(ee) "Stock Option" means an option granted under Section 5.
(ff) "Termination of Employment" means the termination of the participant's
employment with the Corporation and any subsidiary or Affiliate. A participant
employed by a subsidiary or an Affiliate shall also be deemed to incur a
Termination of Employment if the subsidiary or Affiliate ceases to be such a
subsidiary or an Affiliate, as the case may be, and the participant does not
immediately thereafter become an employee of the Corporation or another
subsidiary or Affiliate. Temporary absences from employment because of illness,
vacation or leave of absence and transfers among the Corporation and its
subsidiaries and Affiliates shall not be considered Terminations of Employment.
APPENDIX F
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In addition, certain other terms used herein have definitions given to them
in the first place in which they are used.
SECTION 2. ADMINISTRATION
The Plan shall be administered by the Compensation/Benefits Committee or
such other committee of two or more directors as the Board may from time to time
designate (the "Committee"), which shall be appointed by and serve at the
pleasure of the Board.
The Committee shall have plenary authority to grant Awards pursuant to the
terms of the Plan to officers and employees of the Corporation and its
subsidiaries and Affiliates.
Among other things, the Committee shall have the authority, subject to the
terms of the Plan:
(a) To select the officers and employees, to whom Awards may from time to
time be granted;
(b) Determine whether and to what extent Incentive Stock Options,
Nonqualified Stock Options, Stock Appreciation Rights, Restricted Stock,
Performance Units and Bonus Awards or any combination thereof are to be granted
hereunder;
(c) Determine the number of shares of Common Stock to be covered by each
Award granted hereunder;
(d) Determine the terms and conditions of any Award granted hereunder
(including, but not limited to, the option price (subject to Section 5(a)), any
vesting condition, restriction or limitation (which may be related to the
performance of the participant, the Corporation or any subsidiary or Affiliate)
and any vesting acceleration or forfeiture waiver regarding any Award and the
shares of Common Stock relating thereto, based on such factors as the Committee
shall determine;
(e) Modify, amend or adjust the terms and conditions of any Award, at any
time or from time to time, including but not limited to Performance Goals;
provided, however, that the Committee may not adjust upwards the amount payable
to a designated Covered Employee with respect to a particular award upon the
satisfaction of applicable Performance Goals;
(f) Determine to what extent and under what circumstances Common Stock and
other amounts payable with respect to an Award shall be deferred; and
(g) Determine under what circumstances an Award may be settled in cash or
Common Stock under Sections 5(j), 8(b)(i), 10(b), and 11(a)(iii).
The Committee shall have the authority to adopt, alter and repeal such
administrative rules, guidelines and practices governing the Plan as it shall
from time to time deem advisable, to interpret the terms and provisions of the
Plan and any Award issued under the Plan (and any agreement relating thereto)
and to otherwise supervise the administration of the Plan.
The Committee may act only by a majority of its members then in office,
except that the members thereof may (i) delegate to an officer of the
Corporation the authority to make decisions pursuant to paragraphs (c), (f),
(g), (h) and (i) of Section 5 (provided that without approval by the Board no
such delegation may be made that would cause Awards or other transactions under
the Plan to cease to be exempt from Section 16(b) of the Exchange Act) and (ii)
authorize any one or more of their number or any officer of the Corporation to
execute and deliver documents on behalf of the Committee. Any action permitted
to be taken by the Committee under the Plan may be taken by the full Board in
its discretion, and in such case the Board shall be treated as the Committee
hereunder.
Any determination made by the Committee or pursuant to delegated authority
pursuant to the provisions of the Plan with respect to any Award shall be made
in the sole discretion of the Committee or such delegate at the time of the
grant of the Award or, unless in contravention of any express term of the Plan,
at any time thereafter. All decisions made by the Committee or any appropriately
delegated officer pursuant to the provisions of the Plan shall be final and
binding on all persons, including the Corporation and Plan participants.
APPENDIX F
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SECTION 3. COMMON STOCK SUBJECT TO PLAN
The total number of shares of Common Stock reserved and available for grant
under the Plan shall be 10,000,000. No participant may be granted Awards
pursuant to the Plan covering in excess of 8,000,000 shares of Common Stock over
the life of the Plan. Shares subject to an Award under the Plan may be
authorized and unissued shares or may be treasury shares.
If any shares of Restricted Stock are forfeited for which the participant
did not receive any benefits of ownership (as such phrase is construed by the
Commission or its staff), or if any Stock Option (and related Stock Appreciation
Right, if any) terminates without being exercised, or if any Stock Appreciation
Right is exercised for cash, shares subject to such Awards shall again be
available for distribution in connection with Awards under the Plan.
In the event of any change in corporate capitalization (including, but not
limited to, a change in the number of shares of Common Stock outstanding), such
as a stock split or a corporate transaction, such as any merger, consolidation,
separation, including a Spin-off, or other distribution of stock or property of
the Corporation, any reorganization (whether or not such reorganization comes
within the definition of such term in Section 368 of the Code) or any partial or
complete liquidation of the Corporation, the Committee or Board may make such
substitution or adjustments in the aggregate number and kind of shares reserved
for issuance under the Plan and the maximum limitation upon Awards to be granted
to any participant, in the number, kind and option price of shares subject to
outstanding Stock Options and Stock Appreciation Rights, in the number and kind
of shares subject to other outstanding Awards granted under the Plan and/or such
other equitable substitution or adjustments as it may determine to be
appropriate in its sole discretion; provided, however, that the number of shares
subject to any Award shall always be a whole number. In the event of a corporate
merger, consolidation, acquisition of property or stock, separation,
reorganization or liquidation, the Board shall be authorized to cause the
Corporation to issue or assume stock options, whether or not in a transaction to
which Section 424(a) of the Code applies, by means of substitution of new stock
options for previously issued stock options or an assumption of previously
issued stock options. In such event, the aggregate number of shares of the Stock
available for issuance under Awards under Section 3 will be increased to reflect
such substitution or assumption.
SECTION 4. ELIGIBILITY
Persons who serve or agree to serve as officers, employees, directors or
consultants of the Corporation (including prospective officers or employees),
its subsidiaries and Affiliates who are responsible for or contribute to the
management, growth and profitability of the business of the Corporation, its
subsidiaries and Affiliates are eligible to be granted Awards under the Plan.
SECTION 5. STOCK OPTIONS
Stock Options may be granted alone or in addition to other Awards granted
under the Plan and may be of two types: Incentive Stock Options and Nonqualified
Stock Options. Any Stock Option granted under the Plan shall be in such form as
the Committee may from time to time approve.
The Committee shall have the authority to grant any participant Incentive
Stock Options, Nonqualified Stock Options or both types of Stock Options (in
each case with or without Stock Appreciation Rights); provided, however, that
grants hereunder are subject to the aggregate limit on grants to individual
participants set forth in Section 3. Incentive Stock Options may be granted only
to employees of the Corporation and its "subsidiaries" and "parent", if any
(within the meaning of Section 424(f) of the Code). To the extent that any Stock
Option is not designated as an Incentive Stock Option or even if so designated
does not qualify as an Incentive Stock Option, it shall constitute a
Nonqualified Stock Option.
Stock Options shall be evidenced by option agreements, the terms and
provisions of which may differ. An option agreement shall indicate on its face
whether it is intended to be an agreement for an Incentive Stock Option or a
Nonqualified Stock Option. The grant of a Stock Option shall occur on the date
the Committee by resolution selects an individual to be a participant in any
grant of a Stock Option, determines the number of shares of Common Stock to be
subject to such Stock Option to be granted to such individual and specifies the
terms and provisions of the Stock Option. The Corporation shall notify a
participant of any grant of a Stock
APPENDIX F
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<PAGE> 234
Option, and a written option agreement or agreements shall be duly executed and
delivered by the Corporation to the participant. Such grant shall become
effective upon the date of grant (subject to conditions set forth therein), and
the execution of the option agreements(s) may occur following the grant of the
Stock Option.
Stock Options granted under the Plan shall be subject to the following
terms and conditions and shall contain such additional terms and conditions as
the Committee shall deem desirable:
(a) Option Price. The option price per share of Common Stock purchasable
under a Stock Option shall be determined by the Committee and set forth in the
option agreement, and shall not be less than the Fair Market Value of the Common
Stock subject to the Stock Option on the date of grant.
(b) Option Term. The term of each Stock Option shall be fixed by the
Committee, but no Incentive Stock Option shall be exercisable more than 10 years
after the date the Incentive Stock Option is granted.
(c) Exercisability. Except as otherwise provided herein, Stock Options
shall be exercisable at such time or times and subject to such terms and
conditions as shall be determined by the Committee. If the Committee provides
that any Stock Option is exercisable only in installments, the Committee may at
any time waive such installment exercise provisions, in whole or in part, based
on such factors as the Committee may determine. In addition, the Committee may
at any time accelerate the exercisability of any Stock Option.
(d) Method of Exercise. Subject to the provisions of this Section 5, Stock
Options may be exercised, in whole or in part, at any time during the option
term by giving written notice of exercise to the Corporation specifying the
number of shares of Common Stock subject to the Stock Option to be purchased.
Such notice shall be accompanied by payment in full of the purchase price
by certified or bank check or such other instrument as the Corporation may
accept. If approved by the Committee, payment, in full or in part, may also be
made in the form of unrestricted Common Stock already owned by the optionee of
the same class as the Common Stock subject to the Stock Option (based on the
Fair Market Value of the Common Stock on the date the Stock Option is
exercised); provided, however, that, in the case of an Incentive Stock Option
the right to make a payment in the form of already owned shares of Common Stock
of the same class as the Common Stock subject to the Stock Option may be
authorized only at the time the Stock Option is granted.
In the discretion of the Committee, payment for any shares subject to a
Stock Option may also be made by delivering a properly executed exercise notice
to the Corporation, together with a copy of irrevocable instructions to a broker
to deliver promptly to the Corporation the amount of sale or loan proceeds from
shares of Common Stock owned by the optionee necessary to pay the purchase
price, and, if requested, to pay the amount of any federal, state, local or
foreign withholding taxes. To facilitate the foregoing, the Corporation may
enter into agreements for coordinated procedures with one or more brokerage
firms.
In addition, in the discretion of the Committee, payment for any shares
subject to a Stock Option may also be made by instructing the Committee to
withhold a number of such shares having a Fair Market Value on the date of
exercise equal to the aggregate exercise price of such Stock Option.
No shares of Common Stock shall be issued until full payment therefor has
been made. An optionee shall have all of the rights of a shareholder of the
Corporation holding the class or series of Common Stock that is subject to such
Stock Option (including, if applicable, the right to vote the shares and the
right to receive dividends), when the optionee has given written notice of
exercise, has paid in full for such shares and, if requested, has given the
representation described in Section 14(a).
(e) Nontransferability of Stock Options. No Stock Option shall be
transferable by the optionee other than (i) by will or by the laws of descent
and distribution; or (ii) in the case of a Nonqualified Stock Option, pursuant
to (a) a qualified domestic relations order (as defined in the Code, or the
regulations thereunder), (b) a gift to such optionee's immediate family or other
specified individuals or entities, whether directly or indirectly or by means of
a trust, partnership, limited liability corporation or otherwise, if expressly
permitted under the applicable option agreement or (c) a gift to a charitable
organization, if expressly permitted under the applicable option agreement. All
Stock Options shall be exercisable, subject to the terms of this Plan, during
the optionee's lifetime, only by the optionee or any person to whom the Stock
Option is transferred by will or the laws of descent and distribution or, in the
case of a Nonqualified Stock Option, pursuant to a
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qualified domestic relations order or a gift permitted under the applicable
option agreement. For purposes of this Section 5(e), "immediate family" shall
mean, except as otherwise defined by the Committee, the optionee's spouse,
children, siblings, stepchildren, grandchildren, parents, stepparents,
grandparents, in-laws and persons related by legal adoption. Such transferees
may transfer a Stock Option only by will or the laws of descent and
distribution.
(f) Termination by Death. Unless otherwise determined by the Committee (in
the option agreement or otherwise), if an optionee's Termination of Employment
is by reason of death, any Stock Option held by such optionee may thereafter be
exercised, to the extent then exercisable, or on such accelerated basis as the
Committee may determine, for a period of one year (or such other period as the
Committee may specify in the option agreement) from the date of such death or
until the expiration of the stated term of such Stock Option, whichever period
is the shorter.
(g) Termination by Reason of Disability. Unless otherwise determined by
the Committee (in the option agreement or otherwise), if an optionee's
Termination of Employment is by reason of Disability, any Stock Option held by
such optionee may thereafter be exercised by the optionee, to the extent it was
exercisable at the time of termination, or on such accelerated basis as the
Committee may determine, for a period of 3 years from the date of such
Termination of Employment or until the expiration of the stated term of such
Stock Option, whichever period is the shorter; provided, however, that if the
optionee dies within such period, any unexercised Stock Option held by such
optionee shall, notwithstanding the expiration of such period, continue to be
exercisable to the extent to which it was exercisable at the time of death for a
period of 12 months from the date of such death or until the expiration of the
stated term of such Stock Option, whichever period is the shorter. In the event
of Termination of Employment by reason of Disability, if an Incentive Stock
Option is exercised after the expiration of the exercise periods that apply for
purposes of Section 422 of the Code, such Stock Option will thereafter be
treated as a Nonqualified Stock Option.
(h) Termination by Reason of Retirement. Unless otherwise determined by
the Committee (in the option agreement or otherwise), if an optionee's
Termination of Employment is by reason of Retirement, any Stock Option held by
such optionee may thereafter be exercised by the optionee, to the extent it was
exercisable at the time of such Retirement, or on such accelerated basis as the
Committee may determine, for a period of 5 years from the date of such
termination of employment or until the expiration of the stated term of such
Stock Option, whichever period is the shorter; provided, however, that if the
optionee dies within such period any unexercised Stock Option held by such
optionee shall, notwithstanding the expiration of such period, continue to be
exercisable to the extent to which it was exercisable at the time of death for a
period of 12 months from the date of such death or until the expiration of the
stated term of such Stock Option, whichever period is the shorter. In the event
of Termination of Employment by reason of Retirement, if an Incentive Stock
Option is exercised after the expiration of the exercise periods that apply for
purposes of Section 422 of the Code, such Stock Option will thereafter be
treated as a Nonqualified Stock Option.
(i) Other Termination. Unless otherwise determined by the Committee (in
the option agreement or otherwise): (A) if an optionee incurs a Termination of
Employment for Cause, all Stock Options held by such optionee shall thereupon
terminate; and (B) if an optionee incurs a Termination of Employment for any
reason other than death, Disability, Retirement or Cause, any Stock Option held
by such optionee, to the extent then exercisable, or on such accelerated basis
as the Committee may determine, may be exercised for the lesser of 3 months from
the date of such Termination of Employment or the balance of such Stock Option's
term; provided, however, that if the optionee dies within such three-month
period, any unexercised Stock Option held by such optionee shall,
notwithstanding the expiration of such 3-month period, continue to be
exercisable to the extent to which it was exercisable at the time of death for a
period of 12 months from the date of such death or until the expiration of the
stated term of such Stock Option, whichever period is the shorter.
Notwithstanding the foregoing, unless otherwise determined by the Committee (in
the option agreement or otherwise), if an optionee incurs a Termination of
Employment at or after a Change in Control (as defined Section 11(b)), other
than by reason of death, Disability or Retirement, any Stock Option held by such
optionee shall be exercisable for the lesser of (1) 6 months and one day from
the date following such Termination of Employment, and (2) the balance of such
Stock Option's term. In the event of Termination of Employment, if an Incentive
Stock Option is exercised after the expiration of the exercise periods that
apply
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for purposes of Section 422 of the Code, such Stock Option will thereafter be
treated as a Nonqualified Stock Option.
(j) Cashing Out of Stock Option. On receipt of written notice of exercise,
the Committee may elect to cash out all or part of the portion of the shares of
Common Stock for which a Stock Option is being exercised by paying the optionee
an amount, in cash or Common Stock, equal to the excess of the Fair Market Value
of the Common Stock over the option price times the number of shares of Common
Stock for which the Option is being exercised on the effective date of such
cash-out.
(k) Change in Control Cash-Out. Notwithstanding any other provision of the
Plan, during the 60-day period from and after a Change in Control (the "Exercise
Period"), unless the Committee shall determine otherwise at the time of grant,
an optionee shall have the right, whether or not the Stock Option is fully
exercisable and in lieu of the payment of the exercise price for the shares of
Common Stock being purchased under the Stock Option and by giving notice to the
Corporation, to elect (within the Exercise Period) to surrender all or part of
the Stock Option to the Corporation and to receive cash, within 10 days of such
notice, in an amount equal to the amount by which the Change in Control Price
per share of Common Stock on the date of such election shall exceed the exercise
price per share of Common Stock under the Stock Option (the "Spread") multiplied
by the number of shares of Common Stock granted under the Stock Option as to
which the right granted under this Section 5(k) shall have been exercised.
Notwithstanding the foregoing, if the exercise of any right granted pursuant to
this Section 5(k) would make a Change in Control transaction ineligible for
pooling of interests accounting under APB No. 16 that but for this Section 5(k)
would otherwise be eligible for such accounting treatment, the Committee shall
have the ability to substitute the cash payable pursuant to this Section 5(k)
with Common Stock (or shares of common stock of the entity surviving the Change
in Control transaction, or its parent corporation, if applicable) with a Fair
Market Value equal to the cash that would otherwise be payable hereunder.
SECTION 6. STOCK APPRECIATION RIGHTS
(a) Grant and Exercise. Stock Appreciation Rights may be granted in
conjunction with all or part of any Stock Option granted under the Plan. In the
case of a Nonqualified Stock Option, such rights may be granted either at or
after the time of grant of such Stock Option. In the case of an Incentive Stock
Option, such rights may be granted only at the time of grant of such Stock
Option. A Stock Appreciation Right shall terminate and no longer be exercisable
upon the termination or exercise of the related Stock Option.
A Stock Appreciation Right may be exercised by an optionee in accordance
with Section 6(b) by surrendering the applicable portion of the related Stock
Option in accordance with procedures established by the Committee. Upon such
exercise and surrender, the optionee shall be entitled to receive an amount
determined in the manner prescribed in Section 6(b). Stock Options which have
been so surrendered shall no longer be exercisable to the extent the related
Stock Appreciation Rights have been exercised.
(b) Terms and Conditions. Stock Appreciation Rights shall be subject to
such terms and conditions as shall be determined by the Committee, including the
following:
(i) Stock Appreciation Rights shall be exercisable only at such time
or times and to the extent that the Stock Options to which they relate are
exercisable in accordance with the provisions of Section 5 and this Section
6.
(ii) Upon the exercise of a Stock Appreciation Right, an optionee
shall be entitled to receive an amount in cash, shares of Common Stock or
both, in value equal to the excess of the Fair Market Value of one share of
Common Stock over the option price per share specified in the related Stock
Option multiplied by the number of shares in respect of which the Stock
Appreciation Right shall have been exercised, with the Committee having the
right to determine the form of payment.
(iii) Stock Appreciation Rights shall be transferable only to
permitted transferees of the underlying Stock Option in accordance with
Section 5(e).
(iv) Upon the exercise of a Stock Appreciation Right, the Stock Option
or part thereof to which such Stock Appreciation Right is related shall be
deemed to have been exercised for the purpose of the limitation set forth
in Section 3 on the number of shares of Common Stock to be issued under the
Plan,
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but only to the extent of the number of shares in respect of which the
Stock Appreciation Right has been exercised.
SECTION 7. RESTRICTED STOCK
(a) Administration. Shares of Restricted Stock may be awarded either alone
or in addition to other Awards granted under the Plan. The Committee shall
determine the officers and employees to whom and the time or times at which
grants of Restricted Stock will be awarded, the number of shares to be awarded
to any participant (subject to the aggregate limit on grants to individual
participants set forth in Section 3), the conditions for vesting, the time or
times within which such Awards may be subject to forfeiture and any other terms
and conditions of the Awards, in addition to those contained in Section 7(c).
The Committee may, prior to grant, condition the vesting of Restricted
Stock upon the attainment of Performance Goals. The Committee may, in addition
to or instead of requiring satisfaction of Performance Goals, condition vesting
upon the continued service of the participant. The provisions of Restricted
Stock Awards (including the applicable Performance Goals) need not be the same
with respect to each recipient.
(b) Awards and Certificates. Shares of Restricted Stock shall be evidenced
in such manner as the Committee may deem appropriate, including book-entry
registration or issuance of one or more stock certificates. Any certificate
issued in respect of shares of Restricted Stock shall be registered in the name
of such participant and shall bear an appropriate legend referring to the terms,
conditions, and restrictions applicable to such Award, substantially in the
following form:
"The transferability of this certificate and the shares of stock
represented hereby are subject to the terms and conditions (including
forfeiture) of the HSN, Inc. 1997 Stock and Annual Incentive Plan and a
Restricted Stock Agreement. Copies of such Plan and Agreement are on file
at the offices of HSN, Inc."
The Committee may require that the certificates evidencing such shares be held
in custody by the Corporation until the restrictions thereon shall have lapsed
and that, as a condition of any Award of Restricted Stock, the participant shall
have delivered a stock power, endorsed in blank, relating to the Common Stock
covered by such Award.
(c) Terms and Conditions. Shares of Restricted Stock shall be subject to
the following terms and conditions:
(i) Subject to the provisions of the Plan and the Restricted Stock
Agreement referred to in Section 7(c)(vi), during the period, if any, set
by the Committee, commencing with the date of such Award for which such
participant's continued service is required (the "Restriction Period"), and
until the later of (i) the expiration of the Restriction Period and (ii)
the date the applicable Performance Goals (if any) are satisfied, the
participant shall not be permitted to sell, assign, transfer, pledge or
otherwise encumber shares of Restricted Stock; provided, that the foregoing
shall not prevent a participant from pledging Restricted Stock as security
for a loan, the sole purpose of which is to provide funds to pay the option
price for Stock Options. Within these limits, the Committee may provide for
the lapse of restrictions based upon period of service in installments or
otherwise and may accelerate or waive, in whole or in part, restrictions
based upon period of service or upon performance; provided, however, that
in the case of Restricted Stock subject to Performance Goals granted to a
participant who is a Covered Employee, the applicable Performance Goals
have been satisfied.
(ii) Except as provided in this paragraph (ii) and Section 7(c)(i) and
the Restricted Stock Agreement, the participant shall have, with respect to
the shares of Restricted Stock, all of the rights of a stockholder of the
Corporation holding the class or series of Common Stock that is the subject
of the Restricted Stock, including, if applicable, the right to vote the
shares and the right to receive any cash dividends. If so determined by the
Committee in the applicable Restricted Stock Agreement and subject to
Section 14(e) of the Plan, (1) cash dividends on the class or series of
Common Stock that is the subject of the Restricted Stock Award shall be
automatically deferred and reinvested in additional Restricted Stock, held
subject to the vesting of the underlying Restricted Stock, or held subject
to meeting Performance Goals applicable only to dividends, (2) dividends
payable in Common Stock shall be paid in the form of Restricted Stock of
the same class as the Common Stock with which such dividend
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was paid, held subject to the vesting of the underlying Restricted Stock,
or held subject to meeting Performance Goals applicable only to dividends
and (3) dividends payable in shares of a subsidiary of the Corporation upon
a Spin-off transaction shall be held as restricted shares subject to the
vesting provisions of the underlying Restricted Stock.
(iii) Except to the extent otherwise provided in the applicable
Restricted Stock Agreement and Sections 7(c)(i), 7(c)(iv) and 11(a)(ii),
upon a participant's Termination of Employment for any reason during the
Restriction Period or before the applicable Performance Goals are
satisfied, all shares still subject to restriction shall be forfeited by
the participant.
(iv) In the event of a participant's Retirement or a participant's
involuntary Termination of Employment (other than for Cause), the Committee
shall have the discretion to waive, in whole or in part, any or all
remaining restrictions (other than, in the case of Restricted Stock with
respect to which a participant is a Covered Employee, satisfaction of the
applicable Performance Goals unless the participant's employment is
terminated by reason of death or Disability) with respect to any or all of
such participant's shares of Restricted Stock.
(v) If and when any applicable Performance Goals are satisfied and the
Restriction Period expires without a prior forfeiture of the Restricted
Stock, unlegended certificates for such shares shall be delivered to the
participant upon surrender of the legended certificates.
(vi) Each Award shall be confirmed by, and be subject to, the terms of
a Restricted Stock Agreement.
SECTION 8. PERFORMANCE UNITS
(a) Administration. Performance Units may be awarded either alone or in
addition to other Awards granted under the Plan. The Committee shall determine
the officers and employees to whom and the time or times at which Performance
Units shall be awarded, the number of Performance Units to be awarded to any
participant (subject to the aggregate limit on grants to individual participants
set forth in Section 3), the duration of the Award Cycle and any other terms and
conditions of the Award, in addition to those contained in Section 8(b).
The Committee may condition the settlement of Performance Units upon the
continued service of the participant, the attainment of Performance Goals, or
both. The provisions of such Awards (including the applicable Performance Goals)
need not be the same with respect to each recipient.
(b) Terms and Conditions. Performance Units Awards shall be subject to the
following terms and conditions:
(i) Subject to the provisions of the Plan and the Performance Units
Agreement referred to in Section 8(b)(vi), Performance Units may not be
sold, assigned, transferred, pledged or otherwise encumbered during the
Award Cycle. At the expiration of the Award Cycle, the Committee shall
evaluate the Corporation's performance in light of the Performance Goals
for such Award to the extent applicable, and shall determine the number of
Performance Units granted to the participant which have been earned, and
the Committee may then elect to deliver (1) a number of shares of Common
Stock equal to the number of Performance Units determined by the Committee
to have been earned, or (2) cash equal to the Fair Market Value of such
number of shares of Common Stock to the participant.
(ii) Except to the extent otherwise provided in the applicable
Performance Unit Agreement and Sections 8(b)(iii) and 11(a)(iii), upon a
participant's Termination of Employment for any reason during the Award
Cycle or before any applicable Performance Goals are satisfied, the rights
to the shares still covered by the Performance Units Award shall be
forfeited by the participant.
(iii) Except to the extent otherwise provided in Section 11(a)(iii),
upon a participant's Termination of Employment (other than for Cause), or
in the event of a participant's Retirement, the Committee shall have the
discretion to waive, in whole or in part, any or all remaining payment
limitations (other than, in the case of Performance Units with respect to
which a participant is a Covered Employee, satisfaction of any applicable
Performance Goals unless the participant's Termination of Employment is by
reason of death or Disability) with respect to any or all of such
participant's Performance Units.
APPENDIX F
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(iv) A participant may elect to further defer receipt of the
Performance Units payable under an Award (or an installment of an Award)
for a specified period or until a specified event, subject in each case to
the Committee's approval and to such terms as are determined by the
Committee (the "Elective Deferral Period"). Subject to any exceptions
adopted by the Committee, such election must generally be made prior to
commencement of the Award Cycle for the Award (or for such installment of
an Award).
(v) If and when any applicable Performance Goals are satisfied and the
Elective Deferral Period expires without a prior forfeiture of the
Performance Units, payment in accordance with Section 8(b)(i) hereof shall
be made to the participant.
(vi) Each Award shall be confirmed by, and be subject to, the terms of
a Performance Unit Agreement.
SECTION 9. TAX OFFSET BONUSES
At the time an Award is made hereunder or at any time thereafter, the
Committee may grant to the participant receiving such Award the right to receive
a cash payment in an amount specified by the Committee, to be paid at such time
or times (if ever) as the Award results in compensation income to the
participant, for the purpose of assisting the participant to pay the resulting
taxes, all as determined by the Committee and on such other terms and conditions
as the Committee shall determine.
SECTION 10. BONUS AWARDS
(a) Determination of Awards. The Committee shall determine the total
amount of Bonus Awards for each Plan Year. Prior to the beginning of the Plan
Year (or such later date as may be prescribed by the Internal Revenue Service
under Section 162(m) of the Code), the Committee shall establish Performance
Goals for Bonus Awards for the Plan Year; provided, that such Performance Goals
may be established at a later date for participants who are not Covered
Employees. Bonus amounts payable to any individual participant with respect to a
Plan Year will be limited to a maximum of $10 million. To the extent provided by
the Committee, a participant may elect to defer receipt of amounts payable under
a Bonus Award for a specified period, or until a specified event, subject in
each case to the Committee's approval and to such terms as are determined by the
Committee.
(b) Payment of Awards. Bonus Awards under the Plan shall be paid in cash
or in shares of Common Stock (valued at Fair Market Value as of the date of
payment) as determined by the Committee, as soon as practicable following the
close of the Plan Year, but in any event within 90 days following the close of
the Plan Year. The Bonus Award for any Plan Year to any participant may be
reduced or eliminated by the Committee in its discretion.
(c) Termination of Employment. A participant shall not be entitled to
receive payment of a Bonus Award, unless the annual Performance Goals for the
Plan Year are satisfied or as otherwise set forth in Section 11, if at any time
prior to the end of the Plan Year the participant has a Termination of
Employment for any reason other than death or Disability.
SECTION 11. CHANGE IN CONTROL PROVISIONS
(a) Impact of Event. Notwithstanding any other provision of the Plan to
the contrary, upon a Change in Control:
(i) Any Stock Options and Stock Appreciation Rights outstanding as of
the date of such Change in Control, and which are not then exercisable and
vested, shall become immediately fully exercisable and vested.
(ii) The restrictions and deferral limitations applicable to any
Restricted Stock shall immediately lapse, and such Restricted Stock shall
become free of all restrictions and become fully vested and transferable to
the full extent of the original grant.
(iii) All Performance Units shall be considered to be immediately
earned and payable in full, and any deferral or other restriction shall
lapse and such Performance Units shall be settled in cash or shares of
Common Stock, as determined by the Committee, as promptly as is
practicable.
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(iv) To the extent determined by the Committee, Bonus Awards may be
paid in whole or in part to participants notwithstanding the attainment of
Performance Goals.
(b) Definition of Change in Control. For purposes of the Plan, unless
otherwise provided in an option agreement or other agreement relating to an
Award, a "Change in Control" shall mean the happening of any of the following
events:
(i) The acquisition by any individual entity or group (within the
meaning of Section 13(d)(3) or 14(d)(2) of the Exchange Act), other than
Barry Diller, Liberty Media Corporation, Universal Studios, Inc. and their
respective Affiliates (a "Person") of beneficial ownership (within the
meaning of Rule 13d-3 promulgated under the Exchange Act) of equity
securities of the Corporation representing more than 50% of the voting
power of the then outstanding equity securities of the Corporation entitled
to vote generally in the election of directors (the "Outstanding
Corporation Voting Securities"); provided, however, that for purposes of
this subsection (i), the following acquisitions shall not constitute a
Change of Control: (A) any acquisition by the Corporation, (B) any
acquisition by any employee benefit plan (or related trust) sponsored or
maintained by the Corporation or any corporation controlled by the
Corporation, or (C) any acquisition by any corporation pursuant to a
transaction which complies with clauses (A), (B) and (C) of subsection
(iii); or
(ii) Individuals who, as of October 19, 1997, constitute the Board
(the "Incumbent Board") cease for any reason to constitute at least a
majority of the Board; provided, however, that any individual becoming a
director subsequent to October 19, 1997, whose election, or nomination for
election by the Corporation's shareholders, was approved by a vote of at
least a majority of the directors then comprising the Incumbent Board shall
be considered as though such individual were a member of the Incumbent
Board, but excluding, for this purpose, any such individual whose initial
assumption of office occurs as a result of an actual or threatened election
contest with respect to the election or removal of directors or other
actual or threatened solicitation of proxies or consents by or on behalf of
a Person other than the Board; or
(iii) Approval by the stockholders of the Corporation of a
reorganization, merger or consolidation or sale or other disposition of all
or substantially all of the assets of the Corporation or the purchase of
assets or stock of another entity (a "Business Combination"), in each case,
unless immediately following such Business Combination, (A) all or
substantially all of the individuals and entities who were the beneficial
owners of the Outstanding Corporation Voting Securities immediately prior
to such Business Combination will beneficially own, directly or indirectly,
more than 50% of the then outstanding combined voting power of the then
outstanding voting securities entitled to vote generally in the election of
directors of the corporation resulting from such Business Combination
(including, without limitation, a corporation which as a result of such
transaction owns the Corporation or all or substantially all of the
Corporation's assets either directly or through one or more subsidiaries)
in substantially the same proportions as their ownership, immediately prior
to such Business Combination of the Outstanding Corporation Voting
Securities, (B) no Person (excluding Barry Diller, Liberty Media
Corporation, Universal Studios, Inc. and their Affiliates, any employee
benefit plan (or related trust) of the Corporation or such corporation
resulting from such Business Combination) will beneficially own, directly
or indirectly, more than a majority of the combined voting power of the
then outstanding voting securities of such corporation except to the extent
that such ownership of the Corporation existed prior to the Business
Combination and (C) at least a majority of the members of the board of
directors of the Corporation resulting from such Business Combination will
have been members of the Incumbent Board at the time of the initial
agreement, or action of the Board, providing for such Business Combination;
or
(iv) Approval by the stockholders of the Corporation of a complete
liquidation or dissolution of the Corporation.
(c) Change in Control Price. For purposes of the Plan, "Change in Control
Price" means the higher of (i) the highest reported sales price, regular way, of
a share of Common Stock in any transaction reported on the New York Stock
Exchange Composite Tape or other national exchange on which such shares are
listed or on NASDAQ during the 60-day period prior to and including the date of
a Change in Control or (ii) if the Change in Control is the result of a tender
or exchange offer or a Business Combination, the highest price per
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share of Common Stock paid in such tender or exchange offer or Business
Combination; provided, however, that in the case of Incentive Stock Options and
Stock Appreciation Rights relating to Incentive Stock Options, the Change in
Control Price shall be in all cases the Fair Market Value of the Common Stock on
the date the right set forth in Section 5(k) is exercised. To the extent that
the consideration paid in any such transaction described above consists all or
in part of securities or other noncash consideration, the value of such
securities or other noncash consideration shall be determined in the sole
discretion of the Board.
SECTION 12. TERM, AMENDMENT AND TERMINATION
The Plan will terminate 10 years after the effective date of the Plan;
provided, that the Plan Awards outstanding as of such date shall not be affected
or impaired by the termination of the Plan.
The Board may amend, alter, or discontinue the Plan, but no amendment,
alteration or discontinuation shall be made which would impair the rights of an
optionee under a Stock Option or a recipient of a Stock Appreciation Right,
Restricted Stock Award, Performance Unit Award or Bonus Award theretofore
granted without the optionee's or recipient's consent. In addition, no such
amendment shall be made without the approval of the Corporation's stockholders
to the extent such approval is required by law or agreement.
The Committee may amend the terms of any Stock Option or other Award
theretofore granted, prospectively or retroactively, but no such amendment shall
impair the rights of any holder of such Award without the holder's consent.
Subject to the above provisions, the Board shall have authority to amend
the Plan to take into account changes in law and tax and accounting rules as
well as other developments, and to grant Awards which qualify for beneficial
treatment under such rules without stockholder approval.
SECTION 13. UNFUNDED STATUS OF PLAN
It is presently intended that the Plan constitute an "unfunded" plan for
incentive and deferred compensation. The Committee may authorize the creation of
trusts or other arrangements to meet the obligations created under the Plan to
deliver Common Stock or make payments; provided, however, that unless the
Committee otherwise determines, the existence of such trusts or other
arrangements shall be consistent with the "unfunded" status of the Plan.
SECTION 14. GENERAL PROVISIONS
(a) The Committee may require each person purchasing or receiving shares
pursuant to an Award to represent to and agree with the Corporation in writing
that such person is acquiring the shares without a view to the distribution
thereof. The certificates for such shares may include any legend which the
Committee deems appropriate to reflect any restrictions on transfer.
Notwithstanding any other provision of the Plan or agreements made pursuant
thereto, the Corporation shall not be required to issue or deliver any
certificate or certificates for shares of Common Stock under the Plan prior to
fulfillment of all of the following conditions:
(1) Listing or approval for listing upon notice of issuance, of such
shares on NASDAQ or on the New York Stock Exchange, Inc., or such other
securities exchange as may at the time be the principal market for the
Common Stock;
(2) Any registration or other qualification of such shares of the
Corporation under any state or federal law or regulation or the maintaining
in effect of any such registration or other qualification which the
Committee shall, in its absolute discretion upon the advice of counsel,
deem necessary or advisable; and
(3) Obtaining any other consent, approval, or permit from any state or
federal governmental agency which the Committee shall, in its absolute
discretion after receiving the advice of counsel, determine to be necessary
or advisable.
(b) Nothing contained in the Plan shall prevent the Corporation or any
subsidiary or Affiliate from adopting other or additional compensation
arrangements for its employees.
APPENDIX F
F-12
<PAGE> 242
(c) Adoption of the Plan shall not confer upon any employee any right to
continued employment, nor shall it interfere in any way with the right of the
Corporation or any subsidiary or Affiliate to terminate the employment of any
employee at any time.
(d) No later than the date as of which an amount first becomes includible
in the gross income of the participant for federal income tax purposes with
respect to any Award under the Plan, the participant shall pay to the
Corporation, or make arrangements satisfactory to the Corporation regarding the
payment of, any federal, state, local or foreign taxes of any kind required by
law to be withheld with respect to such amount. Unless otherwise determined by
the Corporation, withholding obligations may be settled with Common Stock,
including Common Stock that is part of the Award that gives rise to the
withholding requirement. The obligations of the Corporation under the Plan shall
be conditional on such payment or arrangements, and the Corporation and its
Affiliates shall, to the extent permitted by law, have the right to deduct any
such taxes from any payment otherwise due to the participant. The Committee may
establish such procedures as it deems appropriate, including making irrevocable
elections, for the settlement of withholding obligations with Common Stock.
(e) Reinvestment of dividends in additional Restricted Stock at the time of
any dividend payment with respect to Restricted Stock shall only be permissible
if sufficient shares of Common Stock are available under Section 3 for such
reinvestment (taking into account then outstanding Stock Options and other
Awards).
(f) The Committee shall establish such procedures as it deems appropriate
for a participant to designate a beneficiary to whom any amounts payable in the
event of the participant's death are to be paid or by whom any rights of the
participant, after the participant's death, may be exercised.
(g) In the case of a grant of an Award to any employee of a subsidiary or
other Affiliate of the Corporation, the Corporation may, if the Committee so
directs, issue or transfer the shares of Common Stock, if any, covered by the
Award to the subsidiary or such other Affiliate, for such lawful consideration
as the Committee may specify, upon the condition or understanding that the
subsidiary will transfer the shares of Common Stock to the employee in
accordance with the terms of the Award specified by the Committee pursuant to
the provisions of the Plan.
(h) The Plan and all Awards made and actions taken thereunder shall be
governed by and construed in accordance with the laws of the State of Delaware,
without reference to principles of conflict of laws.
SECTION 15. EFFECTIVE DATE OF PLAN
The Plan shall be effective as of October 19, 1997, the date it was
approved by the Board, subject to later approval by the Corporation's
stockholders; provided, however, that no Awards may be exercised or paid out
prior to receipt of such stockholder approval.
APPENDIX F
F-13
<PAGE> 243
APPENDIX G
PROPOSED AMENDMENTS TO THE HSNi CERTIFICATE
AUTHORIZED STOCK PROPOSAL
The Authorized Stock Proposal provides that the HSNi Certificate will be
amended by restating the first paragraph of Article IV to read in its entirety
as follows:
"The Corporation shall have the authority to issue eight hundred
million (800,000,000) shares of $.01 par value Common Stock, two hundred
million (200,000,000) shares of $.01 par value Class B Common Stock, and
fifteen million (15,000,000) shares of $.01 par value Preferred Stock."
OWNERSHIP PROPOSAL
The Ownership Proposal provides that the HSNi Certificate will be amended
by adding a new Article XIII to read as follows:
"Article XIII
This Article XIII shall be applicable to the Corporation so long as
the provisions of the Communications Act of 1934, as amended (including the
rules and regulations promulgated thereunder, the "Communications Act"),
are applicable to the Corporation. Notwithstanding any other provision
hereof, no transfer of the Corporation's capital stock, whether voluntary
or involuntary, shall be permitted, and any purported transfer thereof
shall be void ab initio to the fullest extent permitted under applicable
law and the intended transferee shall be deemed never to have had an
interest therein, if such transfer or purported transfer would violate (or
result in the violation of) any provision of the Communications Act.
Subject to further restrictions, if any, that may be contained in the
By-Laws of the Corporation (i) at no time shall more than one-fourth (25%)
of the aggregate number of issued and outstanding shares of the capital
stock of the Corporation, regardless of class, nor shares of the capital
stock of the Corporation representing in the aggregate more than one-fourth
(25%) of the aggregate voting power of all issued and outstanding shares of
the capital stock of the Corporation, be owned of record or beneficially
voted by or for the account of any alien, the representative of any alien,
any corporation organized under the laws of a foreign country or a foreign
government or a representative thereof ("Aliens"); and (ii) the Corporation
shall not be controlled directly or indirectly by any other Corporation of
which more than one-fourth (25%) of the capital stock is owned of record or
voted by Aliens.
If the Board of Directors or a committee thereof shall at any time
determine in good faith that a transfer has taken place that falls within
the scope of this Article XIII or that a person intends to acquire
beneficial ownership of any shares of the capital stock of the Corporation
that would result in a violation of this Article XIII (whether or not such
violation is intended), the Board of Directors or a committee thereof shall
take such action as it or they deem advisable to refuse to give effect or
to prevent such transfer, including, but not limited to, refusing to give
effect to such transfer on the books of the Corporation or instituting
proceedings to enjoin such transfer.
Without limitation to this Article XIII, any purported transferee of
shares acquired in violation of this Article XIII and any person retaining
shares in violation of this Article XIII shall be deemed to have acted as
agent on behalf of the Corporation in holding those shares acquired or
retained in violation of this Article XIII and shall be deemed to hold such
shares in trust on behalf of and for the benefit of the Corporation. Such
shares shall be deemed a separate class of stock until such time as the
shares are redeemed as provided in the following paragraph. The holder
shall have no right to receive dividends or other distributions with
respect to such shares, and shall have no right to vote such shares. Such
holder shall have no claim, cause of action or any other recourse
whatsoever against any transferor of shares acquired in violation of this
Article XIII. The holder's sole right with respect to such shares shall be
to
APPENDIX G
<PAGE> 244
receive the Redemption Price pursuant to the following paragraph. Any
distribution by the Corporation in respect of such shares acquired or
retained in violation of this Article XIII shall be repaid to the
Corporation upon demand.
The Board of Directors shall, within three months after receiving
notice of a transfer of shares that violates this Article XIII or a
retention of shares in violation of this Article XIII, subject to the
requirements of Delaware law applicable to redemptions, redeem such shares
for the Redemption Price in cash on such date within such three-month
period as the Board of Directors may determine, provided, however, that the
Corporation shall not redeem any outstanding shares of capital stock of the
Corporation owned by Universal Studios, Inc. ("Universal") and its
controlled affiliates issued at the Closing (as defined in the Investment
Agreement, dated as of October 19, 1997, as amended and restated as of
December 18, 1997, among Universal, the Corporation, Home Shopping Network,
Inc. and Liberty Media Corporation (the "Investment Agreement")), acquired
not in violation of the Investment Agreement and related agreements and
otherwise acquired not in violation of the Communications Act. For purposes
of this Article XIII, "Redemption Price" shall mean the lower of (i) the
price paid by the transferee from whom shares are being redeemed, and (ii)
the average of the closing bid and asked prices of the Common Stock on the
Nasdaq Stock Market on each of the ten trading days immediately preceding
the date fixed for redemption by the Board of Directors, or if the Common
Stock is not then traded on the Nasdaq Stock Market, the average of the
last reported sales prices of the Common Stock on each of the ten trading
days immediately preceding the relevant date as reported on any exchange or
quotation system over which the Common Stock may be traded, or if the
Common Stock is not then traded over any exchange or quotation system, then
the price determined in good faith by the Board of Directors as the fair
market value of such class of capital stock on the relevant date.
The Corporation shall have the right to require that any prospective
stockholder certify as to its citizenship and control and may refuse to
transfer and or issue shares of stock in the Corporation if to do so would
likely cause the Corporation to be in violation of the Communications Act.
If the provisions of Section 310 of the Communications Act are amended
or replaced with similar legislation, including amendments to allow
transfers that would otherwise be precluded by this Certificate, then the
restrictions on transfer and the right of redemption set forth in the
foregoing paragraphs shall be modified without further action of the
Corporation's stockholders to be consistent with any such amendments or
replacement legislation, including, without limitation, to allow transfers
to Aliens to the maximum extent permitted by Section 310 of the
Communications Act, and, as so modified, shall apply to the Corporation.
The By-Laws of the Corporation, as now in effect or as hereafter from time
to time amended, may contain additional restrictions on ownership of the
Corporation's capital stock by Aliens and provisions to implement the
limitations set forth in the foregoing paragraphs, including, without
limitation, provisions modifying, restricting or eliminating voting,
dividend, transfer or other rights consistent with the provisions of this
Certificate otherwise applicable to any shares of the Corporation's capital
stock; provided such By-Laws shall not be inconsistent with the proviso
applicable to Universal set forth in the fifth paragraph of this Article
XIII. For purposes of this Article XIII, the term "alien" shall have the
meaning ascribed thereto by the Federal Communications Commission (the
"FCC") on the date hereof and in the future as the FCC may change such
meaning from time to time."
NAME CHANGE PROPOSAL
The Name Change Proposal provides that the HSNi Certificate will be amended
by restating Article I to read in its entirety as follows:
"The name of the Corporation is USA Networks, Inc."
APPENDIX G
G-2
<PAGE> 245
DIRECTOR NUMBER PROPOSAL
The Director Number Proposal provides that the HSNi Certificate will be
amended by restating the first paragraph of Article XII to read in its entirety
as follows:
"The number of directors of the Corporation shall be such number as
shall be determined from time to time by resolution of the Board of
Directors."
REMOVAL PROPOSAL
The Removal Proposal provides that the HSNi Certificate will be amended by
adding a new paragraph to the end of Article XII:
"The Chief Executive Officer of the Corporation may only be removed
without cause by the affirmative vote of at least 80% of the entire Board
of Directors. The provisions of this paragraph may not be amended, altered,
changed or repealed, or any provision inconsistent therewith adopted,
without the approval of at least (i) 80% of the entire Board of Directors
and (ii) 80% of the voting power of the Corporation's outstanding voting
securities, voting together as a single class." This paragraph shall be of
no force and effect following such time as the Chief Executive Officer as
of the date of this Amendment to the Amended and Restated Certificate of
HSNi ceases to be Chief Executive Officer pursuant to the terms of this
paragraph and the Stockholders Agreement dated as of October 19, 1997 among
Universal Studios, Inc., Liberty Media Corporation, Barry Diller and the
Corporation (the "STOCKHOLDERS AGREEMENT"). This paragraph shall only apply
with respect to a removal of the Chief Executive Officer without Cause as
such term is defined in the Stockholders Agreement."
APPENDIX G
G-3
<PAGE> 246
APPENDIX H
USA NETWORKS
FINANCIAL STATEMENTS*
INDEX
<TABLE>
PAGE
<S> <C>
UNAUDITED COMBINED FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 1997 AND
FOR THE NINE MONTH PERIODS ENDED SEPTEMBER 30, 1997 AND SEPTEMBER
30, 1996
Combined Balance Sheets....................................... H-2
Combined Statements of Income................................. H-3
Combined Statements of Cash Flows............................. H-4
Notes to Combined Financial Statements........................ H-5
COMBINED FINANCIAL STATEMENTS AS OF DECEMBER 31, 1996 AND 1995 AND
FOR EACH OF THE THREE YEARS ENDED DECEMBER 31, 1996 AND REPORT OF
INDEPENDENT ACCOUNTANTS
Report of Independent Accountants............................. H-7
Independent Auditors' Report.................................. H-8
Combined Balance Sheets....................................... H-9
Combined Statements of Income................................. H-10
Combined Statements of Cash Flows............................. H-11
Combined Statements of Changes in Partners' Equity............ H-12
Notes to Combined Financial Statements........................ H-13
</TABLE>
- ---------------
* Consistent with previously-issued financial statements, USA Networks combined
financial statements include USA Networks, consisting of USA Network and
Sci-Fi Channel, and USA Network's related entity, Sci-Fi Channel Europe,
L.L.C.
APPENDIX H
<PAGE> 247
USA NETWORKS
COMBINED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
(UNAUDITED)
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- ------------
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents.............................. $ 8,165 $ 4,153
Trade accounts receivable, less allowance of $18,743
and $9,114 in 1997 and 1996, respectively............ 132,792 123,211
Program rights......................................... 207,572 197,235
Prepaid expenses and other current assets.............. 6,966 7,528
------------- ------------
Total current assets.............................. 355,495 332,127
Program rights.............................................. 161,596 145,985
Equipment and improvements, net............................. 30,836 33,122
Goodwill, net of accumulated amortization of $11,239 and
$10,342 in 1997 and 1996, respectively.................... 34,666 33,064
Other noncurrent assets..................................... 16,270 11,647
------------- ------------
$ 598,863 $555,945
========== ==========
LIABILITIES AND PARTNERS' EQUITY
Current liabilities
Trade accounts payable................................. $ 3,724 $ 8,870
Short-term borrowings.................................. -- 3,700
Accrued liabilities.................................... 85,471 78,360
Program rights......................................... 116,659 59,907
Program rights-related party........................... 79,767 111,456
------------- ------------
Total current liabilities......................... 285,621 262,293
Contingent liabilities (Notes 3 and 4)...................... -- --
Program rights.............................................. 74,566 25,211
Program rights-related party................................ 79,768 111,364
Other noncurrent liabilities................................ 10,924 7,323
Partners' equity............................................ 147,984 149,754
------------- ------------
$ 598,863 $555,945
========== ==========
</TABLE>
The accompanying notes are an integral part of these unaudited combined
financial statements.
APPENDIX H
H-2
<PAGE> 248
USA NETWORKS
COMBINED STATEMENTS OF INCOME -- UNAUDITED
(in thousands)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------
1997 1996
-------- --------
<S> <C> <C>
Revenues
Advertising, net of agency commissions..................... $294,653 $265,264
Affiliate fees............................................. 250,841 221,183
Other income............................................... 7,798 10,798
-------- --------
553,292 497,245
-------- --------
Costs and expenses
Program.................................................... 177,844 166,442
Program-related party...................................... 137,409 102,019
Broadcast
Operating................................................ 15,750 14,346
Affiliate relations, marketing and research.............. 75,966 58,521
Selling, general and administrative........................ 43,480 40,572
Depreciation............................................... 5,372 4,932
Amortization of goodwill and Sci-Fi investment............. 1,108 1,447
-------- --------
456,929 388,279
-------- --------
Operating income......................................... 96,363 108,966
Interest income................................................. 663 620
Taxes........................................................... 2,664 2,404
-------- --------
Net income............................................... $ 94,362 $107,182
======== ========
</TABLE>
The accompanying notes are an integral part of these unaudited combined
financial statements.
APPENDIX H
H-3
<PAGE> 249
USA NETWORKS
COMBINED STATEMENTS OF CASH FLOWS -- UNAUDITED
(in thousands)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------
1997 1996
-------- --------
<S> <C> <C>
Cash flows from operating activities
Net income................................................. $ 94,362 $107,182
Adjustments to reconcile net income to net cash provided by
operations:
Amortization of program rights........................... 147,887 134,928
Amortization of program rights-related party............. 137,409 102,019
Increase in makegoods.................................... 1,952 12,750
Depreciation............................................. 5,372 4,932
Amortization of goodwill and Sci-Fi investment........... 1,108 1,447
Provision for affiliate rate reserve..................... 8,706 2,787
Provision for bad debts and other noncash charges........ 10,349 10,388
Change in operating assets and liabilities
Acquisition of program rights............................ (244,447) (132,943)
Acquisition of program rights-related party.............. (66,797) (109,092)
Increase (decrease) in liability for program rights...... 42,822 (13,893)
Increase in accounts receivable.......................... (19,495) (16,924)
Increase in prepaid expenses and other assets............ (4,271) (3,678)
Decrease in accounts payable............................. (5,146) (6,905)
(Decrease) increase in accrued liabilities and other
noncurrent liabilities................................ (1,035) 4,107
-------- --------
Net cash provided by operating activities............. 108,776 97,105
-------- --------
Cash flows from investing activities
Sci-Fi contingent payment.................................. (2,500) --
Investment in available for sale securities................ -- (1,478)
Purchase of equipment...................................... (2,936) (4,646)
-------- --------
Net cash used in investing activities................. (5,436) (6,124)
-------- --------
Cash flows from financing activities
Distribution to Partners................................... (95,500) (91,000)
Decrease in short-term borrowings.......................... (3,700) --
-------- --------
Net cash used in financing activities................. (99,200) (91,000)
-------- --------
Effect of exchange rate changes on cash.................... (128) (60)
-------- --------
Increase (decrease) in cash and cash equivalents........... 4,012 (79)
Cash and cash equivalents at beginning of year............. 4,153 10,087
-------- --------
Cash and cash equivalents at end of period................. $ 8,165 $ 10,008
======== ========
Supplemental disclosures of cash flow information:
Taxes paid............................................... $ 900 $ 4,525
======== ========
</TABLE>
The accompanying notes are an integral part of these unaudited combined
financial statements.
APPENDIX H
H-4
<PAGE> 250
USA NETWORKS
NOTES TO COMBINED FINANCIAL STATEMENTS -- UNAUDITED
1. BASIS OF PRESENTATION
The accompanying unaudited combined financial statements include the
accounts of USA Networks ("USAN"), together with its related entity Sci-Fi
Channel Europe, L.L.C. ("Sci-Fi Europe") (collectively, "Combined USAN") and
have been prepared pursuant to guidelines for interim financial reporting and,
accordingly, certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted. In management's opinion, the
accompanying unaudited combined financial statements reflect all adjustments,
consisting only of normal recurring accruals, necessary for a fair presentation
of the combined results of operations for the interim periods presented. The
combined results of operations for such interim periods are not necessarily
indicative of the results that may be expected for future interim periods or for
the year ended December 31, 1997. These interim combined financial statements
and the notes thereto should be read in conjunction with the audited combined
financial statements and the notes thereto included in Combined USAN's financial
statements for the year ended December 31, 1996.
Management of Combined USAN has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of
contingent assets and liabilities to prepare these interim combined financial
statements in conformity with generally accepted accounting principles. Actual
results could differ from those estimates.
2. SUBSEQUENT EVENT
On October 21, 1997, Universal City Studios, Inc., a wholly owned
subsidiary of Universal Studios, Inc. (collectively, "Universal") acquired from
Viacom Inc. ("Viacom") a 50% interest in USAN and Sci-Fi Europe for $1.7 billion
in cash. The acquisition is being accounted for as a purchase, and Universal has
not yet completed its purchase price allocation. A fair market valuation of
assets acquired and liabilities assumed of Combined USAN will be completed in
the near future. The items to be valued include program assets and liabilities,
future commitments to purchase programming and other contractual commitments.
The resulting unallocated goodwill is expected to be amortized over a 40 year
life. Under the acquisition agreement, Combined USAN is committed to purchase
certain programs from Viacom. The maximum program commitment is estimated at
$320 million.
On October 19, 1997, HSN, Inc. ("HSNi") agreed to acquire from Universal
USAN and the domestic television production and distribution business of
Universal in exchange for $4.075 billion in value, comprised of a combination of
securities that in effect represent a 45% equity interest in HSNi and up to
$1.43 billion in cash, plus, in certain circumstances, an additional payment in
the form of a cash distribution. A new joint venture will be created consisting
mainly of Sci-Fi Europe and the international operations of USAN and will be
equally owned by HSNi and Universal. In addition, HSNi intends to change its
corporate name to "USA Networks, Inc." This transaction, which is expected to
close in the first quarter of 1998, is subject to customary conditions,
including HSNi stockholder approval.
APPENDIX H
H-5
<PAGE> 251
USA NETWORKS
NOTES TO COMBINED FINANCIAL STATEMENTS -- UNAUDITED -- CONTINUED
3. CONTINGENT LIABILITIES
In connection with the 1992 acquisition of Sci-Fi Channel, certain
contingent amounts will be payable 90 days after the first full calendar year
that the net revenues of Sci-Fi Channel and Sci-Fi Europe combined exceed the
following amounts:
<TABLE>
<CAPTION>
REQUIRED
REVENUES PAYMENTS
--------- --------
<S> <C>
(in thousands)
<CAPTION>
<S> <C>
$75,000 $2,500
100,000 5,000
150,000 7,500
</TABLE>
For the years ended December 31, 1996, 1995 and 1994, Sci-Fi Channel and
Sci-Fi Europe, collectively, had net revenues of $87,626,000, $48,600,000 and
$22,607,000, respectively. Combined USAN paid $2,500,000 to the former owner of
Sci-Fi Channel during March 1997 in accordance with the Sci-Fi Channel
acquisition agreement.
4. OTHER MATTERS
USAN is involved in continuing disputes regarding the amounts to be paid by
it for the performance of copyrighted music from members of the American Society
of Composers, Authors and Publishers ("ASCAP") and by Broadcast Music, Inc.
("BMI"). The payments to be made to ASCAP will be determined by a federal judge
in a so-called "rate court" proceeding. In the initial phase of the proceeding,
it has been determined that USAN is to pay ASCAP an interim fee of three-tenths
of one percent (0.3%) of its gross revenues. This fee level is subject to
adjustment upward or downward in future rate court proceedings or as the result
of subsequent negotiations for all payments from January 1, 1986. All ASCAP
claims prior to January 1, 1986 have been settled and are final.
On November 1, 1991, USAN and BMI agreed to terms on a license which
provided for payment of a stipulated sum as final payment for all periods prior
to and including December 31, 1989 for the payment of license fees, which are
now final, amounting to three-tenths of one percent (0.3%) of USAN's gross
revenues for the period from January 1, 1990 through June 30, 1992 and for
interim fees of three-tenths of one percent (0.3%) from July 1, 1992 and
forward. This arrangement is terminable by either party upon 30-days notice. In
December 1994, a BMI "rate court" was established under the provisions of BMI's
own government consent decree. The establishment of this rate court could, by
the terms of the BMI license, subject the interim fees to upward or downward
adjustment, resulting from a rate determination proceeding before that court
should such a proceeding be initiated.
APPENDIX H
H-6
<PAGE> 252
REPORT OF INDEPENDENT ACCOUNTANTS
To the Partners of USA Networks
In our opinion, the accompanying combined balance sheets and the related
combined statements of income, of cash flows, and of changes in partners' equity
present fairly, in all material respects, the financial position of USA Networks
at December 31, 1996 and 1995, and the results of their operations and their
cash flows for the years then ended in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
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, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
New York, New York
February 21, 1997
APPENDIX H
H-7
<PAGE> 253
INDEPENDENT AUDITORS' REPORT
The Partners
USA Networks:
We have audited the accompanying combined statements of income, cash flows and
changes in partners' equity of USA Networks for the year ended December 31,
1994. These combined financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
combined financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the combined financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the combined financial statements. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall combined financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the results of operations and cash flows of
USA Networks for the year ended December 31, 1994 in conformity with generally
accepted accounting principles.
KPMG Peat Marwick LLP
New York, New York
February 24, 1995
APPENDIX H
H-8
<PAGE> 254
USA NETWORKS
COMBINED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1996 1995
------------- ------------
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents.............................. $ 4,153 $ 10,087
Trade accounts receivable, less allowance of $9,114
and $20,626 in 1996 and 1995, respectively........... 123,211 113,128
Program rights......................................... 197,235 167,764
Prepaid expenses and other current assets.............. 7,528 5,122
------------- ------------
Total current assets.............................. 332,127 296,101
Program rights.............................................. 145,985 158,240
Equipment and improvements, net............................. 33,122 33,570
Goodwill, net of accumulated amortization of $10,342
and $9,257 in 1996 and 1995, respectively................. 33,064 34,150
Other noncurrent assets..................................... 11,647 3,798
------------- ------------
$ 555,945 $525,859
========== ==========
LIABILITIES AND PARTNERS' EQUITY
Current liabilities
Trade accounts payable................................. $ 8,870 $ 14,397
Short-term borrowings.................................. 3,700 --
Accrued liabilities.................................... 78,360 52,214
Program rights......................................... 59,907 49,561
Program rights-related party........................... 111,456 107,629
------------- ------------
Total current liabilities......................... 262,293 223,801
Commitments and contingent liabilities (Notes 10 and 15).... -- --
Program rights.............................................. 25,211 43,495
Program rights-related party................................ 111,364 137,249
Other noncurrent liabilities................................ 7,323 3,823
Partners' equity............................................ 149,754 117,491
------------- ------------
$ 555,945 $525,859
========== ==========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
APPENDIX H
H-9
<PAGE> 255
USA NETWORKS
COMBINED STATEMENTS OF INCOME
(in thousands)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Revenues
Advertising, net of agency commissions........... $358,455 $322,739 $277,364
Affiliate fees................................... 299,377 243,714 179,057
Other income..................................... 8,640 3,528 1,350
-------- -------- --------
666,472 569,981 457,771
-------- -------- --------
Costs and expenses
Program.......................................... 202,146 132,861 143,260
Program-related party............................ 156,767 172,005 143,351
Broadcast
Operating...................................... 19,035 15,128 13,392
Affiliate relations, marketing and research.... 80,091 58,405 46,906
Selling, general and administrative.............. 52,464 45,600 39,010
Depreciation..................................... 6,647 6,243 5,305
Amortization of goodwill and Sci-Fi investment... 1,930 1,930 1,929
-------- -------- --------
519,080 432,172 393,153
-------- -------- --------
Operating income............................ 147,392 137,809 64,618
Interest income....................................... 827 1,191 766
Taxes................................................. 2,661 3,363 483
-------- -------- --------
Net income.................................. $145,558 $135,637 $ 64,901
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
APPENDIX H
H-10
<PAGE> 256
USA NETWORKS
COMBINED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities
Net income....................................... $145,558 $135,637 $ 64,901
Adjustments to reconcile net income to net cash
provided by operations:
Amortization of program rights................. 160,194 104,074 118,757
Amortization of program rights-related party... 156,767 172,005 143,351
Increase (decrease) in makegoods............... 20,182 (3,769) (3,800)
Depreciation................................... 6,647 6,243 5,305
Amortization of goodwill and Sci-Fi
investment.................................. 1,930 1,930 1,929
Provision for affiliate rate reserve........... 2,694 8,447 19,573
Provision for bad debts and other noncash
charges..................................... 5,100 4,887 3,259
Change in operating assets and liabilities
Acquisition of program rights.................. (161,805) (68,898) (135,264)
Acquisition of program rights-related party.... (172,372) (174,525) (125,284)
(Decrease) increase in liability for program
rights...................................... (29,996) (29,171) 21,815
Increase in accounts receivable................ (13,961) (34,463) (31,498)
Increase in prepaid expenses and other
assets...................................... (3,447) (2,015) (1,129)
(Decrease) increase in accounts payable........ (5,527) 6,265 1,247
Increase (decrease) in accrued liabilities and
other noncurrent liabilities................ 4,179 9,078 (1,731)
-------- -------- --------
Net cash provided by operating activities... 116,143 135,725 81,431
-------- -------- --------
Cash flows from investing activities
Investment in available for sale securities...... (1,479) -- --
Investment in USA Brazil......................... (2,025) -- --
Purchase of equipment............................ (6,221) (2,971) (4,970)
Payments for satellite transponder............... -- -- (4,375)
-------- -------- --------
Net cash used in investing activities.......... (9,725) (2,971) (9,345)
-------- -------- --------
Cash flows from financing activities
Distribution to Partners......................... (116,000) (130,100) (72,000)
Increase in short-term borrowings................ 3,700 -- --
Charge on behalf of Partners - for prior years'
NYC UBT........................................ -- (2,560) --
-------- -------- --------
Net cash used in financing activities....... (112,300) (132,660) (72,000)
-------- -------- --------
Effect of exchange rate changes on cash............... (52) (21) --
-------- -------- --------
(Decrease) increase in cash and cash
equivalents.................................... (5,934) 73 86
Cash and cash equivalents at beginning of year........ 10,087 10,014 9,928
-------- -------- --------
Cash and cash equivalents at end of year.............. $ 4,153 $ 10,087 $ 10,014
======== ======== ========
Supplemental disclosures of cash flow information:
Taxes paid....................................... $ 4,525 $ -- $ 401
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
APPENDIX H
H-11
<PAGE> 257
USA NETWORKS
COMBINED STATEMENTS OF CHANGES IN PARTNERS' EQUITY
(in thousands)
<TABLE>
<S> <C>
BALANCE AT DECEMBER 31, 1993....................................... $121,552
Equity cash distributions.......................................... (72,000)
Net income for the year............................................ 64,901
--------
BALANCE AT DECEMBER 31, 1994....................................... $114,453
Equity cash distributions.......................................... (130,100)
NYC UBT............................................................ (2,560)
Translation adjustment............................................. 61
Net income for the year............................................ 135,637
--------
BALANCE AT DECEMBER 31, 1995....................................... $117,491
Equity cash distributions.......................................... (116,000)
Unrealized holding gain............................................ 1,998
Translation adjustment............................................. 707
Net income for the year............................................ 145,558
--------
BALANCE AT DECEMBER 31, 1996....................................... $149,754
========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
APPENDIX H
H-12
<PAGE> 258
USA NETWORKS
NOTES TO COMBINED FINANCIAL STATEMENTS
1. ORGANIZATION
USA Networks ("USAN") and its related entity, Sci-Fi Channel Europe, L.L.C.
("Sci-Fi Europe") (collectively, "Combined USAN") operates three advertiser
supported 24-hour cable television networks -- USA Network, Sci-Fi Channel and
Sci-Fi Europe. USAN operates in the United States and Latin America and Sci-Fi
Europe operates in Northern Europe. USAN, consisting of USA Network and Sci-Fi
Channel, is a general partnership in which the partners share profits and losses
equally. The general partners are Eighth Century Corporation, a wholly owned
indirect subsidiary of Viacom Inc. ("Viacom," 50%) and Universal Studios, Inc.
and its wholly owned subsidiary Universal City Studios, Inc. (collectively,
"Universal," 50%). Sci-Fi Europe, which was launched November 1, 1995, is a
limited liability company with the same ownership structure as USAN.
2. PRESENTATION AND BASIS OF COMBINATION
The accompanying combined financial statements include the accounts of USAN
and Sci-Fi Europe, which are related through common ownership and common
management. All significant intercompany transactions and balances have been
eliminated.
3. SIGNIFICANT ACCOUNTING POLICIES
Program rights
License agreements for program material are accounted for as a purchase of
program rights. The asset related to the program rights acquired and the
liability for the obligation incurred are recorded at the gross amount when the
license period begins and the program is available for its initial broadcast.
The asset is amortized primarily based on the estimated number of airings.
Amortization is computed generally on the straight-line basis as programs air;
however, when management estimates that the first airing of a program has more
value than subsequent airings, an accelerated method of amortization is used.
Other costs related to programming, which include program assembly, commercial
integration and other costs, are expensed as incurred. Management periodically
reviews the carrying value of program rights and records write-offs, as
warranted, based on changes in programming usage. Certain programs which have
been written-off may air in future periods as a result of changes in
programming.
Equipment and improvements
Equipment and improvements are reported at cost. Depreciation is recorded
using the straight-line basis over the estimated useful lives of the assets.
Amortization of leasehold improvements is recorded over the shorter of the
estimated useful lives or the term of the related leases.
Cash equivalents
Cash equivalents consist of overnight Eurodollar time deposits and
government repurchase agreements with original maturities of three months or
less.
Foreign Currency Translation
The operations of all foreign entities are principally measured in local
currencies. Assets and liabilities are translated into U.S. dollars using
exchange rates in effect at the end of each reporting period. Revenues and
expenses are translated at the average exchange rates prevailing during the
period. Adjustments resulting from translating the financial statements of
foreign entities into U.S. dollars are recorded in Partners' equity.
APPENDIX H
H-13
<PAGE> 259
USA NETWORKS
NOTES TO COMBINED FINANCIAL STATEMENTS -- CONTINUED
Goodwill
Goodwill represents the excess of the purchase price paid over the
partnership equity interest acquired from a withdrawing partner and is amortized
on the straight-line basis over 40 years. On an annual basis, management reviews
the recoverability of goodwill. The measurement of possible impairment is based
primarily on the ability to recover the balance of the goodwill from expected
future operating cash flows on an undiscounted basis. In management's opinion,
no such impairment exists as of December 31, 1996 or 1995.
Short Term Borrowings
Combined USAN has a $15 million revolving line of credit with the Bank of
New York to borrow funds at current money market rates of interest. The December
31, 1996 outstanding balance was repaid in early January 1997.
Revenue recognition
Advertising revenue is recognized in the period in which the advertising
commercials are aired. Provisions are recorded against advertising revenues for
audience under deliveries ("makegoods"). Affiliate fees are recognized in the
period during which the programming is provided.
Income taxes
USAN and Sci-Fi Europe are partnerships and, accordingly, no provision is
made for federal and state income taxes. Combined USAN provides for New York
City Unincorporated Business Taxes ("NYC UBT") and certain foreign withholding
taxes.
Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Fair value of financial instruments
The carrying amounts of Combined USAN's cash and cash equivalents, accounts
receivable, prepaid expenses and other assets, accounts payable, short-term
borrowings and accrued liabilities approximate fair value because of the
short-term maturity of such financial instruments.
4. NEW YORK CITY UNINCORPORATED BUSINESS TAXES
The obligation for NYC UBT for years 1992 and prior has been cleared with
the taxing authorities. The obligation for NYC UBT for years prior to 1991 has
been assumed by the general partners. NYC UBT for 1990 has been audited by the
taxing authorities; since these obligations were directly assumed by the
partners, the related obligation of $2,560,000 was charged to Partners' equity
in 1995. NYC UBT were not provided for in 1994 due primarily to utilization of
carryforward losses and a claim for refund of approximately $900,000 for 1992
NYC UBT.
APPENDIX H
H-14
<PAGE> 260
USA NETWORKS
NOTES TO COMBINED FINANCIAL STATEMENTS -- CONTINUED
5. EQUIPMENT AND IMPROVEMENTS
A summary of equipment and improvements is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
ASSET LIVES 1996 1995
----------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Transponders................................... 10 $31,725 $31,725
Leasehold improvements......................... 5* 17,541 15,607
Office furniture, computers and other.......... 5 12,111 9,742
Production and transmission equipment.......... 5 7,034 5,116
------- -------
68,411 62,190
Accumulated depreciation and
amortization............................ (35,289) (28,620)
------- -------
$33,122 $33,570
======= =======
</TABLE>
- ---------------
* Leasehold improvements are amortized over the lesser of the terms of the
respective leases or 5 years.
6. PROGRAM RIGHTS
As of December 31, 1996, Combined USAN's liability for program rights which
represents future payments to be made under program contract agreements amounted
to $307,938,000. Annual payments required are $171,364,000 in 1997, $85,650,000
in 1998, $30,849,000 in 1999, $13,292,000 in 2000 and $6,783,000 in 2001. The
fair value of program rights payable is estimated as the present value of the
future payments calculated using the borrowing rate currently available to
Combined USAN. Such amount is approximately $279,872,000.
7. LEASES
Combined USAN leases office space, editing/broadcasting facilities and
equipment under noncancelable operating leases. These leases provide for fixed
rentals and, in some cases, additional amounts based on inflation. Rent expense
under these leases amounted to $12,913,580, $9,963,000 and $10,760,000 in 1996,
1995 and 1994, respectively.
As of December 31, 1996, future minimum annual payments under noncancelable
operating leases with terms of one year or more are $13,987,000 in 1997,
$14,402,000 in 1998, $12,169,000 in 1999, $10,770,000 in 2000, and $10,799,000
in 2001 and $36,400,000, thereafter.
8. EMPLOYEE BENEFIT PLANS
Combined USAN has a defined contribution pension, profit sharing and 401(k)
plan which covers substantially all employees. The 401(k) feature of the plan
provides for voluntary contributions by employees, which are partially matched
by Combined USAN. Expense under the defined contribution, profit-sharing and
401(k) plan for 1996, 1995 and 1994 was $2,739,000, $2,722,000 and $2,114,000,
respectively.
Combined USAN also maintains nonqualified executive and nonexecutive
supplemental benefit plans for certain key executive officers and employees.
During 1996, 1995 and 1994, the annual expenses under these plans were
approximately $996,000, $564,000 and $412,000, respectively. The liability for
the supplemental benefit plans was approximately $3,812,000 and $2,519,000 as of
December 31, 1996 and 1995, respectively, and is included in other noncurrent
liabilities in the accompanying balance sheet. This liability is funded by
Combined USAN-owned life insurance policies which are recorded in the
accompanying balance sheet at a cash surrender value of approximately $2,826,000
and $1,158,000 as of December 31, 1996 and 1995, respectively.
APPENDIX H
H-15
<PAGE> 261
USA NETWORKS
NOTES TO COMBINED FINANCIAL STATEMENTS -- CONTINUED
Combined USAN has employment agreements with certain key executive
officers. With regard to the deferred compensation portion of these agreements,
the annual expenses were approximately $1,901,000, $942,000 and $805,000 for the
years ended December 31, 1996, 1995 and 1994, respectively. The liability for
deferred compensation was $2,638,000 and $3,417,000 at December 31, 1996 and
1995, respectively.
9. ACCRUED LIABILITIES
A summary of accrued liabilities is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1996 1995
------- -------
<S> <C> <C>
(IN THOUSANDS)
<CAPTION>
<S> <C> <C>
Makegood accrual.......................................... $33,922 $16,478
Marketing accrual......................................... 12,982 8,679
Royalty accrual........................................... 7,836 6,063
Deferred revenue.......................................... 7,823 5,639
Other..................................................... 15,797 15,355
------- -------
$78,360 $52,214
======= =======
</TABLE>
10. UNRECORDED COMMITMENTS
Combined USAN's unrecorded commitments for program rights consist of
programs for which the license period has not yet begun or the program is not
yet available to air. At December 31, 1996, the unrecorded commitments amounted
to $650,853,000. Annual commitments are $112,600,000 in 1997, $106,717,000 in
1998, $112,909,000 in 1999, $101,196,000 in 2000, $69,402,000 in 2001 and
$148,029,000, thereafter.
In connection with the 1992 acquisition of Sci-Fi Channel, certain
contingent amounts will be payable 90 days after the first full calendar year
that the net revenues of Sci-Fi Channel and Sci-Fi Europe combined exceed the
following amounts:
<TABLE>
<CAPTION>
REQUIRED
REVENUES PAYMENTS
--------- --------
<S> <C>
(IN THOUSANDS)
<CAPTION>
<S> <C>
$75,000 $2,500
100,000 5,000
150,000 7,500
</TABLE>
For the years ended December 31, 1996, 1995 and 1994, Sci-Fi Channel and
Sci-Fi Europe, collectively, had net revenues of $87,626,000, $48,600,000 and
$22,607,000, respectively. Combined USAN will pay $2,500,000 to the former owner
of Sci-Fi Channel during March 1997 in accordance with the Sci-Fi Channel
acquisition agreement.
USAN has a licensing agreement with a Latin American partnership consisting
of Multivision of Mexico and Produfe of Argentina to supply programming for a
24-hour Spanish language, general entertainment network in Latin America
(excluding Brazil). Each Latin American partner has agreed to carry and
distribute the network in its own and contiguous countries. Advertising and
affiliate revenues will be shared between USAN and the Latin American partners.
USAN's costs are limited to programming rights and New York overhead costs.
APPENDIX H
H-16
<PAGE> 262
USA NETWORKS
NOTES TO COMBINED FINANCIAL STATEMENTS -- CONTINUED
11. RELATED PARTY TRANSACTIONS
A summary of related party program transactions between Combined USAN and
Viacom and Universal are as follows:
<TABLE>
<CAPTION>
VIACOM UNIVERSAL TOTAL
-------- -------- --------
<S> <C> <C> <C> <C>
(IN THOUSANDS)
<CAPTION>
<S> <C> <C> <C> <C>
Program acquisitions..................... 1996 $107,813 $ 64,559 $172,372
1995 76,242 98,283 174,525
1994 34,017 91,267 125,284
Programming expense...................... 1996 63,377 93,390 156,767
1995 67,329 104,676 172,005
1994 69,137 74,214 143,351
Liability for program rights at
year-end............................... 1996* 97,194 125,626 222,820
1995 69,926 174,952 244,878
Unrecorded program commitments........... 1996* 139,643 163,826 303,469
1995 163,084 128,953 292,037
</TABLE>
- ---------------
* Such amounts have been included in notes 6 and 10.
The Company leases transmission and uplink facilities from related parties
under noncancelable operating leases. Rent expense under leases with related
parties totaled $1,275,000, $217,000 and $0 in 1996, 1995 and 1994,
respectively.
Future minimum annual payments under noncancelable operating leases with
related parties are $1,033,000 in 1997, $1,062,000 in 1998, $1,085,000 in 1999,
$1,098,000 in 2000, $991,000 in 2001, and $3,553,000, thereafter.
Universal negotiated the business terms on Combined USAN's behalf for the
license of certain programming. The purchase price was funded by an
interest-free loan from Universal to Combined USAN, of which $16 million was
advanced as of December 31, 1994 to fund contemporaneous payments to the program
licensor. The payments to Universal are being made in the ordinary course of
Combined USAN's business and as such this has been reflected as an agreement to
purchase programming rights. The remaining balance of $7,333,334, which is
included in the liabilities for program rights and unrecorded program
commitments, will be paid to Universal in equal installments of $3,666,667 in
1997 and 1998.
12. AFFILIATION AGREEMENTS
Affiliation contracts with certain major multiple cable system operators
expired in recent years. USAN is currently negotiating rate increases as well as
other contractual terms with the respective affiliates. In 1996, USAN received a
settlement from one of its affiliates related to rate discrepancies relating to
1996 and prior years. This settlement did not have a material effect on reported
results.
13. INVESTMENT IN MARKETABLE EQUITY SECURITIES
On April 26, 1996, Combined USAN acquired a common stock investment in
CNET, Inc. ("CNET"). This investment amounts to approximately $3,477,000 as of
December 31, 1996 and is accounted for as available for sale securities in
accordance with Statement of Financial Accounting Standards No. 115, "Accounting
for Certain Investments in Debt and Equity Securities."
APPENDIX H
H-17
<PAGE> 263
USA NETWORKS
NOTES TO COMBINED FINANCIAL STATEMENTS -- CONTINUED
On July 1, 1996, Combined USAN and CNET amended a previous programming
agreement whereby Combined USAN licenses the right to air certain CNET
programming for a fee equivalent to the production cost of the programs. In
addition, under the agreement, CNET granted to Combined USAN 516,750 non-
transferable warrants to purchase CNET common stock. Combined USAN earns the
right to exercise these warrants at interim points over the term of the
agreement by airing the CNET programs.
Effective July 1, 1996, Combined USAN became vested in 206,700 of the
warrants granted. The vested portion of the warrants is recorded in the Combined
Balance Sheets at a value amounting to approximately $2,150,000. This value is
based on the market value of CNET stock on the date of the initial public
offering (July 2, 1996) less a restricted security discount. In addition,
Combined USAN recorded deferred revenue which is recognized as a reduction in
Combined USAN's programming costs over the term of the agreement. If Combined
USAN continues to air the CNET programming in accordance with the noted
agreement, Combined USAN will become vested in 155,025 warrants on July 1, 1997
and 155,025 warrants on July 1, 1998.
14. USA BRAZIL
USA Brazil was launched on May 10, 1996 through a joint venture between
USAN (50%) and Globosat (50%), a multi-channel programming company based in
Brazil. USAN's share of USA Brazil's operating loss for the eight months ended
December 31, 1996 was approximately $1,800,000.
15. OTHER MATTERS
USAN is involved in continuing disputes regarding the amounts to be paid by
it for the performance of copyrighted music from members of the American Society
of Composers, Authors and Publishers ("ASCAP") and by Broadcast Music, Inc.
("BMI"). The payments to be made to ASCAP will be determined by a federal judge
in a so-called "rate court" proceeding. In the initial phase of the proceeding,
it has been determined that USAN is to pay ASCAP an interim fee of three-tenths
of one percent (0.3%) of its gross revenues. This fee level is subject to
adjustment upward or downward in future rate court proceedings or as the result
of subsequent negotiations for all payments from January 1, 1986. All ASCAP
claims prior to January 1, 1986 have been settled and are final.
On November 1, 1991, USAN and BMI agreed to terms on a license which
provided for payment of a stipulated sum as final payment for all periods prior
to and including December 31, 1989 for the payment of license fees, which are
now final, amounting to three-tenths of one percent (0.3%) of USAN's gross
revenues for the period from January 1, 1990 through June 30, 1992 and for
interim fees of three-tenths of one percent (0.3%) from July 1, 1992 and
forward. This arrangement is terminable by either party upon 30-days notice. In
December 1994, a BMI "rate court" was established under the provisions of BMI's
own government consent decree. The establishment of this rate court could, by
the terms of the BMI license, subject the interim fees to upward or downward
adjustment, resulting from a rate determination proceeding before that court
should such a proceeding be initiated.
16. GEOGRAPHIC INFORMATION
The following table sets forth information regarding operating revenues,
operating income or loss, total assets, depreciation and amortization and
capital expenditures by geographic area. Northern Europe repre-
APPENDIX H
H-18
<PAGE> 264
USA NETWORKS
NOTES TO COMBINED FINANCIAL STATEMENTS -- CONTINUED
sents Sci-Fi Europe and Latin America includes USA Brazil and the licensing
agreement with the Latin American partnership (Note 10).
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1996
--------------
<S> <C>
(IN THOUSANDS)
<CAPTION>
<S> <C>
Operating revenue
United States............................................... $646,298
Northern Europe............................................. 7,997
Latin America............................................... 3,537
--------------
$657,832
===========
Operating income (loss)
United States............................................... $167,548
Northern Europe............................................. (16,965)
Latin America............................................... (3,191)
--------------
$147,392
===========
Total assets
United States............................................... $533,248
Northern Europe............................................. 21,872
Latin America............................................... 825
--------------
$555,945
===========
Depreciation and amortization of goodwill and Sci-Fi investment
United States............................................... $ 8,343
Northern Europe............................................. 234
--------------
$ 8,577
===========
Capital Expenditures
United States............................................... $ 5,530
Northern Europe............................................. 691
--------------
$ 6,221
===========
</TABLE>
17. EVENT SUBSEQUENT TO FEBRUARY 21, 1997 (UNAUDITED)
Effective October 21, 1997, Universal acquired Viacom's 50% interest in
USAN and Sci-Fi Europe for $1.7 billion in cash. The acquisition is being
accounted for as a purchase, and Universal has not yet completed its purchase
price allocation. A fair market valuation of assets acquired and liabilities
assumed of Combined USAN will be completed in the near future. The items to be
valued include program assets and liabilities, future commitments to purchase
programming and other contractual commitments. The resulting unallocated
goodwill is expected to be amortized over a 40 year life. Under the acquisition
agreement, Combined USAN is committed to purchase certain programs from Viacom.
The maximum program commitment is estimated at $320 million.
On October 19, 1997, HSN, Inc. ("HSNi") agreed to acquire from Universal
USAN and the domestic television production and distribution business of
Universal in exchange for $4.075 billion in value, comprised of a combination of
securities that in effect represent a 45% equity interest in HSNi and up to
$1.43 billion in cash, plus, in certain circumstances, an additional payment in
the form of a cash distribution. A new joint venture will be created consisting
mainly of Sci-Fi Europe and the international operations of USAN and will be
equally owned by HSNi and Universal. In addition, HSNi intends to change its
corporate name to "USA Networks, Inc." This transaction, which is expected to
close in the first quarter of 1998, is subject to customary conditions,
including HSNi stockholder approval.
APPENDIX H
H-19
<PAGE> 265
APPENDIX I
UNIVERSAL TELEVISION GROUP
FINANCIAL STATEMENTS*
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
UNAUDITED COMBINED FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 1997 AND
FOR THE THREE MONTH PERIODS ENDED SEPTEMBER 30, 1997 AND SEPTEMBER
30, 1996
Combined Balance Sheets....................................... I-2
Combined Statements of Operations............................. I-3
Combined Statements of Cash Flows............................. I-4
Notes to Unaudited Combined Financial Statements.............. I-5
COMBINED FINANCIAL STATEMENTS AS OF JUNE 30, 1997 AND 1996 AND FOR
EACH OF THE THREE PERIODS ENDED JUNE 30, 1997 AND REPORT OF
INDEPENDENT ACCOUNTANTS
Report of Independent Accountants............................. I-9
Combined Balance Sheets....................................... I-10
Combined Statements of Operations............................. I-11
Combined Statements of Cash Flows............................. I-12
Notes to Combined Financial Statements........................ I-13
</TABLE>
- ---------------
* Universal Television Group combined financial statements include 50% of USA
Networks and Sci-Fi Channel Europe, L.L.C.
APPENDIX I
<PAGE> 266
UNIVERSAL TELEVISION GROUP
COMBINED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
(UNAUDITED)
SEPTEMBER 30, JUNE 30,
1997 1997
------------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.............................. $ 16,922 $ 18,929
License fees and other receivables, less allowances.... 181,166 190,949
License fees receivable from Combined USAN............. 42,281 40,347
Program costs, net of amortization..................... 177,430 152,226
Prepaid expenses and other............................. 8,738 6,661
------------- ------------
Total current assets.............................. 426,537 409,112
Program costs, net of amortization.......................... 240,551 257,301
License fees receivable, less allowances.................... 116,571 77,247
License fees receivable from Combined USAN.................. 14,048 25,875
Investment in Combined USAN................................. 787,061 794,266
Goodwill.................................................... 117,288 119,587
Deferred charges and other assets........................... 13,232 8,912
Property, plant and equipment, net.......................... 7,225 7,218
------------- ------------
Total assets...................................... $1,722,513 $1,699,518
=========== ==========
LIABILITIES AND UNIVERSAL EQUITY INVESTMENT
Current liabilities:
Accounts payable and accrued liabilities............... $ 36,248 $ 38,445
Accrued compensation and participations................ 128,094 134,285
Deferred film revenues................................. 61,672 38,452
Income taxes........................................... 10,700 42,000
------------- ------------
Total current liabilities......................... 236,714 253,182
Accrued compensation and participations..................... 73,696 53,750
Other obligations payable after one year.................... 8,009 7,661
Deferred income taxes, net.................................. 53,500 54,100
Commitments and contingencies (Note 7)...................... -- --
Universal equity investment................................. 1,350,594 1,330,825
------------- ------------
Total liabilities and Universal equity
investment...................................... $1,722,513 $1,699,518
=========== ==========
</TABLE>
The accompanying notes are an integral part of these unaudited combined
financial statements.
APPENDIX I
I-2
<PAGE> 267
UNIVERSAL TELEVISION GROUP
COMBINED STATEMENTS OF OPERATIONS -- UNAUDITED
(in thousands)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
---------------------
1997 1996
-------- --------
<S> <C> <C>
REVENUES
Program licensing.......................................... $168,898 $152,306
Program licensing -- Combined USAN......................... 3,812 15,807
-------- --------
172,710 168,113
COSTS AND EXPENSES
Program costs.............................................. 130,904 115,166
Selling, general and administrative expenses............... 21,839 19,625
Depreciation and amortization.............................. 4,393 2,463
-------- --------
OPERATING INCOME................................................ 15,574 30,859
NONOPERATING INCOME (EXPENSE)
Combined USAN pre-tax equity earnings, net of goodwill
amortization............................................. 9,756 16,899
Interest (expense) income, net............................. (1,045) 102
-------- --------
INCOME BEFORE INCOME TAXES...................................... 24,285 47,860
INCOME TAX PROVISION............................................ 11,400 24,200
-------- --------
NET INCOME...................................................... $ 12,885 $ 23,660
======== ========
</TABLE>
The accompanying notes are an integral part of these unaudited combined
financial statements.
APPENDIX I
I-3
<PAGE> 268
UNIVERSAL TELEVISION GROUP
COMBINED STATEMENTS OF CASH FLOWS -- UNAUDITED
(in thousands)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
--------------------
1997 1996
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income.................................................. $ 12,885 $ 23,660
Adjustments to reconcile net income to net cash used by
operations:
Additions to program costs.................................. (111,240) (93,586)
Amortization of program costs............................... 101,085 86,376
Amortization of goodwill and other assets................... 8,707 6,877
Depreciation of plant and equipment......................... 393 292
Equity in net income of Combined USAN....................... (14,003) (21,221)
Distributions received from Combined USAN................... 16,500 11,500
Increase in license fees and other receivables.............. (29,541) (33,174)
Decrease (increase) in license fees receivable from Combined
USAN...................................................... 9,893 (8,603)
Decrease in accounts payable and other liabilities.......... (1,849) (315)
Increase in accrued compensation and participations......... 13,755 4,956
Increase in deferred film revenues.......................... 23,220 15,475
(Decrease) increase in current and deferred income taxes.... (31,900) 4,000
Other changes, net.......................................... (6,682) (5,400)
-------- --------
Net cash used by operating activities............................ (8,777) (9,163)
-------- --------
Cash flows from financing activities
Net cash transferred from Universal......................... 7,170 2,763
-------- --------
Net cash provided by financing activities........................ 7,170 2,763
-------- --------
Cash flows from investing activities
Property, plant and equipment............................... (400) (846)
-------- --------
Net cash used by investing activities............................ (400) (846)
-------- --------
Decrease in cash and cash equivalents............................ (2,007) (7,246)
Cash and cash equivalents at beginning of year................... 18,929 19,046
-------- --------
Cash and cash equivalents at end of period....................... $ 16,922 $ 11,800
======== ========
Supplemental disclosures of cash flow information:
Interest paid............................................... $ 1,400 $ 600
======== ========
Income taxes paid (net of refunds received)................. $ 43,300 $ 19,800
======== ========
</TABLE>
The accompanying notes are an integral part of these unaudited combined
financial statements.
APPENDIX I
I-4
<PAGE> 269
UNIVERSAL TELEVISION GROUP
NOTES TO UNAUDITED COMBINED FINANCIAL STATEMENTS
(in thousands)
NOTE 1 -- UNAUDITED FINANCIAL STATEMENTS
The accompanying unaudited combined financial statements are based in part
on estimates and include only normal recurring adjustments which management
believes are necessary for a fair presentation of the financial position of
Universal Television Group at September 30, 1997 and the results of its
operations for the three-month period then ended. The combined financial
statements and related notes are condensed and have been prepared in accordance
with generally accepted accounting principles ("GAAP") applicable to interim
periods; consequently, they do not include all generally accepted accounting
disclosures required for complete annual financial statements and should be read
in conjunction with the combined financial statements and notes as of June 30,
1997 and 1996 and June 4, 1995. The operating results for the three months ended
September 30, 1997 and 1996 are not necessarily indicative of full year results.
NOTE 2 -- BASIS OF PRESENTATION
For the purpose of these combined financial statements, Universal
Television Group includes the domestic production and the domestic and
international distribution of television product and 50% of the operations of
USA Networks ("USAN") and Sci-Fi Channel Europe, L.L.C. ("Sci-Fi Europe")
(collectively, "Combined USAN"). These assets are owned by Universal Studios,
Inc. ("Universal"), which is 80% owned by The Seagram Company Ltd. ("Seagram")
and 20% owned by Matsushita Electric Industrial Co., Ltd. ("Matsushita") at
September 30, 1997. Subsequently, Seagram increased its ownership of Universal
to 84% reducing Matsushita's ownership to 16%. Pursuant to the terms of an
Investment Agreement, dated as of October 19, 1997, among Universal, HSN, Inc.
("HSNi"), Home Shopping Network, Inc. and Liberty Media Corporation ("Liberty"),
Universal will contribute USAN and its domestic television production and
distribution business ("UTV") to HSNi.
The accompanying combined financial statements and related notes reflect
the carve-out historical results of operations and financial position of the
television business of Universal, as described above. These financial statements
are not necessarily indicative of results that would have occurred if Universal
Television Group had been a separate, stand-alone entity during the periods
presented or of future results of Universal Television Group.
NOTE 3 -- INCOME TAXES
Universal Television Group and its 50% share of Combined USAN's results are
included in the consolidated federal income tax return of their ultimate U.S.
parent, J.E. Seagram Corp., a wholly owned subsidiary of Seagram. The tax
provisions reflected in the Combined Statements of Operations have been
calculated based on the assumption that Universal Television Group would have
paid U.S. federal; state and foreign taxes on a separate company basis. The
resulting current income tax liability has been satisfied directly by J.E.
Seagram Corp. and is reflected in the Universal equity investment. Intercompany
tax payments amounted to $42,000 and $12,100 for the three months ended
September 30, 1997 and 1996, respectively.
APPENDIX I
I-5
<PAGE> 270
UNIVERSAL TELEVISION GROUP
NOTES TO UNAUDITED COMBINED FINANCIAL STATEMENTS -- CONTINUED
(in thousands)
NOTE 4 -- DETAILS OF BALANCE SHEET ACCOUNTS
<TABLE>
<CAPTION>
UNAUDITED
SEPTEMBER 30, JUNE 30,
1997 1997
------------- --------
<S> <C> <C>
LICENSE FEES AND OTHER RECEIVABLES
Gross receivables
Current.............................................. $ 232,622 $240,457
Noncurrent........................................... 133,217 105,515
------------- --------
365,839 345,972
Allowance for doubtful accounts........................... (11,773) (11,554)
------------- --------
$ 354,066 $334,418
============= ========
PROGRAM COSTS, NET OF AMORTIZATION
Released.................................................. $ 380,137 $366,896
In process and unreleased................................. 37,844 42,631
------------- --------
$ 417,981 $409,527
============= ========
GOODWILL
Goodwill.................................................. $ 127,087 $127,087
Accumulated amortization.................................. (9,799) (7,500)
------------- --------
$ 117,288 $119,587
============= ========
PROPERTY, PLANT AND EQUIPMENT, NET
Land...................................................... $ 267 $ 267
Building and leasehold improvements....................... 1,079 1,069
Furniture, fixtures and equipment......................... 8,697 8,367
------------- --------
10,043 9,703
Accumulated depreciation.................................. (2,818) (2,485)
------------- --------
$ 7,225 $ 7,218
============= ========
ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable.......................................... $ 3,621 $ 10,355
Accrued expenses.......................................... 31,548 25,878
Other current liabilities................................. 1,079 2,212
------------- --------
$ 36,248 $ 38,445
============= ========
ACCRUED COMPENSATION AND PARTICIPATIONS
Compensation.............................................. $ 11,394 $ 17,697
Participations............................................ 190,396 170,338
------------- --------
$ 201,790 $188,035
============= ========
</TABLE>
NOTE 5 -- UNIVERSAL EQUITY INVESTMENT
An analysis of the Universal equity investment activity is as follows:
<TABLE>
<S> <C>
Balance, June 30, 1997................................................. $1,330,825
Net income............................................................. 12,885
Change in cumulative foreign currency translation adjustment........... (286)
Net cash transfers..................................................... (1,195)
Allocated charges from Universal....................................... 8,365
----------
Balance, September 30, 1997............................................ $1,350,594
==========
</TABLE>
APPENDIX I
I-6
<PAGE> 271
UNIVERSAL TELEVISION GROUP
NOTES TO UNAUDITED COMBINED FINANCIAL STATEMENTS -- CONTINUED
(in thousands)
Universal funds the working capital requirements of its businesses based
upon a centralized cash management system. Universal equity investment includes
accumulated equity as well as any payables and receivables due to/from Universal
resulting from cash transfers and other intercompany activity.
NOTE 6 -- RELATED PARTY TRANSACTIONS
Universal and certain of its subsidiaries have provided a variety of
services to Universal Television Group. The principal transactions between
Universal and its subsidiaries and Universal Television Group are summarized
below (see Note 3 for a description of the tax relationship between Universal
and Universal Television Group):
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
-------------------
1997 1996
------- -------
<S> <C> <C>
Allocations from Universal
Corporate overhead (a)...................................... $ 5,689 $ 5,320
Information technology overhead (b)......................... 1,257 811
Insurance (c)............................................... 882 924
Rent (d).................................................... 537 584
------- -------
Total allocations................................................ 8,365 7,639
Other charges from Universal
Production facility usage (e)............................... 2,816 3,327
Selling, general and administrative (f) 1,580 2,699
------- -------
Total.................................................. $12,761 $13,665
======= =======
</TABLE>
- ---------------
(a) Includes allocations for certain corporate services, such as executive
management, finance, legal and tax consulting and return preparation. These
costs were allocated based upon certain employee annual compensation costs
and tangible assets of Universal Television Group.
(b) Information technology usage and support costs were allocated based on
usage.
(c) Costs charged for insurance have been based upon Universal's actual costs
and Universal Television Group's proportional payroll, revenues and insured
assets, with adjustments for loss experience.
(d) Rent charged to Universal Television Group has been an allocation of the
actual rent expense, based upon the amount of space occupied by Universal
Television Group in proportion to the total rented space of Universal.
(e) Production at Universal's studio facility is based on fair market rates
applicable to third parties based on similar usage levels.
(f) Selling, general and administrative expenses have been charged by Universal
for the distribution of television product in the home video and pay
television markets and the licensing of television product to merchandisers.
These expenses were allocated based upon revenues.
Allocations from Universal, excluding production facility usage charges,
are included primarily in Selling, general and administrative expenses in the
Combined Statements of Operations. In accordance with FAS 53, "Financial
Reporting by Producers and Distributors of Motion Picture Films," production
facility usage charges are capitalized in program costs in the Combined Balance
Sheets and amortized using the individual film forecast method.
Other services provided by Universal are as follows:
Universal Television Group has participated in Universal's centralized cash
management system. Working capital requirements of Universal Television Group
have been met and the majority of intercompany
APPENDIX I
I-7
<PAGE> 272
UNIVERSAL TELEVISION GROUP
NOTES TO UNAUDITED COMBINED FINANCIAL STATEMENTS -- CONTINUED
(in thousands)
transactions have been effected through changes in the Universal equity
investment. Universal Television Group has had no external sources of financing,
such as available lines of credit, as would be necessary to operate as a
stand-alone company.
Employees of Universal Television Group have been paid directly by
Universal and some have participated in incentive compensation and other
employee plans of Universal. The salary and related costs, incentive
compensation and costs of other employee plans have been charged to Universal
Television Group based upon actual costs incurred by Universal.
Universal Television Group has been charged for certain payments,
principally professional fees, based on the actual amounts paid by Universal for
such services.
Universal provided an interest-free loan to Combined USAN, of which $5,500
was outstanding as of September 30, 1997. Payments of $1,833 are made on April
1st and October 1st of each year with the final payment due on October 1, 1998.
The loan from Universal is reflected as an advance and included in the
Investment in Combined USAN account.
Management believes that the allocation methods described above were
reasonable in the circumstances.
NOTE 7 -- COMMITMENTS AND CONTINGENCIES
Universal Television Group is involved in various lawsuits, claims and
inquiries. Management and its legal counsel believe that the resolution of these
matters will not have a material adverse effect on the financial position of
Universal Television Group or the results of its operations or cash flows.
NOTE 8 -- SUBSEQUENT EVENTS
On September 22, 1997, Universal and Viacom Inc. ("Viacom") announced that
they have agreed to resolve all litigation regarding jointly-owned Combined
USAN. Under the terms of the agreement, Universal acquired, on October 21, 1997,
Viacom's 50% interests in USAN and Sci-Fi Europe, for $1.7 billion in cash. The
acquisition is being accounted for as a purchase, and Universal has not yet
completed its purchase price allocation. A fair market valuation of assets
acquired and liabilities assumed of Combined USAN will be completed in the near
future. The items to be valued include program assets and liabilities, future
program commitments to purchase programming and other contractual commitments.
The resulting unallocated goodwill is expected to be amortized over a life of 40
years.
On October 19, 1997, HSNi agreed to acquire from Universal USAN and UTV in
exchange for $4.075 billion in value, comprised of a combination of securities
that in effect represent a 45% equity interest in HSNi and up to $1.43 billion
in cash, plus, in certain circumstances, an additional payment in the form of a
cash distribution. In addition, HSNi intends to change its corporate name to
"USA Networks, Inc." This transaction, which is expected to close in the first
quarter of calendar 1998, is subject to customary conditions, including HSNi
stockholder approval.
The Universal assets being contributed include USAN and UTV. A new joint
venture will be created consisting mainly of Sci-Fi Europe and the international
operations of USAN and will be equally owned by HSNi and Universal. Universal
will retain ownership of its television library and its international television
production and distribution operations.
APPENDIX I
I-8
<PAGE> 273
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholder of Universal Studios, Inc.
In our opinion, the accompanying combined balance sheets and the related
combined statements of operations and of cash flows present fairly, in all
material respects, the financial position of the Universal Television Group at
June 30, 1997 and 1996, and the results of its operations and its cash flows for
each of the three years in the period ended June 30, 1997, in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which 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, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
As discussed in Note 1 to the financial statements, The Seagram Company Ltd.
acquired an 80% interest in Universal Studios, Inc. on June 5, 1995. As a result
of the application of purchase accounting, the financial statements for the
period ended June 4, 1995 are presented on a different cost basis than
subsequent financial statements.
PRICE WATERHOUSE LLP
Century City, California
December 8, 1997
APPENDIX I
I-9
<PAGE> 274
UNIVERSAL TELEVISION GROUP
COMBINED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
JUNE 30, JUNE 30,
1997 1996
--------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................................ $ 18,929 $ 19,046
License fees and other receivables, less allowances.............. 190,949 171,923
License fees receivable from Combined USAN....................... 40,347 43,108
Program costs, net of amortization............................... 152,226 121,629
Prepaid expenses and other....................................... 6,661 4,965
--------- ---------
Total current assets........................................ 409,112 360,671
Program costs, net of amortization.................................... 257,301 236,442
License fees receivable, less allowances.............................. 77,247 115,751
License fees receivable from Combined USAN............................ 25,875 35,780
Investment in Combined USAN........................................... 794,266 804,834
Goodwill.............................................................. 119,587 72,969
Deferred charges and other assets..................................... 8,912 10,688
Property, plant and equipment, net.................................... 7,218 4,296
---------- ----------
Total assets................................................ $1,699,518 $1,641,431
========== ==========
LIABILITIES AND UNIVERSAL EQUITY INVESTMENT
Current liabilities:
Accounts payable and accrued liabilities......................... $ 38,445 $ 30,688
Accrued compensation and participations.......................... 134,285 96,346
Deferred film revenues........................................... 38,452 31,025
Income taxes..................................................... 42,000 12,100
--------- ---------
Total current liabilities................................... 253,182 170,159
Accrued compensation and participations............................... 53,750 68,336
Other obligations payable after one year.............................. 7,661 18,572
Deferred income taxes, net............................................ 54,100 75,800
Commitments and contingencies (Note 11)............................... -- --
Universal equity investment........................................... 1,330,825 1,308,564
---------- ----------
Total liabilities and Universal equity investment........... $1,699,518 $1,641,431
========== ==========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
APPENDIX I
I-10
<PAGE> 275
UNIVERSAL TELEVISION GROUP
COMBINED STATEMENTS OF OPERATIONS
(in thousands)
<TABLE>
<CAPTION>
FOR THE
YEAR ENDED JUNE 30, FOR THE PERIOD
--------------------- JULY 1, 1994 TO
1997 1996 JUNE 4, 1995
-------- -------- ---------------
<S> <C> <C> <C>
REVENUES
Program licensing................................ $633,429 $696,336 $ 636,626
Program licensing -- Combined USAN............... 50,911 38,812 73,970
-------- -------- --------
684,340 735,148 710,596
COSTS AND EXPENSES
Program costs.................................... 554,332 560,255 693,146
Selling, general and administrative expenses..... 92,512 78,346 50,644
Depreciation and amortization.................... 13,681 9,945 20,947
-------- -------- --------
OPERATING INCOME (LOSS)............................... 23,815 86,602 (54,141)
NONOPERATING INCOME
Combined USAN pre-tax equity earnings, net of
goodwill amortization.......................... 50,593 52,209 44,431
Interest income, net............................. 1,329 281 634
-------- -------- --------
INCOME (LOSS) BEFORE INCOME TAXES..................... 75,737 139,092 (9,076)
INCOME TAX PROVISION (BENEFIT)........................ 37,000 60,600 (3,100)
-------- -------- --------
NET INCOME (LOSS)..................................... $ 38,737 $ 78,492 $ (5,976)
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
APPENDIX I
I-11
<PAGE> 276
UNIVERSAL TELEVISION GROUP
COMBINED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
FOR THE
YEAR ENDED JUNE 30, FOR THE PERIOD
----------------------- JULY 1, 1994 TO
1997 1996 JUNE 4, 1995
--------- --------- ---------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss).............................. $ 38,737 $ 78,492 $ (5,976)
Adjustments to reconcile net income (loss) to net
cash provided by operations:
Additions to program costs..................... (483,271) (515,202) (511,272)
Amortization of program costs.................. 425,010 468,162 567,294
Amortization of goodwill and other assets...... 31,106 25,863 30,293
Depreciation of plant and equipment............ 1,408 1,265 855
Equity in net income of Combined USAN.......... (68,047) (66,579) (53,517)
Distributions received from Combined USAN...... 56,250 64,950 49,600
Decrease (increase) in license fees and other
receivables.................................. 19,478 17,645 (12,665)
Decrease (increase) in license fees receivable
from Combined USAN........................... 12,666 53,952 (42,554)
(Decrease) increase in accounts payable and
other liabilities............................ (3,154) 406 9,485
Increase (decrease) in accrued compensation and
participations............................... 23,353 (39,372) 13,694
Increase (decrease) in deferred film
revenues..................................... 7,427 (4,138) 17,250
Increase (decrease) in current and deferred
income taxes................................. 8,200 48,963 (13,776)
Other changes, net............................. (3,680) 12,333 13,082
-------- -------- --------
Net cash provided by operating activities........... 65,483 146,740 61,793
-------- -------- --------
Cash flows from financing activities
Net cash transferred to Universal.............. (15,837) (145,552) (44,566)
-------- -------- --------
Net cash used in financing activities............... (15,837) (145,552) (44,566)
-------- -------- --------
Cash flows from investing activities
Property, plant and equipment.................. (4,330) (1,687) (1,621)
Acquisition of assets of Multimedia
Entertainment................................ (49,100) -- --
Loan repayments from Combined USAN............. 3,667 3,667 2,167
Loans to Combined USAN......................... -- -- (6,000)
-------- -------- --------
Net cash (used) provided by investing activities.... (49,763) 1,980 (5,454)
-------- -------- --------
(Decrease) increase in cash and cash equivalents.... (117) 3,168 11,773
Cash and cash equivalents at beginning of year...... 19,046 15,878 10,954
-------- -------- --------
Cash and cash equivalents at end of year............ $ 18,929 $ 19,046 $ 22,727
======== ======== ========
Supplemental disclosures of cash flow information:
Interest paid.................................. $ 600 $ 600 $ 800
======== ======== ========
Income taxes paid (net of refunds received).... $ 28,800 $ 10,700 $ 10,200
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
APPENDIX I
I-12
<PAGE> 277
UNIVERSAL TELEVISION GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS
(in thousands)
NOTE 1 -- BASIS OF PRESENTATION
For the purpose of these combined financial statements, Universal
Television Group includes the domestic production and the domestic and
international distribution of television product and 50% of the operations of
USA Networks ("USAN") and Sci-Fi Channel Europe, L.L.C. ("Sci-Fi Europe")
(collectively, "Combined USAN"). These assets are owned by Universal Studios,
Inc. ("Universal") which is 80% owned by The Seagram Company, Ltd. ("Seagram")
and 20% owned by Matsushita Electric Industrial Co., Ltd. ("Matsushita") at June
30, 1997. Subsequently, Seagram increased its ownership of Universal to 84%
reducing Matsushita's ownership to 16%. Pursuant to the terms of an Investment
Agreement, dated as of October 19, 1997, among Universal, HSNi, Inc. ("HSNi"),
Home Shopping Network, Inc. and Liberty Media Corporation ("Liberty"), Universal
will contribute USAN and its domestic television production and distribution
business ("UTV") to HSNi.
Universal Television Group's primary source of revenues is from the
production, distribution and licensing of television programs. Universal
Television Group's product is distributed throughout the world with sales and
distribution activities located principally in the United States and Europe.
Subsequent to the proposed transaction between Universal and HSNi, as discussed
in Note 15, UTV's product will be distributed internationally by Universal for a
fee. Also, Universal will pay a fee to UTV for the domestic distribution of
television programs remaining with Universal.
The accompanying combined financial statements and related notes reflect
the carve-out historical results of operations and financial position of the
television business of Universal, as described above. These financial statements
are not necessarily indicative of results that would have occurred if Universal
Television Group had been a separate, stand-alone entity during the periods
presented or of future results of Universal Television Group.
The combined financial statements are presented for the period July 1, 1994
through June 4, 1995 ("1995") and for the fiscal years ended June 30, 1996
("1996") and June 30, 1997 ("1997"). The 1995 financial statements are presented
on a different cost basis than the 1997 and 1996 financial statements, which are
presented on a basis incorporating purchase accounting resulting from Seagram's
acquisition of an 80% interest in Universal on June 5, 1995. As a result, the
combined financial statements presented for the 1995 period are not comparable
to those for subsequent periods presented. The results for the 25-day period
from June 5, 1995 through June 30, 1995 are summarized in Note 14.
NOTE 2 -- SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF COMBINATION
The accompanying combined financial statements include the accounts of
Universal Television Group and all of its investments of 50% or more owned
subsidiaries. The 50% interest in Combined USAN is accounted for under the
equity method. All significant intercompany transactions with combined entities
have been eliminated.
REVENUE RECOGNITION
Generally, television programs are first licensed for network exhibition
and foreign syndication, and subsequently for domestic syndication, cable
television and home video. Certain television programs are produced and/or
distributed directly for initial exhibition by local television stations,
advertiser-supported cable television, pay television and/or home video.
Revenues are recognized as completed episodes are delivered. Advertising
revenues (i.e., sales of advertising time received by Universal Television Group
in lieu of cash fees for the licensing of program broadcast rights to a
broadcast station ("barter syndication")) are recognized upon both the
commencement of the license period of the program and the sale of advertising
time
APPENDIX I
I-13
<PAGE> 278
UNIVERSAL TELEVISION GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- CONTINUED
(in thousands)
pursuant to non-cancelable agreements, provided that the program is available
for its first broadcast. Foreign minimum guaranteed amounts or inducement fees
are recognized as revenues on the date of the license agreement, provided the
program is available for exhibition. Deferred revenues consist principally of
advance payments received on television contracts for which the program
materials are not yet available for broadcast exploitation.
PROGRAM COSTS
Program costs consist of direct production costs and production overhead
less accumulated amortization. Development roster and related costs and
abandoned story and development costs are charged to production overhead.
Program costs are stated at the lower of unamortized cost or estimated net
realizable value on a production-by-production basis.
Generally, the estimated ultimate costs of completed television productions
are amortized and participation expenses are accrued for each production in the
proportion that current period revenue recognized by Universal Television Group
bears to the estimated future revenue to be received from all sources, under the
individual film forecast method. Estimated ultimate revenues and costs are
reviewed quarterly and revisions to amortization rates or write-downs to net
realizable value are made as required. Acquired library costs of approximately
$121,900, included in noncurrent program costs at June 30, 1997, resulted from
the acquisition of Universal by Seagram. Acquired library costs are being
amortized on the straight-line basis over a 20 year life.
Program costs, net of amortization, classified as current assets include
the portion of unamortized costs of television program productions allocated to
network, first run syndication and initial international distribution markets.
The allocated portion of released program costs expected to be recovered from
secondary markets or other exploitation is reported as a noncurrent asset. Other
costs relating to television productions, such as television program development
costs, in-process productions and the television program library, are classified
as noncurrent assets.
PROPERTY, PLANT AND EQUIPMENT, NET
Buildings and improvements (lives of 10-40 years) and furniture, fixtures
and equipment (lives of 3-8 years) are recorded at cost and are depreciated on
the straight-line basis. Leasehold improvements are amortized over the lesser of
the terms of the respective leases or the lives of the improvements.
GOODWILL
As a result of the acquisition of Universal by Seagram, goodwill of $75
million has been allocated to Universal Television Group as of the acquisition
date of June 5, 1995. Additional goodwill of $49 million results from the
acquisition of certain television assets as discussed in Note 3.
The unallocated excess of cost of purchased businesses over the fair value
of assets acquired and the excess of investments in unconsolidated companies
over the underlying equity in tangible net assets acquired are being amortized
on the straight-line basis principally over 40 years from the date of
acquisition.
It is Universal Television Group's policy to evaluate the recovery of
goodwill if there is an event or change in circumstances which establishes the
existence of impairment indicators and to recognize impairment if it is probable
that the recorded amounts are not recoverable from future undiscounted cash
flows (excluding interest).
APPENDIX I
I-14
<PAGE> 279
UNIVERSAL TELEVISION GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- CONTINUED
(in thousands)
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash and highly liquid temporary
investments that have original maturities of three months or less.
FOREIGN CURRENCY TRANSLATION
For affiliates operating outside the United States, the functional currency
is generally determined to be the local currency. Assets and liabilities are
translated into U.S. dollars using exchange rates in effect at the end of the
reporting period. Revenues and expenses are translated at average exchange rates
prevailing during the period. Adjustments resulting from translating the
financial statements of foreign entities are included as a component of the
Universal equity investment.
INCOME TAXES
Universal Television Group records its income tax provision under the
liability method whereby deferred tax assets and liabilities arise primarily
from the differences between the financial statement and tax bases of assets and
liabilities using presently enacted tax rates.
USE OF ESTIMATES
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities at the date of financial
statements, and the reported amount of revenues and expenses during the reported
periods. Actual results could differ from those estimates.
NOTE 3 -- ACQUISITIONS
On December 1, 1996, Universal Television Group acquired substantially all
of the domestic assets of talk show syndicator Multimedia Entertainment, Inc.,
which includes Sally Jessy Raphael and The Jerry Springer Show, as well as
library rights to Donahue, from Gannett Broadcasting. The acquisition price was
approximately $49,100 which substantially represented goodwill. Pro forma
financial information has not been provided as amounts are not material to these
financial statements.
APPENDIX I
I-15
<PAGE> 280
UNIVERSAL TELEVISION GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- CONTINUED
(in thousands)
NOTE 4 -- INVESTMENT IN COMBINED USAN
At June 30, 1997, Universal has 50% ownership interests in USAN and Sci-Fi
Europe, owners and operators of three advertiser-supported 24-hour cable
television networks, USA Network, Sci-Fi Channel and Sci-Fi Europe. Combined
USAN operates mainly in the United States, Latin America and Europe. Summarized
financial information is presented below for Universal's investment in Combined
USAN.
SUMMARIZED BALANCE SHEET INFORMATION -- COMBINED USAN
<TABLE>
<CAPTION>
AS OF JUNE 30,
-----------------------
1997 1996
--------- ---------
<S> <C> <C>
Current assets...................................................... $ 306,717 $ 290,399
Noncurrent assets................................................... 196,818 222,538
--------- ---------
Total assets........................................................ $ 503,535 $ 512,937
========= =========
Current liabilities................................................. $ 236,367 $ 218,448
Noncurrent liabilities.............................................. 115,450 168,904
Equity.............................................................. 151,718 125,585
--------- ---------
Total liabilities and equity........................................ $ 503,535 $ 512,937
========= =========
Proportionate share of net assets................................... $ 75,859 $ 62,793
========= =========
</TABLE>
The difference between the proportionate share of net assets and the
Investment in Combined USAN results principally from goodwill. Also included in
the investment account is a loan receivable from Combined USAN (discussed in
Note 13). The goodwill is being amortized on the straight-line basis over a 40
year life.
SUMMARIZED STATEMENT OF OPERATIONS -- COMBINED USAN
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Revenues................................................... $ 703,445 $ 624,868 $ 473,578
Earnings before interest and taxes......................... 138,193 137,157 108,724
Net income................................................. 136,199 135,717 106,926
</TABLE>
NOTE 5 -- INTERNATIONAL OPERATIONS
Net income of fully consolidated foreign subsidiaries was $62,600, $63,800
and $45,200 for 1997, 1996 and 1995, respectively.
Universal Television Group derived approximately 39% of its consolidated
revenues from markets outside the United States for 1997 compared to 32% for
1996 and 26% for 1995. There is no foreign country in which Universal Television
Group does business that individually contributed significantly to consolidated
revenues.
APPENDIX I
I-16
<PAGE> 281
UNIVERSAL TELEVISION GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- CONTINUED
(in thousands)
INTERNATIONAL OPERATIONS
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ---------
<S> <C> <C> <C>
REVENUES
United States................................... $418,919 $497,629 $ 525,026
Foreign.........................................
Europe..................................... 192,012 147,750 107,094
Other...................................... 73,409 89,769 78,476
---------- ---------- ---------
$684,340 $735,148 $ 710,596
========= ========= =========
OPERATING INCOME (LOSS)
United States................................... $(44,069) $ 15,393 $(102,527)
Foreign, primarily Europe....................... 67,884 71,209 48,386
---------- ---------- ---------
$ 23,815 $ 86,602 $ (54,141)
========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
AS OF JUNE 30,
-------------------------
1997 1996
---------- ----------
<S> <C> <C> <C>
IDENTIFIABLE ASSETS
United States................................... $1,637,980 $1,604,663
Foreign, primarily Europe....................... 61,538 36,768
---------- ----------
$1,699,518 $1,641,431
========= =========
</TABLE>
NOTE 6 -- INCOME TAXES
Universal Television Group results, including its 50% share of Combined
USAN, are included in the consolidated U.S. federal income tax return of their
ultimate U.S. parent, J.E. Seagram Corp., a wholly owned subsidiary of Seagram,
for the years ended June 30, 1997 and 1996. The tax provisions reflected in the
Combined Statements of Operations have been calculated based on the assumption
that Universal Television Group would have paid U.S. federal, state and foreign
taxes on a separate company basis. The resulting current income tax liability
has been satisfied directly by J.E. Seagram Corp. and is reflected in the
Universal equity investment. Intercompany tax payments/(refunds) amounted to
$12,100 and ($8,600) for 1997 and 1996, respectively.
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
INCOME (LOSS) BEFORE INCOME TAXES
Domestic........................................ $ 6,379 $ 66,998 $(59,327)
Foreign......................................... 69,358 72,094 50,251
-------- -------- --------
$ 75,737 $139,092 $ (9,076)
======== ======== ========
INCOME TAX PROVISION (BENEFIT)
Current
Federal......................................... $ 41,900 $ 11,500 $ (5,400)
State........................................... 5,600 7,000 (200)
Foreign......................................... 11,200 12,900 8,700
-------- -------- --------
58,700 31,400 3,100
Deferred............................................. (21,700) 29,200 (6,200)
-------- -------- --------
$ 37,000 $ 60,600 $ (3,100)
======== ======== ========
</TABLE>
APPENDIX I
I-17
<PAGE> 282
UNIVERSAL TELEVISION GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- CONTINUED
(in thousands)
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
RECONCILIATION OF STATUTORY TO EFFECTIVE TAX RATE
Federal income tax rate..................................... 35.0% 35.0% 35.0%
State taxes, net of federal tax benefit..................... 4.2 3.7 2.9
Amortization of excess cost and assigned values over tax
basis..................................................... 9.6 4.8 --
Other, net.................................................. -- 0.1 (3.7)
---- ---- ----
Effective income tax rate................................... 48.8% 43.6% 34.2%
==== ==== ====
</TABLE>
Universal Television Group provides for U.S. federal, state and foreign
income taxes generally at prevailing tax rates based upon the amounts of
consolidated pretax income in the current year.
The deferred income taxes primarily result from the differences created
between the financial statements' carrying amounts and the historical tax bases.
The components of Deferred income taxes, net, are as follows:
<TABLE>
<CAPTION>
AS OF JUNE 30,
-------------------------
1997 1996
-------- --------
<S> <C> <C>
DEFERRED INCOME TAX LIABILITY
Program costs -- basis and amortization
differences.................................. $ 28,600 $ 20,900
Revenue recognition differences................ 7,200 53,200
Unremitted foreign earnings.................... 22,100 7,100
State taxes.................................... 1,700 2,400
------- -------
59,600 83,600
------- -------
DEFERRED INCOME TAX ASSET
Doubtful accounts.............................. (5,500) (7,800)
------- -------
Deferred income taxes, net..................... $ 54,100 $ 75,800
======= =======
</TABLE>
APPENDIX I
I-18
<PAGE> 283
UNIVERSAL TELEVISION GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- CONTINUED
(in thousands)
NOTE 7 -- DETAILS OF BALANCE SHEET ACCOUNTS
<TABLE>
<CAPTION>
AS OF JUNE 30,
-------------------------
1997 1996
-------- --------
<S> <C> <C>
LICENSE FEES AND OTHER RECEIVABLES
Gross receivables
Current................................................ $240,457 $222,900
Noncurrent............................................. 105,515 154,055
-------- --------
345,972 376,955
Allowance for doubtful accounts............................. (11,554) (10,393)
-------- --------
$334,418 $366,562
======== ========
</TABLE>
Universal Television Group has significant receivables from a number of
customers primarily within the United States and Europe.
<TABLE>
<CAPTION>
AS OF JUNE 30,
-------------------------
1997 1996
-------- --------
<S> <C> <C>
PROGRAM COSTS, NET OF AMORTIZATION
Released............................................... $366,896 $347,786
In process and unreleased.............................. 42,631 10,285
-------- --------
$409,527 $358,071
======== ========
</TABLE>
Unamortized costs related to released television programs aggregated
$366,896 at June 30, 1997. Excluding the acquired library costs, Universal
Television Group currently anticipates that approximately 80% of the unamortized
released program costs will be amortized under the individual film forecast
method during the three years ending June 30, 2000.
APPENDIX I
I-19
<PAGE> 284
UNIVERSAL TELEVISION GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- CONTINUED
(in thousands)
<TABLE>
<CAPTION>
AS OF JUNE 30,
-------------------------
1997 1996
-------- --------
<S> <C> <C>
GOODWILL
Goodwill.................................................. $127,087 $ 75,000
Accumulated amortization.................................. (7,500) (2,031)
-------- --------
$119,587 $ 72,969
======== ========
PROPERTY, PLANT AND EQUIPMENT, NET
Land...................................................... $ 267 $ 267
Buildings and leasehold improvements...................... 1,069 204
Furniture, fixtures and equipment......................... 8,367 5,037
-------- --------
9,703 5,508
Accumulated depreciation.................................. (2,485) (1,212)
-------- --------
$ 7,218 $ 4,296
======== ========
ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable.......................................... $ 10,355 $ 17,278
Accrued expenses.......................................... 25,878 11,741
Other current liabilities................................. 2,212 1,669
-------- --------
$ 38,445 $ 30,688
======== ========
ACCRUED COMPENSATION AND PARTICIPATIONS
Compensation.............................................. $ 17,697 $ 11,042
Participations............................................ 170,338 153,640
-------- --------
$188,035 $164,682
======== ========
</TABLE>
NOTE 8 -- EMPLOYEE BENEFIT PLANS
Universal Television Group participates in various multi-employer defined
benefit and defined contribution pension plans under union and industry
agreements. These plans include substantially all participating production
employees covered under various collective bargaining agreements. In addition,
Universal Television Group has a defined contribution profit sharing plan
covering certain other domestic employees.
The aggregate expense for all of the Universal Television Group's
contributions to pension, profit sharing, postretirement and postemployment
benefit plans was $1,300, $500 and $400 for 1997, 1996 and 1995, respectively.
With the exception of postretirement and postemployment benefit plans, for which
there is no advanced funding, Universal Television Group funds substantially all
costs of employee plans on an annual basis. The impact on liabilities and
expenses associated with FAS 106, "Employers' Accounting for Postretirement
Benefits Other Than Pensions" are immaterial to Universal Television Group's
financial statements.
NOTE 9 -- STOCK OPTION PLANS
Certain Universal Television Group employees are covered under the
Universal employee stock option plans. Options may be granted to purchase the
common shares of Universal's ultimate parent, Seagram, at not less than the fair
market value of the shares on the date of the grant. Currently outstanding
options become exercisable over three to four years from the grant date and
expire 10 years after the grant date.
Universal Television Group has adopted FAS 123, "Accounting for Stock-Based
Compensation." In accordance with the provisions of FAS 123, Universal
Television Group applies the provisions of APB Opinion
APPENDIX I
I-20
<PAGE> 285
UNIVERSAL TELEVISION GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- CONTINUED
(in thousands)
No. 25, "Accounting for Stock Issued to Employees," and related interpretations
in accounting for its plans and does not recognize compensation expense for its
stock-based compensation plans except to the extent that the exercise price
differs from the fair market value at date of grant. If Universal Television
Group elected to recognize compensation expense based upon the fair value at the
grant date for awards under these plans consistent with the fair value
methodology prescribed by FAS 123, net income would be reduced by $1,661 and
$106 for 1997 and 1996, respectively.
The fair value for these options was estimated at the date of grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions for the periods 1997 and 1996, respectively: dividend yields of 1.6
and 1.8%; expected volatility of 24 and 22%; risk-free interest rates of 6.7 and
6.0%; and expected life of six years for all periods. The weighted average fair
value of options granted for which the exercise price equals the market price on
the grant date was $11.76 and $8.87 for 1997 and 1996, respectively.
Transactions involving stock options are summarized as follows (per share
price in whole dollars):
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
OPTIONS EXERCISE
DESCRIPTION OUTSTANDING PRICE
----------------------------------------------------------- ----------- ------------
<S> <C> <C>
Balance, June 30, 1995..................................... -- $ --
Granted.................................................... 66,220 33.38
Exercised.................................................. -- --
Forfeitures................................................ -- --
------- ------
Balance, June 30, 1996..................................... 66,220 33.38
Granted.................................................... 439,530 37.78
Exercised.................................................. -- --
Forfeitures................................................ -- --
------- ------
Balance, June 30, 1997..................................... 505,750 $37.20
======= ======
</TABLE>
No grants have expired as of June 30, 1997. The following table summarizes
information concerning outstanding and exercisable stock options as of June 30,
1997 (per share price in whole dollars):
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------- --------------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
RANGE OF REMAINING AVERAGE AVERAGE
EXERCISE NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
PRICE OUTSTANDING LIFE PRICE EXERCISABLE PRICE
- ---------------- ------------ ------------ --------- ------------ ---------
<S> <C> <C> <C> <C> <C>
$30 - $40 505,750 9.52 yrs. $37.20 128,351 $34.54
=========== ========== ======== ========== ========
</TABLE>
NOTE 10 -- FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of cash and cash equivalents, current receivables,
current accounts payable and accrued liabilities and current accrued
compensation and participations approximate fair value because of the short
maturity of those instruments. The carrying values of long term receivables and
accrued compensation and participations generally approximate fair value.
NOTE 11 -- COMMITMENTS AND CONTINGENCIES
Universal Television Group occupies facilities and rents equipment under
operating lease agreements which expire at various dates through 2006. Total
rent expense was $9,207, $5,211, and $5,350 for 1997, 1996
APPENDIX I
I-21
<PAGE> 286
UNIVERSAL TELEVISION GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- CONTINUED
(in thousands)
and 1995, respectively. In addition to the above, Universal Television Group
incurs intercompany rent expense for use of Universal's studio facilities, which
is discussed in Note 12.
The following schedule summarizes the future minimum rentals under the
terms of the Universal Television Group's leases at June 30, 1997; certain of
these leases also provide for payment of taxes, insurance and maintenance.
<TABLE>
<CAPTION>
LEASE
COMMITMENTS
-----------
<S> <C>
1998.............................................................. $ 4,873
1999.............................................................. 943
2000.............................................................. 552
2001.............................................................. 592
2002.............................................................. 556
Thereafter........................................................ 1,272
-----------
$ 8,788
==========
</TABLE>
Universal Television Group has commitments of approximately $127,225 at
June 30, 1997 for (1) program development and production costs, (2) employment
contracts and (3) the purchase or construction of property, plant and equipment.
Universal Television Group is involved in various other lawsuits, claims
and inquiries. Management and its legal counsel believe that the resolution of
these matters will not have a material adverse effect on the financial position
of Universal Television Group or the results of its operations or cash flows.
NOTE 12 -- UNIVERSAL EQUITY INVESTMENT
An analysis of the Universal equity investment activity is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Balance, beginning of period.......................... $1,308,564 $1,374,220 $1,119,033
Net income (loss)..................................... 38,737 78,492 (5,976)
Change in cumulative foreign currency translation
adjustment.......................................... (639) 1,404 2,187
Net cash transfers.................................... (54,186) (180,993) (67,155)
Allocated charges from Universal...................... 38,349 35,441 22,589
---------- ---------- ----------
Balance, end of period................................ $1,330,825 $1,308,564 $1,070,678
========== ========== ==========
</TABLE>
Universal funds the working capital requirements of its businesses based
upon a centralized cash management system. Universal equity investment includes
accumulated equity as well as any payables and receivables due to/from Universal
resulting from cash transfers and other intercompany activity.
NOTE 13 -- RELATED PARTY TRANSACTIONS
Universal and certain of its subsidiaries have provided a variety of
services to Universal Television Group. The principal transactions between
Universal and its subsidiaries and Universal Television Group are
APPENDIX I
I-22
<PAGE> 287
UNIVERSAL TELEVISION GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- CONTINUED
(in thousands)
summarized below (see Note 6 for a description of the tax relationship between
Universal and Universal Television Group):
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Allocations from Universal
Corporate overhead(a).................................... $27,522 $26,458 $14,038
Information technology overhead(b)....................... 4,798 5,151 4,796
Insurance(c)............................................. 3,695 1,973 1,978
Rent(d).................................................. 2,334 1,859 1,777
------- ------- -------
Total allocations............................................. 38,349 35,441 22,589
Other charges from Universal
Production facility usage(e)............................. 19,633 20,032 16,758
Selling, general and administrative(f)................... 8,065 5,679 1,808
------- ------- -------
Total......................................................... $66,047 $61,152 $41,155
======= ======= =======
</TABLE>
(a) Includes allocations for certain corporate services, such as executive
management, finance, legal and tax consulting and return preparation. These
costs were allocated based upon certain employee annual compensation costs
and tangible assets of Universal Television Group.
(b) Information technology usage and support costs were allocated based on
usage.
(c) Costs charged for insurance have been based upon Universal's actual costs
and Universal Television Group's proportional payroll, revenues and insured
assets, with adjustments for loss experience.
(d) Rent charged to Universal Television Group has been an allocation of the
actual rent expense, based upon the amount of space occupied by Universal
Television Group in proportion to the total rented space of Universal.
(e) Production at Universal's studio facility is based on fair market rates
applicable to third parties based on similar usage levels.
(f) Selling, general and administrative expenses have been charged by Universal
for the distribution of television product in the home video and pay
television markets and the licensing of television product to
merchandisers. These expenses are allocated based upon revenues.
Allocations from Universal, excluding production facility usage charges,
are included primarily in Selling, general and administrative expenses in the
Combined Statements of Operations. In accordance with FAS 53, "Financial
Reporting by Producers and Distributors of Motion Picture Films," production
facility usage charges are capitalized in program costs in the Combined Balance
Sheets and amortized using the individual film forecast method.
Other services provided by Universal are as follows:
Universal Television Group has participated in Universal's centralized cash
management system. Working capital requirements of Universal Television Group
have been met and the majority of intercompany transactions have been effected
through changes in Universal's equity investment. Universal Television Group has
had no external sources of financing, such as available lines of credit, as
would be necessary to operate as a stand-alone company.
Employees of Universal Television Group have been paid directly by
Universal and some have participated in incentive compensation and other
employee plans of Universal. The salary and related costs,
APPENDIX I
I-23
<PAGE> 288
UNIVERSAL TELEVISION GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- CONTINUED
(in thousands)
incentive compensation and costs of other employee plans have been charged to
Universal Television Group based upon actual costs incurred by Universal.
Universal Television Group has been charged for certain payments,
principally professional fees, based on the actual amounts paid by Universal for
such services.
Universal provided an interest-free loan to Combined USAN, of which $5,500
and $9,167 were outstanding as of June 30, 1997 and 1996, respectively. Payments
of $1,833 are made on April 1st and October 1st of each year with the final
payment due on October 1, 1998. The loan from Universal is reflected as an
advance and included in the Investment in Combined USAN account.
Management believes that the allocation methods as disclosed above were
reasonable in the circumstances.
NOTE 14 -- JUNE 5, 1995 THROUGH JUNE 30, 1995 RESULTS
The results of operations for Universal Television Group for the period
June 5, 1995 through June 30, 1995 are as follows:
<TABLE>
<S> <C>
Revenues
Program licensing........................................ $18,644
Program licensing -- Combined USAN....................... 4,400
-------
23,044
Costs and expenses
Program costs............................................ 14,244
Selling, general and administrative...................... 4,131
Depreciation and amortization............................ 804
-------
Operating income........................................... 3,865
Nonoperating income
Combined USAN pre-tax equity earnings, net of goodwill
amortization.......................................... 5,100
Interest income, net..................................... --
-------
Income before income taxes................................. 8,965
Income tax provision....................................... 3,500
-------
Net income................................................. $ 5,465
=======
</TABLE>
APPENDIX I
I-24
<PAGE> 289
UNIVERSAL TELEVISION GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- CONTINUED
(in thousands)
The cash flow results for the period June 5, 1995 through June 30, 1995 are
as follows:
<TABLE>
<S> <C>
Cash flows used in operating activities:
Net income.............................................. $ 5,465
Adjustments to reconcile net income to net cash used by
operations:
Additions to program costs.............................. (30,662)
Amortization of program costs........................... 12,277
Depreciation and amortization........................... 2,096
Equity in net income of Combined USAN................... (6,318)
Distributions received from Combined USAN............... 8,000
Decrease in license fees and other receivables.......... 24,216
Decrease in accounts payable and other liabilities...... (20,985)
Other changes, net...................................... 4,662
--------
Net cash used by operating activities..................... (1,249)
Cash flows used in investing activities:
Net cash transferred from Universal..................... (5,353)
--------
Net cash used by financing activities..................... (5,353)
--------
Cash flows used in financing activities:
Property, plant and equipment........................... (247)
--------
Net cash used by investing activities..................... (247)
--------
Decrease in cash and cash equivalents..................... (6,849)
Cash and cash equivalents at beginning of period.......... 22,727
--------
Cash and cash equivalents at end of period................ $ 15,878
========
Supplemental disclosures of cash flow information:
Interest paid........................................... $ --
========
Income taxes paid (net of refunds received)............. $ --
========
</TABLE>
NOTE 15 -- SUBSEQUENT EVENTS
On September 22, 1997, Universal and Viacom Inc. ("Viacom") announced that
they have agreed to resolve all litigation regarding jointly-owned Combined
USAN. Under the terms of the agreement, Universal acquired, on October 21, 1997,
Viacom's 50% interests in USAN, and Sci-Fi Europe, for $1.7 billion in cash. The
acquisition is being accounted for as a purchase, and Universal has not yet
completed its purchase price allocation. A fair market valuation of assets
acquired and liabilities assumed of Combined USAN will be completed in the near
future. The items to be valued include program assets and liabilities, future
program commitments to purchase programming and other contractual commitments.
The resulting unallocated goodwill is expected to be amortized over a 40-year
life.
On October 19, 1997, HSNi agreed to acquire from Universal USAN and UTV in
exchange for $4.075 billion in value, comprised of a combination of securities
that in effect represent a 45% equity interest in HSNi and up to $1.43 billion
in cash, plus, in certain circumstances, an additional payment in the form of a
cash distribution. In addition, HSNi intends to change its corporate name to
"USA Networks, Inc." This transaction, which is expected to close in the first
quarter of calendar 1998, is subject to customary conditions, including HSNi
stockholder approval.
APPENDIX I
I-25
<PAGE> 290
UNIVERSAL TELEVISION GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- CONTINUED
(in thousands)
The Universal assets being contributed include USAN and UTV. A new
international joint venture will be created consisting mainly of Sci-Fi Europe
and the international operations of USAN and will be equally owned by HSNi and
Universal. Universal will retain ownership of its television library and its
international television production and distribution operations.
APPENDIX I
I-26
<PAGE> 291
APPENDIX J
HSN, INC.
SUPPLEMENTAL UNAUDITED PRO FORMA
COMBINED CONDENSED FINANCIAL STATEMENTS
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Unaudited Pro Forma Combined Condensed
Financial Statements -- Introductory Paragraph...................... J-2
Unaudited Pro Forma Combined Condensed
Statement of Operations -- Ticketmaster Investment
For the Year Ended December 31, 1996................................ J-3
Notes to Unaudited Pro Forma Combined
Condensed Financial Statements -- Ticketmaster Investment... J-4
Unaudited Pro Forma Combined Condensed
Statement of Operations -- Mergers
For the Year Ended December 31, 1996................................ J-5
Notes to Unaudited Pro Forma Combined
Condensed Financial Statements -- Mergers... J-6
Unaudited Pro Forma Combined Condensed
Statement of Operations -- Ticketmaster Group, Inc.
For the Fiscal Year Ended January 31, 1997.......................... J-7
Notes to Unaudited Pro Forma Combined
Condensed Statement of Operations -- Ticketmaster Group, Inc. ... J-8
</TABLE>
APPENDIX J
<PAGE> 292
UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS
The following unaudited pro forma combined condensed statements of
operations included in this appendix have been prepared to give effect to the
acquisition of a controlling interest in Ticketmaster Group Inc.
("Ticketmaster"), including certain acquisitions by Ticketmaster (collectively,
the "Ticketmaster Investment") and separately to give effect to the Savoy Merger
and the Home Shopping Merger (collectively, the "Mergers"). These unaudited pro
forma combined condensed statements of operations give effect to the
Ticketmaster Investment and the Mergers using the purchase method of accounting.
The unaudited pro forma statements of operations reflect certain
assumptions regarding the Ticketmaster Investment and the Mergers and are based
on the historical consolidated financial statements of the respective companies.
These unaudited pro forma statements of operations, including the notes thereto,
are qualified in their entirety by reference to, and should be read in
conjunction with, the Current Report on Form 8-K dated July 17, 1997, and the
audited financial statements and the unaudited interim financial statements,
including the notes thereto, of HSNi and Ticketmaster, which are incorporated by
reference.
The Unaudited Pro Forma Combined Statement of Operations -- Ticketmaster
Investment for the year ended December 31, 1996 combines the unaudited pro forma
statement of operations of HSNi described below for the year ended December 31,
1996, which gives effect to the Mergers as if they had occurred January 1, 1996,
with the results of operations of Ticketmaster for the 12-month period ended
January 31, 1997, reflecting the pro forma effects of certain acquisitions by
Ticketmaster.
The Unaudited Pro Forma Combined Statements of Operations -- Mergers for
the year ended December 31, 1996 combines the results of operations of HSNi
(formerly Silver King Communications, Inc.) for the year ended December 31,
1996, which includes the results of operations since the acquisition of Home
Shopping on December 20, 1996 and the acquisition of Savoy on December 19, 1996,
with the results of operations of Home Shopping Network, Inc. for the period
January 1, 1996 to December 20, 1996 and Savoy Pictures Entertainment, Inc. for
the period from January 1, 1996 to December 19, 1996.
The purchase accounting information included herein is preliminary and has
been made solely for the purposes of developing such unaudited pro forma
combined condensed statements of operations. In connection with finalizing the
purchase price allocation, HSNi is currently evaluating the fair value of
contractual agreements, principally relating to providing ticketing services
("purchased user agreements"). The unaudited pro forma combined information is
presented for illustrative purposes only and is not necessarily indicative of
the results of operations which would have actually been reported had any of the
transactions occurred as of the dates described, nor is it necessarily
indicative of future results of operations.
APPENDIX J
J-2
<PAGE> 293
HSN, INC.
UNAUDITED PRO FORMA COMBINED CONDENSED
STATEMENT OF OPERATIONS -- TICKETMASTER INVESTMENT
YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
TICKETMASTER GROUP, INC.
-----------------------------------------------------------
YEAR ENDED
HSN, INC. JANUARY 31, 1997 CANADIAN PRO FORMA ADJUSTED PRO FORMA PRO FORMA
PRO FORMA(a) PRO FORMA(b) TRANSACTION(b) ADJUSTMENTS PRO FORMA ADJUSTMENTS COMBINED
------------ ---------------- -------------- ----------- --------- ----------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
NET REVENUES:
Home Shopping............ $1,014,705 $ -- $ -- $ -- $ -- $ -- $1,014,705
Ticket operations........ -- 232,241 25,763 (505)(c) 257,499 -- 257,499
Broadcasting and other... 53,215 38,610 -- -- 91,825 -- 91,825
------------ -------- ------- ----------- --------- ----------- ----------
Total net
revenues......... 1,067,920 270,851 25,763 (505) 296,109 -- 1,364,029
------------ -------- ------- ----------- --------- ----------- ----------
Operating costs and
expenses:
Cost of sales............ 626,090 17,980 -- -- 17,980 -- 644,070
Other costs.............. 311,640 223,598 21,684 (477)(c) 243,761 -- 555,401
(1,044)(d)
Depreciation and
amortization........... 90,862 17,995 1,012 2,621(e) 21,628 6,162(i) 118,652
------------ -------- ------- ----------- --------- ----------- ----------
Total operating
costs and
expenses......... 1,028,592 259,573 22,696 1,100 283,369 6,162 1,318,123
------------ -------- ------- ----------- --------- ----------- ----------
Operating profit... 39,328 11,278 3,067 (1,605) 12,740 (6,162) 45,906
------------ -------- ------- ----------- --------- ----------- ----------
Interest income
(expense), net......... (34,665) (8,793) (133) (613)(g) (9,539) -- (44,204)
Other income (expense)... 320 6,311 (24) 24(f) 6,311 -- 6,631
------------ -------- ------- ----------- --------- ----------- ----------
Earnings (loss) before
income taxes and minority
interest................. 4,983 8,796 2,910 (2,194) 9,512 (6,162) 8,333
Income tax (expense)
benefit.................. (22,582) (5,043) (1,375) (198)(h) (6,616) -- (29,198)
Minority interest (expense)
benefit.................. 3,288 (81) -- -- (81) (1,405)(j) 1,802
------------ -------- ------- ----------- --------- ----------- ----------
NET EARNINGS (LOSS)........ $ (14,311) $ 3,672 $ 1,535 $(2,392) $ 2,815 $(7,567) $ (19,063)
=========== ============= ============ ========== ======== ========== =========
Weighted average shares
outstanding(k)........... 48,761 58,002
=========== =========
Net loss per common
share.................... $ (.29) $ (.33)
=========== =========
</TABLE>
APPENDIX J
J-3
<PAGE> 294
HSN, INC.
NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL
STATEMENTS -- TICKETMASTER INVESTMENT
(a) HSNi pro forma for the year ended December 31, 1996 has been prepared to
give effect to the Savoy Merger and the Home Shopping Merger as if these
transactions had occurred January 1, 1996. See separate Merger pro forma
statement of operations (page J-5) included elsewhere herein.
(b) Ticketmaster acquired (by purchase, redemption or otherwise) various joint
venture partners', minority shareholders' and licensees' interests
("Acquired Businesses") during fiscal 1997. See separate Ticketmaster Group,
Inc. pro forma statement of operations included on page J-7. In addition,
pursuant to an agreement dated May 13, 1997, Ticketmaster acquired all the
issued and outstanding shares of capital stock of its Canadian licensee (the
"Ticketmaster Canadian Transaction").
(c) Reflects the elimination of licensing fees paid by Ticketmaster Canada to,
and profit on equipment sold to Ticketmaster Canada by, Ticketmaster during
the applicable period.
(d) Represents the elimination of shareholder bonuses paid by Ticketmaster
Canada during the year under previous employment agreements.
(e) Represents amortization arising from the purchased user agreements and
goodwill related to the Ticketmaster Canadian Transaction. The purchased
user agreements are being amortized using a discounted cash flow method
through the expiration date of the underlying contracts generally ranging
from 3 to 10 years. Goodwill is being amortized over a 30-year period.
(f) Represents the elimination of net income on unconsolidated affiliates, as
the unconsolidated affiliates were not acquired in the Ticketmaster Canadian
Transaction.
(g) Represents the increase in interest expense resulting from indebtedness
incurred in connection with the Ticketmaster Canadian Transaction, at rates
of interest incurred by Ticketmaster during the first quarter of fiscal
1998, approximately 6.7%. In addition, the adjustment also reflects the
reduction in interest expense resulting from debt not acquired. Rates of
interest used represent Ticketmaster Canada's rate on the respective debt,
approximately 10%.
(h) Represents the related income tax effect of the pro forma adjustments
utilizing a statutory Federal rate of 34% and a statutory rate for state and
foreign taxes based on the rate in the applicable jurisdiction.
(i) Reflects additional amortization expense resulting from the increase in
intangible assets as a result of the acquisition of a controlling interest
in Ticketmaster and additional contingent rights shares issued to Liberty
HSN (the "Liberty HSN Contingent Rights"). The excess of acquisition cost
over net assets acquired has preliminarily been allocated to goodwill to be
amortized over 40 years. The final purchase price allocation is principally
subject to adjustment upon completion of an evaluation of the fair value
and amortization period of purchase user agreements.
(j) Reflects the minority interest in the earnings of Ticketmaster.
(k) Pro forma weighted average shares outstanding include the HSNi pro forma
weighted average shares outstanding plus 7,238,507 shares to be issued in
connection with the acquisition and 2,002,591 shares to be issued in
connection with Liberty HSN Contingent Rights.
APPENDIX J
J-4
<PAGE> 295
HSN, INC.
UNAUDITED PRO FORMA COMBINED CONDENSED
STATEMENT OF OPERATIONS -- MERGERS
YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
PERIOD FROM PERIOD FROM
JANUARY 1, 1996 JANUARY 1, 1996
YEAR ENDED TO TO
DECEMBER 31, 1996 DECEMBER 20, 1996 DECEMBER 19, 1996 PRO FORMA
HSNi* HOME SHOPPING SAVOY ADJUSTMENTS COMBINED
----------------- ----------------- ----------------- ----------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Revenues:
Broadcasting, net......................... $43,359 $ -- $ 50,680 $ (40,824)(A) $ 53,215
Home Shopping............................. 30,588 984,117 -- -- 1,014,705
Other..................................... 1,225 -- -- (1,225)(F) --
------- -------- ------- -------- ----------
Total revenues...................... 75,172 984,117 50,680 (42,049) 1,067,920
Operating costs and expenses:
Cost of sales............................. 20,974 600,914 4,202 -- 626,090
Other costs(C)............................ 35,100 305,643 34,904 (64,007)(A) 311,640
Depreciation and amortization............. 15,486 35,386 9,028 30,962(B) 90,862
------- -------- ------- -------- ----------
Total operating expenses............ 71,560 941,943 48,134 (33,045) 1,028,592
Operating income (loss)............. 3,612 42,174 2,546 (9,004) 39,328
Other income (expense):
Net interest expense...................... (8,603) (7,612) (14,232) (4,218)(G) (34,665)
Miscellaneous............................. 44 276 -- -- 320
------- -------- ------- -------- ----------
(8,559) (7,336) (14,232) (4,218) (34,345)
Income (loss) before income taxes, minority
interest and extraordinary item........... (4,947) 34,838 (11,686) (13,222) 4,983
Income tax (expense) benefit................ (1,872) (12,636) (2,615) (5,459)(H) (22,582)
Minority interest........................... 280 (1) 4,250 (1,241)(D) 3,288
Extraordinary item.......................... -- -- (1,048) 1,048(I) --
------- -------- ------- -------- ----------
Net income (loss)......................... $(6,359) $ 22,201 $ (11,099) $ (18,874) $ (14,311)
======= ======== ======= ======== ==========
Weighted average number of common shares and
common share equivalents(E)............... 10,786 48,761
======= ==========
Net loss per common share................... $ (.61) $ (.29)
======= ==========
</TABLE>
- ---------------
* Formerly Silver King Communications, Inc.
APPENDIX J
J-5
<PAGE> 296
HSN, INC.
NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED
FINANCIAL STATEMENTS -- MERGERS
(A) Intercompany revenue and engineering expense between HSNi and Home Shopping
have been eliminated in these pro forma combined condensed financial
statements. HSNi received a monthly affiliation fee for broadcasting Home
Shopping's programming. Home Shopping had accrued higher costs due to
affiliate fee bonuses recorded based on Home Shopping sales during the year,
whereas HSNi recorded these bonuses as revenue when the cash was received.
(B) Pro forma amortization adjustments reflect additional amortization expense
resulting from the increase in intangible assets. Purchase price in excess
of net assets acquired has been allocated to goodwill and is amortized over
40 years.
(C) In connection with the Mergers, HSNi will incur compensation expense of
approximately $1.3 million, which will be amortized over the four-year
vesting period, as a result of the grant to Mr. Diller of options to
purchase 625,000 shares of HSNi Common Stock. The expense has not been
reflected in the pro forma combined condensed financial statements because
the charge is non-recurring.
(D) On June 13, 1996 and September 11, 1996, Fox Broadcasting Company acquired,
through exercise of its options, additional 25% non-voting interests in one
and three of the SF Broadcasting Company television stations (the "Savoy
Stations"), respectively, thereby increasing its total non-voting interest
in these entities to 50%. Fox has no representatives on the board of
directors of the subsidiaries of Savoy holding the Savoy Stations and will
not participate in the operations of the Savoy Stations. Minority interest
in the results of operations of the Savoy Stations has been adjusted to
reflect Fox's increased ownership percentages as of the beginning of the
respective periods.
(E) Pro forma weighted average shares outstanding include the HSNi historic
weighted average shares outstanding plus 37,975,000 shares issued in
connection with the Mergers.
(F) Represents adjustment to eliminate, for pro forma purposes, revenue from the
Savoy motion picture business which was discontinued in 1996. Future
revenues from such operations is not expected to be significant.
(G) Relates to interest expense portion of the fair value adjustments of certain
long-term cable and broadcast contracts.
(H) Represents additional tax expense resulting from the non-deductibility of
goodwill amortization offset by tax benefits related to net operating
losses.
(I) Represents the elimination of a non-recurring charge in connection with the
reduction of the SF Broadcast Facility.
APPENDIX J
J-6
<PAGE> 297
HSN, INC.
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS -- TICKETMASTER
GROUP, INC.
FISCAL YEAR ENDED JANUARY 31, 1997
(in thousands)
<TABLE>
<CAPTION>
TICKETMASTER ACQUIRED OTHER ACQUIRED
CONSOLIDATED TICKETING BUSINESSES -- PRO FORMA COMBINED
BUSINESSES BUSINESSES PACER/CATS/CCS ADJUSTMENTS PRO FORMA
------------- ---------- -------------- ----------- ---------
<S> <C> <C> <C> <C> <C>
NET REVENUES:
Ticket operations........ $ 205,491 $ 26,878 $ -- $ (128)(1) $ 232,241
Other.................... 25,470 176 12,964 38,610
-------- ------- ------- ------- --------
Total net
revenues....... 230,961 27,054 12,964 (128) 270,851
-------- ------- ------- ------- --------
Operating costs and
expenses
Cost of sales............ 9,518 -- 8,462 17,980
Selling, general and
administrative........ 198,841 20,198 4,687 (128)(1) 223,598
Depreciation and
amortization.......... 12,544 1,154 504 3,793(2)(3) 17,995
-------- ------- ------- ------- --------
Total operating
costs and
expenses....... 220,903 21,352 13,653 3,665 259,573
-------- ------- ------- ------- --------
Operating profit
(loss)......... 10,058 5,702 (689) (3,793) 11,278
-------- ------- ------- ------- --------
Interest income
(expense), net........ (11,508) 47 (484) 3,152(5) (8,793)
Other income (expense)... 6,800 365 (854)(4) 6,311
-------- ------- ------- ------- --------
(4,708) 412 (484) 2,298 (2,482)
-------- ------- ------- ------- --------
Earnings (loss) before
income taxes and minority
interest................. 5,350 6,114 (1,173) (1,495) 8,796
Income tax (expense)....... (3,258) -- -- (1,785)(7) (5,043)
Minority interest.......... (300) -- -- 219(6) (81)
-------- ------- ------- ------- --------
NET EARNINGS (LOSS)........ $ 1,792 $ 6,114 $ (1,173) $(3,061) $ 3,672
======== ======= ======= ======= ========
</TABLE>
APPENDIX J
J-7
<PAGE> 298
HSN, INC.
NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF
OPERATIONS -- TICKETMASTER GROUP, INC.
(1) Represents the elimination of license fees paid by Delaware Valley
(Philadelphia) to Ticketmaster during the year.
(2) Represents depreciation arising from the purchase of the building which
serves as corporate headquarters.
(3) Represents amortization arising from the purchased user agreements and
excess purchase price paid for the net assets of a joint venture
partner's 50% equity interest in the European Joint Venture, a
licensee's 100% equity interest in Nashville, Tennessee, a joint
venture partner's 50% equity interest in Ticketmaster-Indiana, a
licensee's 100% equity interest in Delaware Valley (Philadelphia), a
minority shareholder's 20% equity interest in Ticketmaster's Florida
operating subsidiary, a minority shareholder's 20% equity interest in
Ticketmaster's Texas operating subsidiary and a licensee's approxi-
mately 50% equity interest in its Mexico licensee. The purchased user
agreements are being amortized using a discounted cash flow method
through the expiration date of the underlying contracts, generally
ranging from 3 to 10 years. The cost in excess of net assets acquired
is being amortized over a 30 year period.
(4) Represents the consolidation of income earned by Ticketmaster-Indiana
and the European Joint Venture, aggregating $2,027, and losses incurred
by the Pacer Joint Venture, totaling $1,173,000.
(5) Represents the reduction in interest expense resulting from the
repayment of indebtedness under Ticketmaster's Credit Agreement at
rates of interest incurred by Ticketmaster during the year,
approximately 7.0%.
(6) Represents a decrease in the minority interests held by the minority
shareholders in Ticketmaster's Florida and Texas operating
subsidiaries.
(7) Represents the related income tax effect of the pro forma adjustments
utilizing a statutory Federal rate of 34% and a statutory rate for
state and foreign taxes based on the rate in the applicable
jurisdiction.
APPENDIX J
J-8
<PAGE> 299
- --------------------------------------------------------------------------------
HSN, INC.
FORM OF PROXY
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
ANNUAL MEETING OF STOCKHOLDERS
The undersigned stockholder of HSN, Inc., a Delaware corporation, hereby
acknowledges receipt of the Notice of Annual Meeting of Stockholders and Proxy
Statement, each dated January 12, 1998, and hereby appoints each of Victor A.
Kaufman and James G. Gallagher proxy and attorney-in-fact, each with full power
of substitution, on behalf and in the name of the undersigned, to represent the
undersigned at the Annual Meeting of Stockholders of HSN, Inc. to be held on
Wednesday, February 11, 1998, at 10:00 a.m., local time, at the Century Plaza
Hotel and Tower, 2025 Avenue of the Stars, Los Angeles, California 90067, and at
any adjournments thereof, and to vote all shares of Common Stock and Class B
Common Stock which the undersigned would be entitled to vote if then and there
personally present, on the matters set forth on the reverse side hereof.
PLEASE MARK, SIGN, DATE AND RETURN THE PROXY CARD PROMPTLY IN THE ENCLOSED
ENVELOPE PROVIDED.
(SEE REVERSE SIDE)
HSN, INC.
P.O. BOX 11064
NEW YORK, NEW YORK 10203-0064
<PAGE> 300
THE HSNi BOARD OF DIRECTORS RECOMMENDS A VOTE FOR PROPOSALS 1-10
1. THE PROPOSAL TO APPROVE THE ISSUANCE OF SHARES OF HSNi COMMON STOCK AND HSNi
CLASS B COMMON STOCK IN CONNECTION WITH THE TRANSACTION.
<TABLE>
<S> <C> <C>
[ ] FOR [ ] AGAINST [ ] ABSTAIN
</TABLE>
2. THE PROPOSAL TO APPROVE THE TERMS OF THE GOVERNANCE AGREEMENT DATED AS OF
OCTOBER 19, 1997 AMONG HSNi, UNIVERSAL, LIBERTY AND MR. DILLER.
<TABLE>
<S> <C> <C>
[ ] FOR [ ] AGAINST [ ] ABSTAIN
</TABLE>
3. THE AUTHORIZED CAPITAL STOCK PROPOSAL TO INCREASE THE AUTHORIZED SHARES OF
HSNi COMMON STOCK AND HSNi CLASS B COMMON STOCK.
<TABLE>
<S> <C> <C>
[ ] FOR [ ] AGAINST [ ] ABSTAIN
</TABLE>
4. THE PROPOSAL TO RESTRICT TOTAL ALIEN OWNERSHIP AND VOTING POWER OF HSNi STOCK
(REGARDLESS OF CLASS) EACH TO A MAXIMUM OF 25% IN ACCORDANCE WITH THE
COMMUNICATIONS ACT.
<TABLE>
<S> <C> <C>
[ ] FOR [ ] AGAINST [ ] ABSTAIN
</TABLE>
5. THE PROPOSAL TO CHANGE THE CORPORATE NAME OF HSNi TO "USA NETWORKS, INC."
UPON CONSUMMATION OF THE TRANSACTION.
<TABLE>
<S> <C> <C>
[ ] FOR [ ] AGAINST [ ] ABSTAIN
</TABLE>
6. THE PROPOSAL TO ELIMINATE THE CLAUSE IN THE HSNi CERTIFICATE THAT SPECIFIES
THAT THE NUMBER OF DIRECTORS OF HSNi SHALL BE NO LESS THAN 3 AND NO MORE THAN
15.
<TABLE>
<S> <C> <C>
[ ] FOR [ ] AGAINST [ ] ABSTAIN
</TABLE>
7. THE PROPOSAL TO PROVIDE FOR THE REMOVAL WITHOUT CAUSE OF HSNi'S CHIEF
EXECUTIVE OFFICER ONLY BY THE AFFIRMATIVE VOTE OF AT LEAST 80% OF THE ENTIRE
BOARD.
<TABLE>
<S> <C> <C>
[ ] FOR [ ] AGAINST [ ] ABSTAIN
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C>
- -------
</TABLE>
(PLEASE SIGN, DATE AND RETURN THIS PROXY IN THE ENCLOSED POSTAGE PREPAID
ENVELOPE.)
8. ELECTION OF DIRECTORS.
<TABLE>
<S> <C> <C>
Barry Diller Victor A. Kaufman Gen. H. Norman Schwarzkopf
Paul G. Allen Bruce M. Ramer* Richard E. Snyder
James G. Held William D. Savoy*
</TABLE>
* To be voted upon by the holders of Common Stock voting as a separate class.
<TABLE>
<S> <C>
[ ] FOR all nominees [ ]WITHHOLD
(except as marked AUTHORITY to
to the contrary vote for all
above) the nominees
listed above
</TABLE>
(INSTRUCTION: TO WITHHOLD AUTHORITY TO VOTE FOR ANY INDIVIDUAL NOMINEE, STRIKE A
LINE THROUGH THE NOMINEE'S NAME.)
All nominees will serve a term of one year.
9. THE PROPOSAL TO ADOPT THE HSNi 1997 STOCK AND ANNUAL INCENTIVE PLAN.
<TABLE>
<S> <C> <C>
[ ] FOR [ ] AGAINST [ ] ABSTAIN
</TABLE>
10. THE PROPOSAL TO RATIFY THE APPOINTMENT OF ERNST & YOUNG LLP AS THE FIRM OF
INDEPENDENT AUDITORS FOR THE YEARS ENDING DECEMBER 31, 1997 AND DECEMBER 31,
1998.
<TABLE>
<S> <C> <C>
[ ] FOR [ ] AGAINST [ ] ABSTAIN
</TABLE>
THIS PROXY WILL BE VOTED AS DIRECTED OR, IF NO DIRECTION IS INDICATED, WILL BE
VOTED "FOR" EACH OF THE PROPOSALS LISTED, AND AS SAID PROXY DEEMS ADVISABLE ON
SUCH OTHER MATTERS AS MAY COME BEFORE THE MEETING, INCLUDING, AMONG OTHER
THINGS, CONSIDERATION OF ANY MOTION MADE FOR ADJOURNMENT OF THE MEETING.
Please sign exactly as name appears on Proxy.
Dated:
---------------------------------------------------------------
---------------------------------------------------------------
Signature
---------------------------------------------------------------
(Signature, if held jointly)
---------------------------------------------------------------
(Title)
Note: When shares are held by joint tenants, both should sign. When signing as
attorney, executor, administrator, trustee, guardian or corporate officer or
partner, please give full title as such. If a corporation, please sign in
corporate name by President or other authorized officer. If a partnership,
please sign in partnership name by authorized person.
<TABLE>
<S> <C> <C> <C>
----
VOTES MUST BE INDICATED X
(X) IN BLACK OR BLUE INK. ----
</TABLE>
