-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, WIPcD8iXeOy+lwl682HW6r0OyeiNV1562cblvnLVKX6TDjrP7RfFYZOEizid6hZ8 rBaUVBXguLNcZDFO6WfpbQ== 0000950144-96-001278.txt : 19960329 0000950144-96-001278.hdr.sgml : 19960329 ACCESSION NUMBER: 0000950144-96-001278 CONFORMED SUBMISSION TYPE: ARS PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19951231 FILED AS OF DATE: 19960328 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: HOME SHOPPING NETWORK INC CENTRAL INDEX KEY: 0000791024 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-CATALOG & MAIL-ORDER HOUSES [5961] IRS NUMBER: 592649518 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: ARS SEC ACT: 1934 Act SEC FILE NUMBER: 001-09118 FILM NUMBER: 96540355 BUSINESS ADDRESS: STREET 1: 2501 118TH AVE NORTH CITY: ST PETERSBURG STATE: FL ZIP: 33716 BUSINESS PHONE: 8135728585 ARS 1 HOME SHOPPING NETWORK ANNUAL REPORT 1 HOME SHOPPING NETWORK, INC. 1995 ANNUAL REPORT This report is being printed on the lowest cost paper obtainable. Management felt that this was appropriate given this year's dismal performance. Our hope is that next year this report will glow with color, graphics, and expansive statements about the future of your Company, supported by results from calendar year 1996. Meanwhile, there is work to be done. 2 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 --------------------- FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED) FOR THE YEAR ENDED DECEMBER 31, 1995
COMMISSION FILE NO. 1-9118 --------------------- HOME SHOPPING NETWORK, INC. (Exact name of registrant as specified in its charter) --------------------- DELAWARE 59-2649518 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 2501 118TH AVENUE NORTH, ST. PETERSBURG, 33716 FLORIDA (Zip Code) (Address of registrant's principal executive offices)
(813) 572-8585 (Registrant's telephone number, including area code) SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
TITLE OF NAME OF EXCHANGE EACH CLASS ON WHICH REGISTERED -------------------------------------------------------- ------------------- Common Stock, $.01 Par Value............................ NYSE
--------------------- SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: NONE Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes /X/ No / / Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. /X/ As of March 6, 1996, there were outstanding 70,740,579 shares of Common Stock (net of 6,986,000 shares held in treasury) and 20,000,000 shares of Class B common stock. The aggregate market value of the voting stock held by non-affiliates of the registrant as of March 6, 1996, was $611,499,585. DOCUMENTS INCORPORATED BY REFERENCE:
DOCUMENTS FORM 10-K REFERENCE -------------------- Proxy Statement dated March 1996..................... Part III Items 10-13
- -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 3 HOME SHOPPING NETWORK, INC. FORM 10-K ANNUAL REPORT TABLE OF CONTENTS
PAGE NO. -------- PART I Item 1 Business................................................................ 1 Item 2 Properties.............................................................. 7 Item 3 Legal Proceedings....................................................... 8 Item 4 Submission of Matters to a Vote of Security Holders..................... 8 PART II Item 5 Market for Registrant's Common Equity and Related Stockholder Matters... 9 Item 6 Selected Financial Data................................................. 10 Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations........................................................... 12 Item 8 Consolidated Financial Statements....................................... 24 Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosures................................................... 46 PART III Item 10 Directors and Executive Officers of the Registrant...................... 47 Item 11 Executive Compensation.................................................. 47 Item 12 Security Ownership of Certain Beneficial Owners and Management.......... 47 Item 13 Certain Relationships and Related Transactions.......................... 47 PART IV Item 14 Exhibits, Financial Statement Schedule, and Reports on Form 8-K......... 47
4 PART I ITEM 1 -- BUSINESS GENERAL Home Shopping Network, Inc. ("HSN" or the "Company") is a holding company, the subsidiaries of which conduct the day-to-day operations of the Company's various business activities. The Company's primary business, and principal source of revenue, is electronic retail sales by Home Shopping Club, Inc. ("HSC"), a wholly-owned subsidiary of the Company and a leader in the electronic retailing industry. The Company experienced a downturn in its business during 1995, reporting a net loss of $61.9 million, a decline in net sales, significant operating losses and negative cash flow from operations. The Company believes that its negative performance in 1995 was due in part to the adverse effects of certain merchandising and programming strategies which had been implemented in late 1994 and 1995. In November 1995, the Company appointed Barry Diller as Chairman of the Board of Directors and James Held as President and Chief Executive Officer. The Company sought the services of Messrs. Diller and Held because of their significant experience in electronic retailing and programming. The new senior management of HSN has undertaken a comprehensive review of HSN's merchandising and programming strategies, operations, budget and financial condition. Although the Company believes that new management's operating and merchandising strategies will improve the Company's operating results, there can be no assurance that management will be successful in these efforts. On March 1, 1996, the Company obtained additional financing through a private placement of $100.0 million of Convertible Subordinated Debentures. In November 1995, Tele-Communications, Inc. ("TCI"), which, through its wholly owned subsidiary Liberty Media Corporation ("Liberty"), beneficially owns approximately 41% of the outstanding equity securities of the Company, representing approximately 80% of the voting power, entered into certain agreements with Mr. Diller and Silver King Communications, Inc. ("SKC") pursuant to which, among other things, TCI has agreed to transfer these equity securities of the Company to SKC. Pursuant to a separate proposed transaction between Mr. Diller and Liberty, an entity controlled by Mr. Diller would acquire equity securities representing a majority of the voting power of SKC. As a result, assuming the consummation of these transactions, Mr. Diller would acquire indirect voting control of the Company through his voting interest in SKC. The consummation of each of these transactions is subject to a number of conditions including, but not limited to, the receipt of necessary regulatory and SKC shareholder approvals. HOME SHOPPING CLUB, INC. HSC sells a variety of consumer goods and services by means of HSC's live, customer-interactive electronic retail sales programs which are transmitted twenty-four hours a day, seven days per week, via satellite to cable television systems, affiliated broadcast television stations and satellite dish receivers. HSC's retail sales programming is currently carried on two separate networks, HSN and Spree!. Both networks are carried by cable television systems and broadcast television stations throughout the country. Spree! programming is available in one hour segments, which enable broadcast and cable affiliates to air Spree! in available time slots that would not otherwise produce revenue for the affiliate. The Company's electronic retail marketing and programming is intended to promote sales and customer loyalty through a combination of information, entertainment and the creation of confidence in HSC and its products. HSC programming is divided into segments which are televised live with a show host who presents the merchandise and conveys information relating to the product, including price, quality, features and benefits. Viewers place orders for products by calling a toll-free telephone number. Show hosts engage callers in on-air discussions regarding the currently featured product or the caller's previous experience with the Company's products. This format creates a spontaneous and entertaining program. HSC attempts to stimulate 1 5 customer loyalty by providing, among other things, marketing materials such as the "Bargaineer(R) HomeView(sm)" magazine which offers discounts on HSC purchases, features articles on the Company's products and programming, and includes schedules of upcoming shows. On August 5, 1995, the Company relaunched HSN with more scheduled programs and theme related shows, new sets, graphics and music. During the third quarter of 1995, the Company relaunched Spree! with a more spontaneous format, new graphics and music. These changes were designed to distinguish the networks and reach a broader range of potential customers. The following table highlights the changes in the estimated unduplicated television household reach of HSN, the Company's primary network, by category for the year ended December 31, 1995:
--------------------------------------------------------------------------------------------- CABLE* BROADCAST SATELLITE TOTAL --------------------------------------------------------------------------------------------- (In thousands of households) Households -- December 31, 1994..................... 38,960 23,068 3,750 65,778 Net additions/(deletions)........................... 4,757 (1,510) -- 3,247 Shift in classification............................. 503 (503) -- -- Change in Nielsen household counts.................. -- 164 -- 164 ------ --------- --------- ------ Households -- December 31, 1995..................... 44,220 21,219 3,750 69,189 ====== ======= ====== ======
- --------------- * Households capable of receiving both broadcast and cable transmissions are included under cable. According to industry sources, as of December 31, 1995, there were 95.3 million homes in the United States with a television set, 62.1 million basic cable television subscribers and 3.8 million homes with satellite dish receivers. In addition to the households in the above table, as of January 1, 1996, approximately 12.0 million cable television households were reached by Spree!, of which 3.4 million were on a part-time basis. Of the total cable television households receiving Spree!, 9.7 million also receive HSN. CUSTOMER SERVICE AND RETURN POLICY HSC believes that satisfied customers will be loyal and will purchase merchandise on a regular basis. Accordingly, HSC has customer service personnel and computerized voice response units (the "VRU") available to handle calls relating to customer inquiries seven days a week, twenty-four hours a day. Generally, any item purchased from HSC may be returned within thirty days for a full refund of the purchase price, including the original shipping and handling charges. DISTRIBUTION, DATA PROCESSING AND TELECOMMUNICATIONS The Company's fulfillment subsidiaries store, service and ship merchandise from warehouses located in St. Petersburg, Florida, Salem, Virginia and Waterloo, Iowa. During 1995, the Company closed its distribution warehouse in Reno, Nevada. Generally, merchandise is delivered to customers within 7 to 10 business days of placing an order. HSN currently operates several Unisys main frame computers and has extensive computer systems which track purchase orders, inventory, sales, payments, credit authorization, and delivery of merchandise to customers. HSC has digital telephone and switching systems and utilizes the VRU which allows callers to place their orders by means of touch tone input or to be transferred to an operator. The Company is developing plans for upgrading or replacing many of these systems during 1996 and 1997. 2 6 PRODUCT PURCHASING AND LIQUIDATION HSC purchases merchandise made to its specifications, merchandise from manufacturers' lines and overstock inventories of wholesalers. During 1995, the Company continued to change its purchasing strategy to emphasize product sourcing, variety, development of new private label lines and name brand merchandise. This strategy is likely to change in 1996 based on determinations to be made by new management. The mix of products and source of such merchandise depends upon a variety of factors, including price and availability. HSC has no long-term commitments with any of its vendors, and there are various sources of supply available for each category of merchandise sold. HSC's product offerings include: jewelry; hardgoods, which include consumer electronics, collectibles, housewares, and consumables; softgoods, which consist primarily of clothing and fashion accessories, and cosmetics. For 1995, jewelry, hardgoods, softgoods and cosmetics accounted for approximately 39%, 37%, 14% and 10%, respectively, of HSC's net sales. The Company liquidates short lot and returned merchandise through its five outlet stores and two liquidation centers located in Florida. Merchandise that is damaged is liquidated by the Company through traditional channels. TRANSMISSION AND PROGRAMMING HSC produces retail sales programs in its studios located in St. Petersburg, Florida. These programs are distributed to cable television systems, broadcast television stations, a direct broadcast satellite service and satellite dish receivers by means of HSN's satellite uplink facilities to satellite transponders leased by HSN. Any cable television system, broadcast television station or individual satellite dish owner in the United States and the Caribbean Islands equipped with standard satellite receiving facilities is capable of receiving HSC programming. HSN has lease agreements securing full-time use of three transponders on three domestic communications satellites. Each of the transponder lease agreements grants HSN "protected" rights. When the carrier provides services to a customer on a "protected" basis, replacement transponders (i.e., spare or unassigned transponders) on the satellite may be used in the event the "protected" transponder fails. Should there be no replacement transponders available, the "protected" customer will displace a "preemptible" transponder customer on the same satellite. The carrier also maintains a protection satellite and should a satellite fail completely, all "protected" transponders would be moved to the protection satellite which is available on a "first fail, first served" basis. One transponder leased by HSN may, however, be preempted in order to satisfy the owner's obligations to provide the transponder to another lessee on the satellite in the event that the other lessee cannot be restored to service through the use of spare or reserve transponders (the "Special Termination Right"). As of June 5, 1995, the Company discontinued use of this satellite transponder for which it has a non-cancelable operating lease calling for monthly payments of approximately $150,000 through December 31, 2006. The Company subleased this satellite transponder to a related party during 1995. The sublease expired on February 15, 1996, and the Company is currently seeking to sublease the transponder or to sell its rights with respect to this satellite transponder. The Company does not expect any material adverse financial impact in connection with the lease. A transponder failure that would necessitate a move to another transponder on the same satellite would not result in any significant interruptions of service to the cable systems and/or television stations which receive HSC's programming. However, a failure that would necessitate a move to another satellite may temporarily affect the number of cable systems and/or television stations which receive HSC's programming (as well as all other programming carried on the failed satellite) because of the need to install equipment or to reorient earth stations. The terms of two of the leases are for the life of the satellites, which are projected to be through 2004. The term of the third lease is through December 31, 2006, subject to earlier implementation of the Special Termination Right. 3 7 HSN's access to three transponders pursuant to long-term agreements would enable HSC to continue transmission of its two programming services, HSN and Spree!, should any one of the satellites fail. Although HSN believes it is taking every reasonable measure to ensure its continued satellite transmission capability, there can be no assurance that termination or interruption of satellite transmissions will not occur. Such a termination or interruption of service by one or more of these satellites could have a material adverse effect on the operation and financial condition of the Company. The availability of replacement satellites and transponder time beyond current leases is dependent on a number of factors over which HSN has no control, including competition among prospective users for available transponders and the availability of satellite launching facilities for replacement satellites. The Federal Communications Commission ("FCC") grants licenses to construct and operate satellite uplink facilities which transmit signals to satellites. These licenses are generally issued without a hearing if suitable frequencies are available. HSN has been granted two licenses for operation of C-band satellite transmission facilities and two licenses for operation of KU-band satellite transmission facilities on a permanent basis in Clearwater and St. Petersburg, Florida. REGULATORY MATTERS On October 5, 1992, the Cable Television Consumer Protection and Competition Act of 1992 (the "1992 Cable Act") was enacted into law. Among the many provisions of this law is one that mandates that cable systems carry the signals of local commercial television stations ("must carry") or, at the station's option, that cable systems and television stations negotiate a fee to be paid by cable systems for the retransmission by such cable systems of the local television station's broadcast signal. HSC's full-time, full power broadcast affiliates have all requested "must carry" status in lieu of a retransmission fee and most have obtained "must carry" status. The U. S. District Court for the District of Columbia has twice upheld the constitutionality of the "must carry" rules. The Supreme Court will review this issue in late 1996 or early 1997. During 1993 and 1994, "must carry" was important to the Company in obtaining carriage by cable operators. Due to HSC's success in obtaining long-term carriage commitments, in the event "must carry" is ruled unconstitutional, the Company does not believe the ruling will have a material adverse impact on the Company or result in any significant loss in carriage. In November 1994, the FCC issued "going forward" rules pursuant to the 1992 Cable Act regarding the fees cable operators can charge subscribers for new programming. The going forward rules provide that cable operators can increase the charges to subscribers for new programming but must offset the charges by revenues, including sales commissions, they receive from the programmer. The Company and other electronic retailing companies filed Petitions for Reconsideration with the FCC which requested that shop-at-home programming revenues be excluded from the cable operator's offset to revenues, and this petition was granted in August 1995. In January 1996, the Telecommunications Act of 1996 became law, providing for, among other things, the deregulation of the telephone and cable industries to permit increased competition and technological developments. Although the effect of this law on the telecommunications industry cannot yet be determined, the Company does not believe it will have an adverse impact on its business. AFFILIATION AGREEMENTS WITH CABLE OPERATORS HSC enters into affiliation agreements with cable system operators to carry HSN, Spree! or both. HSC has a standard form of affiliation agreement which has a term of five years, is automatically renewable for subsequent one year terms, and obligates the cable operator to assist the promotional efforts of HSC by carrying commercials regarding HSN and Spree! and distributing HSC's marketing materials to the cable operator's subscribers. The standard form of affiliation agreement provides that the cable operator will receive a commission of five percent of the net sales of merchandise sold within the cable operator's franchise area (from both cable and non-cable households). However, particularly with larger, multiple system operators, HSC has agreed to provide additional compensation. In the past, this has included the purchase of advertising 4 8 availabilities from cable operators on other programming networks and the establishment of commission guarantees committing HSC to a certain level of payments. Although a number of these contracts remain in effect, as a general rule, HSC is no longer entering into agreements that provide for advertising availability and commission guarantee compensation. These forms of compensation were replaced with cable distribution fees or performance bonus commissions that are intended to increase sales by compensating the cable operators for promotional efforts which result in higher net sales levels. Due to the possibility of "must carry" being found unconstitutional, HSC embarked on an aggressive campaign to bring the "must carry" households under contract by volunteering to pay commissions to cable operators required to transmit HSC's programming. As an additional contract incentive, HSC offered to make payments of cable distribution fees, primarily consisting of up-front payments, based on a commitment to transmit HSC programming to a certain number of subscribers. In exchange for these payments, HSC required significant commitments for both the "must carry" and "non-must carry" households and original terms of five to fifteen years. AFFILIATION AGREEMENTS WITH BROADCAST TELEVISION STATIONS SKC, through its subsidiaries, owns twelve broadcast television stations, including one television satellite station. These stations are located in many of the top markets in the United States and exclusively broadcast HSC programming, except for a portion of broadcast time which is used to provide public affairs and other non-entertainment programming and advertising inserts. Each of the full power SKC stations has an affiliation agreement with HSC to carry HSC's programming through December 28, 1997 providing for an hourly fee, and upon reaching certain sales levels, commissions on net sales. These agreements are automatically renewable at SKC's option for a five-year term, unless written notice is given by SKC at least 18 months prior to the expiration date. The Company has agreed in principle with SKC that the period for delivery of the notice of non-renewal by SKC will be extended until December 28, 1996. SKC has informed the Company that it has not made any final decision regarding whether it will renew any or all of the affiliation agreements but presently contemplates that it will not renew the affiliation agreements. The Company believes, based on its preliminary analysis, that the orderly termination of the affiliation agreements may be in the Company's best interests because of the potential cost savings and the existing cable carriage of the HSC programming in many of the SKC markets. The Company is evaluating the affected markets to determine the need for obtaining additional program carriage and the related costs of such carriage. There can be no assurance that SKC will in fact terminate any or all of the affiliation agreements or that, if so terminated, that the Company will be able to find other means of distributing HSC programming by broadcast or cable to the households in the broadcast areas currently served by SKC stations. SKC also owns 26 low power television ("LPTV") stations that broadcast HSC's programming services. Fourteen stations are currently under existing affiliation agreements, and the Company contemplates entering into contracts with the remaining stations in 1996. LPTV stations have lower power transmitters than conventional television stations, and therefore, the broadcast signal of an LPTV station does not cover as broad a geographical area as conventional broadcast stations. In addition to affiliation agreements with the SKC broadcast television and LPTV stations, HSC has entered into affiliation agreements with other broadcast television stations and LPTV stations to carry either HSN or Spree! for a predetermined number of hours per day. The broadcast station affiliation agreements may generally be terminated upon notice by either party and specify the payment of fixed hourly fees for the carriage of HSC programming. ADDITIONAL SUBSIDIARY BUSINESSES In addition to the electronic retailing business, the Company's subsidiaries are involved in mail order, insurance and other businesses complementary to electronic retailing. 5 9 HSN Mail Order, Inc. ("Mail Order") markets a variety of merchandise through five mail order catalogs. The catalogs include HSN By Mail(sm), HSN By Mail(sm) -- Signature Gem Collection(sm), HSN by Mail(sm) -- The Gallery of Dolls(sm), HSN By Mail(sm) -- Private Showing(R) Jewelry, and Bargaineer(R) Homeview(sm). Mail Order also markets a variety of products by inserting marketing materials, including its catalogs, in packages containing HSC products shipped to customers. In addition, through its Life Way(R) name, Mail Order markets natural vitamin and mineral supplements, over-the-counter items, health and wellness merchandise and a complete line of skin and hair products. Vela Research, Inc. develops and markets high technology audio and video MPEG compression/decompression products to the cable, broadcast, computer and telecommunications industries. HSN Direct Joint Venture ("HSND") develops, produces, and markets infomercials and short form direct response spots on a national and international basis. The Company presently owns a majority interest in HSND. The Company has entered into negotiations with FlexTech p.1.c., an affiliate of TCI, ("FlexTech") pursuant to which FlexTech (or a subsidiary thereof) would make a substantial investment in HSND and become the majority owner of HSND. If this transaction is consummated upon the terms presently proposed, FlexTech would own approximately 79% of the business of HSND, and the Company's interest would be reduced to 15%. In connection with this transaction, the Company would receive approximately $5.0 million. There can be no assurance that this transaction will be consummated or, if consummated, will be consummated on the currently proposed terms. Internet Shopping Network, Inc. ("ISN") is a wholly-owned subsidiary which operates an interactive shopping service on the Internet specializing in small office and computer equipment. ISN is also engaged in exploring business opportunities for merchandising products via digital interactive television services and other new digital retailing vehicles. HSN Insurance, Inc. ("HSI") is a full-service insurance agency marketing a wide range of insurance products such as life, health, auto, homeowners and commercial policies to the public and HSC customers. Mass-marketing of other insurance and service-related products such as a private-label travel club, an auto club, a health and dental discount program, an AD & D insurance product and an extended service plan for electronics are offered to HSC customers nationally. HSI also handles the placement of all property and liability insurance for HSN and its subsidiaries, as well as employee benefits insurance products. COMPETITION The Company operates in a highly competitive environment. It is in direct competition with businesses which are engaged in retail merchandising, other electronic retailers, direct marketing retailers such as mail order companies, companies that sell from catalogs, other discount retailers and companies that market through computer technology. The Company also competes for access to its customers with broadcasters and alternative forms of entertainment and information, such as programming for network and independent broadcast television stations, basic and pay cable television services, satellite master antenna systems, home satellite dishes and home entertainment centers. In particular, the price and availability of programming for cable television systems affects the availability of these channels for the Company's programs and the compensation which must be paid to the cable operators for carriage of HSC programming. In addition, the Company believes that due to a number of factors, including the development by cable operators of alternative sources of cable operator owned programming, the competition for channel capacity has substantially increased. With the advent of new compression technologies on the horizon, this competition for channel capacity may substantially decrease, although additional competitors may have the opportunity to enter the marketplace. No predictions can be made with respect to the viability of these technologies or the extent to which they will ultimately impact the availability of channel capacity. The Company and QVC, Inc. ("QVC") are currently the two leading electronic retailing companies. There are other companies, some having an affiliation or common ownership with cable operators, that now market merchandise by means of live television. A number of other entities are engaged in direct retail sales businesses which utilize television in some form and which target the same markets in which the Company 6 10 operates. Some of the Company's competitors are larger and more diversified than the Company, or are also affiliated with cable operators which have a substantial number of subscribers. The Company cannot predict the degree of success with which it will meet competition in the future. TCI currently owns 43% of QVC but has entered into a stockholders agreement with Comcast Corporation (which owns 57% of QVC) pursuant to which Comcast Corporation controls the day to day operations of QVC. In addition to the above factors, the Company's affiliation with broadcast television stations creates another set of competitive conditions. These stations compete for television viewers primarily within local markets. The Company's affiliated broadcast television stations are located in highly competitive markets and compete against both VHF and UHF stations. Due to technical factors, a UHF television station generally requires greater power and a higher antenna to secure substantially the same geographical coverage as a VHF television station. Under present FCC regulations, additional UHF commercial television broadcasting stations may be operated in all such markets, with the possible exception of New York City. The Company also competes with new entertainment and shopping networks for carriage on broadcast television stations. The Company cannot quantify the competitive effect of the foregoing or any other sources of video programming on any of the Company's affiliated television stations, nor can it predict whether such competition will have a material adverse effect on its operations. In summary, the Company operates in a highly competitive environment in which, among other things, technological change, changes in distribution patterns, media innovations, data processing improvements and new entrants make the competitive position of both the Company and its competitors extremely difficult to predict. TRADEMARKS, TRADENAMES AND COPYRIGHTS The Company has registered and continues to register, when appropriate, its trade and service marks as they are developed and used, and the Company vigorously protects its trade and service marks. The Company believes that its marks are a primary marketing tool. EMPLOYEES During 1995, the Company instituted a number of cost cutting measures including a reduction in work force of 262 employees. At December 31, 1995, the Company had 3,804 full-time employees and 491 part-time employees. The Company believes it has generally good employee relationships. ITEM 2 -- PROPERTIES The Company owns an approximately 480,000 square foot facility in St. Petersburg, Florida, which houses its television studios, broadcast facilities, and most of the Company's administrative offices and training facilities. The Company operates four warehouse type facilities totaling approximately 115,000 square feet near the Company's main campus in St. Petersburg, Florida. These facilities are used for returns processing, retail distribution and general storage. The Company leases a 21,000 square foot facility in Clearwater, Florida for its video and post production operations. The Company owns and operates a warehouse consisting of approximately 163,000 square feet located in Waterloo, Iowa which is used as a fulfillment center. The Company operates a warehouse located in Salem, Virginia, consisting of approximately 650,000 square feet which is leased from the City of Salem Industrial Development Authority. On November 1, 1999, the Company will have the option to purchase the property for $1. The Company's retail outlet subsidiary leases seven retail stores in the Tampa Bay and Orlando areas totaling approximately 173,000 square feet. 7 11 The Company and its other subsidiaries also lease office space in California, Colorado and New Jersey. The Company considers its properties suitable and adequate for its present needs. ITEM 3 -- LEGAL PROCEEDINGS The Company has agreed to settle a consolidated class action initiated in 1990 pending in the Court of Common Pleas of Bucks County, Pennsylvania, entitled Mauger v. Home Shopping Network, Inc.; Powell v. Home Shopping Network, Inc. (case number 91-6152-20-1). The complaints allege violation of the Pennsylvania Unfair Trade Practices and Consumer Protection Law in relation to the Company's pricing practices with respect to diamond and imitation diamond jewelry sold to Pennsylvania residents between December 27, 1984 and May 20, 1991. Under the proposed settlement, customers who present adequate proof of purchase of cubic zirconia or diamond jewelry during the class period will have the option of receiving a cash payment or a discount certificate usable for the purchase of HSN merchandise during the following twelve months. The maximum cash payment required from the Company with respect to all costs relating to the settlement is $2.5 million, which will be placed in an escrow account following preliminary court approval of the settlement. The Company will be entitled to a refund of any balance not used for these purposes. If certificates representing a maximum discount of more than $5.2 million would be issuable under the settlement, the Company has the right to require that the certificates be pro-rated among those who elect to receive them. The settlement is subject to approval by the Court after notice and hearing. On March 2, 1995, the Federal Trade Commission ("FTC") issued an administrative complaint against the Company, HSC and HSN Lifeway Health Products, Inc., In Re Home Shopping Network, Inc. et al., No. D-9272, in connection with the on-air presentation in 1993 of certain spray vitamin and nutritional supplement products. The FTC alleged that the Company did not have a reasonable basis to support certain on-air claims, and proposed a settlement based upon a cease and desist order that would require the Company to obtain scientific evidence that would meet certain defined standards. The Company did not agree that the consent order proposed by the FTC was warranted, and the complaint, which seeks no monetary damages, will be heard by an FTC administrative law judge during the first half of 1996. ITEM 4 -- SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable 8 12 PART II ITEM 5 -- MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS PRICE RANGE OF COMMON STOCK The following table sets forth, for the quarterly periods indicated, the high and low sales prices of the Company's common stock on the New York Stock Exchange (Symbol: HSN).
-------------------------------------------------------------------------------------- HIGH LOW -------------------------------------------------------------------------------------- YEAR ENDED DECEMBER 31, 1995 Quarter ended March 31........................................... $10.00 $ 7.38 Quarter ended June 30............................................ 8.50 6.50 Quarter ended September 30....................................... 10.75 8.13 Quarter ended December 31........................................ 10.13 7.88 YEAR ENDED DECEMBER 31, 1994 Quarter ended March 31........................................... $15.13 $11.63 Quarter ended June 30............................................ 14.75 9.50 Quarter ended September 30....................................... 13.00 10.38 Quarter ended December 31........................................ 11.75 9.50
The closing price per share as of March 6, 1996 was $11.50 and there were 8,050 stockholders of record as of that date. The Company has paid no dividends on its common stock to date and does not anticipate that it will pay cash dividends in 1996. Any payment of future dividends and the amounts thereof will be dependent upon the Company's earnings, financial requirements and other factors deemed relevant by the Board of Directors. 9 13 ITEM 6 -- SELECTED FINANCIAL DATA SUMMARY FINANCIAL DATA - -------------------------------------------------------------------------------- (Table amounts in thousands, except per share data) - --------------------------------------------------------------------------------
SUMMARY CONSOLIDATED STATEMENTS OF YEARS ENDED DECEMBER 31, FOUR MONTHS YEARS ENDED AUGUST 31, OPERATIONS ------------------------------------- ENDED ----------------------- DATA 1995 1994 1993 DECEMBER 31, 1992 1992 1991 - ---------------------------------------------------------------------------------------------------------- Net sales............ $1,018,625 $1,126,514 $1,046,580 $ 357,166 $1,097,787 $1,078,547 Gross profit......... 316,947(1) 396,010 342,540(4) 124,636 406,459 389,398 Operating profit (loss)............. (80,280)(2) 26,879 (6,949) 17,569 82,202 64,570(6) Earnings (loss) before extraordinary item............... (61,883)(3) 17,701 (15,539)(5) 5,140 37,405 (9,599)(6) Net earnings (loss)............. (61,883)(3) 16,777 (22,781) 5,140 37,293 (8,945)(6) Earnings (loss) per common share: Earnings (loss) before extraordinary item............... (.69)(3) .19 (.18) .06 .42 (.11)(6) Net earnings (loss)............. (.69)(3) .18 (.26) .06 .42 (.10)(6) Weighted average common shares outstanding........ 90,782 95,061 91,192 91,115 90,255 87,452
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DECEMBER 31, AUGUST 31, SUMMARY CONSOLIDATED --------------------------------------------------------- ----------------------- BALANCE SHEET DATA 1995 1994 1993 1992 1992 1991 - ---------------------------------------------------------------------------------------------------------- Working capital...... $ 7,571 $ 23,073 $ 8,053 $ 38,493 $ 47,004 $ 52,868 Total assets......... 436,295 446,499 501,143 477,913 519,670 565,036 Secured Revolving Credit Facility.... 135,000 -- -- -- -- -- Unsecured Revolving Credit Facility.... -- 25,000 -- -- -- -- Unsecured Senior Term Loans.............. -- -- 85,000(7) -- -- -- 11 3/4% Senior Notes due October 15, 1996............... -- -- -- 140,000(7) 153,252(7) 184,752 5 1/2% Convertible Subordinated Debentures due April 22, 2002..... -- -- -- 16,915 16,915 17,115 Other long-term obligations........ 810 2,491 1,927 2,276 2,689 3,175 Stockholders' equity............. 125,061 206,443 196,554 170,149 170,329 161,839
- --------------- (1) The gross profit declined to 31.1% for the year ended December 31, 1995, from 35.2% for the year ended December 31, 1994. This was due to warehouse sales and other promotional events and an inventory carrying value adjustment of $14,500,000 primarily relating to new management's evaluation of existing inventory and determining that certain merchandise would not fit the Company's future sales and merchandising strategy. (2) During 1995 the Company recorded a $4,114,000 restructuring charge related to closing its fulfillment center in Reno, Nevada. The Company also recorded $11,893,000 of other charges, including $3,978,000 of severance pay related to a reduction in work force, $4,800,000 of payments to certain executives as provided for under their employment agreements in connection with the termination of their employment and $1,303,000 related to the write-down of inventory to net realizable value for Ortho-Vent, one of the Company's mail order subsidiaries. An additional $2,400,000 related to name lists of Ortho-Vent were 10 14 written off and included in depreciation and amortization. Other charges also include the write-off of certain equipment maintenance and contractual fees totaling $1,812,000 related to service contracts which the Company will no longer utilize. (3) During 1995, the Company recorded additional interest expense of $773,000 related to bank fees that were amortized, miscellaneous expense of $4,700,000 for the write-down of computer equipment, and $6,383,000 of additional litigation expense. (4) The gross profit declined to 32.7% for the year ended December 31, 1993, from 37.0% for the year ended August 31, 1992. This was primarily due to the liquidation of inventory at less than cost. (5) In the fourth quarter of 1993, the Company charged $13,000,000 to other income (expense) for the settlement of various lawsuits. (6) During 1991, the Company recorded $44,500,000 in pre-tax non-recurring special charges. Additionally, the Company increased its income tax provision $10,382,000 relating to certain adjustments proposed by the IRS. (7) At December 31, 1993 and 1992, and August 31, 1992, $25,000,000, $3,200,000 and $27,500,000, respectively was classified as a current liability reflecting management's ability and intent to satisfy a portion of the debt from funds provided from operations. 11 15 ITEM 7 -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL Home Shopping Network, Inc. (the "Company") is a holding company, the subsidiaries of which conduct the day-to-day operations of the Company's various business activities. The Company's primary business is electronic retailing conducted by Home Shopping Club, Inc. ("HSC"), a wholly-owned subsidiary of the Company. The following discussion presents the material changes in the consolidated results of operations of the Company which have occurred between the years ended December 31, 1995 and 1994, along with material changes between the years ended December 31, 1994 and 1993. Reference should also be made to the Consolidated Financial Statements and Summary Financial Data included herein. The Company expects to sell a majority of its interest in its infomercial joint venture, HSN Direct Joint Venture ("HSND") in early 1996. This transaction will result in a reduction in net sales, cost of sales and certain operating expenses in 1996. The sale of HSND should not have a material impact on the Company's results of operations in 1996 or future periods. All tables and discussion included herein calculate the percentage changes using actual dollar amounts, versus rounded dollar amounts. YEAR ENDED DECEMBER 31, 1995 VS. YEAR ENDED DECEMBER 31, 1994 NET SALES For the year ended December 31, 1995, net sales for the Company decreased $107.9 million, or 9.6%, to $1.019 billion from $1.127 billion for the year ended December 31, 1994. Net sales of HSC decreased $140.6 million, or 13.9%, for the year ended December 31, 1995, reflecting a 19.4% decrease in the number of packages shipped and a 9.1% increase in the average price per unit sold compared to the year ended December 31, 1994. The decrease in HSC sales was partially offset by sales increases by HSND, and wholly-owned subsidiaries, HSN Mail Order, Inc. ("Mail Order") and Vela Research, Inc. ("Vela"), totaling $32.0 million for the year ended December 31, 1995. Since June 5, 1995, the Company has operated two full-time networks renamed HSN, the primary network, and Spree!. On August 5, 1995, the Company relaunched the HSN network with more scheduled programs and theme related shows, new sets, graphics and music. During the third quarter of 1995, the Company relaunched the Spree! network with a more spontaneous format and new graphics and music. These changes were designed to reduce programming redundancies, distinguish the networks and reach a broader range of potential customers. Management also instituted promotional programs to help increase sales, including a national advertising campaign and a "no interest-no payments" credit promotion through February 1996 for certain purchases made during the third and fourth quarters of 1995 using the Company's private label credit card. Although the credit promotion program was successful, its effect was not enough to offset the overall decrease in sales. The Company believes that its negative performance in 1995 was due, in part, to the adverse effects of certain merchandising and programming strategies which had been implemented in late 1994 and 1995. Consequently, in November 1995, the Company appointed a new chairman of the board and a new president and chief executive officer, both with significant experience in the electronic retailing and programming areas. Immediate changes were made to the Company's merchandising and programming strategies which management believes resulted in the improved sales in December 1995 and January 1996 when compared to the same months in the prior years. Further plans include improving inventory mix with respect to product assortment and price point designed to attract both first-time buyers and active buyers, improving inventory management and better planning of programmed shows. While management is optimistic that results will continue to improve and the Company will return to profitability, there can be no assurance that changes to the Company's merchandising and programming strategies will achieve management's intended results. 12 16 For the year ended December 31, 1995, HSC's merchandise return percentage increased to 25.7% from 24.4% compared to 1994. The increase in return rate is attributable, in part, to an increase in average price per unit and, in part, to returns resulting from promotional events. New management's merchandising strategy is designed to reduce return rates in 1996. Promotional price discounts increased to 2.8% from 2.7% of HSC sales for the year ended December 31, 1995 compared to 1994. At December 31, 1995, HSC had approximately 4.8 million active members representing a 3.1% decline from December 31, 1994. An active member is defined as a customer that has completed a transaction within the last 18 months or placed an order within the last seven months. In addition, 59.2% of active members have made more than one purchase in the last 18 months, compared to 59.4% at December 31, 1994. The Company has significantly increased its program carriage and believes that future levels of net sales of HSC will be dependent on the success of new management's plans, as discussed above, in increasing market penetration. Market penetration represents the level of active customers within a market. The following table highlights the changes in the estimated unduplicated television household reach of HSN, the Company's primary network, by category for the year ended December 31, 1995:
--------------------------------------------------------------------------------------------- CABLE* BROADCAST SATELLITE TOTAL --------------------------------------------------------------------------------------------- (In thousands of households) Households -- December 31, 1994..................... 38,960 23,068 3,750 65,778 Net additions/(deletions)........................... 4,757 (1,510) -- 3,247 Shift in classification............................. 503 (503) -- -- Change in Nielsen household counts.................. -- 164 -- 164 ------ --------- --------- ------ Households -- December 31, 1995..................... 44,220 21,219 3,750 69,189 ====== ======= ====== ======
- --------------- * Households capable of receiving both broadcast and cable transmissions are included under cable. According to industry sources, as of December 31, 1995, there were 95.3 million homes in the United States with a television set, 62.1 million basic cable television subscribers and 3.8 million homes with satellite dish receivers. The cable television household growth was achieved through increased cable system carriage of HSC's broadcast signal due to the implementation of "must carry" beginning in September 1993, and the Company's aggressive campaign to obtain contracts for cable carriage of HSC programming. In areas where HSC programming is now carried by a cable operator, former broadcast households that are cable subscribers can more easily access HSC programming. In addition to the households in the above table, as of January 1, 1996 approximately 12.0 million cable television households were reached by the Spree! network, of which 3.4 million were on a part-time basis. Of the total cable television households receiving Spree!, 9.7 million also receive HSN. During 1996, cable system contracts covering 4.2 million cable subscribers are subject to termination or renewal. This represents 9.4% of the total number of unduplicated cable households receiving HSN. The Company is pursuing both renewals and additional cable television system contracts, but channel availability, competition, consolidation within the cable industry and cost of carriage are some of the factors affecting the negotiations for cable television system contracts. Although management cannot determine the percentage of expiring contracts that will be renewed or the number of households that will be added through new contracts, management believes that a majority of these contracts will be renewed. HSC's market penetration lags behind increases in carriage. As a result of the increase in carriage which began in late 1993, and previous changes in merchandising and programming strategies, the Company has experienced a decrease in its market penetration. As the new households mature and new management's plans are fully implemented, the Company expects market penetration to improve, but there can be no assurance that this will occur. 13 17 COST OF SALES For the year ended December 31, 1995, cost of sales decreased $28.8 million, or 3.9%, to $701.7 million from $730.5 million for the year ended December 31, 1994. As a percentage of net sales, cost of sales increased to 68.9% from 64.8% compared to the year ended December 31, 1994. Cost of sales of HSC decreased $49.1 million for the year ended December 31, 1995. This was partially offset by increases in cost of sales of HSND, Mail Order and Vela totaling $21.4 million for the year ended December 31, 1995. As a percentage of HSC's net sales, cost of sales increased to 71.8% from 66.9% for the year ended December 31, 1995, compared to 1994. The 1995 dollar decreases in consolidated and HSC's cost of sales, compared to 1994, relate to the lower sales volume. The comparative increases in cost of sales percentages primarily relate to warehouse sales and other promotional events. These events offered price discounts to facilitate the Company's distribution center restructuring and sales of existing merchandise to make room for new merchandise for the holiday selling season and to correct excessive inventory levels and product mix in December 1995. In addition, consolidated and HSC's cost of sales for the year ended December 31, 1995, reflect a $14.5 million increase in HSC's inventory carrying value adjustment primarily related to product which is inconsistent with HSC's new sales and merchandising philosophy. OPERATING EXPENSES The following table highlights the operating expense section from the Company's Consolidated Statements of Operations:
--------------------------------------------------------------------------------------- YEARS ENDED DECEMBER 31, --------------- $ % 1995 1994 CHANGE CHANGE --------------------------------------------------------------------------------------- (In millions, except %) Selling and marketing............................... $167.1 $161.9 $ 5.2 3.2% Engineering and programming......................... 98.2 98.8 (.6 ) (.6) General and administrative.......................... 77.1 79.3 (2.2 ) (2.8) Depreciation and amortization....................... 38.8 29.1 9.7 33.7 Other charges....................................... 11.9 -- 11.9 100.0 Restructuring charges............................... 4.1 -- 4.1 100.0 ------ ------ ------ $397.2 $369.1 $28.1 7.6 ====== ====== =====
As a percentage of net sales, operating expenses increased to 39.0% from 32.8% compared to the year ended December 31, 1994. In 1995 and early 1996, management instituted measures aimed at streamlining operations primarily by reducing its work force and taking other actions to reduce operating expenses. Although these changes resulted in some reduction in individual categories of operating expenses in 1995 and will result in future reductions to operating expenses, the Company incurred additional costs in 1995 as a result of these measures. See "Other Charges" and "Restructuring Charges." SELLING AND MARKETING For the year ended December 31, 1995, selling and marketing expenses, as a percentage of net sales, increased to 16.4% from 14.4% compared to the year ended December 31, 1994. 14 18 The major components of selling and marketing expenses are detailed below:
---------------------------------------------------------------------------------------- YEARS ENDED DECEMBER 31, ------------- $ % 1995 1994 CHANGE CHANGE ---------------------------------------------------------------------------------------- (In millions, except %) Telephone, operator and customer service............... $51.8 $53.8 $(2.0 ) (3.6 )% Fees to cable system operators: Commissions.......................................... 33.2 38.4 (5.2 ) (13.5 ) Marketing payments for cable advertising............. 16.8 25.3 (8.5 ) (33.6 ) Performance bonus commissions........................ 12.8 9.1 3.7 40.1 HSND selling expenses.................................. 10.0 6.7 3.3 50.6
Telephone, operator and customer service expenses are typically related to sales, call volume and the number of packages shipped. For the year ended December 31, 1995, telephone costs decreased due to a $1.4 million rebate for past telephone charges from the Company's long distance telephone carrier in connection with a new contract for telephone services. This contract will also result in lower future telephone rates compared to prior periods. HSC telephone and operator costs decreased $2.2 million for the year ended December 31, 1995, due to lower call volume. In addition, the sale in the second quarter of 1994 of the Company's former wholly-owned subsidiary, HSN Mistix Corporation ("Mistix"), resulted in a $2.0 million decrease in telephone and operator costs for the year ended December 31, 1995. These decreases were primarily offset by increased telephone and operator costs incurred by Mail Order and the Company's telemarketing subsidiary, National Call Center, Inc., totaling $2.9 million for the year ended December 31, 1995. Management expects HSC operator costs to fluctuate in relation to call and package volume in 1996. Customer service costs increased $.3 million for the year ended December 31, 1995, due to the expansion of customer service operating hours, in March 1995, to seven days a week, twenty-four hours a day. For the year ended December 31, 1995, commissions to cable system operators decreased as a result of the decrease in sales. Marketing payments for cable advertising, which relate primarily to previous contractual commitments, decreased for the year ended December 31, 1995. As older agreements expire or are renegotiated and new cable carriage agreements are executed, marketing payments for cable advertising are being replaced by other forms of incentive compensation to cable operators. These include payment of cable distribution fees, as discussed in "Depreciation and Amortization," and performance bonus commissions which require payments based upon HSC attaining certain sales levels in the cable operator's franchise area. Accordingly, marketing payments for cable advertising are expected to decrease, and depreciation and amortization will increase in 1996. Performance bonus commissions are expected to fluctuate in relation to sales in 1996. In addition, cable operators which have executed affiliation agreements to carry the Company's programming are generally compensated for all sales within their franchise areas, regardless of whether a customer's order results from watching the program via cable, satellite dish, or on a broadcast television station. Thus, with the advent of "must carry," HSC is paying commissions to cable operators in addition to the hourly affiliation payments made to broadcast television stations. As a result of the above factors, subject to sales volume, fees paid to cable system operators are expected to remain at higher levels in future periods. Selling and marketing expenses related to HSND primarily consist of media and telephone, operator and customer service expenses. The remaining net increase in selling and marketing expenses is attributable to promotional expenses incurred in connection with the Company's programming strategies which were implemented in 1995, increased Mail Order catalog costs and advertising and promotional expenses of the Company's other subsidiary operations, totaling $12.4 million. As a result of the Company's promotional program related to its private label credit card, the Company incurred an additional $1.4 million of interest charges in the fourth quarter of 1995. Management believes that total selling and marketing expenses in future periods will be at higher levels as the Company maintains its efforts to increase the number of cable systems carrying the Company's programming and increase market penetration through expanded direct mailings and other advertising, as discussed in "Net Sales." 15 19 ENGINEERING AND PROGRAMMING For the year ended December 31, 1995, engineering and programming expenses, as a percentage of net sales, increased to 9.6% from 8.8% compared to the year ended December 31, 1994 primarily as a result of the decrease in net sales. The decrease in engineering and programming expenses for the year ended December 31, 1995, compared to 1994, was primarily due to lower broadcast costs of $2.3 million. In addition, based on sales within the broadcast markets of Silver King Communications, Inc. ("SKC"), for the year ended December 31, 1995, the Company incurred lower broadcast commission expense of $1.1 million, compared to the year ended December 31, 1994. Broadcast commission expense is expected to fluctuate in relation to sales for 1996. These decreases were offset by increases totaling $2.3 million for the year ended December 31, 1995, in production costs incurred in connection with the Company's new programming strategies, as discussed in "Net Sales", and HSND programming costs. Engineering and programming expenses are expected to remain relatively constant in 1996. GENERAL AND ADMINISTRATIVE For the year ended December 31, 1995, general and administrative expenses, as a percentage of net sales, increased to 7.6% from 7.0% compared to the year ended December 31, 1994. For the year ended December 31, 1995, decreases in legal expense and expense in connection with the Company's executive stock award program and repairs and maintenance totaling $4.9 million were primarily offset by increases in expenses for consulting, Stock Appreciation Rights ("SAR's"), the Company's employee equity participation plan, and other administrative expenses totaling $2.7 million. Based on savings expected to be realized in connection with the reduction of the Company's work force, as discussed in Note F to the Consolidated Financial Statements included herein, and other expense reduction initiatives, management expects general and administrative expenses to decrease in 1996. DEPRECIATION AND AMORTIZATION The increase in depreciation and amortization was primarily due to the amortization of cable distribution fees, which increased $8.8 million to $12.7 million for the year ended December 31, 1995. Amortization of these fees is expected to total $15.7 million in 1996 based on existing agreements. This amortization could increase if additional long-term cable contracts are entered into during 1996, as discussed in "Net Sales." The expected increase in depreciation expense in 1996 will be partially offset by a decrease related to the retirement of certain equipment as discussed in "Other Income (Expense)." In addition, amortization expense increased $2.4 million for the year ended December 31, 1995, in connection with the sale of the assets of Ortho-Vent, Inc. ("Ortho-Vent"), as discussed in Note F to the Consolidated Financial Statements included herein. OTHER CHARGES The other charges of $11.9 million for the year ended December 31, 1995 consist of severance costs of $4.0 million related to a reduction in work force, $4.8 million of payments to certain executives as provided for under their employment agreements in connection with the termination of their employment and the write-off of certain equipment maintenance and contractual fees totaling $1.8 million related to service contracts which the Company will no longer utilize. In addition, the Company recorded a write-down of inventory totaling $1.3 million to net realizable value based on the disposition of Ortho-Vent's assets. See Note F to the Consolidated Financial Statements, included herein. The sale of Ortho-Vent should not have a material impact on the Company's net sales or results of operations in future periods. RESTRUCTURING CHARGES Restructuring charges for the year ended December 31, 1995, of $4.1 million, represent management's estimate of costs to be incurred in connection with the closing of the Company's Reno, Nevada, distribution 16 20 center, which was accomplished in June 1995. The decision to close the Reno distribution center was based on an evaluation of the Company's overall distribution strategy. Management believes that consolidation of the Company's distribution facilities will result in operating efficiencies and improved service to customers. OTHER INCOME (EXPENSE) For the year ended December 31, 1995, the Company had net other expense of $(14.9) million compared to net other income of $3.6 million for the year ended December 31, 1994. Interest income decreased $7.6 million for the year ended December 31, 1995, compared to 1994, primarily due to the repayment by SKC in August 1994, of its indebtedness to the Company. Interest income is expected to further decrease in 1996, compared to 1995. Interest expense increased $4.6 million for the year ended December 31, 1995, due to borrowings by the Company under its Secured $150.0 million Revolving Credit Facility ("Credit Facility") in late 1994 and 1995. On March 1, 1996, the Company obtained additional financing through a private placement of $100.0 million of convertible subordinated debentures, as discussed in "Financial Position, Liquidity and Capital Resources." Interest expense for 1996 will increase compared to 1995. For the years ended December 31, 1995 and 1994, net miscellaneous expenses remained constant at $.4 million. In 1995, $6.0 million in losses recorded in connection with the retirement of equipment was offset by receipts from lawsuit settlements, royalty income and other miscellaneous income totaling $5.6 million. In 1994, a $(2.9) million loss on the sale of the common stock of Mistix was offset by receipts from lawsuit settlements and other miscellaneous income totaling $2.5 million. Litigation expense for the year ended December 31, 1995, of $6.4 million, represents litigation settlements and anticipated costs in connection with the resolution of certain pending litigation. INCOME TAXES The Company's effective tax rate was a benefit of (35.0)% for the year ended December 31, 1995, and an expense of 42.0% for the year ended December 31, 1994. The Company's effective tax rate for these periods differed from the statutory rate due primarily to the amortization of goodwill, state income taxes and the provision for interest on adjustments proposed by the Internal Revenue Service ("IRS"). The Company anticipates full realization of its net operating loss carryforward and accordingly no valuation allowance has been provided. See Note D to the Consolidated Financial Statements included herein. EXTRAORDINARY ITEM -- LOSS ON EARLY EXTINGUISHMENT OF LONG-TERM OBLIGATIONS In the year ended December 31, 1994, the Company repaid the remaining $85.0 million outstanding balance on its Senior Term Loans. This resulted in an extraordinary item -- loss on early extinguishment of long-term obligations, net of taxes as discussed in Note C to the Consolidated Financial Statements included herein. NET EARNINGS (LOSS) The Company had a net loss of $(61.9) million, or $(.69) per share, for the year ended December 31, 1995, compared to net earnings of $16.8 million, or $.18 per share, for the year ended December 31, 1994. The loss for the year ended December 31, 1995 compared to the year ended December 31, 1994, was primarily attributable to the decrease in net sales of $107.9 million, the decrease in gross profit of $79.1 million and increased operating expenses and other charges as discussed above. The results for the year ended December 31, 1994, include an extraordinary loss of $(.9) million, or $(.01) per share, on the early extinguishment of long-term obligations. 17 21 YEAR ENDED DECEMBER 31, 1994 VS. YEAR ENDED DECEMBER 31, 1993 NET SALES For the year ended December 31, 1994, net sales for the Company increased $79.9 million, or 7.6%, to $1.127 billion from $1.047 billion for the year ended December 31, 1993. Net sales of HSC increased $65.2 million, or 6.8%, for the year ended December 31, 1994, reflecting a 19.5% increase in the number of packages shipped and a 10.2% decrease in the average price per unit sold compared to the year ended December 31, 1993. Promotional price discounts, used to enhance HSC merchandise sales, increased to 2.7% of HSC sales for the year ended December 31, 1994, from 1.8% in 1993. In addition, sales by HSND, which commenced operations during the third quarter of 1994, totaled $13.5 million and sales by the Company's retail outlets increased $6.7 million for the year ended December 31, 1994 compared to the prior year. The increases for the year ended December 31, 1994 were primarily offset by a decline in sales of $6.9 million attributable to the sale of Mistix in the second quarter of 1994. The sales increases for the year ended December 31, 1994 versus 1993, occurred primarily in the first nine months of the year and were the continuation of a trend that began in the latter part of the third quarter of 1993. Management believes that 1994 sales levels were positively affected by several factors, most significantly the addition of new cable subscribers beginning in September 1993 as a result of the "must carry" provisions of the cable re-regulation law. In September 1994, the Company appointed senior management personnel with expertise in merchandising. The Company had also instituted procedures intended to improve purchasing and other merchandising practices. Management's emphasis included evaluating new product sources and programs to boost customer loyalty, offering higher quality and a greater variety of products, developing strong private label lines, selling higher margin items and offering name brand merchandise. During the fourth quarter of 1994, in addition to reorganizing its merchandising and sales practices, the Company continued to significantly restyle its programming. This included new on-air presentations, offering regularly scheduled themed shows, increasing the number of items aired per hour and the display of item numbers which enables a customer to order an item when it is off the air. These changes in merchandising and programming strategy were aimed at long-term improvements in sales by attempting to attract new customers and increase the frequency of sales. However, the impact of these changes was a slowdown in sales, such that consolidated net sales for the quarter ended December 31, 1994 increased only 1.8% over the same period in 1993. For the years ended December 31, 1994 and 1993, HSC's merchandise return percentage remained constant at 24.4%. The return rate continued to be affected by high returns in jewelry and electronics merchandise categories which typically experience higher return rates than other merchandise categories. The following table highlights the changes in the estimated unduplicated television household reach of HSN programming by category for the year ended December 31, 1994:
--------------------------------------------------------------------------------------------- CABLE* BROADCAST SATELLITE TOTAL --------------------------------------------------------------------------------------------- (In thousands of households) Households -- December 31, 1993..................... 33,788 25,876 3,100 62,764 Net additions....................................... 2,029 463 650 3,142 Shift in classification............................. 3,143 (3,143) -- -- Change in Nielsen household counts.................. -- (128) -- (128) ------ --------- --------- ------ Households -- December 31, 1994..................... 38,960 23,068 3,750 65,778 ====== ======= ====== ======
- --------------- * Households capable of receiving both broadcast and cable transmissions are included under cable. 18 22 COST OF SALES For the year ended December 31, 1994, cost of sales increased $26.5 million, or 3.7%, to $730.5 million from $704.0 million for the year ended December 31, 1993. As a percentage of net sales, cost of sales decreased to 64.8% from 67.3% compared to year ended December 31, 1993. Cost of sales of HSC increased $22.5 million for the year ended December 31, 1994. As a percentage of HSC sales, cost of sales decreased to 66.9% from 69.1%, compared to the year ended December 31, 1993. In addition, cost of sales for HSND and the Company's retail outlets for the year ended December 31, 1994, increased $5.0 million and $3.7 million, respectively, compared to the year ended December 31, 1993. The remaining decrease in cost of sales for the year ended December 31, 1994, compared to 1993, was primarily attributable to the sale of Mistix, as discussed in "Net Sales." The decreases in consolidated and HSC's cost of sales percentages in 1994 compared to 1993 relate primarily to an additional $20.1 million adjustment made to HSC's inventory carrying amount, which increased cost of sales in the first quarter of 1993, in connection with a change in management's merchandising philosophy. OPERATING EXPENSES The following table highlights the operating expense section from the Company's Consolidated Statements of Operations:
----------------------------------------------------------------------------------------- YEARS ENDED DECEMBER 31, --------------- $ % 1994 1993 CHANGE CHANGE ----------------------------------------------------------------------------------------- (In millions, except %) Selling and marketing................................. $161.9 $138.1 $ 23.8 17.2% Engineering and programming........................... 98.8 93.7 5.1 5.5 General and administrative............................ 79.3 93.5 (14.2) (15.1) Depreciation and amortization......................... 29.1 24.2 4.9 20.2 ------ ------ ------ $369.1 $349.5 $ 19.6 5.6 ====== ====== ======
As a percentage of net sales, operating expenses decreased to 32.8% from 33.4% compared to year ended December 31, 1993. SELLING AND MARKETING For the year ended December 31, 1994, selling and marketing expenses, as a percentage of net sales, increased to 14.4% from 13.2% compared to the year ended December 31, 1993. The major components of selling and marketing expenses are detailed below:
---------------------------------------------------------------------------------------- YEARS ENDED DECEMBER 31, --------------- $ % 1994 1993 CHANGE CHANGE ---------------------------------------------------------------------------------------- (In millions, except %) Telephone, operator and customer service......... $53.8 $48.5 $ 5.3 10.8 % Fees to cable system operators: Commissions.................................... 38.4 33.9 4.5 13.1 Marketing payments for cable advertising....... 25.3 30.7 (5.4 ) (17.5 ) Performance bonus commissions.................. 9.1 -- 9.1 100.0
Telephone, operator and customer service expenses are typically related to sales, call volume and the number of packages shipped, and for the year ended December 31, 1994, compared to the year ended December 31, 1993, these expenses increased as a result of increases in call and package volume. 19 23 For the year ended December 31, 1994, commissions to cable system operators increased at a higher rate than sales as a result of increased cable system carriage of the Company's programming due to the implementation of the "must carry" provisions of the cable re-regulation law. Marketing payments for cable advertising, related primarily to previous contractual commitments, decreased for the year ended December 31, 1994, compared to the year ended December 31, 1993. Selling and marketing expenses related to HSND totaled $6.7 million for the year ended December 31, 1994. The remaining net increase in selling and marketing expenses was attributable to other advertising and promotional expenses of the Company's other subsidiary operations. ENGINEERING AND PROGRAMMING For the year ended December 31, 1994, engineering and programming expenses, as a percentage of net sales, decreased to 8.8% from 9.0% compared to the year ended December 31, 1993. Increases in expense related to broadcast affiliates in additional markets totaled $3.7 million compared with the year ended December 31, 1993. In addition, based on sales within the broadcast markets of SKC for the year ended December 31, 1994, the Company incurred additional broadcast commission expense of $1.3 million, compared to the year ended December 31, 1993. GENERAL AND ADMINISTRATIVE For the year ended December 31, 1994, general and administrative expenses, as a percentage of net sales, decreased to 7.0% from 8.9% compared to the year ended December 31, 1993. For the year ended December 31, 1994, consulting and stockholder relations expenses decreased $5.3 million, due to expenses incurred in 1993, in connection with a merger proposal by Liberty Media Corporation ("Liberty") following the acquisition, in February 1993, of a controlling interest in the Company by a wholly-owned subsidiary of Liberty and the unsolicited merger proposal by QVC, Inc. that was not consummated. Expenses in connection with the Company's executive stock award program, SAR's, settlement of sales tax issues, legal expense, repairs and maintenance and equipment rental decreased $13.8 million for the year ended December 31, 1994, compared to the year ended December 31, 1993. The above decreases were offset by increases for the year ended December 31, 1994, totaling $5.0 million, in payroll expense and other administrative expenses. DEPRECIATION AND AMORTIZATION For the year ended December 31, 1994, depreciation and amortization increased $3.9 million due to the amortization of cable distribution fees for the year ended December 31, 1994. The balance of the increase in depreciation and amortization was attributable to capital asset additions during the year ended December 31, 1994. OTHER INCOME (EXPENSE) For the year ended December 31, 1994, the Company had net other income of $3.6 million compared to net other expense of $(12.6) million for the year ended December 31, 1993. Interest income decreased $4.1 million for the year ended December 31, 1994, compared to the year ended December 31, 1993, due to the repayment by SKC, in August 1994, of its indebtedness to the Company. Interest expense decreased $5.4 million for the year ended December 31, 1994, primarily as a result of the repayment by the Company, in August 1994, of its Senior Term Loans. For the year ended December 31, 1994, net miscellaneous expense decreased $2.0 million compared to the year ended December 31, 1993. Net miscellaneous expense for the year ended December 31, 1993 included nonrecurring costs totaling $3.8 million. For the year ended December 31, 1994, net miscellaneous 20 24 expense included a $(2.9) million loss on the sale of Mistix. In addition, 1994 included the receipt of proceeds from a lawsuit settlement totaling $.8 million. Net other expense for the year ended December 31, 1993 also included litigation settlements totaling $13.0 million. INCOME TAXES The Company's effective tax rate was an expense of 42.0% for the year ended December 31, 1994 and a benefit of (20.6)% for the year ended December 31, 1993. The Company's effective tax rate for these periods differed from the statutory rate due primarily to the amortization of goodwill and other acquired intangible assets relating to acquisitions from prior years, state income taxes and the provision for interest on adjustments proposed by the IRS, as discussed in Note D to the Consolidated Financial Statements included herein. EXTRAORDINARY ITEM -- LOSS ON EARLY EXTINGUISHMENT OF LONG-TERM OBLIGATIONS In the year ended December 31, 1994, the Company repaid the remaining $85.0 million outstanding balance on its Senior Term Loans. In the year ended December 31, 1993, the Company refinanced and retired the remaining $143.3 million of its 11 3/4% Senior Notes and retired the remaining $16.9 million of its 5 1/2% Convertible Subordinated Debentures. These transactions resulted in extraordinary items -- loss on early extinguishment of long-term obligations, net of taxes as discussed in Note C to the Consolidated Financial Statements included herein. NET EARNINGS (LOSS) The Company had net earnings of $16.8 million, or $.18 per share, for the year ended December 31, 1994, compared to a net loss of $(22.8) million, or $(.26) per share, for the year ended December 31, 1993. The increase in net earnings for the year ended December 31, 1994, was primarily attributable to an increase in net sales of $79.9 million and an increase in gross profit of $53.5 million compared to the year ended December 31, 1993. As discussed in "Cost of Sales," the results for the year ended December 31, 1993, included an additional adjustment of $20.1 million to the inventory carrying amount. The results for the year ended December 31, 1993 were also affected by the litigation settlements of $13.0 million, as discussed in "Other Income (Expense)." As previously discussed, the Company recorded a loss of $(2.9) million on the sale of the common stock of Mistix. In addition, the consolidated results for the year ended December 31, 1994 included a pre-tax loss for Mistix of $(1.6) million. Consolidated results also included extraordinary losses, net of taxes, of $(.9) million, or $(.01) per share, for the year ended December 31, 1994, and $(7.2) million, or $(.08) per share, for the year ended December 31, 1993. SEASONALITY The Company believes that seasonality does impact its business but not to the same extent it impacts the retail industry in general. FINANCIAL POSITION, LIQUIDITY AND CAPITAL RESOURCES The following table highlights various balances and ratios from the Consolidated Financial Statements included herein:
--------------------------------------------------------------------------------------- DECEMBER 31, ------------------- 1995 1994 --------------------------------------------------------------------------------------- Cash and cash equivalents (millions).............................. $ 25.2 $ 33.6 Working capital (millions)........................................ $ 7.6 $ 23.1 Current ratio..................................................... 1.04:1 1.11:1 Accounts and notes receivable, net (millions)..................... $ 23.6 $ 43.7 Inventories, net (millions)....................................... $ 101.6 $ 118.8 Annual inventory turnover......................................... 6.37 6.36
21 25 The principal source of cash for the year ended December 31, 1995, was borrowings by the Company under its Credit Facility, which were used principally to pay cable distribution fees of $72.1 million, purchase treasury stock, pay litigation settlements of $14.5 million and pay for capital expenditures. The net loss adjusted for non-cash items totaled $(32.2) million for the year ended December 1995. The primary reason for the decrease in accounts and notes receivable is "FlexPay" accounts receivable which totaled $13.0 million at December 31, 1995, compared to $23.6 million at December 31, 1994. The Company's financing of "FlexPay" accounts receivable has not had a significant impact on its liquidity position. In addition, on March 27, 1995, Precision Systems, Inc. ("PSi") repaid $2.7 million, plus accrued interest, of its $5.0 million loan from the Company. Under an agreement between the Company and PSi, the remaining principal balance of the loan was recorded as a prepayment of monthly software maintenance payments due PSi from the Company through December 1995. Inventories decreased due to promotional sales events held in December 1995 and a $14.5 million increase in HSC's inventory carrying value adjustment primarily related to product which is inconsistent with HSC's new sales and merchandising philosophy. The inventory balance is net of a carrying value adjustment of $33.3 million at December 31, 1995, which represents an increase from $18.8 million at December 31, 1994. Capital expenditures for the year ended December 31, 1995, were $13.0 million. The Company estimates capital expenditures will range between $18.0 million and $21.0 million for 1996. The Company's Credit Facility was amended on September 28, 1995 and the maximum borrowing availability was increased from $100.0 million to $150.0 million at that time. On that date, HSN pledged the capital stock of HSC and HSN Realty, Inc. ("Realty"), the guarantors of the Credit Facility, to secure the Company's obligation under the Credit Facility. On February 13, 1996, the covenants in the Credit Facility were further amended to include the effect of, among other things, certain of the restructuring and other charges as discussed in Note F to the Consolidated Financial Statements included herein, to allow for additional subordinated financing as discussed in Notes P and R to the Consolidated Financial Statements included herein and, upon conclusion of the additional financing, to reduce the maximum borrowing availability under the Credit Facility to $120.0 million. Restrictions remain on repurchases of the Company's common stock based upon future cash flow levels. On March 1, 1996, the Company completed a private placement of $100.0 million of Convertible Subordinated Debentures due March 1, 2006. The Company used the net proceeds to repay borrowings under the Credit Facility leaving an outstanding loan balance of $30.0 million with $90.0 million available for borrowing. The Company anticipates that it will use its additional borrowing capacity to finance working capital requirements, capital expenditures and general corporate purposes. During 1996, management expects to pay cable distribution fees, totaling $12.3 million, relating to current contracts with cable system operators to carry HSC programming. Of this amount, $2.3 million is payable to a related party. In July 1995, the Company paid $4.0 million for a 20.0% interest in Body By Jake Enterprises, L.L.C. This investment is accounted for under the cost method. In management's opinion, available cash, internally generated funds and the Credit Facility will provide sufficient capital resources to meet the Company's foreseeable needs. As of February 29, 1996, the Company had a $25.0 million committed bank credit line collateralized by the capital stock of HSC and Realty. In addition, the Company had an additional uncommitted unsecured bank credit line offered on a conditional basis. These credit lines back letters of credit which are used exclusively to facilitate the purchase of imported inventory. Presentation of letters of credit by vendors results in an immediate charge to the Company's account with no interest charges incurred. Outstanding letters of credit, which cannot exceed $25.0 million in total in accordance with the Credit Facility, amounted to $11.6 million at February 29, 1996, on the committed and uncommitted lines, leaving $13.4 million available. 22 26 For the year ended December 31, 1995, the Company did not pay any cash dividends and does not anticipate paying cash dividends in the immediate future. In 1994, the Company's Board of Directors authorized the repurchase of up to an additional $75.0 million of the Company's common stock. In 1994, the Company repurchased 1.3 million shares at a total cost of $13.1 million and in the quarter ended March 31, 1995, the Company repurchased an additional 2.6 million shares at a total additional cost of $21.6 million. Under the terms of the Credit Facility the Company is restricted from purchasing its common stock until it meets certain cash flow ratios. NEW ACCOUNTING PRONOUNCEMENTS In October 1995, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("FAS 123") effective for transactions entered into after December 15, 1995. FAS 123 provides alternatives for the methods used by entities to record compensation expense associated with its stock-based compensation plans. Additionally, FAS 123 provides further guidance on the disclosure requirements relating to stock-based compensation plans. Management believes that the adoption of FAS 123 will not have a material impact on the financial condition or the results of operations of the Company. 23 27 ITEM 8 -- CONSOLIDATED FINANCIAL STATEMENTS INDEPENDENT AUDITORS' REPORT HOME SHOPPING NETWORK, INC. AND SUBSIDIARIES THE BOARD OF DIRECTORS HOME SHOPPING NETWORK, INC. We have audited the accompanying consolidated balance sheets of Home Shopping Network, Inc. and subsidiaries as of December 31, 1995 and 1994 and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the years in the three year period ended December 31, 1995. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Home Shopping Network, Inc. and subsidiaries as of December 31, 1995 and 1994, and the results of their operations and their cash flows for each of the years in the three year period ended December 31, 1995 in conformity with generally accepted accounting principles. /s/ KPMG PEAT MARWICK LLP St. Petersburg, Florida February 21, 1996 24 28 HOME SHOPPING NETWORK, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
- -------------------------------------------------------------------------------------------------------- DECEMBER 31, ----------------------- 1995 1994 - -------------------------------------------------------------------------------------------------------- (In thousands) ASSETS CURRENT ASSETS Cash and cash equivalents...................................................... $ 25,164 $ 33,648 Accounts and notes receivable (net of an allowance for doubtful accounts of $1,685 and $1,738, respectively)............................................. 23,634 43,657 Inventories, net............................................................... 101,564 118,801 Deferred income taxes.......................................................... 24,484 22,108 Other current assets, net...................................................... 8,149 10,632 -------- -------- Total current assets.................................................. 182,995 228,846 PROPERTY, PLANT AND EQUIPMENT Computer and broadcast equipment............................................... 90,581 106,144 Buildings and leasehold improvements........................................... 69,843 74,514 Furniture and other equipment.................................................. 49,561 46,183 -------- -------- 209,985 226,841 Less accumulated depreciation and amortization........................ 118,710 116,697 -------- -------- 91,275 110,144 Land........................................................................... 17,093 17,774 Construction in progress....................................................... 406 3,182 -------- -------- 108,774 131,100 OTHER ASSETS Cable distribution fees, net ($34,803 and $34,174, respectively, to related parties)..................................................................... 99,161 67,978 Deferred income taxes.......................................................... 23,142 -- Long-term investments ($10,000 in a related party)............................. 14,000 10,000 Other non-current assets....................................................... 8,223 8,575 -------- -------- 144,526 86,553 -------- -------- $436,295 $446,499 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Current maturities of long-term obligations.................................... $ 1,555 $ 1,690 Accounts payable............................................................... 84,297 75,264 Accrued liabilities: Programming fees ($2,260 and $26,591 respectively, to related parties)....... 20,377 50,170 Sales returns................................................................ 10,832 12,304 Litigation settlements....................................................... 6,140 14,450 Treasury stock............................................................... -- 13,109 Other........................................................................ 52,223 38,786 -------- -------- Total current liabilities............................................. 175,424 205,773 LONG-TERM OBLIGATIONS (net of current maturities).............................. 135,810 27,491 DEFERRED INCOME TAXES.......................................................... -- 6,792 COMMITMENTS AND CONTINGENCIES.................................................. -- -- STOCKHOLDERS' EQUITY Preferred stock -- $.01 par value; authorized 500,000 shares, no shares issued and outstanding.............................................................. -- -- Common stock -- $.01 par value; authorized 150,000,000 shares, issued 77,718,379 and 77,553,329 at December 31, 1995 and 1994, respectively........ 777 776 Class B -- convertible common stock -- $.01 par value; authorized, issued and outstanding 20,000,000 shares................................................ 200 200 Additional paid-in capital..................................................... 169,057 167,463 Retained earnings.............................................................. 7,677 69,560 Treasury stock -- 6,986,000 and 4,440,700 common shares, at cost, at December 31, 1995 and 1994, respectively.............................................. (48,718) (27,136) Unearned compensation.......................................................... (3,932) (4,420) -------- -------- 125,061 206,443 -------- -------- $436,295 $446,499 ======== ========
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. 25 29 HOME SHOPPING NETWORK, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
- ------------------------------------------------------------------------------------------------- YEARS ENDED DECEMBER 31, ------------------------------------ 1995 1994 1993 - ------------------------------------------------------------------------------------------------- (In thousands, except per share data) NET SALES.................................................. $1,018,625 $1,126,514 $1,046,580 Cost of sales.............................................. 701,678 730,504 704,040 ---------- ---------- ---------- Gross profit..................................... 316,947 396,010 342,540 ---------- ---------- ---------- Operating expenses: Selling and marketing.................................... 167,063 161,886 138,092 Engineering and programming.............................. 98,216 98,835 93,686 General and administrative............................... 77,087 79,344 93,539 Depreciation and amortization............................ 38,854 29,066 24,172 Other charges............................................ 11,893 -- -- Restructuring charges.................................... 4,114 -- -- ---------- ---------- ---------- 397,227 369,131 349,489 ---------- ---------- ---------- Operating profit (loss).......................... (80,280) 26,879 (6,949) Other income (expense): Interest income.......................................... 1,961 9,556 13,655 Interest expense......................................... (10,077) (5,512) (10,863) Miscellaneous............................................ (426) (403) (2,410) Litigation settlements................................... (6,383) -- (13,000) ---------- ---------- ---------- (14,925) 3,641 (12,618) ---------- ---------- ---------- Earnings (loss) before income taxes and extraordinary item..................................................... (95,205) 30,520 (19,567) Income tax expense (benefit)............................... (33,322) 12,819 (4,028) ---------- ---------- ---------- Earnings (loss) before extraordinary item.................. (61,883) 17,701 (15,539) Extraordinary item -- loss on early extinguishment of long-term obligations (net of tax benefit of $567 and $4,395 for the years ended December 31, 1994 and 1993, respectively)............................................ -- (924) (7,242) ---------- ---------- ---------- NET EARNINGS (LOSS)........................................ $ (61,883) $ 16,777 $ (22,781) ========= ========= ========= Earnings (loss) per common share: Earnings (loss) before extraordinary item................ $ (.69) $ .19 $ (.18) Extraordinary item, net.................................. -- (.01) (.08) ---------- ---------- ---------- Net earnings (loss)...................................... $ (.69) $ .18 $ (.26) ========= ========= =========
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. 26 30 HOME SHOPPING NETWORK, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
- ------------------------------------------------------------------------------------------------------------------ CLASS B CONVERTIBLE ADDITIONAL UNEARNED COMMON COMMON PAID-IN RETAINED TREASURY COMPEN- STOCK STOCK CAPITAL EARNINGS STOCK SATION TOTAL - ------------------------------------------------------------------------------------------------------------------ (In thousands) BALANCE AT DECEMBER 31, 1992....... $671 $ 242 $115,846 $ 75,564 $(14,027) $(8,147) $170,149 Issuance of common stock upon exercise of stock options........ 55 -- 31,796 -- -- -- 31,851 Issuance of common stock upon conversion of debentures......... -- -- 15 -- -- -- 15 Unearned compensation related to executive stock award program.... -- -- 1,009 -- -- (1,009) -- Income tax benefit related to executive stock award program and stock options exercised.......... -- -- 11,705 -- -- -- 11,705 Expense related to executive stock award program.................... -- -- -- -- -- 5,615 5,615 Conversion of Class B common stock to common stock.................. 36 (36) -- -- -- -- -- Net loss for the year ended December 31, 1993................ -- -- -- (22,781) -- -- (22,781) ------ ----- ---------- -------- -------- -------- -------- BALANCE AT DECEMBER 31, 1993....... 762 206 160,371 52,783 (14,027) (3,541) 196,554 Issuance of common stock upon exercise of stock options........ 8 -- 4,517 -- -- -- 4,525 Unearned compensation related to employee equity participation plan............................. -- -- -- -- -- (3,736) (3,736) Income tax benefit related to executive stock award program and stock options exercised.......... -- -- 2,575 -- -- -- 2,575 Expense related to executive stock award program.................... -- -- -- -- -- 2,047 2,047 Expense related to employee equity participation plan............... -- -- -- -- -- 810 810 Purchases of treasury stock, at cost............................. -- -- -- -- (13,109) -- (13,109) Conversion of Class B common stock to common stock.................. 6 (6) -- -- -- -- -- Net earnings for the year ended December 31, 1994................ -- -- -- 16,777 -- -- 16,777 ------ ----- ---------- -------- -------- -------- -------- BALANCE AT DECEMBER 31, 1994....... 776 200 167,463 69,560 (27,136) (4,420) 206,443 Issuance of common stock upon exercise of stock options........ 1 -- 902 -- -- -- 903 Unearned compensation related to executive stock award program and stock options granted............ -- -- 96 -- -- (63) 33 Unearned compensation related to employee equity participation plan............................. -- -- -- -- -- (1,264) (1,264) Income tax benefit related to executive stock award program and stock options exercised.......... -- -- 596 -- -- -- 596 Expense related to executive stock award program.................... -- -- -- -- -- 795 795 Expense related to employee equity participation plan............... -- -- -- -- -- 1,020 1,020 Purchases of treasury stock, at cost............................. -- -- -- -- (21,582) -- (21,582) Net loss for the year ended December 31, 1995................ -- -- -- (61,883) -- -- (61,883) ------ ----- ---------- -------- -------- -------- -------- BALANCE AT DECEMBER 31, 1995....... $777 $ 200 $169,057 $ 7,677 $(48,718) $(3,932) $125,061 ======== ========== ========= ========= ========= ======== =========
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. 27 31 HOME SHOPPING NETWORK, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
- ----------------------------------------------------------------------------------------------- YEARS ENDED DECEMBER 31, ------------------------------------ 1995 1994 1993 - ----------------------------------------------------------------------------------------------- (In thousands) Cash flows from operating activities: Net earnings (loss).................................... $(61,883) $ 16,777 $ (22,781) Adjustments to reconcile net earnings (loss) to net cash provided by (used in) operating activities: Depreciation and amortization..................... 26,162 25,173 24,172 Amortization of cable distribution fees........... 12,692 3,893 -- Inventory carrying value adjustment............... 14,468 (6,455) 12,179 Deferred income taxes............................. (32,310) 5,649 (14,102) Loss on disposition of wholly-owned subsidiary.... -- 2,854 -- Loss on retirement of long-term obligations....... -- 1,491 11,637 Change in Stock Appreciation Rights ("SAR's") and common stock issued for services provided...... 1,911 1,310 8,449 Provision for losses on accounts and notes receivable..................................... 440 377 (171) Equity in (earnings) losses of unconsolidated affiliates..................................... 302 (144) 589 (Gain) loss on sale of assets..................... 6,040 106 (277) Liquidation of joint venture operation............ -- -- 722 Change in current assets and liabilities: (Increase) decrease in accounts receivable..... 12,576 (10,698) (15,753) (Increase) decrease in interest receivable from related party................................ -- 1,039 (1,039) (Increase) decrease in inventories............. 1,635 (1,416) (4,056) (Increase) decrease in other current assets.... 3,572 (3,313) (1,175) Increase (decrease) in accounts payable........ 9,362 (13,594) 26,683 Increase (decrease) in accrued liabilities..... (24,303) 24,687 29,923 Increase in cable distribution fees............... (43,874) (71,871) -- Stock purchases for employee equity participation plan........................................... (1,264) (3,736) -- -------- -------- --------- NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES................................... (74,474) (27,871) 55,000 -------- -------- --------- Cash flows from investing activities: Capital expenditures................................... (13,004) (18,602) (15,491) Proceeds from sale of assets........................... 8,727 3,221 548 Increase in long-term investments...................... (4,000) -- (2,775) Proceeds from long-term notes receivable............... 3,169 133,325 4,892 Increase in intangible assets.......................... (2,378) (4,338) (2,057) (Increase) decrease in other non-current assets........ (920) (6,185) 683 -------- -------- --------- NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES................................... (8,406) 107,421 (14,200) -------- -------- --------- Cash flows from financing activities: Borrowings from secured credit facility................ 120,000 -- -- Payments for purchases of treasury stock............... (34,691) -- -- Principal payments on and redemptions of long-term obligations......................................... (11,816) (110,993) (206,506) Proceeds from issuance of common stock................. 903 4,525 31,851 Borrowings from unsecured credit facilities............ -- 25,000 150,000 -------- -------- --------- NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES................................... 74,396 (81,468) (24,655) -------- -------- --------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS..... (8,484) (1,918) 16,145 Cash and cash equivalents at beginning of year........... 33,648 35,566 19,421 -------- -------- --------- CASH AND CASH EQUIVALENTS AT END OF YEAR................. $ 25,164 $ 33,648 $ 35,566 ======== ======== =========
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. 28 32 HOME SHOPPING NETWORK, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE A -- ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Home Shopping Network, Inc. (the "Company" or "HSN") is a holding company, the subsidiaries of which conduct the day-to-day operations of the Company's various business activities. The Company's primary business is electronic retailing conducted by Home Shopping Club, Inc. ("HSC"), a wholly-owned subsidiary of the Company. The following is a summary of the significant accounting policies of the Company consistently applied in the preparation of the accompanying consolidated financial statements. 1. CONSOLIDATION The consolidated financial statements include the accounts of the Company and all wholly-owned subsidiaries. All significant intercompany transactions and accounts have been eliminated. 2. CASH AND CASH EQUIVALENTS For purposes of reporting cash flows, cash and cash equivalents include cash and short-term investments. Short-term investments consist primarily of U.S. Treasury Securities, auction preferred shares, U.S. Government agencies and certificates of deposit with original maturities of less than 91 days. 3. ACCOUNTS AND NOTES RECEIVABLE HSN has a sales program with a deferred payment arrangement, "FlexPay", which allows customers to charge their purchases to third party credit cards in installments, generally over three consecutive months. FlexPay receivables totaled $13,015,000 and $23,621,000 at December 31, 1995 and 1994, respectively. At December 31, 1994 accounts and notes receivable included $3,000,000 due from a former chairman of the Company's Board of Directors and a $5,000,000 note receivable from a former wholly-owned subsidiary, Precision Systems, Inc. ("PSi"). 4. INVENTORIES, NET Merchandise inventories are valued at the lower of cost or market, cost being determined using the first-in, first-out method. Cost includes freight, certain warehousing costs and other allocable overhead. Market is determined on the basis of net realizable value, giving consideration to obsolescence and other factors. Inventories are presented net of an inventory carrying adjustment of $33,259,000 and $18,791,000 at December 31, 1995 and 1994, respectively. 5. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment, including significant improvements, are recorded at cost. Repairs and maintenance and any gains or losses on dispositions are included in operations. Depreciation and amortization are provided on a straight-line basis to allocate the cost of depreciable assets to operations over their estimated service lives as follows:
DEPRECIATION/ ASSET CATEGORY AMORTIZATION PERIOD -------------------------------------------------------------------- ------------------- Computer and broadcast equipment.................................... 3 to 10 Years Buildings........................................................... 30 to 40 Years Leasehold improvements.............................................. 4 to 13 Years Furniture and other equipment....................................... 3 to 10 Years
29 33 HOME SHOPPING NETWORK, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Depreciation and amortization expense on property, plant and equipment was $20,452,000, $22,540,000 and $21,911,000 for the years ended December 31, 1995, 1994 and 1993, respectively. For income tax purposes, certain assets are depreciated using allowable accelerated methods which result in different depreciation amounts than would be calculated for financial statement purposes. 6. CABLE DISTRIBUTION FEES, NET The Company pays upfront fees for long-term cable contracts for carriage of the Company's programming. These fees are amortized to expense on a straight-line basis, over the terms of the respective contracts which range from 5 to 15 years. Amortization expense for cable distribution fees for the years ended December 31, 1995 and 1994 was $12,692,000 and $3,893,000, respectively. Accumulated amortization as of December 31, 1995 and 1994 was $16,585,000 and $3,893,000, respectively. The Company periodically analyzes the value of its cable distribution fees to determine if an impairment has occurred. The Company measures the potential impairment of recorded cable distribution fees by the undiscounted value of expected future operating cash flows in relation to its net capital investment. Based on its analysis, the Company does not believe that an impairment of its cable distribution fees has occurred. 7. OTHER NON-CURRENT ASSETS Other non-current assets consists primarily of goodwill which is recorded at cost and amortized on a straight-line basis over its economic life, primarily three years. In connection with the purchase of Internet Software, Inc. ("ISN") during 1994, as discussed in Note E, goodwill increased by $5,239,000. Amortization expense for other non-current assets was $5,710,000, $2,633,000 and $2,261,000 for the years ended December 31, 1995, 1994 and 1993, respectively. The increase in amortization expense during 1995 was related to the sale of name lists for Ortho-Vent, Inc. ("Ortho-Vent"), one of the Company's mail order subsidiaries, as discussed below and in Note F. Costs in connection with mailing lists developed for the Company's direct response advertising business are amortized over a two year period. The total amount of direct response advertising included in amortization expense for the years ended December 31, 1995, 1994, and 1993, was $3,868,000, $1,982,000, and $1,988,000, respectively. Due to the sale of the Ortho-Vent assets, the Company no longer incurs these costs and all previously capitalized amounts were written-off in 1995. All non-direct response advertising is expensed in the period incurred. 8. NET SALES Revenues include merchandise sales and shipping and handling revenues, and are reduced by incentive discounts and sales returns to arrive at net sales. Revenues are recorded for credit card sales upon transaction authorization, and for check sales upon receipt of customer payment, which does not vary significantly from the time goods are shipped. The Company's sales policy allows merchandise to be returned at the customer's discretion, generally up to 30 days. An allowance for returned merchandise is provided based upon past experience. 9. INCOME TAXES The Company accounts for income taxes pursuant to Statement of Financial Accounting Standards No. 109 "Accounting for Income Taxes" ("Statement 109"). Under Statement 109, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences 30 34 HOME SHOPPING NETWORK, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. 10. EARNINGS (LOSS) PER SHARE Primary earnings (loss) per common share is based on net earnings (loss) divided by the weighted average number of common shares outstanding giving effect to stock options and convertible debt, when dilutive. Fully diluted earnings per share is not materially different from primary earnings per share in any period presented. The weighted average number of common shares outstanding was 90,782,000, 95,061,000 and 91,192,000 for the years ended December 31, 1995, 1994 and 1993, respectively. 11. RECLASSIFICATIONS Certain amounts in the prior year's consolidated financial statements have been reclassified to conform to the 1995 presentation. NOTE B -- LONG-TERM INVESTMENTS In July 1995, the Company paid $4,000,000 for a 20% interest in Body By Jake Enterprises, L.L.C. ("BBJ"). This investment is accounted for under the cost method. Simultaneously, the Company entered into a long-term joint marketing agreement with BBJ to provide for the sale and promotion of merchandise through HSC and other distribution channels. The Company has a $10,000,000 investment consisting of 100,000 shares of Series A non-voting preferred stock, $.01 par value, with a liquidation preference of $100 per share, in The National Registry Inc. ("NRI"), which is accounted for under the cost method. This investment is convertible into 6,336,154 shares of NRI common stock at the Company's option, however, conversion to common stock is automatic in the event that cumulative gross revenues for NRI reach $15,000,000. At December 31, 1995, one of the Company's executive officers served as a director of NRI. J. Anthony Forstmann, a director of the Company, is Chairman of NRI and had voting rights with respect to 28.3% of NRI's common stock as of December 31, 1995. NOTE C -- LONG-TERM OBLIGATIONS AND CREDIT FACILITIES
- ---------------------------------------------------------------------------------------------- DECEMBER 31, ---------------------- 1995 1994 - ---------------------------------------------------------------------------------------------- (In thousands) Secured $150,000,000 Revolving Credit Facility as amended February 13, 1996, ("Credit Facility") which expires April 1, 1997 (unsecured prior to September 28, 1995). Borrowings can be used for general corporate purposes. The interest rate ranged from 6.25% to 8.81% and is tied to the London Interbank Offered Rate ("LIBOR"), plus an applicable margin based on the Company's total debt to operating cash flow ratio..................................................... $135,000 $25,000 Unsecured 7.5% note, plus accrued interest, payable to related parties, in connection with a business acquisition, due on September 1, 1996. See Note E................................................. 1,325 2,903 Other long-term obligations........................................... 1,040 1,278 -------- ------- Total long-term obligations........................................... 137,365 29,181 Less current maturities............................................... 1,555 1,690 -------- ------- Long-term obligations, net of current maturities...................... $135,810 $27,491 ======== =======
31 35 HOME SHOPPING NETWORK, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Aggregate contractual maturities of long-term obligations are as follows:
--------------------------------------------------------------------------------------- YEARS ENDING DECEMBER 31, --------------------------------------------------------------------------------------- (In thousands) 1996................................................................... $ 1,555 1997................................................................... 135,250 1998................................................................... 270 1999................................................................... 290 -------------- $137,365 ===========
The Company's Credit Facility was amended on September 28, 1995 and the maximum borrowing availability was increased from $100,000,000 to $150,000,000 at that time. On that date, HSN pledged the stock of HSC and HSN Realty, Inc. ("Realty"), the guarantors of the Credit Facility, to secure the Company's obligation under the Credit Facility. On February 13, 1996, the covenants in the Credit Facility were further amended to include the effect of, among other things, certain of the restructuring and other charges as discussed in Note F and to allow for additional subordinated financing as discussed in Note P. The Credit Facility has yearly extension options beyond April 1997, if requested by the Company, subject to approval of the participating banks. Under the Credit Facility, the interest rate on borrowings is tied to the LIBOR, Federal Funds Rate, or Prime Rate, at the Company's option, plus an applicable margin. Commitment fee payments relating to the Credit Facility totaled $2,720,000 and $170,000, respectively, during 1995 and 1994. The unamortized commitment fee balance of $1,170,000 at December 31, 1995 is being amortized over the expected remaining life of the agreement. Restrictions contained in the Credit Facility include, but are not limited to, limitations on the encumbrance and disposition of assets, certain restrictions on repurchases of the Company's common stock and the maintenance of various financial covenants and ratios. The Company also has a $25,000,000 committed bank credit line secured by the capital stock of HSC and Realty. In addition, the Company has an uncommitted unsecured bank credit line offered on a conditional basis. On February 13, 1996, the committed bank credit line was amended on the same terms as the Credit Facility discussed above. These facilities back letters of credit, used exclusively to facilitate the purchase of imported inventory. Presentation of letters of credit by vendors results in an immediate charge to the Company's account with no interest charges incurred. Outstanding letters of credit are limited to a total of $25,000,000 at any time, under the terms of the Credit Facility. At December 31, 1995, outstanding letters of credit amounted to $14,052,000 leaving $10,948,000 of these bank credit lines available. The Company recognized extraordinary losses on the early extinguishment of its long-term obligations as follows:
-------------------------------------------------------------------------------------- DECEMBER 31, -------------------- 1994 1993 -------------------------------------------------------------------------------------- (In thousands) Total extinguished.............................................. $85,000 $160,152 ======= ======== Pre-tax loss net of discounts................................... $(1,491) $(11,637) Income tax benefit.............................................. 567 4,395 ------- -------- Extraordinary loss.............................................. $ (924) $ (7,242) ======= ========
There was no early extinguishment of long-term obligations during the year ended December 31, 1995. 32 36 HOME SHOPPING NETWORK, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE D -- INCOME TAXES A reconciliation of total income tax expense (benefit) to the amounts computed by applying the statutory federal income tax rate to earnings (loss) before income tax expense (benefit) and extraordinary item is shown as follows:
------------------------------------------------------------------------------------------------- YEARS ENDED DECEMBER 31, -------------------------------- 1995 1994 1993 ------------------------------------------------------------------------------------------------- (In thousands) Income tax expense (benefit) at the federal statutory rate of 35% (effect of rate change in 1993 to 35% was $(196))........ $(33,322) $10,682 $(6,848) Amortization and write-off of goodwill and other acquired intangibles and interest on adjustments proposed by the Internal Revenue Service ("IRS")............................. 1,629 2,145 1,582 State income tax expense (benefit), net of effect of federal taxes........................................................ (1,778) 803 71 Executive compensation in excess of $1 million................. (688) -- 688 Sale of wholly-owned subsidiary................................ -- (920) -- Other, net..................................................... 837 109 479 -------- ------- ------- $(33,322) $12,819 $(4,028) ========= ======== ========
The Company's effective tax expense (benefit) rate was (35.0)% for 1995, 42.0% for 1994; and (20.6)% for 1993. The components of income tax expense (benefit) attributable to operations are as follows:
------------------------------------------------------------------------------------------------- YEARS ENDED DECEMBER 31, --------------------------------- 1995 1994 1993 ------------------------------------------------------------------------------------------------- (In thousands) CURRENT INCOME TAXES: Federal....................................................... $ (1,023) $ 4,791 $ 8,753 State......................................................... 11 584 870 -------- ------- -------- (1,012) 5,375 9,623 -------- ------- -------- DEFERRED INCOME TAXES: Net operating loss carry over................................. (23,489) -- -- Depreciation for tax in excess of (less than) financial statements.................................................. (2,207) 683 55 Sales returns................................................. 382 493 (471) Amortization of acquired intangible assets.................... -- (1,622) 47 Provision for accrued liabilities............................. (1,407) 956 (1,363) Inventory costing............................................. (4,421) 1,330 (4,057) Litigation settlements........................................ 1,859 542 (4,550) Deferred compensation......................................... 662 275 (907) State income taxes............................................ (1,786) 325 (618) IRS settlement................................................ -- 1,794 -- Amortization of long-term obligation issue costs.............. -- -- (718) Sales tax accrual............................................. 294 771 24 Provision for uncollectible amounts........................... (6) 2,585 (351) Amortization of cable distribution fees....................... (1,775) (530) -- Charitable contribution carryover............................. (48) 244 (910) Valuation allowance........................................... 240 116 135 Other, net.................................................... (608) (518) 33 -------- ------- -------- (32,310) 7,444 (13,651) -------- ------- -------- $(33,322) $12,819 $ (4,028) ========= ======== =========
During the years ended December 31, 1994 and 1993, the Company recorded an extraordinary item, loss on early extinguishment of long-term obligations, net of the income tax effect. See Note C. 33 37 HOME SHOPPING NETWORK, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities are presented below:
-------------------------------------------------------------------------------------- DECEMBER 31, ------------------ 1995 1994 -------------------------------------------------------------------------------------- (In thousands) CURRENT Deferred tax assets: Inventory costing............................................... $ 10,339 $ 5,918 Provision for accrued liabilities............................... 5,182 3,775 Sales returns................................................... 3,794 4,176 Litigation settlements.......................................... 2,149 4,008 Provision for uncollectible amounts............................. 614 608 Deferred compensation........................................... 1,163 1,825 Sales tax accrual............................................... 484 778 Charitable contribution carryover............................... 714 666 Other........................................................... 45 354 -------- ------- Net deferred tax assets................................. $ 24,484 $22,108 ======== ======= NON-CURRENT Deferred tax liabilities (assets): Net operating loss carry over................................... $(23,489) $ -- State income taxes.............................................. (2,419) (633) Cable distribution fees......................................... (2,305) (530) Investment in unconsolidated subsidiaries....................... -- (238) Installment sale................................................ -- (182) Other........................................................... (1,759) (915) -------- ------- (29,972) (2,498) Less valuation allowance........................................ 1,235 995 -------- ------- (28,737) (1,503) Depreciation for tax in excess of financial statements.......... 5,409 7,616 Capitalized costs of mailing lists.............................. -- 539 Other........................................................... 186 140 -------- ------- Net deferred tax liabilities (assets)................... $(23,142) $ 6,792 ======== =======
The Company had taxable income (loss) and pre-tax book income (loss) for the periods presented as follows:
--------------------------------------------------------------------------------------- YEARS ENDED DECEMBER 31, ----------------------------- 1995 1994 1993 --------------------------------------------------------------------------------------- (In thousands) Taxable income (loss)................................... $(72,849) $ 5,200 $ 8,207 Pre-tax book income (loss).............................. $(95,205) $29,029 $(31,204)
The primary differences between taxable income (loss) and pre-tax book income (loss) are the gross effects of the deferred income taxes, exclusive of the net operating loss carry over as detailed above. In addition to these reconciling items, the Company recognized income tax deductions relating to the issuance of common stock pursuant to the Company's executive stock award program and the exercise of stock options ("Common Stock Deductions"), the income tax benefit of which was recorded as an increase to additional 34 38 HOME SHOPPING NETWORK, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) paid-in capital. During the years ended December 31, 1995, 1994 and 1993, the Company incurred Common Stock Deductions of $1,445,000, $7,308,000 and $31,697,000, respectively. Except for the effects of the reversal of net deductible temporary differences and the effects of future Common Stock Deductions, the Company is not currently aware of any factors which would cause any significant differences between taxable income and pre-tax book income in future years. There can be no assurances that there will not be significant differences in the future between taxable income and pre-tax book income if circumstances change (for example, changes in tax laws or the Company's financial condition or performance). During 1995, the Company incurred a tax loss of $72,849,000. The Company will carryback $8,900,000 to prior taxable years to obtain an income tax refund. The remaining tax loss of $63,949,000 will be carried forward and will expire on December 31, 2010. Management believes that it will generate future taxable income sufficient to realize this tax benefit prior to its expiration. New management, which has substantial experience in the television retail business, has been appointed and is establishing a new direction for the Company intended to reverse operating losses experienced in 1995. The Company's plans are to provide a proper inventory mix with respect to product assortment and price point that attracts both first-time buyers and active buyers, and improved inventory management. Management of the Company believes that through minimal growth in net sales, calculated at cost of living increases of 3.5%, cost reduction measures implemented during late 1995 and early 1996, and further anticipated reductions resulting from expected capital expenditures, that both the net operating loss carryforwards of $63,949,000 and a substantial portion of other deferred tax assets presented above will be recovered within a three-year period. Accordingly, the Company has recognized an asset related to these carryforward and no valuation allowance has been provided. There can be no assurance, however, that the Company will generate any earnings or any specific level of continuing earnings in order to allow the Company to realize the benefits of the net operating loss carryforward or other deferred tax assets. During 1994, the IRS completed its examination of the Company's federal income tax returns for fiscal years 1986 through 1989 and proposed various adjustments. The Company and the IRS agreed to settle all of the outstanding issues with the exception of the deductibility of royalty payments made to a then related party. The Company paid the assessments, totaling $15,000,000 including interest, related to all the issues except the royalty payments covering all taxable periods through August 31, 1993. These assessments had previously been accrued. Also in 1994, the IRS issued a Statutory Notice of Deficiency for fiscal years 1986 through 1989 related to the royalty payments issue. The Company paid the assessments, totaling $4,600,000 including interest, which had previously been accrued. The Company continues to maintain that it has meritorious positions regarding the deductibility of these payments and will file a refund claim with the IRS during 1996. On May 12, 1995, the IRS completed its examination of the Company's federal income tax returns for fiscal years 1990 and 1991, and proposed adjustments resulting in income tax and interest deficiencies of $4,200,000, primarily related to the royalty payments issue. On October 31, 1995, the Company and the IRS agreed to settle all of the outstanding issues, except the royalty payments issue, and the Company paid the resulting assessment of $1,100,000, including interest. These assessments had previously been accrued. The Company has not yet received a Statutory Notice of Deficiency relating to the royalty payments issue. The Company will protest such assessment when received. The Company also made such royalty payments during fiscal years 1992 through 1993. The deductibility of these payments will also be challenged by the IRS upon audit. The Company has made adequate provision for this issue for these years. 35 39 HOME SHOPPING NETWORK, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The Company's federal income tax returns for fiscal years 1992, 1993 and 1994 are currently under examination by the IRS. No proposed material adjustments relating to such years, other than those discussed above, have been brought to management's attention. NOTE E -- BUSINESS COMBINATION On September 1, 1994, a wholly-owned subsidiary of the Company purchased all the outstanding shares of ISN for cash of $2,097,000 and notes payable of $2,903,000, see Note C, for a total of $5,000,000. The purchase method of accounting was used to account for this business combination. Goodwill acquired in connection with this transaction is being amortized over three years. Consolidated results of operations for the year ended December 31, 1994 include the results of ISN from its acquisition date. The results of operations prior to the date of acquisition, were not significant to the Company's consolidated results of operations and therefore pro forma effects are not presented. NOTE F -- OTHER CHARGES AND RESTRUCTURING CHARGES During 1995, the Company recorded $42,340,000 in pre-tax special charges. In connection with new management's sales and merchandising philosophy an overall analysis of the Company's inventory was conducted and determined that certain merchandise was not compatible with this new philosophy. As a result, such merchandise will be liquidated through other than the Company's normal retailing channels. Accordingly, management increased the Company's inventory carrying value adjustment by $12,077,000 to $33,259,000 at December 31, 1995 to reflect the net realizable value of the Company's inventory. During 1995, the Company recorded $11,893,000 in "Other Charges." These consisted of severance pay of $3,978,000 related to a reduction in work force, $4,800,000 of payments to certain executives as provided for under their employment agreements in connection with the termination of their employment and the write-off of certain equipment maintenance and contractual fees totaling $1,812,000 related to service contracts which the Company will no longer utilize. In addition, the Company recorded a write-down of inventory totaling $1,303,000 to net realizable value based on the disposition of Ortho-Vent's assets. An additional $2,400,000, related to name lists of Ortho-Vent were written off and included in "Depreciation and Amortization." During 1995 the Company recorded restructuring charges of $4,114,000 covering employee and other costs related to the closing of its fulfillment center in Reno, Nevada. The facility was closed by June 30, 1995. During 1995, payments totaling $1,214,000 were made related to this charge leaving $2,900,000 accrued for future charges, at December 31, 1995. Interest expense includes $773,000 of bank fees related to the Company's Credit Facility which have been amortized based on the Company's intent to seek refinancing of this debt prior to its contractual maturity. Miscellaneous expense includes the write-down of computer equipment no longer in use with a net book value of $4,700,000. Estimated costs related to pending and settled litigation for the year ended December 31, 1995 totaled $6,383,000. NOTE G -- EMPLOYEE BENEFIT PLANS The Company offers a plan pursuant to Section 401(k) of the Internal Revenue Code covering substantially all full-time employees. Matching employer contributions are set at the discretion of the Board of Directors. The Company's contributions for the years ended December 31, 1995, 1994 and 1993 were $864,000, $824,000 and $667,000, respectively. 36 40 HOME SHOPPING NETWORK, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) On December 28, 1994, the Board of Directors adopted the Home Shopping Network, Inc. Employee Equity Participation Plan (the "Equity Plan"), effective December 31, 1994. In January 1996, the Company received a favorable determination letter stating that the Equity Plan is a qualified plan for IRS purposes. The Equity Plan covers all employees who have completed one year of service, at least 1,000 hours of service during that year, are at least 21 years of age, are not highly compensated, and do not hold options to purchase shares of HSN common stock. The Company contributed $5,000,000 which was used to purchase a total of 499,000 shares of common stock in 1994 and 1995 to fund the Equity Plan. Employees who met the eligibility requirements on December 31, 1994 and June 30, 1995, will receive grants under the Equity Plan. The stock vests ratably at 20% a year with the first vesting being effective as of the calendar year in which the eligible employee has worked at least 1,000 hours. The Board of Directors have not made the decision regarding any additional grants for any period subsequent to June 30, 1995. The common stock in the Equity Plan is included in the weighted average number of shares for the Company's earnings per share calculation. The common stock when purchased was recorded as unearned compensation. For the years ended December 31, 1995 and 1994, $1,020,000 and $810,000, respectively, has been charged to expense based on the shares authorized for granting and the vesting schedule discussed above. The fair value of the shares which were unvested and as yet not authorized for grants at December 31, 1995 is $2,858,000. Any future contributions to the Equity Plan will be subject to the Board of Directors' approval. NOTE H -- COMMITMENTS AND CONTINGENCIES The Company leases satellite transponders, computers, warehouse and office space used in connection with its operations under various operating leases. Future minimum payments under non-cancellable operating leases are as follows:
--------------------------------------------------------------------------------------- YEARS ENDING DECEMBER 31, --------------------------------------------------------------------------------------- (In thousands) 1996................................................................... $ 13,541 1997................................................................... 12,862 1998................................................................... 7,981 1999................................................................... 7,203 2000................................................................... 6,959 Thereafter............................................................. 30,352 -------- $ 78,898 ========
Rent and lease expenses charged to operations were $13,263,000, $13,978,000 and $15,185,000 for the years ended December 31, 1995, 1994 and 1993, respectively. During June 1995, in connection with the restructuring of its programming the Company discontinued use of a satellite transponder which is under a non-cancellable operating lease calling for monthly payments ranging from $140,000 to $150,000 through December 2006. The Company subleased this satellite transponder to a related party during 1995, as discussed in Note M. The sublease expired on February 15, 1996, and the Company is currently seeking to sublease the transponder or to sell its rights with respect to this satellite transponder. The Company does not expect any material adverse financial impact in connection with the lease. On December 28, 1992, HSC entered into affiliation agreements with Silver King Communications, Inc. ("SKC") which provide for SKC's broadcast television stations to air HSC programming on a full-time basis. The agreements have an original term of five years, and are renewable for two successive five year terms at 37 41 HOME SHOPPING NETWORK, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) SKC's sole option. The affiliation agreements are cancelable by SKC with eighteen months' written notice prior to the end of any scheduled term. The notice period of non-renewal of the first term is scheduled to end on June 28, 1996, but is being extended by mutual agreement between SKC and the Company to December 28, 1996. HSC pays an affiliation fee to SKC based on hourly rates and, upon reaching certain sales levels, commissions on net sales. Expense related to affiliation agreements with SKC for the years ended December 31, 1995, 1994 and 1993, was $41,332,000, $42,415,000 and $41,135,000, respectively, of which $778,000, $1,865,000 and $996,000, respectively, represents commissions. In December 1995, the Company entered into a four-year employment agreement with the Company's Executive Vice President of Administration, which is automatically renewable for successive one-year terms unless either party provides at least 180 days' written notice. The employment agreement provides for an annual base salary of $235,000 per annum until December 1999, a signing bonus of $50,000, and options to purchase 50,000 shares of the Company's common stock at $8.50 per share. These options were granted under the terms of the 1996 Stock Option Plan for Employees ("1996 Employee Plan"), which plan is subject to shareholder approval. See Note L. In November 1995, the Company entered into a four-year employment agreement with the Company's President, which is automatically renewable for successive one-year terms unless either party provides at least 180 days' written notice. The employment agreement provides for an annual base salary of not less than $500,000 and a $1,000,000 loan, evidenced by a note, bearing interest at 5.00% per annum, with only interest, payable monthly. The loan will be used for the purchase or renovation of a residence and will be secured by this property. The note, which has not yet been drawn against, will be due upon the first anniversary of the termination of the President. The employment agreement also provides options to purchase 2,500,000 shares of the Company's common stock at $8.50 per share. These options were granted under the terms of the 1996 Employee Plan, which plan is subject to shareholder approval. See Note L. In September 1994, the Company entered into a three-year employment agreement with its General Counsel which is automatically renewable for successive one-year terms unless either party provides written notice by April 30 in any year. The agreement calls for an annual base salary of at least $225,000 per year until August 1997 and options to purchase 100,000 shares of the Company's common stock at $11.75 per share under the terms of the 1986 Stock Option Plan for Employees. Termination of the above employment agreements by the Company other than for cause will result in payment of the annual base salary amounts that would have been payable had employment continued until the expiration of the employment terms plus any annual bonus for the year of termination. In addition, termination of employment following a change in control of the Company may result in entitlement to all unpaid compensation and other benefits through the term of the contracts. On August 11, 1993 a former Chairman of the Board of the Company, upon his resignation, commenced a five-year consultancy and non-competition arrangement with the Company during which period he receives $500,000 per year. The Company has entered into an amended five year agreement for inbound 800 service usage with MCI Telecommunications Corporation ("MCI") ending in August 2000 which requires minimum annual payments of $9,600,000. If the Company terminates the agreement for reasons other than cause, payment of 50% of the aggregate of the minimum amounts for the remainder of the unexpired term will be due 30 days after the termination. The Company's payments to MCI for phone services during the years ended December 31, 1995 and 1994 substantially exceeded the above mentioned minimum. In addition, the Company has entered into an agreement with MCI covering equipment maintenance for a term from April 1, 1996 through April 1, 2001, requiring minimum annual payments of $2,676,000. Upon payment of $13,380,000 under the terms of the contract, the Company is no longer required to pay any fees for these services. The Company will receive a credit for any annual fees over $3,211,000. 38 42 HOME SHOPPING NETWORK, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE I -- LITIGATION The Company has reached an agreement to settle a consolidated class action pending in the Court of Common Pleas of Bucks County, Pennsylvania, relating to the Company's pricing practices with respect to diamond and imitation diamond jewelry sold to Pennsylvania residents between December 27, 1984 and May 20, 1991. Under the proposed settlement, customers who present adequate proof of purchase of cubic zirconia or diamond jewelry during the class period will have the option of receiving a cash payment or a discount certificate usable for the purchase of HSN merchandise during the following twelve months. The maximum cash payment required from the Company with respect to all costs relating to the settlement is $2,500,000. The Company will be entitled to a refund of any balance not used for these purposes. If certificates representing a maximum discount of more than $5,200,000 would be issuable under the settlement, the Company has the right to require that the certificates be pro-rated among those who elect to receive them. The settlement is subject to approval by the Court after notice and hearing. The Company believes it has accrued a balance sufficient to cover anticipated costs in connection with the resolution of this and other pending litigation. During 1995, the Company paid $14,450,000 relating to litigation settlements accrued in 1993. The Company is also involved in various other lawsuits either as plaintiff or defendant. In the opinion of management, the ultimate outcome of these various lawsuits should not have a material impact on the Company's liquidity, results of operations or financial condition. NOTE J -- STOCKHOLDERS' EQUITY The holders of both classes of the Company's common stock are entitled to receive ratably such dividends, if any, as may be declared by the Board of Directors out of funds legally available for the payment of dividends. In the event of the liquidation, dissolution or winding up of the Company, the holders of both classes of common stock are entitled to share ratably in all assets of the Company remaining after provision for payment of liabilities. Shares of Class B common stock are convertible at the option of the sole holder, Liberty Media Corporation ("Liberty"), a wholly-owned subsidiary of Tele-Communications, Inc. ("TCI"), into shares of common stock of the Company on a share-for-share basis. In the event of conversion of the Class B common stock, the Class B shares so converted will be retired and not subject to reissue. The holder of the Class B common stock votes together with the holders of common stock on all matters submitted to stockholders, except that it has no vote in the election of 25% of the Board of Directors. The holder of the Class B common stock is entitled to cast ten votes per share on all other matters. As of December 31, 1995, Liberty's beneficial ownership and voting rights were 41.4% and 80.4%, respectively. NOTE K -- ANTICIPATED CHANGE IN CONTROL In November 1995, Liberty and the new Chairman of the Company's Board of Directors (the "Chairman"), entered into an agreement, which related to, among other things, SKC's acquisition of control of the Company through the transfer to SKC of the common stock and Class B common stock owned by Liberty ("Company Shares"). Pursuant to the agreement between the Chairman and Liberty and certain other agreements entered into at such time, SKC would acquire the Company Shares (which shares represent a majority of the voting power of the outstanding equity securities of the Company) in exchange for additional shares of SKC's common stock and Class B stock. If such transactions are consummated, the Chairman, who became Chairman of the Board and Chief Executive Officer of SKC in August 1995 and acquired a significant number of options to acquire SKC common stock at such time, would also control securities of SKC representing a majority of the outstanding voting power of that entity. In addition, in connection with such 39 43 HOME SHOPPING NETWORK, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) transfer of the Company Shares, TCI would acquire beneficial ownership of a substantial additional equity interest in SKC and, through such ownership of SKC securities, would continue to have a substantial equity interest in the Company. The consummation of each of the foregoing transactions is subject to the satisfaction of certain conditions, including, but not limited to, receipt of FCC approval, and approval of transaction in which it is to acquire the Company Shares by the stockholders of SKC. In addition, SKC's acquisition of control of the Company referred to above, will constitute a "change in control" of the Company which will require an amendment to the Credit Facility. See Note P. There can be no assurance that the transactions described above will be consummated. NOTE L -- STOCK OPTIONS AND AWARDS The Company has granted options to purchase common stock under option plans as follows: The Board of Directors authorized the issuance of a total of 18,700,000 shares for the 1996 Employee Plan and the 1996 Stock Option Plan for Directors ("1996 Director Plan"), subject to shareholder approval at the Company's annual meeting of shareholders. The 1996 Employee Plan provides for the grant of options to purchase common stock at fair market value, subject to the discretion of the Compensation/Benefits Committee of the Board of Directors, as of the date of grant. The options vest annually and equally over five years, unless otherwise specified by the Compensation/Benefits Committee of the Board of Directors, beginning one year from the date of grant, and expire ten years from the date of grant. During 1995, the Company granted options for 15,950,000 shares which vests over a four year period of which 13,400,000 were to the Chairman of the Board, 2,500,000 were to the new President and Chief Executive Officer, and 50,000 were to the Executive Vice President of Administration, all at $8.50 per share. The 1996 Director Plan provides for issuance of options to outside directors. Options for 5,000 shares of common stock are automatically granted upon appointment to the Board of Directors, and options for an additional 5,000 shares are granted annually thereafter. Options provide for purchase at fair market value on the date of grant, vest over three years, and expire five years from the date of vesting. The 1987 Cable Operators Stock Option Plan, as amended, provided for the issuance of options to purchase common stock at or above the fair market value at the date of grant in exchange for entering into affiliation agreements to carry the Company's programming for up to seven years. All outstanding options were exercised or cancelled on or before June 1, 1994. The price of these options ranged between $5.56 and $6.49. The 1986 Stock Option Plan for Employees, as amended, provides for the grant of options to purchase common stock at the fair market value at date of grant. The options generally vest annually and equally over five years beginning one year from the date of grant, and expire ten years from the date of grant. The 1986 Stock Option Plan for Outside Directors, as amended, provides for the grant of options to purchase common stock at fair market value as of the date of grant. The options vest equally over two years beginning on the date of grant and expire five years from the date they vest. During 1992, the Board of Directors and shareholders approved certain amendments to the plan. The amendments provide for additional option grants after five years of service and, in addition, the number of shares of common stock subject to option under the plan was increased to 1,630,000 shares. 40 44 HOME SHOPPING NETWORK, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) A summary of changes in outstanding options under the stock option plans except for the 1996 Employee Plan and the 1996 Director Plan, which are subject to shareholder approval, as discussed above, is as follows:
- ------------------------------------------------------------------------------------------------------------ STOCK OPTION PLANS ----------------------------------------------------------------------- CABLE OPERATORS EMPLOYEES OUTSIDE DIRECTORS --------- ----------------------- ----------------------- TOTAL OPTIONS OPTIONS PRICE RANGE OPTIONS PRICE RANGE OPTIONS - ------------------------------------------------------------------------------------------------------------ (In thousands, except price range) Total authorized................... 27,500 10,000 1,630 39,130 ======= ====== ====== ====== Outstanding -- December 31, 1992... 4,325 2,934 $ 3.25- 8.23 300 $ 3.36- 6.61 7,559 Granted.......................... 49 1,063 $ 8.50- 14.63 180 $14.75- 14.75 1,292 Exercised........................ (3,305) (1,781) $ 3.25- 6.96 (216) $ 3.36- 6.61 (5,302) Canceled......................... (524) (115) $ 4.41- 9.88 (54) $ 4.98- 4.98 (693) --------- ------- ------- ------- Outstanding -- December 31, 1993... 545 2,101 $ 3.25- 14.63 210 $ 5.45- 14.75 2,856 Granted.......................... -- 3,316 $10.25- 12.25 -- -- 3,316 Exercised........................ (336) (335) $ 3.71- 9.88 (30) $ 5.45- 5.45 (701) Canceled......................... (209) (419) $ 4.41- 14.63 -- -- (628) --------- ------- ------- ------- Outstanding -- December 31, 1994... -- 4,663 $ 3.25- 14.63 180 $14.75- 14.75 4,843 Granted.......................... -- 195 $ 6.75- 9.00 90 $10.38- 10.38 285 Exercised........................ -- (165) $ 3.25- 8.50 -- -- (165) Canceled......................... -- (755) $ 4.41- 14.63 -- -- (755) --------- ------- ------- ------- Outstanding -- December 31, 1995... -- 3,938 $ 3.25- 14.63 270 $10.38- 14.75 4,208 ======= ====== ====== ====== Options exercisable................ -- 2,425 $ 3.25- 14.63 210 $10.38- 14.75 2,635 ======= ====== ====== ====== Available for grant................ -- 2,978 724 3,702 ======= ====== ====== ======
During the year ended December 31, 1995, 165,050 shares of common stock were issued in connection with the exercise of stock options for which the Company received $903,000 in cash. In October 1990, the Company adopted the 1990 Executive Stock Award Program (the "Program") pursuant to which 2,990,000 shares of common stock were granted to certain key employees and consultants. The Program was funded exclusively by the contribution of shares of common stock owned by a former chairman of the board and a former president of the Company. The Company did not issue any additional shares of stock in connection with the Program. The shares granted under the Program are distributed in five equal annual installments commencing one year from the grant date. Participants in the Program are entitled to receive dividends, if declared, on their unvested shares and certain officers are entitled to voting rights with respect to their unvested shares. Forfeitures are reissued at the discretion of the Compensation/Benefits Committee of the Board of Directors. Under this Program and another award of stock, the amount amortized and expensed relating to the compensation earned was $795,000, $2,047,000, and $5,615,000 for the years ended December 31, 1995, 1994 and 1993, respectively. In 1993, the former president and chief executive officer of HSN received SAR's with respect to 984,876 shares of the Company's common stock at an exercise price of $8.25 per share. The SAR's vested upon termination of his employment and were exercised during September 1995, at $10.13 per share. Compensation expense (benefit) recognized by the Company for the SAR's during the years ended December 31, 1995, 1994 and 1993 was ($758,000), ($1,547,000) and $2,834,000, respectively. In addition, $1,345,000 of expense related to the exercise of these SAR's is included in "Other Charges." 41 45 HOME SHOPPING NETWORK, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE M -- RELATED PARTY TRANSACTIONS Currently, the Company is involved in several agreements with related parties and has made payments to those related parties as follows. Effective August 25, 1995 the Chairman and Chief Executive Officer of SKC was appointed to the Company's board of directors and was appointed Chairman of the Company's Board of Directors effective November 27, 1995. The Company has affiliation agreements with SKC for which the Company paid $42,651,000 in 1995. See Note H. HSC has entered into affiliation agreements with cable operators which are wholly or partially owned by TCI. In addition, certain officers of Liberty and TCI served, or continue to serve, on the Company's Board of Directors. The managing general partner of certain cable systems which carry the Company's programming, was appointed to HSN's Board of Directors in July 1993. TCI also has an ownership interest in these cable systems. Payments to the above related parties for cable commissions and advertising were $7,150,000, $7,269,000, and $4,300,000 for the years ended December 31, 1995, 1994 and 1993, respectively. Cable distribution fees paid to related parties were $28,715,000 and $8,673,000 for the years ended December 31, 1995 and 1994, respectively. Additional commitments for cable distribution fees to related parties totaled $1,630,000 at December 31, 1995. In addition, the Company received $896,000 in payments for rental of a satellite transponder during 1995 from a wholly owned subsidiary of TCI. On April 28, 1992, the Company purchased 100,000 shares of Series A Preferred Stock of NRI. Pursuant to the purchase of these shares, HSN provides office space to NRI beginning in 1993. The Company charged NRI $68,000 and $65,000, respectively, for rent during the years ended December 31, 1995 and 1994. The Chairman and Chief Executive Officer of NRI was appointed to the Board of Directors of the Company on April 30, 1992. At December 31, 1995, one of the Company's executive officers served as a director of NRI. See Notes B and Q. Prior to 1994, the Company received a variety of products and services from entities related through common ownership and management with the former Chairman of the Company's Board of Directors and his immediate family members. These transactions were considered related party transactions until the resignation of the former Chairman of the Company's Board of Directors in August 1993. Subsequent to his resignation, these transactions are no longer considered related party, but are included for disclosure purposes for periods prior to January 1, 1994. Transactions with these entities are summarized as follows: 1. COMPUTER SOFTWARE LICENSE AGREEMENT: In 1985, the Company entered into a license agreement for computer software with Pioneer Data Processing, Inc., which provided for continuing monthly payments of 1% of HSC's gross profit, as defined. The amount expensed in connection with this agreement was $297,000 for the year ended December 31, 1993. 2. COMMISSIONS ON INVENTORY: Certain inventory in the form of returned merchandise, rejects and small lot saleable inventory were disposed of through Western Hemisphere, Inc. ("Western") for a 15% commission. Sales by the related party were less than 1% of total sales. The Company also provided certain equipment and space located at or in close proximity to each of the Company's four fulfillment centers, free of charge. The Company terminated this arrangement in 1993. Commissions were $561,000 for the year ended December 31, 1993. As of December 31, 1994 and 1993, the Company had a $4,500,000 liability recorded to Western which was paid during 1995. This amount related to cancellation of the computer software license agreement pursuant to which Western provided certain liquidation and related services, as noted above, and all other existing agreements and arrangements excluding certain assignment, secrecy and non-compete agreements. In connection with this and other litigation settlements, the former chairman of the Company's board of directors 42 46 HOME SHOPPING NETWORK, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) paid HSN $3,000,000 during 1995. This amount was recorded in accounts and notes receivable, as of December 31, 1994. The Company purchased certain equipment from PSi and paid license and system maintenance fees related to this equipment of $1,316,000 and $3,545,000, respectively, for the year ended December 31, 1993. The former chairman of HSN owns a controlling position in PSi's outstanding stock. Until August 1993, HSN and PSi also shared a common board member, and officer. Subsequent to August 11, 1993, PSi is no longer considered a related party due to the resignation of certain members of PSi's board of directors, and the resignation of a former chairman of the board of the Company. NOTE N -- CONSOLIDATED STATEMENTS OF CASH FLOWS Supplemental disclosure of cash flow information:
- ------------------------------------------------------------------------------------------- YEARS ENDED DECEMBER 31, --------------------------- 1995 1994 1993 - ------------------------------------------------------------------------------------------- (In thousands) CASH PAID DURING THE PERIOD FOR: Interest.................................................... $ 6,896 $ 5,899 $13,872 Income taxes................................................ 1,707 25,922 2,815 CASH RECEIVED FOR: Income tax refund........................................... 11,258 3,492 2,300
Supplemental information of non-cash investing and financing activities: - - During 1995 and 1994, the Company purchased 1,335,000 and 2,545,000 shares, respectively, of treasury stock for which the Company paid $34,691,000 in 1995. - - During the year ended December 31, 1993, $15,000 of the Company's 5 1/2% Convertible Subordinated Debentures were converted into 2,293 shares of common stock. - - As discussed in Note E, in connection with the purchase of ISN, the Company issued notes payable totaling $2,903,000. - - During the years ended December 31, 1994 and 1993, RMS converted 559,456 and 3,600,000 shares, respectively, of Class B common stock into shares of common stock. - - On March 27, 1995, PSi repaid $2,700,000, plus accrued interest, of its $5,000,000 loan from the Company. Under an agreement between the Company and PSi, the remaining principal balance of the loan was recorded as a prepayment of future monthly software maintenance payments through December 1995. NOTE O -- QUARTERLY RESULTS (UNAUDITED)
- ------------------------------------------------------------------------------------------------------- QUARTER QUARTER QUARTER QUARTER ENDED ENDED ENDED ENDED MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, - ------------------------------------------------------------------------------------------------------- (Table in thousands, except per share data) YEAR ENDED DECEMBER 31, 1995 Net sales................................. $ 243,610 $246,659 $ 239,894 $288,462 Gross profit.............................. 81,675 80,503 77,583 77,186(c) Net loss.................................. (8,799)(a) (9,736) (17,701)(b) (25,647)(d) Loss per common share..................... (.10) (.11) (.20) (.28)
43 47 HOME SHOPPING NETWORK, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
- ------------------------------------------------------------------------------------------------------- QUARTER QUARTER QUARTER QUARTER ENDED ENDED ENDED ENDED MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, - ------------------------------------------------------------------------------------------------------- (Table in thousands, except per share data) YEAR ENDED DECEMBER 31, 1994 Net sales................................. $ 274,215 $274,005 $ 276,612 $301,682 Gross profit.............................. 98,600 95,202 97,620 104,588 Earnings before extraordinary item........ 6,651 1,908 7,349 1,793 Net earnings.............................. 6,651 1,908 6,425 1,793 Earnings per common share: Before extraordinary item.............. .07 .02 .08(e) .02 Net earnings........................... .07 .02 .07(e) .02
- --------------- (a) The quarter ended March 31, 1995 included $2,041,000 of "Restructuring Charges". (b) During the quarter ended September 30, 1995, the Company recorded "Other Charges" of $5,427,000, litigation expense of $3,200,000, and $2,400,000 of additional "Depreciation and Amortization". (c) During the quarter ended December 31, 1995, cost of sales included an additional inventory carrying value adjustment of $12,077,000. (d) The fourth quarter of 1995 included $6,466,000 of "Other Charges", $2,073,000 in additional "Restructuring Charges," and $8,656,000 of other expense items, including $3,183,000 of litigation expense. (e) The difference between earnings before extraordinary item and net earnings for the quarter ended September 30, 1994 represents a loss from the early extinguishment of long-term obligations. The Company believes that seasonality does impact its business, but not to the same extent it impacts the retail industry in general. NOTE P -- SUBSEQUENT EVENT On February 15, 1996, the Company announced it was seeking $100,000,000 of additional financing through a proposed private placement of convertible subordinated debentures that will not be registered under the Securities Act of 1933. On February 13, 1996, the Company amended its Credit Facility, as discussed in Note C, and agreed that upon consummation of the sale of the subordinated debentures the amount available for borrowing under the Credit Facility would be reduced by 30% of the principal amount of subordinated debentures sold. In addition, the covenants were amended to give consent to the anticipated change in control, as discussed in Note K, subject to the Company obtaining at least $50,000,000 in net proceeds from the sale of the subordinated debentures. There can be no assurance that such private placement can be completed on terms satisfactory to the Company. 44 48 HOME SHOPPING NETWORK, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE Q -- FINANCIAL INSTRUMENTS The additional disclosure below of the estimated fair value of financial instruments was made in accordance with the requirements of Statements of Financial Accounting Standards No. 107. The estimated fair value amounts have been determined by the Company using available market information and appropriate valuation methodologies, when available.
- ------------------------------------------------------------------------------------------------- DECEMBER 31, 1995 DECEMBER 31, 1994 --------------------- ------------------- CARRYING FAIR CARRYING FAIR AMOUNT VALUE AMOUNT VALUE - ------------------------------------------------------------------------------------------------- (In thousands) Cash and cash equivalents......................... $ 25,164 $ 25,164 $ 33,648 $ 33,648 Other non-current assets.......................... 4,290 4,290 1,309 1,309 Long-term investments............................. 14,000 21,424 10,000 7,875 Long-term obligations............................. (137,365) (137,365) (29,181) (29,181)
The carrying value of cash and cash equivalents and other non-current assets are a reasonable estimate of their fair value. There are no available current market prices for the $4,000,000 long-term investment in Body by Jake Enterprises LLC as the investment is in a private company. The Company has no reason to believe there has been a deterioration in the investment value below its cost basis, and as such a total of $4,000,000 is included in the 1995 Fair Value table above. The amount set out in the table above as the fair value of long-term investment in NRI at December 31, 1995 and 1994 has been determined using the trading price of NRI's common stock on those dates. Management is of the opinion, however, that the fair value of this investment is not readily determinable. The Company's investment is in the preferred stock of NRI which is not publicly traded and, therefore, does not have an established market price. In addition, if the Company were to convert its investment to common stock, its investment would represent 20.7% of NRI's outstanding common stock at December 31, 1995. It is not anticipated that the Company would be able to sell its holdings without adversely affecting the market price of the NRI common stock and the amount realized in the event of a sale. In early 1995, NRI indicated that it believes the adequacy of cash resources and the ability to continue operations is dependent upon achieving sales and obtaining additional capital to continue, among other things, the development, testing and marketing of its products. On March 15, 1995, NRI sold 4,000,000 shares of common stock to a third party investor for $4,000,000. In addition, on January 30, 1996 NRI completed an equity financing pursuant to which certain investors purchased from NRI 800 shares of NRI Series B Preferred Stock for a gross cash purchase price of $8,000,000, before commissions and expenses. Based in part on these capital infusions, which provided NRI funds to continue the development, testing and marketing of its products, management believes that continuing to carry the Company's investment in NRI at cost is appropriate. The Company's maximum exposure on the NRI investment is the $10,000,000 carrying value. The fair value of the Company's long-term obligations at December 31, 1995 and 1994 approximates the carrying value because the underlying instrument is a variable rate note that reprices frequently. NOTE R -- EVENT (UNAUDITED) SUBSEQUENT TO THE DATE OF THE INDEPENDENT AUDITORS' REPORT On March 1, 1996, the Company completed a private placement of $100,000,000 of Convertible Subordinated Debentures due March 1, 2006, (the "Debentures"). The Debentures, which are unsecured and subordinated to all existing and future senior debt of the Company, bear interest at 5 7/8% per annum payable in arrears each March 1 and September 1. The Debentures are convertible into shares of the Company's common stock at any time prior to redemption, repurchase or maturity, at a conversion price of $12.00 per 45 49 HOME SHOPPING NETWORK, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) share, subject to adjustment in certain circumstances. The Debentures are not redeemable by the Company prior to March 1, 1998. Thereafter, the Debentures may be redeemed at the option of the Company in whole or in part at specified prices provided that until March 1, 1999, the debentures may not be redeemed unless the closing price of the common stock equals or exceeds 140% of the specified conversion price for at least 20 out of 30 consecutive trading days ending within 20 calendar days before the notice of redemption is mailed. Based on the terms of the Credit Facility amendment discussed in Note P, the maximum borrowing availability under the Credit Facility was reduced to $120,000,000. The Company used the net proceeds to repay borrowings under its Credit Facility leaving an outstanding loan balance of $30,000,000 with $90,000,000 available for borrowing. ITEM 9 -- CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not Applicable 46 50 PART III ITEM 10 -- DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information set forth under the caption "Election of Directors" in the Proxy Statement dated March 1996, for the Annual Meeting of Stockholders to be held May 9, 1996, is incorporated herein by reference. ITEM 11 -- EXECUTIVE COMPENSATION The information set forth under the captions "Summary Compensation Table" and "Employment Agreements" in the Proxy Statement dated March 1996, for the Annual Meeting of Stockholders to be held May 9, 1996, is incorporated herein by reference. ITEM 12 -- SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Security ownership by management as outlined under the caption "Security Ownership of Certain Beneficial Owners and Management" in the Proxy Statement dated March 1996, for the Annual Meeting of Stockholders to be held May 9, 1996, is incorporated herein by reference. ITEM 13 -- CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information set forth under the captions "Compensation of Directors and Executive Directors" and "Certain Transactions and Business Relationships" in the Proxy Statement dated March 1996, for the Annual Meeting of Stockholders to be held on May 9, 1996, is incorporated herein by reference. PART IV ITEM 14 -- EXHIBITS, FINANCIAL STATEMENT SCHEDULE, AND REPORTS ON FORM 8-K (a) List of Documents filed as part of this Report: (1) Financial Statement Schedule
SCHEDULE PAGE NUMBER NUMBER - -------- ------ II -- Valuation and Qualifying Accounts......................................... 56
The report of the Company's independent auditors with respect to the above listed financial statement schedule appears on page 55. All other financial statements and schedules not listed have been omitted since the required information is included in the Consolidated Financial Statements or the notes thereto, or is not applicable or required. (2) Exhibits (numbered in accordance with Item 601 of Regulation S-K)
EXHIBIT NUMBER DESCRIPTION - ------- ----------------------------------------------------------------------------------- 3.1 -- Restated Certificate of Incorporation of the Company filed as Exhibit 3.1 to the Company's Annual Report on Form 10-K for the year ended August 31, 1987, is incorporated herein by reference. 3.2 -- Amendment to Restated Certificate of Incorporation of the Company filed as Exhibit 3.2 to the Company's Annual Report on Form 10-K for the year ended August 31, 1987, is incorporated herein by reference. 3.3 -- Amendment filed December 17, 1986, to the Restated Certificate of Incorporation of the Company filed as Exhibit 3.3 to the Company's Annual Report on Form 10-K for the year ended August 31, 1987, is incorporated herein by reference.
47 51
EXHIBIT NUMBER DESCRIPTION - ------- ----------------------------------------------------------------------------------- 3.4 -- Amended By-Laws of the Company filed as Exhibit 3.4 to the Company's Annual Report on Form 10-K for the year ended December 31, 1993, are incorporated herein by reference. 3.5 -- Certificates of Amendment of By-Laws dated September 18, 1995 and February 27, 1996. 4.0 -- Indenture dated as of March 1, 1996 between the Company and United States Trust Company of New York, as Trustee relating the Company's 5.875% Convertible Subordinated Debentures due March 1, 2006. *10.1 -- Employment Agreement dated March 5, 1986, by and between Roy M. Speer and the Company, filed as Exhibit 10.10 to the Company's Form S-1 Registration Statement #33-4356, dated May 13, 1986, is incorporated herein by reference. *10.2 -- Amended 1986 Stock Option Plan for Outside Directors dated August 1, 1986, filed as Exhibit 10.32 to the Company's Form S-1 Registration Statement #33-8560, dated October 15, 1986, is incorporated herein by reference. *10.3 -- 1986 Stock Option Plan for Employees dated August 1, 1986, filed as Exhibit 10.33 to the Company's Form S-1 Registration Statement #33-8560, dated October 15, 1986, is incorporated herein by reference. 10.4 -- Lease Agreement dated December 1, 1986, by and between G&M Properties, a Nevada partnership and Home Shopping Network Realty, Inc., a subsidiary of the Company filed as Exhibit 10.53 to the Company's Form S-1 Registration Statement #33-12527, dated May 4, 1987, is incorporated herein by reference. 10.5 -- Option Agreement dated December 1, 1986, by and between G&M Properties, a Nevada partnership and Home Shopping Network Realty, Inc., a subsidiary of the Company filed as Exhibit 10.54 to the Company's Form S-1 Registration Statement #33-12527, dated May 4, 1987, is incorporated herein by reference. 10.6 -- Lease Agreement dated January 30, 1987, by and between G&M Properties, a Nevada partnership and Home Shopping Network Realty, Inc., a subsidiary of the Company filed as Exhibit 10.55 to the Company's Form S-1 Registration Statement #33-12527, dated May 4, 1987, is incorporated herein by reference. 10.7 -- Lease Agreement dated January 30, 1987, by and between G&M Properties, a Nevada partnership and Home Shopping Network Realty, Inc., a subsidiary of the Company filed as Exhibit 10.56 to the Company's Form S-1 Registration Statement #33-12527, dated May 4, 1987, is incorporated herein by reference. 10.8 -- License Agreement dated as of July 16, 1986, between Home Shopping Network, Inc., and Canadian Home Shopping Network, Ltd., filed as Exhibit 10.61 to the Company's Form S-1 Registration Statement #33-12527, dated May 4, 1987, is incorporated herein by reference. *10.9 -- Form of 1990 Executive Stock Award Program dated October 17, 1990, as amended, filed as Exhibit 10.23 to the Company's Annual Report on Form 10-K for the year ended August 31, 1991, is incorporated herein by reference. *10.10 -- Third and Fourth Amendments to 1986 Stock Option Plan for Outside Directors, filed as Exhibit 10.30 to the Company's Annual Report on Form 10-K for the year ended August 31, 1991, is incorporated herein by reference. 10.11 -- Distribution Agreement by and between Home Shopping Network, Inc. and Precision Systems, Inc. dated as of July 31, 1992 filed as Exhibit 10.1 to the Precision Systems, Inc. Form 10, Registration Statement No. 0-20068 and filed April 14, 1992, is incorporated herein by reference. 10.12 -- Tax Sharing Agreement by and between Home Shopping Network, Inc. and Precision Systems, Inc. dated as of July 31, 1992 filed as Exhibit 10.3 to the Precision Systems, Inc. Form 10, Registration Statement No. 0-20068 and filed April 14, 1992, is incorporated herein by reference.
48 52
EXHIBIT NUMBER DESCRIPTION - ------- ----------------------------------------------------------------------------------- 10.13 -- Software License Agreement by and between Home Shopping Network, Inc. and Precision Systems, Inc. dated as of July 31, 1992 filed as Exhibit 10.4 to the Precision Systems, Inc. Form 10, Registration Statement No. 0-20068 and filed April 14, 1992, is incorporated herein by reference. 10.14 -- Software Development Agreement by and between Home Shopping Network, Inc. and Precision Systems, Inc. dated as of July 31, 1992 filed as Exhibit 10.6 to the Precision Systems, Inc. Form 10, Registration Statement No. 0-20068 and filed April 14, 1992, is incorporated herein by reference. 10.15 -- Stock Purchase Agreement by and between Home Shopping Network, Inc. and The National Registry Inc. dated April 28, 1992 filed as Exhibit 10.29 to the Company's Annual Report on Form 10-K for the year ended August 31, 1992, is incorporated herein by reference. 10.16 -- Form of Distribution Agreement between Home Shopping Network, Inc. and Silver King Communications, Inc. ("SKC") dated as of December 28, 1992 filed as Exhibit 10.1 to the SKC Registration Statement on Form 10, as amended, Registration Statement No. 0-20570, is incorporated herein by reference. 10.17 -- Form of Affiliation Agreements between Home Shopping Club, Inc. and SKC dated as of December 28, 1992 filed as Exhibit 10.2 to the SKC Registration Statement on Form 10, as amended, Registration Statement No. 0-20570, is incorporated herein by reference. 10.18 -- Form of Amendment dated as of July 28, 1994 to Affiliation Agreements between Home Shopping Club, Inc. and SKC filed as Exhibit 10.19 to the Company's Annual Report on Form 10-K for the year ended December 31, 1994 is incorporated herein by reference. 10.19 -- Form of Tax Sharing Agreement between Home Shopping Network, Inc. and SKC dated as of December 28, 1992 filed as Exhibit 10.4 to the SKC Registration Statement on Form 10, as amended, Registration Statement No. 0-20570, is incorporated herein by reference. 10.20 -- Amended and Restated System Maintenance and Support Agreement effective as of February 2, 1993 between Home Shopping Network, Inc. and Precision Systems, Inc. filed as Exhibit 10.28 to the Company's Annual Report on Form 10-K for the year ended December 31, 1993, is incorporated herein by reference. 10.21 -- Credit Card Program Agreement, dated as of February 16, 1994, by and among Home Shopping Network, Inc., participating subsidiaries and General Electric Capital Corporation filed as Exhibit 10.30 to the Company's Annual Report on Form 10-K for the year ended December 31, 1993, is incorporated herein by reference. *10.22 -- First, Second, Third and Fourth Amendments to the 1986 Stock Option Plan for Employees filed as Exhibit 10.31 to the Company's Annual Report on Form 10-K for the year ended December 31, 1993, are hereby incorporated herein by reference. *10.23 -- Employment Agreement between Home Shopping Network, Inc. and Gerald F. Hogan, dated as of February 23, 1993 filed as Exhibit 10.32 to the Company's Annual Report on Form 10-K for the year ended December 31, 1993, is hereby incorporated herein by reference. *10.24 -- First Amendment, effective as of August 4, 1994, to Employment Agreement between Home Shopping Network, Inc. and Gerald F. Hogan filed as Exhibit 10.27 to the Company's Annual Report on Form 10-K for the year ended December 31, 1994, is incorporated herein by reference 10.25 -- Second Amended and Restated Credit Agreement $100,000,000 Three-Year Revolving Credit Facility, dated as of August 30, 1994 among Home Shopping Network, Inc., Home Shopping Club, Inc., the signatory banks, LTCB Trust Company as Agent, Bank of Montreal and The Bank of New York, each as a Co-Agent, and LTCB Trust Company as Administrative Agent, as amended filed as Exhibit 10.28 to the Company's Annual Report on Form 10-K for the year ended December 31, 1994, is incorporated herein by reference.
49 53
EXHIBIT NUMBER DESCRIPTION - ------- ----------------------------------------------------------------------------------- *10.26 -- Amended and Restated Home Shopping Network, Inc. Retirement Savings Plan and Trust Agreements, which incorporates by reference the Home Shopping Network, Inc. Retirement Savings and Employee Stock Ownership Plan and Trust filed as Exhibit 10.33 to the Company's Annual Report on Form 10-K for the year ended December 31, 1993 is incorporated herein by reference. *10.27 -- Home Shopping Network, Inc. Employee Stock Purchase Plan and Part-Time Employee Stock Purchase Plan filed as Exhibit 10.30 to the Company's Annual Report on Form 10-K for year ended December 31, 1994 is incorporated herein by reference. *10.28 -- Home Shopping Network, Inc. Employee Equity Participation Plan and Agreement and Declaration of Trust filed as Exhibit 10.31 to the Company's Annual Report on Form 10-K for the year ended December 31, 1994 is incorporated herein by reference. *10.29 -- Employment Agreement between Home Shopping Network, Inc. and David F. Dyer, dated as of August 16, 1994 filed as Exhibit 10.32 to the Company's Annual Report on Form 10-K for the year ended December 31, 1994 is incorporated herein by reference. *10.30 -- Employment Agreement between Home Shopping Network, Inc. and Barry S. Augenbraun, dated as of September 1, 1994 filed as Exhibit 10.33 to the Company's Annual Report on Form 10-K for the year ended December 31, 1994 is incorporated herein by reference. 10.31 -- First Amendment, dated as of March 29, 1995, to the Second Amended and Restated Credit Agreement filed as Exhibit 10.37 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1995, is incorporated herein by reference. 10.32 -- Second Amendment, dated as of June 28, 1995, to the Second Amended and Restated Credit Agreement filed as Exhibit 10.38 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1995, is incorporated herein by reference. 10.33 -- Third Amendment, dated as of September 28, 1995, to the Second Amended and Restated Credit Agreement filed as Exhibit 10.39 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1995, is incorporated herein by reference. 10.34 -- Letter of Credit Facility dated as of September 28, 1995, filed as Exhibit 10.40 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1995, is incorporated herein by reference. *10.35 -- Employment Agreement between Home Shopping Network, Inc. and James G. Held, dated as of November 24, 1995. *10.36 -- Employment Agreement between Home Shopping Network, Inc. and Mary Ellen Pollin, dated as of December 15, 1995. 10.37 -- Fourth Amendment, dated as of February 13, 1996, to the Second Amended and Restated Credit Agreement. 11 -- Computation of net earnings (loss) per share. 21 -- List of Subsidiaries of the Company. 27 -- Financial Data Schedule (for SEC use only).
- --------------- * Reflects management contracts and compensatory plans. (b) Reports on Form 8-K None. 50 54 SIGNATURES PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED. March 28, 1996 HOME SHOPPING NETWORK, INC. By: /s/ JAMES G. HELD ------------------------------------ James G. Held President and Chief Executive Officer PURSUANT TO THE REQUIREMENTS OF THE SECURITIES AND EXCHANGE ACT OF 1934, THIS REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE REGISTRANT AND IN THE CAPACITIES INDICATED ON MARCH 28, 1996.
SIGNATURE TITLE - --------------------------------------------- ------------------------------ /s/ JAMES G. HELD President, Chief Executive - --------------------------------------------- Officer and Director James G. Held /s/ KEVIN J. McKEON Executive Vice President, - --------------------------------------------- Chief Financial Officer and Kevin J. McKeon Treasurer (Principal Financial Officer) /s/ BRIAN J. FELDMAN Vice President and Controller - --------------------------------------------- (Chief Accounting Officer) Brian J. Feldman /s/ BARRY DILLER Chairman of the Board and - --------------------------------------------- Director Barry Diller /s/ PETER R. BARTON Director - --------------------------------------------- Peter R. Barton /s/ ROBERT R. BENNETT Director - --------------------------------------------- Robert R. Bennett /s/ JOHN M. DRAPER Director - --------------------------------------------- John M. Draper /s/ J. ANTHONY FORSTMANN Director - --------------------------------------------- J. Anthony Forstmann /s/ LEO J. HINDERY, JR. Director - --------------------------------------------- Leo J. Hindery, Jr. /s/ JOHN C. MALONE, PH.D. Director - --------------------------------------------- John C. Malone, Ph.D. /s/ GEORGE C. MCNAMEE Director - --------------------------------------------- George C. McNamee /s/ ELI J. SEGAL Director - --------------------------------------------- Eli J. Segal
51 55 EXHIBIT 11 HOME SHOPPING NETWORK, INC. AND SUBSIDIARIES COMPUTATION OF NET EARNINGS (LOSS) PER SHARE
- ----------------------------------------------------------------------------------------------- YEARS ENDED DECEMBER 31, ----------------------------- 1995 1994 1993 - ----------------------------------------------------------------------------------------------- (In thousands, except per share amounts) Primary earnings (loss) per share: Weighted average shares outstanding Common Stock............................................... 70,782 72,843 67,802 Class B Common Stock....................................... 20,000 21,352 23,390 Shares assumed to be issued upon the exercise of common stock options under the treasury stock method.................... -- 866 -- -------- ------- -------- 90,782 95,061 91,192 ======== ======= ======== Earnings (loss) before extraordinary item..................... $(61,883) $17,701 $(15,539) Extraordinary item, net of taxes.............................. -- (924) (7,242) -------- ------- -------- Net earnings (loss)........................................... $(61,883) $16,777 $(22,781) ======== ======= ======== Earnings (loss) per share before extraordinary item........... $ (.69) $ .19 $ (.18) Extraordinary item per share, net of taxes.................... -- (.01) (.08) -------- ------- -------- Net earnings (loss) per share................................. $ (.69) $ .18 $ (.26) ======== ======= ======== Fully diluted earnings (loss) per share:(2) Weighted average shares outstanding Common Stock............................................... 70,782 72,843 67,802 Class B Common Stock....................................... 20,000 21,352 23,390 Shares assumed to be issued upon the exercise of common stock options under the treasury stock or modified treasury stock method..................................................... 298 872 2,182 Shares assumed to be issued upon the conversion of the Company's 5 1/2% convertible debentures.................... -- -- 938 -------- ------- -------- 91,080 95,067 94,312 ======== ======= ======== Earnings (loss) before extraordinary item..................... $(61,883) $17,701 $(15,539) Interest expense adjustment(1)................................ -- -- 205 -------- ------- -------- Earnings (loss) before extraordinary item..................... (61,883) 17,701 (15,334) Extraordinary item, net of taxes.............................. -- (924) (7,242) -------- ------- -------- Net earnings (loss)........................................... $(61,883) $16,777 $(22,576) ======== ======= ======== Earnings (loss) per share before extraordinary item........... $ (.68) $ .19 $ (.16) Extraordinary item per share, net of taxes.................... -- (.01) (.08) -------- ------- -------- Net earnings (loss) per share................................. $ (.68) $ .18 $ (.24) ======== ======= ========
- --------------- (1) Interest expense, net of taxes, that would not have been incurred had conversion of the Company's 5 1/2% convertible debentures taken place at the beginning of the period. (2) The amounts in earnings (loss) per share on the fully diluted basis are solely shown in this exhibit. Because the amounts are the same as the primary calculation for the year ended December 31, 1994 and are antidilutive for the years ended December 31, 1995 and 1993, respectively, (decrease the loss per share), they are not required to be presented elsewhere in this Form 10-K. 52 56 EXHIBIT 21 LIST OF SUBSIDIARIES OF HOME SHOPPING NETWORK, INC. A DELAWARE CORPORATION AS OF MARCH 1, 1996
STATE OF INCORPORATION ------------- Home Shopping Club, Inc......................................................... Delaware d/b/a Home Shopping Club Telemation HSN Spree HSC Spree Home Shopping Network HSN Home Shopping Network Outlets, Inc.............................................. Delaware d/b/a HSC Outlet Home Shopping Network Outlet HSN Liquidation Center Home Shopping Services, Inc..................................................... Delaware d/b/a Home Shopping Services of Delaware, Inc. HSN Direct, Inc d/b/a Innovations in Living HSN Direct Joint Ventures HSN Direct Home Shopping Showcase HSN Capital Corporation......................................................... Nevada HSN Credit Corporation.......................................................... Delaware HSN Entertainment Events, Inc................................................... Delaware HSN Entertainment Holding Company, Inc.......................................... Delaware HSN Entertainment Joint Ventures II, Inc........................................ Delaware d/b/a/ Pacific Media Ventures HSN Fulfillment, Inc............................................................ Delaware HSN Fulfillment of Iowa, Inc.................................................... Delaware HSN Fulfillment of Nevada, Inc.................................................. Delaware HSN Fulfillment of Virginia, Inc................................................ Delaware HSN Insurance, Inc.............................................................. Florida HSN Interactive, Inc............................................................ Delaware HSN Lifeway Health Products, Inc d/b/a HSN Products, Inc........................ Delaware HSN Liquidation, Inc............................................................ Delaware HSN Liquidation, Inc. of Florida................................................ Delaware HSN Mail Order, Inc............................................................. Delaware d/b/a HSN By Mail HSC By Mail Designer Direct Home Shopping Values Private Showing -- Jewelry Values by Mail HSN Media Merchandise Heroes Collector's Club HSN Realty, Inc................................................................. Delaware d/b/a HSN Realty of Delaware, Inc. HSN Redi-Med, Inc............................................................... Delaware HSN Television Shopping Mall, Inc............................................... Delaware HSN Transportation, Inc......................................................... Delaware
53 57
STATE OF INCORPORATION ------------- HSN Travel, Inc................................................................. Delaware Internet Shopping Network, Inc.................................................. California MarkeTechs, Services, Inc....................................................... Delaware d/b/a/ Petals & Presents National Call Center, Inc....................................................... Delaware Ortho-Vent, Inc................................................................. Delaware Vela Research, Inc.............................................................. Delaware World Rez, Inc.................................................................. Delaware d/b/a Home Shopping Travel World Rez Inc. of Delaware
54 58 INDEPENDENT AUDITORS' REPORT The Board of Directors Home Shopping Network, Inc. Under date of February 21, 1996, we reported on the consolidated balance sheets of Home Shopping Network, Inc. and subsidiaries as of December 31, 1995 and 1994 and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the years in the three year period ended December 31, 1995, as contained in Item 8 of the Company's 1995 Form 10-K. In connection with our audits of the aforementioned consolidated financial statements, we also have audited the related financial statement schedule as listed in Item 14. This financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion on this financial statement schedule based on our audits. In our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. /s/ KPMG Peat Marwick LLP St. Petersburg, Florida February 21, 1996 55 59 SCHEDULE II HOME SHOPPING NETWORK, INC. AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS
ADDITIONS --------------------- BALANCE CHARGED CHARGED BALANCE AT TO TO OTHER AT BEGINNING COSTS AND ACCOUNTS-- DEDUCTIONS-- END DESCRIPTION OF PERIOD EXPENSES DESCRIBE DESCRIBE(1) OF PERIOD - ---------------------------------------------- --------- --------- --------- ----------- --------- (In thousands) Allowance for doubtful accounts: Year ended December 31, 1995................ $ 1,738 $ 2,851 $ -- $(2,904) $ 1,685 ======= ======= ======== ========= ======= Year ended December 31, 1994................ $ 1,627 $ 1,866 $ -- $(1,755) $ 1,738 ======= ======= ======== ========= ======= Year ended December 31, 1993................ $ 1,798 $ 2,025 $ -- $(2,196) $ 1,627 ======= ======= ======== ========= ======= Allowance for doubtful other current assets: Year ended December 31, 1995................ $ -- $ -- $ -- $ -- $ -- ======= ======= ======== ========= ======= Year ended December 31, 1994................ $ 6,200 $ -- $ -- $(6,200) $ -- ======= ======= ======== ========= ======= Year ended December 31, 1993................ $ 6,200 $ -- $ -- $ -- $ 6,200 ======= ======= ======== ========= =======
- --------------- (1) Accounts written off as uncollectible. 56 60 BOARD OF DIRECTORS BARRY DILLER Chairman Home Shopping Network Chairman and Chief Executive Officer Silver King Communications, Inc. New York, NY JAMES G. HELD President and Chief Executive Officer Home Shopping Network, Inc. PETER R. BARTON President Liberty Media Corporation Englewood, Colorado ROBERT R. BENNETT Senior Vice President and Chief Financial Officer Liberty Media Corporation Englewood, Colorado JOHN M. DRAPER Consultant to Liberty Media Corporation Englewood, Colorado J. ANTHONY FORSTMANN Chairman The National Registry Inc. St. Petersburg, Florida LEO J. HINDERY, JR. Managing General Partner InterMedia Partners San Francisco, California JOHN C. MALONE, PH.D. President and Chief Executive Officer Tele-Communications, Inc. Denver, Colorado GEORGE C. MCNAMEE Chairman First Albany Companies, Inc. Albany, New York ELI J. SEGAL Former assistant to the President of the United States Washington, DC OFFICERS JAMES G. HELD President and Chief Executive Officer BARRY S. AUGENBRAUN Executive Vice President, General Counsel and Secretary BRIAN J. FELDMAN Vice President and Controller HONORE A. LE BRUN, III Executive Vice President Broadcast and Cable Affiliate Sales KEVIN J. MCKEON Executive Vice President, Chief Financial Officer and Treasurer MARY ELLEN POLLIN Executive Vice President Administration STOCKHOLDER INFORMATION CORPORATE HEADQUARTERS 2501 118th Avenue North St. Petersburg, Florida 33716-1900 (813) 572-8585 Mailing address: Post Office Box 9090 Clearwater, Florida 34618-9090 STOCK EXCHANGE Home Shopping Network is listed on the New York Stock Exchange. The ticker symbol is HSN. TRANSFER AGENT AND REGISTRAR For address changes, account consolidation, registration changes, lost stock certificates and other stockholder services, contact: The Bank of New York 101 Barclay Street New York, New York 10286 (800) 524-4458 INVESTOR RELATIONS AND CORPORATE COMMUNICATIONS The Company maintains an office to assist analysts, investment professionals, stockholders, potential stockholders, press and media. Inquiries are welcome by telephone or letter at the corporate headquarters. INDEPENDENT AUDITORS KPMG Peat Marwick LLP Barnett Tower, Suite 1600 200 Central Avenue St. Petersburg, Florida 33701 ANNUAL MEETING The Annual Meeting of Stockholders will be held on May 9, 1996 at 10:00 a.m. at the Holiday Inn, 3535 Ulmerton Road, St. Petersburg/Clearwater, Florida GETTING ON-LINE WITH HSN INTERNET SHOPPING NETWORK (ISN) At the World Wide Web (WWW) access line, type "http://www.internet.net". 61 HOME SHOPPING NETWORK, INC. 1995 ANNUAL REPORT EX-3.5 2 HSN - CERTIFICATE OF AMENDMENT OF BY-LAWS 1 EXHIBIT 3.5 CERTIFICATE OF AMENDMENT OF BY-LAWS I, BARRY S. AUGENBRAUN, DO HEREBY CERTIFY as follows: I am the duly elected Secretary of Home Shopping Network, Inc. (the "Company"); I DO FURTHER CERTIFY that at a meeting of the Board of Directors held on August 24, 1995, pursuant to waiver of notice duly executed by all members of the Board of Directors, at which meeting a quorum was present and acting throughout, the following amendment to Article III, Section 1 of the By-laws was duly adopted by unanimous vote of the Directors: Section 1. NUMBER AND TENURE. The business and affairs of the Corporation shall be managed by a Board of nine (9) directors, unless a different number shall be established by amendment to these By-laws, subject to the limitation established by the Certificate of Incorporation. I DO FURTHER CERTIFY that the foregoing Amendment to the By-laws is in full force and effect on the date hereof. IN WITNESS WHEREOF, I have hereunto set my hand and seal of the Company this 18th day of September, 1995 -------------------------------- CORPORATE SEAL Barry S. Augenbraun Secretary 2 CERTIFICATE OF AMENDMENT OF BY-LAWS I, BARRY S. AUGENBRAUN, DO HEREBY CERTIFY as follows: I am the duly elected Secretary of Home Shopping Network, Inc. (the "Company"); I DO FURTHER CERTIFY that at a meeting of the Board of Directors held on February 12, 1996, pursuant to notice duly given, at which meeting a quorum was present and acting throughout, the following amendment to Article III, Section 1 of the By-laws was duly adopted by unanimous vote of the Directors: Section 1. NUMBER AND TENURE. The business and affairs of the Corporation shall be managed by a Board of ten (10) directors, unless a different number shall be established by amendment to these By-laws, subject to the limitation established by the Certificate of Incorporation. I DO FURTHER CERTIFY that the foregoing Amendment to the By-laws is in full force and effect on the date hereof. IN WITNESS WHEREOF, I have hereunto set my hand and seal of the Company this 27 day of February, 1996. CORPORATE SEAL ---------------------------- Barry S. Augenbraun Secretary EX-4 3 HSN - INDENTURE 1 EXHIBIT 4 HOME SHOPPING NETWORK, INC. 5.875% CONVERTIBLE SUBORDINATED DEBENTURES DUE MARCH 1, 2006 INDENTURE Dated as of March 1, 1996 UNITED STATES TRUST COMPANY OF NEW YORK Trustee 2 CROSS - REFERENCE TABLE*
Trust Indenture Act Section Indenture Section 310 (a)(l) 7.10 (a)(2) 7.10 (a)(3) N.A. (a)(4) N.A. (a)(5) 7.8; 7.10; 13.2 (b) 7.10 (c) N.A. 311 (a) 7.11 (b) 7.11 (c) N.A. 312 (a) 2.5 (b) 13.3 (c) 13.3 313 (a) 7.6 (b)(1) N.A. (b)(2) 7.6; 7.7 (c) 7.6; 13.2 (d) 7.6 314 (a) 4.3; 4.4; 13.2 (b) N.A. (c)(l) 13.4 (c)(2) 13.4 (c)(3) N.A. (d) N.A. (e) 13.5 (f) N.A. 315 (a) 7.1 (b) 7.5; 13.2 (c) 7.1 (d) 7.1 (e) 6.11 316 (a)(last sentence) 2.9 (a)(1)(A) 6.5 (a)(1)(B) 6.4 (a)(2) N.A. (b) 6.7 (c) 2.13 317 (a)(l) 6.8 (a)(2) 6.9 (b) 2.4 318 (a) 13.1 (b) N.A. (c) 13.1
N.A. means not applicable. * This Cross-Reference Table is not part of this Indenture. 3 TABLE OF CONTENTS ARTICLE 1. DEFINITIONS AND INCORPORATION BY REFERENCE . . . . . . . . . . . . . . . . . 1 SECTION 1.1 DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 SECTION 1.2 OTHER DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 SECTION 1.3 INCORPORATION BY REFERENCE OF TRUST INDENTURE ACT . . . . . . . . . . . . . . . . . . . . . . . 10 SECTION 1.4 RULES OF CONSTRUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 ARTICLE 2. THE DEBENTURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 SECTION 2.1 FORM AND DATING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 SECTION 2.2 EXECUTION AND AUTHENTICATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 SECTION 2.3 REGISTRAR AND PAYING AGENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 SECTION 2.4 PAYING AGENT TO HOLD MONEY IN TRUST . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 SECTION 2.5 LISTS OF HOLDERS OF THE DEBENTURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 SECTION 2.6 TRANSFER AND EXCHANGE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 SECTION 2.7 REPLACEMENT DEBENTURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 SECTION 2.8 OUTSTANDING DEBENTURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 SECTION 2.9 TREASURY DEBENTURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 SECTION 2.10 TEMPORARY DEBENTURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 SECTION 2.11 CANCELLATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 SECTION 2.12 DEFAULTED INTEREST . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 SECTION 2.13 RECORD DATE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 SECTION 2.14 CUSIP NUMBER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 SECTION 2.15 COMPUTATION OF INTEREST . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 SECTION 2.16 SECURITIES IN GLOBAL FORM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 SECTION 2.17 PERSONS DEEMED OWNERS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 ARTICLE 3. REDEMPTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 SECTION 3.1 NOTICES TO TRUSTEE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 SECTION 3.2 NOTICE OF REDEMPTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 SECTION 3.3 EFFECT OF NOTICE OF REDEMPTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 SECTION 3.4 DEPOSIT OF REDEMPTION PRICE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 SECTION 3.5 DEBENTURES REDEEMED IN PART . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 SECTION 3.6 OPTIONAL REDEMPTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 SECTION 3.7 NO MANDATORY REDEMPTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 SECTION 3.8 SELECTION OF DEBENTURES TO BE REDEEMED . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 ARTICLE 4. COVENANTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 SECTION 4.1 PAYMENT OF DEBENTURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 SECTION 4.2 MAINTENANCE OF OFFICE OR AGENCY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 SECTION 4.3 REPORTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 SECTION 4.4 COMPLIANCE CERTIFICATE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 SECTION 4.5 STAY, EXTENSIONS AND USURY LAWS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 SECTION 4.6 [INTENTIONALLY DELETED] . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 SECTION 4.7 OFFER TO PURCHASE UPON CHANGE OF CONTROL . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 SECTION 4.8 CORPORATE EXISTENCE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 SECTION 4.9 PAYMENTS FOR CONSENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 SECTION 4.10 CALCULATION OF ORIGINAL ISSUE DISCOUNT . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
i 4 ARTICLE 5. SUCCESSORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 SECTION 5.1 MERGER, CONSOLIDATION, OR SALE OF ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 SECTION 5.2 SUCCESSOR CORPORATION SUBSTITUTED . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 ARTICLE 6. CERTAIN DEFAULT PROVISIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 SECTION 6.1 EVENTS OF DEFAULT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 SECTION 6.2 ACCELERATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 SECTION 6.3 OTHER REMEDIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 SECTION 6.4 WAIVER OF PAST DEFAULTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 SECTION 6.5 CONTROL BY MAJORITY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 SECTION 6.6 LIMITATION ON SUITS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39 SECTION 6.7 RIGHTS OF HOLDERS OF DEBENTURES TO RECEIVE PAYMENT . . . . . . . . . . . . . . . . . . . . . . 39 SECTION 6.8 COLLECTION SUIT BY TRUSTEE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40 SECTION 6.9 TRUSTEE MAY FILE PROOFS OF CLAIM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40 SECTION 6.10 PRIORITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41 SECTION 6.11 UNDERTAKING FOR COSTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41 ARTICLE 7. TRUSTEE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42 SECTION 7.1 DUTIES OF TRUSTEE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42 SECTION 7.2 RIGHTS OF TRUSTEE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43 SECTION 7.3 INDIVIDUAL RIGHTS OF TRUSTEE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44 SECTION 7.4 TRUSTEE'S DISCLAIMER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44 SECTION 7.5 NOTICE OF DEFAULTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45 SECTION 7.6 REPORTS BY TRUSTEE TO HOLDERS OF THE DEBENTURES . . . . . . . . . . . . . . . . . . . . . . . . 45 SECTION 7.7 COMPENSATION AND INDEMNITY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45 SECTION 7.8 REPLACEMENT OF TRUSTEE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47 SECTION 7.9 SUCCESSOR TRUSTEE BY MERGER, ETC. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48 SECTION 7.10 ELIGIBILITY; DISQUALIFICATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48 SECTION 7.11 PREFERENTIAL COLLECTION OF CLAIMS AGAINST COMPANY . . . . . . . . . . . . . . . . . . . . . . 48 ARTICLE 8. REGISTRATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49 SECTION 8.1 SHELF REGISTRATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49 SECTION 8.2 ADDITIONAL INTEREST . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51 SECTION 8.3 REGISTRATION PROCEDURE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51 SECTION 8.4 INDEMNIFICATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52 SECTION 8.5 REGISTRATION EXPENSES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54 ARTICLE 9. AMENDMENT, SUPPLEMENT AND WAIVER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55 SECTION 9.1 WITHOUT CONSENT OF HOLDERS OF DEBENTURES . . . . . . . . . . . . . . . . . . . . . . . . . . . 55 SECTION 9.2 WITH CONSENT OF HOLDERS OF DEBENTURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55 SECTION 9.3 COMPLIANCE WITH TRUST INDENTURE ACT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57 SECTION 9.4 REVOCATION AND EFFECT OF CONSENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57 SECTION 9.5 NOTATION ON OR EXCHANGE OF DEBENTURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57 SECTION 9.6 TRUSTEE TO SIGN AMENDMENTS, ETC. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58 ARTICLE 10. SUBORDINATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58 SECTION 10.1 AGREEMENT TO SUBORDINATE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58 SECTION 10.2 LIQUIDATION; DISSOLUTION; BANKRUPTCY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58 SECTION 10.3 DEFAULT ON SENIOR DEBT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60
ii 5 SECTION 10.4 ACCELERATION OF DEBENTURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61 SECTION 10.5 WHEN DISTRIBUTION MUST BE PAID OVER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61 SECTION 10.6 NOTICE BY COMPANY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62 SECTION 10.7 SUBROGATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62 SECTION 10.8 RELATIVE RIGHTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63 SECTION 10.9 SUBORDINATION NOT AFFECTED . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64 SECTION 10.10 DISTRIBUTION OR NOTICE TO REPRESENTATIVE . . . . . . . . . . . . . . . . . . . . . . . . . . 64 SECTION 10.11 RIGHTS OF TRUSTEE AND PAYING AGENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65 SECTION 10.12 AUTHORIZATION TO EFFECT SUBORDINATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65 SECTION 10.14 AMENDMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65 SECTION 10.15 NO WAIVER, ETC. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66 SECTION 10.16 NO SECURITY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66 ARTICLE 11. CONVERSION OF DEBENTURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66 SECTION 11.1 CONVERSION PRIVILEGES AND CONVERSION PRICE . . . . . . . . . . . . . . . . . . . . . . . . . . 66 SECTION 11.2 EXERCISE OF CONVERSION PRIVILEGE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67 SECTION 11.3 FRACTIONAL SHARES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68 SECTION 11.4 ADJUSTMENT OF CONVERSION PRICE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68 SECTION 11.5 NOTICE OF ADJUSTMENTS OF CONVERSION PRICE. . . . . . . . . . . . . . . . . . . . . . . . . . . 71 SECTION 11.6 NOTICE OF CERTAIN CORPORATE ACTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72 SECTION 11.7 COMPANY TO RESERVE COMMON STOCK . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73 SECTION 11.8 TAXES ON CONVERSION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73 SECTION 11.9 COVENANT AS TO COMMON STOCK . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73 SECTION 11.10 CANCELLATION OF CONVERTED DEBENTURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73 SECTION 11.11 EFFECT OF RECLASSIFICATION, CONSOLIDATION, MERGER, SHARE EXCHANGE OR SALE . . . . . . . . . . 73 ARTICLE 12. DEFEASANCE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74 SECTION 12.1 DEFEASANCE AND DISCHARGE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74 SECTION 12.2 CONDITIONS TO DEFEASANCE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75 SECTION 12.3 DEPOSITED MONEY TO BE HELD IN TRUST; OTHER MISCELLANEOUS PROVISIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76 SECTION 12.4 REPAYMENT TO COMPANY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77 SECTION 12.5 REINSTATEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77 ARTICLE 13. MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78 SECTION 13.1 TRUST INDENTURE ACT CONTROLS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78 SECTION 13.2 NOTICES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78 SECTION 13.3 COMMUNICATION BY HOLDERS OF DEBENTURES WITH OTHER HOLDERS OF DEBENTURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79 SECTION 13.4 CERTIFICATE AND OPINION AS TO CONDITIONS PRECEDENT . . . . . . . . . . . . . . . . . . . . . . 79 SECTION 13.5 STATEMENTS REQUIRED IN CERTIFICATE OR OPINION . . . . . . . . . . . . . . . . . . . . . . . . 80 SECTION 13.6 RULES BY TRUSTEE AND AGENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81 SECTION 13.7 NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND STOCKHOLDERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81 SECTION 13.8 GOVERNING LAW . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81
iii 6 SECTION 13.9 NO ADVERSE INTERPRETATION OF OTHER AGREEMENTS . . . . . . . . . . . . . . . . . . . . . . . . 81 SECTION 13.10 SUCCESSORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81 SECTION 13.11 SEVERABILITY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81 SECTION 13.12 COUNTERPART ORIGINALS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81 SECTION 13.13 TABLE OF CONTENTS HEADINGS, ETC. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82
iv 7 INDENTURE dated as of March 1, 1996 by and between Home Shopping Network, Inc., a Delaware corporation (the "Company"), and United States Trust Company of New York, [a ________ banking association with its principal corporate office in ____________], as trustee (the "Trustee"). The Company and the Trustee agree as follows for the benefit of each other and for the equal and ratable benefit of the Holders of the 5.875% Convertible Subordinated Debentures due March 1, 2006 of the Company (the "Debentures"): ARTICLE 1. DEFINITIONS AND INCORPORATION BY REFERENCE SECTION 1.1 DEFINITIONS "Additional Interest" means all additional interest, if any, payable pursuant to Article 8 hereof. "Affiliate" of any specified Person means any other Person directly or indirectly controlling or controlled by or under direct or indirect common control with such specified Person. For purposes of this definition, "control" (including, with correlative meanings, the terms "controlling," "controlled by" and "under common control with"), as used with respect to any Person, shall mean the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of such Person, whether through the ownership of voting securities, by agreement or otherwise. "Agent" means any Registrar, Paying Agent or co-registrar. "BNY Facility Agreement" means that certain Letter of Credit Facility Agreement, dated as of the September 28, 1995, among Home Shopping Club, Inc., HSN Mail Order, Inc. and HSN Direct, Inc., as applicants, the Company and HSN Realty, Inc., as guarantors, The Bank of New York, as issuer and as administrative agent, and The Bank of New York Company, Inc., as a participant, as amended by the First Amendment thereto, dated as of February 13, 1996, and as otherwise amended and in effect from time to time. "Bankruptcy Law" means Title 11 of the United States Code or any similar federal or state law for the relief of debtors. "Board of Directors" means, with respect to any Person, the Board of Directors of such Person, or any authorized committee of the Board of Directors of such Person. 8 "Business Day" means any day other than a Legal Holiday. "Capital Stock" means any and all shares, interests, participations, rights or other equivalents (however designated) of corporate stock, including, without limitation, with respect to partnerships, partnership interests (whether general or limited) and any other interest or participation that confers on a Person the right to receive a share of the profits and losses of, or distributions of assets of, such partnership. "Change of Control" means an event or series of events as a result of which (i) any "person" or "group" (as such terms are used in Sections 13(d) or 14(d) of the Exchange Act) (other than a member of the Control Group) acquires "beneficial ownership" (as determined in accordance with Rule 13d-3 under the Exchange Act), directly or indirectly, of more than 50% of the total voting power of the outstanding Voting Stock (as defined below) of the Company; provided, however, that any such person or group shall not be deemed to be the beneficial owner of, or to beneficially own, any Voting Stock tendered in a tender or exchange offer until such Voting Stock is accepted for purchase or exchange under such tender or exchange offer, or (ii) the Common Stock of the Company (or other equity securities into which the Debentures are then convertible or into which the Common Stock of the Company shall have been reclassified or changed) is neither listed for trading on a United States national securities exchange nor approved for trading on an established over-the-counter trading market in the United States; provided, however that no such Change of Control shall be deemed to have occurred pursuant to clause (i) of this definition as a result of any event or series of events to the extent that (x) the Closing Price of the Common Stock (or other equity securities into which the Debentures are then convertible or into which the Common Stock of the Company shall have been reclassified or changed) for any five trading days during the ten trading days immediately preceding the event or series of events that would otherwise constitute a Change of Control is at least equal to 105% of the Conversion Price in effect on the last such trading day and at least fifteen Business Days prior to the consummation of the Change of Control (a) the Holders of the Debentures shall have received written notice of such event or series of events that would otherwise constitute a Change of Control and (b) the Company shall have published in The Wall Street Journal, or if no longer published, in a newspaper of general circulation a notice of the Change of Control (both such notices to contain the information required by (i), (ii), (v) and (x) of Section 4.7(b)) or (y) such Change of Control results from a transaction or series of transactions (including any tender or exchange offer subject to the provisions of the Exchange Act, whether by the issuer or otherwise) available to the holders of the Voting Stock in general (including holders of Debentures who 2 9 would be entitled to tender or otherwise participate therein upon the conversion thereof) in which the weighted average price paid by such person or group to acquire such Voting Stock in such transaction or series of transactions exceeds the then applicable Conversion Price of the Debentures. "Closing Price" means, for any trading day, the last reported sale price of the Common Stock regular way on such day or, in case no such reported sales takes place on such day, the average of the reported closing bid and asked prices regular way on such day, in either case on the New York Stock Exchange or, if the Common Stock is not listed or admitted to trading or, if not listed or admitted to trading on any national securities exchange, on the Nasdaq National Market or, if the Common Stock is not listed or admitted to trading on any national securities exchange or quoted on the Nasdaq National Market, the average of the closing bid and asked prices in the over-the-counter market as furnished by the New York Stock Exchange member firm selected from time to time by the Company for that purpose. If the Common Stock is not listed or admitted to trading in any national securities exchange, quoted on such National Market System or listed in any list of bid and asked prices in the over-the-counter market, "Closing Price" shall mean the fair market value of the Common Stock as determined in good faith by the Board of Directors. "Common Stock" means the Common Stock, par value $.01 per share, of the Company. "Company" means the party named as such in this Indenture until a successor replaces it pursuant to this Indenture and thereafter means such successor. "Controlled Affiliate" means any Person in which one or more members of the Control Group (including their respective Subsidiaries and other Controlled Affiliates), directly or indirectly, collectively own (i) in the case of a corporation, a majority of the outstanding Capital Stock of such corporation with voting power under ordinary circumstances, to elect directors or (ii) in the case of any other Person (other than a corporation), a majority ownership interest and the power to generally direct the policies, management and affairs thereof. "Control Group" means, as of any date, (i) Tele-Communications, Inc., Liberty Media Corporation, Mr. Barry Diller, Silver Management Company, and Silver King Communications, Inc.; (ii) any Person that acquires, directly or indirectly, through a Spin-Off Transaction or otherwise, a substantial portion of the assets currently held, directly or indirectly, by Liberty Media Corporation, if no Person or Persons (other than (x) a member or members of the Control Group, (y) any entity formed in connection with or as a result of such Spin-Off 3 10 Transaction (a "Spin-Off Transaction Person"), or (z) any Person or group which acquires equity securities of such Spin- Off Transaction Person representing a majority of the voting power of the outstanding equity securities of such Spin-Off Transaction Person solely as a result of such Spin-Off Transaction) shall thereupon beneficially own, directly or indirectly, more than 50% of the Voting Stock of the Company; (iii) the respective successors of each of the foregoing; and (iv) their respective Controlled Affiliates. "Conversion Price" shall have the meaning set forth in Article 11 hereof. "Corporate Trust Office of the Trustee" shall be at the address of the Trustee specified in Section 13.2 hereof or such other address as to which the Trustee shall give notice to the Company. "Credit Agreement" means that certain Second Amended and Restated Credit Agreement, dated as of August 30, 1994, among the Company, as borrower, Home Shopping Club, Inc. and HSN Realty, Inc., as guarantors, the banks that are parties thereto, LTCB Trust Company, as agent for such banks, as administrative agent for such banks and as collateral agent for such banks, and The Bank of New York Company, Inc., Toronto Dominion [Texas], Inc. and Bank of Montreal, as co-agents, as amended by the First Amendment thereto, dated as of March 29, 1995, as further amended by the Second Amendment thereto, dated as of June 28, 1995, as further amended by the Third Amendment thereto, dated as of September 28, 1995, as further amended by the Fourth Amendment thereto, dated as of February 13, 1996, and as otherwise amended and in effect from time to time. "Custodian" means any receiver, trustee, assignee, liquidator or similar official under any Bankruptcy Law. "Default" means any event that is, or with the passage of time or the giving of notice or both would be, an Event of Default as set forth in Article 6 hereof. "Designated Senior Debt" shall mean (i) any and all obligations of the Company to pay principal, interest, fees and any other amount under, or in connection with, the Credit Agreement, (ii) any and all obligations of the Company and the other obligors under the BNY Facility Agreement to pay principal, interest, fees and any other amount under, or in connection with, unreimbursed drawings under the letters of credit issued under the BNY Facility Agreement and the stated amount of all such outstanding letters of credit under which drawings have not yet been made and (iii) indebtedness incurred by the Company (and/or any of the other obligors under the BNY Facility Agreement) to refund, refinance, repurchase or extend any of the foregoing. 4 11 "Distribution" means, for purposes of Article 10 hereof, a distribution consisting of cash, securities or other property, by set-off or otherwise. "Effectiveness Period" means the period which commences on the Issuance Date and ends on the earlier to occur of (x) the third anniversary of the Issuance Date and (y) such time as there are no Transfer Restricted Securities outstanding. "Exchange Act" means the Securities Exchange Act of 1934, as amended. "GAAP" means generally accepted accounting principles set forth in the opinions and pronouncements of the Accounting Principles Board of the American Institute of Certified Public Accountants and statements and pronouncements of the Financial Accounting Standards Board or in such other statements by such other entity as have been approved by a significant segment of the accounting profession in the United States, as in effect from time to time. "Government Obligations" means direct Obligations of, or Obligations guaranteed by, the United States of America for the payment of which is pledged the full faith and credit of the United States of America. "Holder" means a Person in whose name a Debenture is registered on the books of the Company or the Registrar kept for that purpose. "Indebtedness" means with respect to any Person, (i) any obligation, contingent or otherwise, of such Person (a) for borrowed money (whether or not the recourse of the lender is to the whole of the assets of such Person or only to a portion thereof), (b) evidenced by a note, debenture or similar instrument (including a purchase money obligation), (c) for the payment of any money under a lease required to be capitalized on the balance sheet of the lessee under generally accepted accounting principles, (d) in respect of letters of credit (including reimbursement obligations with respect thereto) or (e) to pay the deferred purchase price of property or services; (ii) any obligation of others which the Person has directly or indirectly guaranteed (including any monetary obligation of a keep-well or similar nature); (iii) any obligation secured by a mortgage, pledge, lien, encumbrance, charge or adverse claim affecting title or resulting in an encumbrance to which the property or assets of such person are subject, whether or not the obligations secured thereby shall have been assumed by or shall otherwise be such person's legal liability; (iv) to the extent not otherwise included, obligations under currency swap agreements and interest rate protection agreements or similar agreements; and (v) any and all deferrals, renewals, extensions 5 12 and refundings of, or amendments, modifications or supplements to, any liability of the kind described in any of the preceding clauses (i), (ii), (iii), or (iv); provided, that Indebtedness shall not include accounts payable or any other indebtedness to trade creditors created or assumed by the Company in the ordinary course of business. "Indenture" means this Indenture, as amended or supplemented from time to time. "Issuance Date" means the closing date for the sale and original issuance of the Debentures. "Legal Holiday" means a Saturday, a Sunday or a day on which banking institutions in The City of New York or at a place of payment in the state in which the Corporate Trust Office of the Trustee is located are authorized by law, regulation or executive order to remain closed. If a date on which any notice, payment or other action is required hereunder to be taken or made is a Legal Holiday at a place of payment or in the state in which the Corporate Trust Office of the Trustee is located, such action may be taken or made at that place on the next succeeding day that is not a Legal Holiday, and, if applicable, interest shall not accrue for the intervening period. "Lien" means, with respect to any asset, any mortgage, lien, pledge, charge, security interest or encumbrance of any kind in respect of such asset, whether or not filed, recorded or otherwise perfected under applicable law (including any conditional sale or other title retention agreement, any lease in the nature thereof, any option or other agreement to sell or give a security interest in and any filing of or agreement to give any financing statement under the Uniform Commercial Code (or equivalent statutes) of any jurisdiction). "NASD" means the National Association of Securities Dealers, Inc. "Obligations" means any principal, interest, premiums, penalties, fees, indemnifications, reimbursements, damages and other liabilities payable under the documentation governing any Indebtedness. "Officer" means, with respect to any Person, the Chairman of the Board, the Chief Executive Officer, the President, the Chief Operating Officer, the Chief Financial Officer, any Vice-President, the Treasurer, any Assistant Treasurer, the Controller, the Secretary or any Assistant Secretary of such Person. "Officers' Certificate" means a certificate signed on behalf of the Company by two Officers of the Company, one of whom 6 13 must be the principal executive officer, principal financial officer, or principal accounting officer of the Company, that meets the requirements of Section 13.5 hereof. "Opinion of Counsel" means an opinion from legal counsel who is reasonably acceptable to the Trustee, that meets the requirements of Section 13.5 hereof. The counsel may be an employee of or counsel to the Company, any Subsidiary of the Company or the Trustee. "Payment Blockage Notice" shall have the meaning provided in Article 10 hereof. "Person" means any individual, corporation, partnership, joint venture, association, joint-stock company, trust, unincorporated organization, government or any agency or political subdivision thereof or any other entity. "Prospectus" means any prospectus included in the Shelf Registration Statement, as amended or supplemented by any subsequent prospectus and by all other amendments thereto, including post-effective amendments and all materials incorporated by reference into such Prospectus. "Registration Default" shall have the meaning as defined in Article 8 hereof. "Representative" means (a) so long as any Obligations are outstanding under the Credit Agreement or the BNY Facility Agreement, LTCB Trust Company, as Agent for the banks parties to the Credit Agreement, or The Bank of New York, as administrative agent under the BNY Facility Agreement or such other trustee, agent or representative designated as such pursuant to an intercreditor agreement among the creditors in respect of the Designated Senior Debt and any additional Senior Debt and (b) thereafter the indenture trustee or other trustee, agent or representative for any Senior Debt. "Responsible Officer" when used with respect to the Trustee, means any officer within the Corporate Trust Administration of the Trustee (or any successor group of the Trustee) or any other officer of the Trustee customarily performing functions similar to those performed by any of the above designated officers and also means, with respect to a particular corporate trust matter, any other officer of the Trustee to whom such matter is referred because of his knowledge of and familiarity with the particular subject. "SEC" means the Securities and Exchange Commission. "Securities Act" means the Securities Act of 1933, as amended. 7 14 "Senior Debt" shall mean the principal of, premium, if any, and interest (including interest which accrues after a petition in bankruptcy is filed by or against the Company) on and other amounts due on or in connection with any Indebtedness of the Company, whether outstanding on the date of this Indenture or thereafter created, incurred, assumed, guaranteed or in effect guaranteed by the Company (including all deferrals, renewals, extensions or refundings of, or amendments, modifications or supplements to the foregoing); provided, however, that Senior Debt does not include (i) any particular Indebtedness in which the instrument creating or evidencing the same or the assumption or guarantee thereof expressly provides that such Indebtedness shall not be senior in right of payment to, or is pari passu with, or is subordinated or junior to, the Debentures or (ii) the Debentures. "Shelf Deadline Date" shall have the meaning set forth in Article 8 hereof. "Shelf Registration Statement" means the shelf registration statement of the Company relating to the registration for resale of Transfer Restricted Securities, which is filed pursuant to the provisions of this Indenture, including the Prospectus included therein, all amendments and supplements to the Shelf Registration Statement (including post-effective amendments) and all exhibits and materials incorporated by reference therein. "Significant Subsidiary" means any Subsidiary that would be a "significant subsidiary" as defined in Article 1, Rule 1-02 of Regulation S-X, promulgated pursuant to the Securities Act, as such Regulation is in effect on the date hereof. "Spin-Off Transaction" means any transaction or series of related transactions resulting in the holders of outstanding equity securities of a member of the Control Group (either separately or together with the holders of other series or classes of securities) acquiring (or having the right to acquire upon the exercise of rights, warrants or similar securities) equity securities of any Person which, directly or indirectly, holds equity securities of the Company on a pro rata basis based upon such holders' ownership of one or more classes or series of equity securities of such member of the Control Group on the record or other similar date for such transaction. "Standstill Period" shall have the meaning set forth in Article 6 hereof. "Subordinated Reorganization Securities" shall have the meaning set forth in Article 10 hereof. 8 15 "Subsidiary" means with respect to any Person, (i) a corporation a majority of whose Capital Stock with voting power, under ordinary circumstances, to elect directors is at the time, directly or indirectly, owned by such Person, by one or more Subsidiaries of such Person or by such Person and one or more Subsidiaries thereof or (ii) any other Person (other than a corporation) in which such Person, one or more Subsidiaries thereof or such Person and one or more Subsidiaries thereof, directly or indirectly, at the date of determination thereof has at least a majority ownership interest and the power to generally direct the policies, management and affairs thereof. "TIA" means the Trust Indenture Act of 1939 (15 U.S.C. Section Section 7aaa-77bbbb) as in effect on the date on which this Indenture is qualified under the TIA, except as provided in Section 9.3 hereof and except to the extent any amendment to the TIA retroactively applies to this Indenture. "Transfer Restricted Security" means, the Debentures and the Common Stock of the Company issuable upon conversion thereof unless or until the first to occur of (x) the third anniversary of the Issue Date and (ii) the effectiveness of the Shelf Registration Statement. "Trustee" means the party named as such above until a successor replaces it in accordance with the applicable provisions of this Indenture and thereafter means the successor serving hereunder. "Voting Stock" means the Common Stock of the Company, the Class B Common Stock of the Company and any other capital stock or similar interests of any class or classes (however designated) of the Company, the holders of which are generally at the time entitled, as such holders, to vote upon matters which may be submitted to a vote of stockholders at any annual or special meeting. SECTION 1.2 OTHER DEFINITIONS
Term Defined in Section ---- ------------------ "Change of Control Offer" 4.7 "Change of Control Payment" 4.7 "Change of Control Purchase Date" 4.7 "Change of Control Purchase Notice" 4.7 "Conversion Agent" 2.3 "Covenant Defeasance" 12.3 "Event of Default" 6.1 "Legal Defeasance" 12.2 "Paying Agent" 2.3 "Payment Blockage Notice" 10.3 "Registrar" 2.3
9 16 SECTION 1.3 INCORPORATION BY REFERENCE OF TRUST INDENTURE ACT Whenever this Indenture refers to a provision of the TIA, the provision is incorporated by reference in and made a part of this Indenture, other than those provisions of the TIA that may be excluded herefrom, which provisions shall be excluded to the extent specifically excluded from this Indenture. The following TIA terms used in this Indenture have the following meanings: "indenture securities" means the Debentures; "indenture security holder" means a Holder of a Debenture; "indenture to be qualified" means this Indenture; "indenture trustee" or "institutional trustee" means the Trustee; "obligor" on the Debentures means the Company and any successor obligor upon the Debentures. All other terms used in this Indenture that are defined by the TIA, defined by TIA reference to another statute or defined by a rule or regulation promulgated by the SEC under the TIA have the meanings so assigned to them. SECTION 1.4 RULES OF CONSTRUCTION Unless the context otherwise requires: (1) a term has the meaning assigned to it; (2) an accounting term not otherwise defined has the meaning assigned to it in accordance with GAAP; (3) "or" is not exclusive; (4) words in the singular include the plural, and words in the plural include the singular; (5) provisions apply to successive events and transactions; and (6) references to sections of or rules under the Securities Act or the Exchange Act shall be deemed to include substitute, replacement or successor sections or rules adopted by the SEC from time to time. 10 17 ARTICLE 2. THE DEBENTURES SECTION 2.1 FORM AND DATING The Debentures and the Trustee's certificate of authentication shall be substantially in the form of Exhibit A hereto, the terms of which are incorporated in and made part of this Indenture. In addition to those set forth in Exhibit A, the Debentures may have notations, legends or endorsements approved as to form by the Company and required by law, stock exchange rule, agreements to which the Company is subject, or usage. Each Debenture shall be dated the date of its authentication. The Debentures will be issued in fully registered form, without coupons, and will be initially issuable only in denominations of $10,000 and any integral multiple of $1,000 in excess thereof; provided, that following the effectiveness of the Shelf Registration Statement the Debentures shall be issuable in minimum denominations of $1,000 and any integral multiple in excess thereof. The Debentures are not issuable in bearer form and the Debentures may be issued in whole or in part in the form of one or more global Debentures as contemplated by Section 2.16. SECTION 2.2 EXECUTION AND AUTHENTICATION Two Officers of the Company shall sign the Debentures for the Company by manual or facsimile signature. The Company's seal shall be reproduced on the Debentures and may be in facsimile form. If an Officer of the Company whose signature is on a Debenture, no longer holds that office at the time the Debenture is authenticated, the Debenture shall nevertheless be valid. A Debenture shall not be valid until authenticated by the manual signature of the Trustee. The signature of the Trustee shall be conclusive evidence that the Debenture has been authenticated under this Indenture. The form of Trustee's certificate of authentication to be borne by the Debentures shall be substantially as set forth in Exhibit A hereto. At any time and from time to time after the execution and delivery of this Indenture, the Company may deliver Debentures executed by the Company to the Trustee for authentication, and the Trustee shall, subject to the provisions hereof and of such Debentures, authenticate said Debentures and deliver said Debentures to or upon the written order of the Company, signed by two Officers of the Company, without any further action by the Company. The aggregate principal amount of the Debentures outstanding at any time shall not exceed $100,000,000 (except as 11 18 provided in Section 2.7 hereof). The Debentures shall be subordinated in right of payment to Senior Debt as provided in Article 10 hereof. Unless the context otherwise requires, the Debentures shall constitute one series for all purposes under this Indenture, including without limitation, amendments, waivers, approvals, redemptions, and Change of Control Offers. The Trustee may appoint an authenticating agent acceptable to the Company to authenticate the Debentures. Unless limited by the terms of such appointment, an authenticating agent may authenticate the Debentures whenever the Trustee may do so. Each reference in this Indenture to authentication by the Trustee includes authentication by such agent. SECTION 2.3 REGISTRAR AND PAYING AGENT The Company shall maintain in the City of New York (i) an office or agency where the Debentures may be presented for registration of transfer or for exchange (including any co-registrar, the "Registrar"); (ii) an office or agency where the Debentures may be presented for payment ("Paying Agent"); and (iii) an office or agency where the Debentures may be presented for conversion ("Conversion Agent"). The Registrar shall keep a register of the Debentures and of their transfer and exchange. The Company may appoint one or more co-registrars, one or more additional paying agents and one or more additional Conversion Agents. The terms "Paying Agents" and "Conversion Agents" include any additional paying agent or conversion agent, respectively. The Company may change any Paying Agent, Registrar or co-registrar without prior notice to any Holder of a Debenture. The Company shall promptly notify the Trustee and the Trustee shall promptly notify the Holders of the Debentures of the name and address of any Agent not a party to this Indenture. The Company may act as Paying Agent, Conversion Agent, Registrar or co-registrar. The Company shall enter into an appropriate agency agreement with any Agent not a party to this Indenture, which shall be subject to any obligations imposed by the provisions of the TIA. The agreement shall implement the provisions of this Indenture that relate to such Agent. The Company shall notify the Trustee of the name and address of any such Agent. If the Company fails to maintain a Conversion Agent, Registrar or Paying Agent, or fails to give the foregoing notice, the Trustee shall act as such, and shall be entitled to appropriate compensation in accordance with Section 7.7 hereof. The Company initially appoints the Trustee as Registrar, Paying Agent and Conversion Agent with respect to the Debentures. 12 19 SECTION 2.4 PAYING AGENT TO HOLD MONEY IN TRUST The Company shall require each Paying Agent other than the Trustee to agree in writing that the Paying Agent shall hold in trust for the benefit of the Holders of the Debentures or the Trustee all money held by the Paying Agent for the payment of principal of, and interest (and any Additional Interest, if any) on the Debentures (for purposes of this Section 2.4 the "Debenture Funds"), and shall notify the Trustee of any Default by the Company in making any such payment. While any such Default continues, the Trustee may require a Paying Agent to pay all Debenture Funds held by it to the Trustee. The Company at any time may require a Paying Agent to pay all Debenture Funds held by it to the Trustee. Upon payment over to the Trustee, the Paying Agent (if other than the Company) shall have no further liability for the Debenture Funds delivered to the Trustee. If the Company acts as Paying Agent, it shall segregate and hold in a separate trust fund for the benefit of the Holders of the Debentures subject to Article 10 hereof, all Debenture Funds held by it as Paying Agent. Upon any bankruptcy or reorganization proceeding relating to the Company, the Trustee shall serve as Paying Agent for the Debentures and the Company shall require each Paying Agent to agree in writing to turn over to the Trustee immediately thereupon all money held by each such Paying Agent. SECTION 2.5 LISTS OF HOLDERS OF THE DEBENTURES The Trustee shall preserve in as current a form as is reasonably practicable the most recent list available to it of the names and addresses of Holders of the Debentures and shall otherwise comply with TIA Section 312(a). If the Trustee is not the Registrar, the Company shall furnish to the Trustee at least seven Business Days before each interest payment date and at such other times as the Trustee may request in writing a list in such form and as of such date as the Trustee may reasonably require of the names and addresses of Holders of the Debentures, including the aggregate principal amount of the Debentures held by each thereof, and the Company shall otherwise comply with TIA Section 312(a). SECTION 2.6 TRANSFER AND EXCHANGE (a) Transfer and Exchange of Definitive Debentures. When any of the Debentures are presented to the Registrar with a request: (x) to register the transfer of the Debentures; or (y) to exchange such Debentures for an equal principal amount of Debentures of other authorized denominations, 13 20 the Registrar shall register the transfer or make the exchange as requested if its requirements for such transactions are met; provided, however, that the Debentures presented or surrendered for register of transfer or exchange: (i) shall be duly endorsed or accompanied by a written instruction of transfer in form satisfactory to the Registrar; duly executed by the Holder thereof or by his attorney duly authorized in writing; and (ii) in the case of a Debenture that is a Transfer Restricted Security, such request shall be accompanied by the following additional information and documents, as applicable: (A) if such Transfer Restricted Security is being delivered to the Registrar by a Holder for registration in the name of such Holder, without transfer, a certification from such Holder to that effect (in substantially the form of Exhibit A hereto); or (B) if such Transfer Restricted Security is being transferred to a "qualified institutional buyer" (as defined in Rule 144A under the Securities Act) in accordance with Rule 144A under the Securities Act or pursuant to an exemption from registration in accordance with Rule 144 or Rule 904 under the Securities Act or pursuant to an effective registration statement under the Securities Act, a certification from such Holder to that effect (in substantially the form of Exhibit A hereto) and, in the case of a transfer pursuant to an exemption from registration in accordance with Rule 144 or Rule 904 under the Securities Act, an Opinion of Counsel from such Holder or the transferee reasonably acceptable to the Company and to the Registrar to the effect that such transfer is in compliance with the Securities Act; or (C) if such Transfer Restricted Security is being transferred in reliance on another exemption from the registration requirements of the Securities Act, a certification from such Holder to that effect (in substantially the form of Exhibit A hereto) and an Opinion of Counsel from such Holder or the transferee reasonably acceptable to the Company and to the Registrar to the effect that such 14 21 transfer is in compliance with the Securities Act. (b) Legends. (i) Except as permitted by the following paragraphs (ii) and (iii), each Debenture shall bear legends in substantially the following form: "THE SECURITY REPRESENTED HEREBY (OR ITS PREDECESSOR) WAS ORIGINALLY ISSUED IN A TRANSACTION EXEMPT FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND MAY NOT BE SOLD OR OTHERWISE TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR APPLICABLE EXEMPTION THEREFROM AND IN ANY EVENT MAY BE SOLD OR OTHERWISE TRANSFERRED ONLY IN ACCORDANCE WITH THE INDENTURE (COPIES OF WHICH MAY BE OBTAINED FROM THE COMPANY). EACH HOLDER OF THIS SECURITY REPRESENTS TO THE COMPANY THAT (A) SUCH HOLDER WILL NOT SELL OR OTHERWISE TRANSFER THIS SECURITY PRIOR TO THE DATE WHICH IS THREE YEARS AFTER THE LATER OF THE ORIGINAL ISSUE DATE AND THE LAST DATE ON WHICH THE COMPANY OR ANY AFFILIATE OF THE COMPANY WAS THE OWNER OF THIS SECURITY (OR ANY PREDECESSOR), OTHER THAN (I) TO A QUALIFIED INSTITUTIONAL PREDECESSOR), OTHER THAN (II) IN AN OFFSHORE TRANSACTION COMPLYING WITH REGULATION S UNDER THE SECURITIES ACT, (III) TO AN ACCREDITED INVESTOR THAT, PRIOR TO SUCH TRANSFER, FURNISHES (OR HAS FURNISHED ON ITS BEHALF BY A U.S. BROKER-DEALER) TO THE COMPANY AND UNITED STATES TRUST COMPANY OF NEW YORK, AS TRUSTEE, A SIGNED LETTER CONTAINING CERTAIN REPRESENTATIONS AND AGREEMENTS RELATING TO THE RESTRICTIONS ON TRANSFER OF THIS SECURITY (THE FORM OF WHICH LETTER CAN BE OBTAINED FROM THE TRUSTEE) AND, IN THE CASE OF CLAUSE (I), (II) OR (III), SUCH OTHER DOCUMENTS, CERTIFICATES AND OPINIONS AS THE COMPANY OR THE TRUSTEE MAY REASONABLY REQUEST, (IV) PURSUANT TO ANOTHER AVAILABLE EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT (IN WHICH CASE THE HOLDER SHALL HAVE RECEIVED THE PRIOR WRITTEN AUTHORIZATION OF THE COMPANY OR SHALL PROVIDE AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY AND ADDRESSED TO THE COMPANY AND THE TRUSTEE), (V) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT, OR (VI) TO THE COMPANY OR ANY SUBSIDIARY THEREOF; AND THAT (B) THE HOLDER WILL, AND EACH SUBSEQUENT HOLDER IS REQUIRED TO, NOTIFY ANY PURCHASER OF THIS SECURITY FROM IT OF THE RESALE RESTRICTIONS REFERRED TO IN (A) ABOVE AND TO DELIVER TO THE TRANSFEREE PRIOR TO SALE A COPY OF A 15 22 NOTICE TO INVESTORS DESCRIBING SUCH RESTRICTIONS (COPIES OF WHICH MAY BE OBTAINED FROM THE COMPANY)." (ii) Upon any sale or transfer of a Debenture bearing the legends set forth in (i) above pursuant to Rule 144 under the Securities Act or pursuant to an effective registration statement under the Securities Act, the Registrar shall permit the Holder thereof to exchange such Debenture for a Debenture that does not bear such legends and rescind any restriction on the transfer of such Debenture; provided, however, that with respect to any request for an exchange of a Debenture for a Debenture that does not bear such legends, which request is made in reliance upon Rule 144, the Holder thereof shall certify in writing to the Registrar that such request is being made pursuant to Rule 144 (such certification to be substantially in the form of Exhibit A hereto). (c) General Provisions Relating To Transfers and Exchanges. (i) To permit registrations of transfers and exchanges, the Company shall execute and the Trustee shall authenticate the Debentures at the Registrar's request. (ii) No service charge shall be made to a Holder for any registration of transfer or exchange, but the Company or the Registrar may require a Holder, among other things, to furnish appropriate endorsements and transfer documents and to pay a sum sufficient to cover any transfer tax or similar governmental charge payable in connection therewith (other than any such transfer taxes or similar governmental charge payable upon exchange or transfer pursuant to Sections 2.7, 2.10, 3.5, 4.7 or 9.5 hereof). (iii) The Registrar shall not be required to register the transfer of or exchange any Debenture selected for redemption in whole or in part or tendered for repurchase pursuant to Section 4.7 hereof, except the unredeemed or unrepurchased portion of any Debenture being redeemed or repurchased in part, as the case may be. (iv) All Debentures issued upon any registration of transfer or exchange of Debentures shall be the valid Obligations of the Company, evidencing the same debt, and entitled to the same benefits under this Indenture, as the Debentures surrendered upon such registration of transfer or exchange. (v) The Company or the Registrar shall not be required to register the transfer or exchange of a Debenture between a record date and the next succeeding interest payment date. 16 23 (vi) Prior to due presentment for the registration of a transfer of any Debenture, the Trustee, any Agent and the Company may deem and treat the person in whose name any Debenture is registered as the absolute owner of such Debenture for the purpose of receiving payment of principal of, interest and Additional Interest, if any, on such Debenture, and neither the Trustee, any Agent nor the Company shall be affected by notice to the contrary. (vii) The Trustee shall authenticate the Debentures upon receipt of an Officers' Certificate instructing it to do so. (d) Global Certificate Debentures. Notwithstanding any other provision of this Section, unless and until it is exchanged in whole or in part for Debentures in definitive form, a global Debenture representing all or a portion of the Debentures may not be transferred except as a whole by the depositary for the Debentures to a nominee of such depositary or by a nominee of such depositary to such depositary or another nominee of such depositary or by such depositary or any such nominee to a successor depositary for the Debentures or a nominee of such successor depositary. A global Debenture may be exchanged only as provided in this Section 2.6(d). If at any time the depositary with respect to a global Debenture or Debentures representing all or a portion of the Debentures notifies the Company that it is unwilling, unable or ineligible to continue as such depositary, the Company shall appoint a successor depositary with respect to such Debenture. If a successor depositary is not so appointed by the Company within 90 days after the Company receives such notice, the Company will execute and the Trustee, upon receipt of a written order of the Company for the authentication and delivery of definitive Debentures (or, if such written order has previously been delivered, then upon receipt of written instructions from the person or persons specified in such written order), will authenticate and deliver Debentures of such series in definitive form equal in aggregate principal amount to the principal amount of the global Debenture(s) in exchange for such global Debenture(s). The Company may at any time and in its sole discretion determine that the Debentures issued in the form of one or more global Debentures shall no longer be represented by such global Debenture(s). In such event, the Company will execute and the Trustee, upon receipt of a written order of the Company for the authentication and delivery of definitive Debentures (or, if such written order has previously been delivered, then upon receipt of written instructions from the person or persons specified in such written order), will authenticate and deliver Debentures in 17 24 definitive form equal in aggregate principal amount to the principal amount of the global Debenture(s) in exchange for such global Debenture(s). In any exchange provided for herein, the Company will execute and the Trustee will authenticate and deliver Debentures in definitive registered form in authorized denominations as provided in Section 2.1 hereof. Upon the exchange of a global Debenture in definitive form, such global Debenture shall be cancelled by the Trustee, unless endorsement of the surrendered global Debenture is contemplated by Section 2.16. Definitive Debentures issued in exchange for a global Debenture pursuant to this Section shall be registered in such names and in such authorized denominations as the depositary for such global Debenture shall instruct the Registrar in writing, pursuant to instructions from its direct or indirect participants or otherwise. The Company and the Trustee shall be fully protected in relying upon written directions from the depositary as to the names and addresses in which the Debentures are to be issued, and in no event shall have any liability to any Person claiming any right in or to any of the Debentures issued pursuant to directions received from the depositary. The Trustee shall deliver such definitive Debentures to the persons in whose names such Debentures are so registered. If a definitive Debenture is issued in exchange for any portion of a global Debenture after the close of business at the office or agency where such exchange occurs on any regular record date, or special record date, and before the opening of business at such office or agency on the relevant interest payment date, interest and Additional Interest, if any, will be payable on such interest payment date in respect of such definitive Debenture, to the person to whom interest and Additional Interest, if any, in respect of such portion of such global Debenture is payable in accordance with the provisions of this Indenture. SECTION 2.7 REPLACEMENT DEBENTURES If (i) any mutilated Debenture is surrendered to the Trustee, or (ii) the Company and the Trustee receive evidence to their satisfaction of the destruction, loss or theft of any Debenture, and there is delivered to the Company and the Trustee security or indemnity as may be required by them to save each of them and any Agent harmless, then in the absence of notice to the Company or the Trustee that such Debenture has been acquired by a bona fide purchaser, the Company shall issue and the Trustee shall authenticate a replacement Debenture, if the Trustee's and the Company's requirements for replacements of Debentures are met. If required by the Trustee or the Company, an indemnity 18 25 bond must be supplied by the Holder that is sufficient in the judgment of the Trustee and the Company to protect the Company, the Trustee, any Agent or any authenticating agent from any loss which any of them may suffer if a Debenture is replaced. The Company and the Trustee may require the payment of a sum sufficient to cover any tax or other governmental charge that may be imposed and any other expenses incurred by it in connection with replacing a Debenture. Every Replacement Debenture shall represent an Obligation of the Company and shall be entitled to all of the benefits of this Indenture equally and ratably with all other Debentures duly issued hereunder. SECTION 2.8 OUTSTANDING DEBENTURES The Debentures outstanding at any time are all the Debentures authenticated by the Trustee except for those cancelled by it, those delivered to it for cancellation and those described in this Section 2.8 as not outstanding. If a Debenture is replaced pursuant to Section 2.7 hereof, it ceases to be outstanding unless the Trustee receives proof satisfactory to it that the replaced Debenture is held by a bona fide purchaser. If the principal amount of any Debenture is considered paid under Section 4.1 hereof, it ceases to be outstanding and interest on it ceases to accrue. Subject to Section 2.9 hereof, a Debenture does not cease to be outstanding because the Company, a Subsidiary of the Company or an Affiliate of the Company holds the Debenture. SECTION 2.9 TREASURY DEBENTURES In determining whether the Holders of the required principal amount of Debentures have concurred in any direction, waiver or consent, Debentures owned by the Company, or any of its Subsidiaries or any of its Affiliates shall be considered as though not outstanding, except that for purposes of determining whether the Trustee shall be protected in relying on any such direction, waiver or consent, only Debentures which the Trustee is advised by the Company are so owned shall be so considered. Notwithstanding the foregoing, Debentures that are to be acquired by the Company, or any Subsidiary of the Company or any of its Affiliates pursuant to an exchange offer, tender offer or other agreement shall not be deemed to be owned by the Company, a Subsidiary of the Company or its Affiliates until legal title to such Debentures passes to the Company, such Subsidiary or such Affiliate, as the case may be. SECTION 2.10 TEMPORARY DEBENTURES Until permanent Debentures are ready for delivery, the Company may prepare, and the Trustee shall authenticate, 19 26 temporary Debentures. The temporary Debentures shall be substantially in the form of permanent Debentures but may have variations that the Company and the Trustee consider appropriate for temporary Debentures. Without unreasonable delay upon the request of a Holder, the Company shall prepare and the Trustee, upon receipt of the written order of the Company signed by two Officers of the Company, shall authenticate permanent Debentures in exchange for temporary Debentures. Until such exchange, temporary Debentures shall be entitled to the same rights, benefits and privileges as permanent Debentures. SECTION 2.11 CANCELLATION The Company may at any time deliver Debentures to the Trustee for cancellation. The Registrar and Paying Agent shall forward to the Trustee any Debentures surrendered to them for registration of transfer, repurchase, exchange or payment. The Trustee shall cancel all Debentures surrendered for registration of transfer, repurchase, exchange, payment, replacement or cancellation and shall destroy cancelled Debentures (subject to the record retention requirement of the Exchange Act), unless the Company directs cancelled Debentures to be returned to it. The Company may not issue new Debentures to replace Debentures that it has redeemed, repurchased or paid or that have been delivered to the Trustee for cancellation. SECTION 2.12 DEFAULTED INTEREST If the Company defaults in a payment of interest on the Debentures, the Company shall pay the defaulted interest in any lawful manner plus, to the extent lawful, interest payable on the defaulted interest, to the Persons who are Holders of the Debentures on a subsequent special record date, which date shall be at the earliest practicable date but in all events at least five Business Days prior to the payment date, in each case at the rate provided in the Debentures. The Company shall fix each such special record date and payment date, and shall, promptly thereafter, notify the Trustee of any such date. At least 15 days before the special record date, the Company (or the Trustee, in the name of and at the expense of the Company) shall mail to Holders of the Debentures a notice that states the special record date, the related payment date and the amount of such interest to be paid, and at the same time the Company shall deposit with the Trustee an amount of money equal to the aggregate amount proposed to be paid in respect of such defaulted interest or shall make arrangements satisfactory to the Trustee for such deposit prior to the date of the proposed payment, such money when deposited to be held in trust for the benefit of the Persons entitled to such defaulted interest as in this Section 2.12 provided. 20 27 SECTION 2.13 RECORD DATE The record date for purposes of determining the identity of Holders of the Debentures entitled to vote or consent to any action by vote or consent authorized or permitted under this Indenture shall be determined as provided for in TIA Section 316(c). SECTION 2.14 CUSIP NUMBER The Company in issuing the Debentures may use "CUSIP" numbers and, if it does so, the Trustee shall use the CUSIP numbers in notices of redemption or exchange as a convenience to Holders; provided that any such notice may state that no representation is made as to the correctness or accuracy of the CUSIP numbers printed in the notice or on the Debentures and that reliance may be placed only on the other identification numbers printed on the Debentures. The Company will promptly notify the Trustee of any change in any CUSIP number. SECTION 2.15 COMPUTATION OF INTEREST Interest will be computed on the basis of a 360-day year consisting of twelve 30-day months. SECTION 2.16 SECURITIES IN GLOBAL FORM In connection with the issuance of a global Debenture, the Company shall execute, and the Trustee shall, in accordance with the written order of the Company, authenticate and deliver one or more global Debentures in permanent form that (i) shall be registered in the name of the depositary for such global Debenture(s) or its nominee, (ii) shall be delivered by the Trustee to such depositary or pursuant to such depositary's instructions, and (iii) shall bear a legend substantially to the following effect: "Unless and until it is exchanged in whole or in part for Debentures in definitive form as provided in Section 2.6(d) of the Indenture, this Debenture may not be transferred except as a whole by the depositary to a nominee of the depositary or by a nominee of the depositary to the depositary or another nominee of the depositary or by the depositary or any such nominee to a successor depositary or a nominee of such successor depositary." Each depositary designated by the Company for a global Debenture in registered form must be, to the extent required by applicable law or regulation, a clearing agency registered under the Exchange Act, any other applicable statute or regulation, at the time of its designation and at all times that it serves as depositary. Any such global Debenture shall represent such of the outstanding Debentures represented thereby as shall be specified thereon and may provide that it shall represent the aggregate amount of outstanding Debentures from time to time endorsed thereon and that the aggregate amount of 21 28 the Debentures represented thereby may from time to time be increased or decreased to reflect exchanges. Any endorsement of a Debenture in global form to reflect the amount, or any increase or decrease in the amount, or changes in the rights of Holders, of outstanding Debentures represented thereby shall be made in such manner and upon instructions given by such person or persons as shall be specified in a written order of the Company to be delivered to the Trustee. The Trustee shall deliver and redeliver any Debenture in permanent global form in the manner and upon instructions given by the person or persons specified in an applicable written order of the Company. SECTION 2.17 PERSONS DEEMED OWNERS No holder of any beneficial interest in any global Debenture held on its behalf by a depositary shall have any rights under this Indenture with respect to such global Debenture, and such depositary (or its nominee, if such global Debenture is registered in the name of a nominee) may be treated by the Company, the Trustee and any agent of the Company or the Trustee as the owner of such global Debenture for all purposes whatsoever. None of the Company, the Trustee, any Paying Agent or the Registrar will have any responsibility or liability for any aspect of the records relating to or payments made on account of beneficial ownership interests of a global Debenture or for maintaining, supervising or reviewing any records relating to such beneficial ownership interests. Notwithstanding the foregoing, with respect to any global Debenture, nothing herein shall prevent the Company, the Trustee or any agent of the Company or the Trustee from giving effect to any written certification, proxy or other authorization furnished by any depositary, as a Holder, with respect to such global Debenture or impair, as between such depositary and owners of beneficial interests in such global Debenture, the operation of customary practices governing the exercise of the rights of such depositary (or its nominee) as Holder of such global Debenture. ARTICLE 3. REDEMPTION SECTION 3.1 NOTICES TO TRUSTEE If the Company elects to redeem Debentures pursuant to the optional redemption provisions of Section 3.6 hereof, it shall furnish to the Trustee, at least 30 days but not more than 60 days before a redemption date, an Officers' Certificate setting forth (i) the redemption date, (ii) the principal amount of Debentures to be redeemed, and (iii) the applicable redemption price. 22 29 SECTION 3.2 NOTICE OF REDEMPTION At least 30 days but not more than 60 days before a redemption date, the Company shall mail or cause to be mailed, by first class mail, a notice of redemption to each Holder whose Debentures are to be redeemed at its registered address. The notice shall identify the Debentures (including CUSIP number, if any, and, in the case of a partial redemption, the principal amount of the Debentures) to be redeemed and shall state: (a) the redemption date; (b) the redemption price (including accrued interest to the redemption date); (c) if any Debenture is being redeemed in part, the portion of the principal amount of such Debenture to be redeemed and that, after the redemption date upon surrender of such Debenture, a new Debenture in principal amount equal to the unredeemed portion shall be issued upon cancellation of the original Debenture; (d) the name and address of the Paying Agent; (e) that Debentures called for redemption must be surrendered to the Paying Agent to collect the redemption price; (f) that, unless the Company defaults in making such redemption payment, interest on Debentures (or portion thereof) called for redemption ceases to accrue on and after the redemption date; (g) a statement of the conversion rights of the Holder of the Debenture and the Conversion Price then in effect; and (h) that no representation is made as to the correctness or accuracy of the CUSIP number, if any, listed in such notice or printed on the Debentures. At the Company's request, the Trustee shall give the notice of redemption in the Company's name and at its expense; provided, however, that the Company shall have delivered to the Trustee, at least 30 days prior to the redemption date, an Officers' Certificate requesting that the Trustee give such notice and setting forth the information to be stated in such notice as provided in the preceding paragraph. Failure to give any required notice of redemption as to any Debenture, or any defect in any such notice, shall not affect the validity of the call for redemption of any Debentures in respect of which no such failure or defect has occurred. Any notice mailed as provided 23 30 herein shall be effective when sent and shall be conclusively presumed to have been given, whether or not actually received by any Holder. SECTION 3.3 EFFECT OF NOTICE OF REDEMPTION Once notice of redemption is mailed in accordance with Section 3.2 hereof, Debentures called for redemption become irrevocably due and payable on the redemption date at the redemption price. A notice of redemption may not be conditional. On and after the redemption date, unless the Company defaults in the payment of the redemption price, interest will cease to accrue on the Debentures or portions thereof called for redemption and all rights of Holders with respect to such Debentures will terminate except for the right to receive payment of the redemption price upon surrender for redemption. SECTION 3.4 DEPOSIT OF REDEMPTION PRICE One Business Day prior to the redemption date, the Company shall deposit with the Paying Agent money sufficient to pay the principal of, accrued interest on and accrued Additional Interest, if any, on all Debentures to be redeemed on the redemption date. The Paying Agent shall promptly return to the Company any money deposited with the Paying Agent by the Company in excess of the amounts necessary to pay the redemption price of, accrued interest and accrued Additional Interest, if any, on, all Debentures to be redeemed. If the Company complies with the provisions of the preceding paragraph, on and after the redemption date, interest shall cease to accrue on the Debentures or the portions of Debentures called for redemption, whether or not such Debentures are presented for payment. If a Debenture is redeemed on or after an interest record date but on or prior to the related interest payment date, then any accrued and unpaid interest (and Additional Interest, if any) as of such record date shall be paid to the Person in whose name such Debenture was registered at the close of business on such record date. If any Debenture called for redemption shall not be so paid upon surrender for redemption because of the failure of the Company to comply with the preceding paragraph, interest shall be paid on the unpaid principal, from the redemption date until such principal is paid, and to the extent lawful on any interest not paid on such unpaid principal, in each case at the rate provided in the Debentures. Any funds deposited by the Company pursuant to the preceding paragraph that are not claimed by the Holders within one year of such deposit shall be returned to the Company, subject to the requirements of any applicable law which would require a different disposition of such funds. 24 31 SECTION 3.5 DEBENTURES REDEEMED IN PART Upon surrender of a Debenture that is redeemed in part, the Company shall issue and, upon the Company's written direction, the Trustee shall authenticate for the Holder at the expense of the Company a new Debenture equal in principal amount to the unredeemed portion of the Debenture surrendered. SECTION 3.6 OPTIONAL REDEMPTION At any time on or after March 1, 1998, the Company may, at its option, upon not less than 30, nor more than 60 days' notice, on the date specified in such notice, redeem all or a portion of the Debentures by prepaying all or a portion of the principal amount of the Debentures (in integral multiples of $1000), at the following redemption prices (expressed as percentages of the principal amount to be redeemed) plus accrued and unpaid interest, and any accrued and unpaid Additional Interest on such principal amount as of the redemption date: If redeemed during the 12 month period beginning March 1 of the years indicated:
Year Redemption Price ---- ---------------- 1998 104.700% 1999 104.113% 2000 103.525% 2001 102.938% 2002 102.350% 2003 101.763% 2004 101.175% 2005 100.588%
and, on or after March 1, 2006, at a redemption price equal to 100% of the principal amount plus accrued and unpaid interest, and any accrued and unpaid Additional Interest related thereto. provided, however, that the Debentures may not be redeemed prior to March 1, 1999 unless the Closing Price of the Common Stock equals or exceeds 140% of the then effective Conversion Price of the Debentures for at least 20 out of 30 consecutive trading days ending within 20 calendar days before the mailing of the notice to be provided in connection with such redemption. SECTION 3.7 NO MANDATORY REDEMPTION Except as set forth below under Section 4.7 hereof, the Company shall not be required to make mandatory redemption or sinking fund payments with respect to the Debentures. 25 32 SECTION 3.8 SELECTION OF DEBENTURES TO BE REDEEMED If less than all the Debentures are to be redeemed, the particular Debentures (or portions thereof) to be redeemed shall be selected from Debentures by lot or by such method as the Trustee considers fair and appropriate (and in such manner as complies with applicable requirements of any stock exchange on which the Debentures are listed) and which may provide for the selection for redemption of portions in principal amount of $1,000 or any integral multiple thereof). Provisions of this Indenture that apply to Debentures called for redemption also apply to portions of Debentures called for redemption. If any Debenture selected for partial redemption is converted in part after such selection but before the termination of the conversion right with respect to the portion of the Debenture so selected, the converted portion of such Debenture shall be deemed (so far as may be practicable) to be the portion selected for redemption. ARTICLE 4. COVENANTS SECTION 4.1 PAYMENT OF DEBENTURES The Company shall pay or cause to be paid the principal of, Additional Interest, if any, and interest on the Debentures on the dates and in the manner provided in the Debentures and in this Indenture. Principal, Additional Interest, if any, and interest, as applicable, shall be considered paid on the date due if the Paying Agent, if other than the Company, holds as of 10:00 a.m. Eastern Time on the due date money deposited by the Company in immediately available funds and designated for and sufficient to pay all principal, Additional Interest, if any, and interest then due. The Company shall pay interest (including post-petition interest in any proceeding under any Bankruptcy Law) on overdue principal at the applicable interest rate on the Debentures to the extent lawful. Any such default interest payments shall be made in the same manner and in accordance with the same provisions as regular interest payments. The Company shall notify the Trustee of the Company's obligation, if any, to pay Additional Interest to any Holders of Debentures no later than five Business Days following the occurrence of the event giving rise to the Company's obligation to pay such Additional Interest. 26 33 SECTION 4.2 MAINTENANCE OF OFFICE OR AGENCY The Company shall maintain in the Borough of Manhattan, City of New York, an office or agency (which may be an office of the Trustee or an affiliate of the Trustee, Registrar or co-registrar) where Debentures may be surrendered for registration of transfer or for exchange and where notices and demands to or upon the Company in respect of the Debentures and this Indenture may be served. The Company shall give prompt written notice to the Trustee of the location, and any change in the location, of such office or agency. If at any time the Company shall fail to maintain any such required office or agency or shall fail to furnish the Trustee with the address thereof, such presentations, surrenders, notices and demands may be made or served at the Corporate Trust Office of the Trustee. The Company may also from time to time designate one or more other offices or agencies where the Debentures may be presented or surrendered for any or all such purposes and may from time to time rescind such designations; provided, however, that no such designation or rescission shall in any manner relieve the Company of its obligation to maintain an office or agency in the Borough of Manhattan, City of New York for such purposes. The Company shall give prompt written notice to the Trustee of any such designation or rescission and of any change in the location of any such other office or agency. The Company hereby designates the Corporate Trust Office of the Trustee at 114 West 47th Street, New York, NY 10036 as one such office or agency of the Company in accordance with Section 2.3 hereof. SECTION 4.3 REPORTS Whether or not required by the rules and regulations of the SEC, for so long as any Debentures are outstanding, the Company shall furnish to the Trustee within 15 days after it files them with the SEC copies of the annual report and of any other information, documents and other reports which the Company files with the SEC pursuant to Section 13 or 15(d) of the Exchange Act. The Company shall also comply with the provisions of TIA Section 314(a). SECTION 4.4 COMPLIANCE CERTIFICATE (a) The Company shall deliver to the Trustee, within 120 days after the end of each fiscal year of the Company, an Officers' Certificate stating whether or not, to the knowledge of such officer, the Company has complied with all conditions and covenants on its part contained in this Indenture, and if such officer has obtained knowledge of any default by the Company in 27 34 the performance, observance or fulfillment of any such condition or covenant, specifying each such default and the nature thereof. (b) The Company shall, so long as any of the Debentures are outstanding, promptly deliver to the Trustee upon any such Officer becoming aware of any Default or Event of Default, an Officers' Certificate specifying any such Default or Event of Default and what action the Company is taking or proposes to take with respect thereto. SECTION 4.5 STAY, EXTENSIONS AND USURY LAWS The Company covenants (to the extent that it may lawfully do so) that it shall not at any time insist upon, plead, or in any manner whatsoever claim or take the benefit or advantage of, any stay, extension or usury law wherever enacted, now or at any time hereafter in force, that may affect the covenants or the performance of this Indenture; and the Company (to the extent that it may lawfully do so) hereby expressly waives all benefit or advantage of any such law, and covenants that it shall not, by resort to any such law, hinder, delay or impede the execution of any power herein granted to the Trustee, but shall suffer and permit the execution of every such power as though no such law has been enacted. SECTION 4.6 [INTENTIONALLY DELETED] SECTION 4.7 OFFER TO PURCHASE UPON CHANGE OF CONTROL (a) Subject to Section 10.3 hereof, upon the occurrence of a Change of Control, at any time after the Issuance Date and on or prior to the maturity of the Debentures, the Company shall commence an offer in the manner provided by this Section 4.7 (the "Change of Control Offer") to repurchase each Holder's Debentures at an offer price in cash equal to 100% of the aggregate principal amount thereof plus accrued and unpaid interest and Additional Interest, if any, thereon (the "Change of Control Payment") at the change of control purchase date, which shall be a business day no earlier than 15 Business Days nor later than 30 Business Days from the date of the mailing of the notice required by Section 4.7(b) hereof (the "Change of Control Purchase Date"). If a Change of Control shall have occurred, the Company shall purchase the Debentures of an electing Holder by delivering the Change of Control Payment on the Change of Control Purchase Date subject to satisfaction by the Holder of any relevant requirements herein. (b) Within 15 Business Days after the occurrence of a Change of Control, the Company will mail a notice to the Trustee and to each Holder and at such time will cause a copy of such notice to be published in The Wall Street Journal, or if no 28 35 longer published, in a national newspaper of general circulation, stating: (i) the events causing such Change of Control and the date of the consummation of the Change of Control; (ii) the Change of Control Purchase Date; (iii) the amount of the Change of Control Payment; (iv) the name and address of the Paying Agent; (v) the Conversion Price and any adjustments thereto resulting from such Change of Control, if any; (vi) that Debentures as to which a Change of Control Purchase Notice has been tendered to the Company may thereafter be converted in accordance with Article 11 hereof only if the Change of Control Purchase Notice has been withdrawn in accordance with the terms of this Indenture; (vii) that tendered Debentures will cease to accrue interest after the Change of Control Purchase Date; (viii) that the Change of Control Payment for any Debenture as to which a Change of Control Purchase Notice has been duly given and not withdrawn will be paid promptly following the later of the Change of Control Purchase Date and the time of surrender of such Debenture as described in clause (h); (ix) the procedures the Holder must follow to exercise rights under this Section 4.7; (x) a brief description of the conversion rights of the Debentures; and (xi) the procedures for withdrawing a Change of Control Purchase Notice. (c) A Holder may exercise its rights specified in this Section 4.7 by delivering a written notice of purchase (a "Change of Control Purchase Notice") to the Paying Agent at any time prior to the close of business on the Change of Control Purchase Date, stating: (i) the certificate number of the Debenture that such Holder will deliver to be purchased; (ii) the portion of the principal amount of such Debenture (in increments of the minimum authorized $1,000 denomination) that such Holder will deliver to be purchased; 29 36 (iii) that such Debenture is to be purchased by the Company pursuant to the terms and conditions of this Indenture. The delivery of such Debenture (together with all necessary endorsements) to the Paying Agent prior to the close of business on the Change of Control Purchase Date at the offices of the Paying Agent shall be a condition to the receipt by the Holder of the Change of Control Payment therefor, provided, however, that such Change of Control Payment shall be paid pursuant to this Section 4.7 only if the Debenture so delivered to the Paying Agent shall conform in all respects to the description thereof set forth in the related Change of Control Purchase Notice and such notice shall have been received by the Paying Agent prior to the close of business on the Change of Control Purchase Date. The Company shall purchase from the Holder thereof, pursuant to this Section 4.7, a portion of the Debenture if such portion is equal to the minimum authorized denomination for Debentures or an integral multiple of $1,000 in excess thereof. Provisions of this Indenture that apply to the purchase of a Debenture also apply to the purchase of a portion of such Debenture. The Paying Agent shall advise the Company, on a daily basis following the mailing of the notice of the Change of Control to Holders as contemplated by this Section 4.7, of all Change of Control Purchase Notices and all written notices of withdrawal thereof received by the Paying Agent. Notwithstanding anything herein to the contrary, any Holder delivering to the Paying Agent the Change of Control Purchase Notice contemplated by this Section 4.7 shall have the right to withdraw such Change of Control Purchase Notice at any time prior to the close of business on the Change of Control Purchase Date by delivery of a written notice of withdrawal to the Paying Agent in the form of a telegram, telex, facsimile transmission or letter setting forth the name of the Holder, the principal amount of the Debentures to have been purchased, the principal amount of the Debentures which remains subject to the original Change of Control Purchase Notice and which has been or will be delivered for purchase by the Company (if applicable) and a statement that such Holder is withdrawing his election to have such Debentures purchased. Notwithstanding anything herein to the contrary, for so long as any Designated Senior Debt is outstanding, in the event of the occurrence of any event or series of events which constitute a Change of Control under clause (ii) of the definition of such term under this Indenture (that does not otherwise constitute a Change of Control under clause (i) of the definition of such term), the 30 37 Company shall not commence its Change of Control Offer resulting from such Change of Control until the later to occur of (i) April 15, 1997 and (ii) 15 Business Days following the occurrence of such Change of Control; provided that the purchase of any Debentures pursuant to this Section 4.7 shall in any event be subject to the provisions of Article 6 and Article 10 hereof. (d) Upon receipt by the Company of the Change of Control Purchase Notice, the Holder of the Debenture in respect of which such Change of Control Purchase Notice was given shall (unless such Change of Control Purchase Notice is withdrawn as specified herein) thereafter be entitled to receive solely the Change of Control Payment with result to such Debenture. Such Change of Control Payment shall be paid to such Holder promptly following the later of (x) the second Business Day next following the Change of Control Purchase Date with respect to such Debenture and (y) the time of delivery of such Debenture to the Paying Agent by the Holder thereof. If a Change of Control Purchase Notice has been timely given by a Holder in respect of a Debenture, such Debenture may not be converted pursuant to the provisions of Article 11 on or after the date of the delivery of such Change of Control Purchase Notice, unless such Change of Control Purchase Notice has first been validly withdrawn as specified herein. The purchase of any Debentures pursuant to this Section 4.7 shall also be subject to the restrictions of Article 10. (e) On or before the second Business Day next following the Change of Control Purchase Date, the Company shall deposit with the Trustee or with the Paying Agent (or, if the Company or a Subsidiary is acting as the Paying Agent, shall segregate and hold in trust) an amount of money sufficient to pay the aggregate Change of Control Payment of all the Debentures or portions thereof with respect to which a Change of Control Purchase Notice has been delivered and not withdrawn and which are to be purchased as of the Change of Control Purchase Date. (f) Any Debenture which is to be purchased only in part shall be surrendered at the office of the Paying Agent (with, if the Company or the Trustee so requires, due endorsement by, or a written instrument of transfer in form satisfactory to the Company and the Trustee duly executed by, the Holder thereof or such Holder's attorney duly authorized in writing) and the Company shall execute and the Trustee shall authenticate and deliver to the Holder of such Debenture, without service charge, a new Debenture or Debentures, of any authorized denomination as required by such holder, in aggregate principal amount equal to, and in exchange for, the portion of the principal amount of the Debenture so surrendered which is not purchased and, if a global Debenture is so surrendered, the Company shall execute and the Trustee shall authenticate and deliver to the depositary for such global Debenture, without service charge, a new global Debenture 31 38 in a denomination equal to and in exchange for the unpurchased portion of the principal amount of the global Debenture so surrendered. (g) In connection with any Change of Control Offer under this Section 4.7 (provided that such offer or purchase constitutes an "issuer tender offer" for purposes of Rule 13e-4 of the General Rules and Regulations under the Exchange Act ("Rule 13e-4", which term, as used herein, includes any successor provision thereto) at the time of such offer or purchase), the Company shall (i) comply with Rule 13e-4, (ii) file the related Schedule 13E-4 (or any successor schedule, form or report) under the Exchange Act, and (iii) otherwise comply with all Federal securities law, and use reasonable efforts to comply with all state securities laws, regulating the Change of Control Offer and delivery of the Change of Control Payment upon purchase of the Debentures, so as to permit the rights and obligations under this Section 4.7 to be exercised in the time and in the manner specified in this Section 4.7. (h) To the extent that the aggregate amount of cash deposited by the Company pursuant to this Section 4.7 exceeds the aggregate Change of Control Payment of the Debentures or portions thereof that the Company is obligated to purchase pursuant to this Section 4.7, then promptly after the second Business Day next following the Change of Control Purchase Date the Trustee or the Paying Agent, as the case may be, shall return any such excess to the Company. (i) Notwithstanding anything to the contrary in this Indenture, if the Company shall have deposited with the Trustee or with the Paying Agent (or, if the Company or a subsidiary is acting as the Paying Agent, shall segregate and hold in trust) an amount of money sufficient to pay the aggregate Change of Control Payment for all the Debentures or portions thereof which are required to be purchased as of the Change of Control Purchase Date pursuant to this Section 4.7, then from and after such date all obligations of the Company in respect of such Debentures or portions thereof shall cease and be discharged. (j) The Company may omit in any particular instance to comply with any term, provision or condition set forth in this Section 4.7 with respect to the Debentures if before the time for such compliance the Holders of at least a majority in principal amount of the outstanding Debentures shall either waive such compliance in such instance or generally waive compliance with such term, provision or condition, but no such waiver shall extend to or affect such term, provision or condition except to the extent so expressly waived, and, until such waiver shall become effective, the obligations of the Company and the duties of the Trustee in respect of any such term, provision or condition shall remain in full force and effect. The Company 32 39 shall provide to the Trustee an Officers' Certificate that such a waiver has been given, which Officers' Certificate shall contain the terms, provisions or conditions waived thereby. SECTION 4.8 CORPORATE EXISTENCE The Company shall do or cause to be done all things necessary to preserve and keep in full force and effect its corporate existence and the corporate, partnership or other existence of each of its Significant Subsidiaries; provided that the foregoing shall not prohibit or otherwise restrict any merger or consolidation (i) not prohibited by Article 5 hereof or (ii) among the Company and one or more of its Subsidiaries (including its Significant Subsidiaries) or among one or more of its Subsidiaries (including Significant Subsidiaries). SECTION 4.9 PAYMENTS FOR CONSENT Neither the Company nor any of its Subsidiaries shall, directly or indirectly, pay or cause to be paid any consideration, whether by way of interest, fee or otherwise, to any Holder of any Debentures for or as an inducement to any consent, waiver or amendment of any of the terms or provisions of this Indenture or the Debentures unless such consideration is offered to be paid or agreed to be paid to all Holders of the Debentures that consent, waive or agree to amend in the time frame set forth in the solicitation documents relating to such consent, waiver or agreement. SECTION 4.10 CALCULATION OF ORIGINAL ISSUE DISCOUNT If the Debentures are determined to have been issued with any original issue discount, the Company shall file with the Trustee promptly at the end of each calendar year a written notice specifying the amount of original issue discount (including daily rates and accrued periods), if any, accrued on outstanding Debentures as of the end of such year. ARTICLE 5. SUCCESSORS SECTION 5.1 MERGER, CONSOLIDATION, OR SALE OF ASSETS The Company shall not consolidate with or merge with or into or sell, assign, transfer, lease, convey or otherwise dispose of all or substantially all of its properties or assets in one or more related transactions, to another corporation, Person or entity unless (i) the Company is the surviving corporation or the entity or the Person formed by or surviving any such consolidation or merger (if other than the Company) or to which such sale, assignment, transfer, lease, conveyance or 33 40 other disposition shall have been made is a corporation organized or existing under the laws of the United States, any state thereof or the District of Columbia; (ii) the entity or Person formed by or surviving any such consolidation or merger (if other than the Company) or the entity or Person to which such sale, assignment, transfer, lease, conveyance or other disposition shall have been made assumes all the obligations of the Company under the Debentures and this Indenture pursuant to a supplemental indenture in a form reasonably satisfactory to the Trustee; and (iii) immediately after such transaction no Default or Event of Default exists. SECTION 5.2 SUCCESSOR CORPORATION SUBSTITUTED Upon any consolidation or merger, or any sale, assignment, transfer, lease, conveyance or other disposition of all or substantially all of the assets of the Company in accordance with Section 5.1 hereof, the successor corporation formed by such consolidation or into or with which the Company is merged (if other than the Company) or to which such sale, assignment, transfer, lease, conveyance or other disposition is made shall succeed to, and be substituted for (so that from and after the date of such consolidation, merger, sale, lease, conveyance or other disposition, the provisions of this Indenture referring to the "Company" shall refer instead to the successor corporation and not to the Company), and may exercise every right and power of the Company under this Indenture with the same effect as if such successor Person had been named as the Company herein; provided, however, that the predecessor Company shall not be relieved from the obligation to pay the principal of, interest and Additional Interest, if any, on the Debentures except in the case of a sale of all or substantially all of the Company's assets that meets the requirements of Section 5.1 hereof. ARTICLE 6. CERTAIN DEFAULT PROVISIONS SECTION 6.1 EVENTS OF DEFAULT An "Event of Default" occurs if: (a) the Company defaults in the payment of interest on, or Additional Interest, if any, on the Debentures (whether or not such payment is prohibited by the subordination provisions of Article 10 hereof) when the same becomes due and payable and such default continues for a period of 30 days; (b) the Company defaults in the payment of principal of the Debentures (whether or not such payment is prohibited by the subordination provisions of Article 10 hereof) when the same becomes due and payable at maturity, upon redemption, upon 34 41 purchase by the Company pursuant to a Change of Control Purchase Notice or otherwise; (c) the Company fails to comply with any of its other covenants (including, but not limited to, the covenant to commence a Change of Control Offer upon the occurrence of a Change of Control) in, the Debentures, or this Indenture after the giving of notice and the failure to cure as specified below; (d) maturity of any Senior Debt is accelerated by the applicable holder(s) or its or their Representative, if the aggregate principal amount (or, if applicable, issue price plus accrued original issue discount, if any) of the Senior Debt the maturity of which has been accelerated exceeds $10 million, unless within 30 days after the Company's receipt of written notice of such Default hereunder such acceleration is rescinded or annulled, such Senior Debt is paid or such acceleration is contested by appropriate proceedings and all consequences thereof that would have a material adverse effect on the Company stayed (without the Company's having posted a bond or surety or entered into a similar arrangement); (e) a final judgment or final judgments (in each case not subject to further appeal) for the payment of money in excess of $5,000,000 are entered by a court or courts of competent jurisdiction against the Company or any of its Subsidiaries and such judgments are not paid, discharged or stayed for a period of more than 90 days of the entry of the last of such judgments and are not being contested by the Company in good faith; (f) pursuant to or within the meaning of any Bankruptcy Law, the Company, any of its Subsidiaries that is a Significant Subsidiary or any group of Subsidiaries that, taken together, would constitute a Significant Subsidiary: (i) commences a voluntary case, (ii) consents to the entry of an order for relief against it in an involuntary case, (iii) consents to the appointment of a Custodian of it or for all or substantially all of its property, (iv) makes a general assignment for the benefit of its creditors, or (g) a court of competent jurisdiction enters an order or decree under any Bankruptcy Law that: (i) is for relief against the Company or any Subsidiary or group of Subsidiaries that is a Significant Subsidiary of the Company in an involuntary case, 35 42 (ii) appoints a Custodian of the Company or any Subsidiary or group of Subsidiaries that is a Significant Subsidiary of the Company or for all or substantially all of the property of the Company or any Subsidiary or group of Subsidiaries that is a Significant Subsidiary of the Company, or (iii) orders the liquidation of the Company or any Subsidiary or group of Subsidiaries that is a Significant Subsidiary of the Company, and the order or decree remains unstayed and in effect for 90 consecutive days. A Default under clause (c) is not an Event of Default until the Trustee notifies the Company, or the Holders of at least 25% in principal amount of the then outstanding Debentures notify the Company and the Trustee, of the Default and the Company does not cure the Default in all material respects within 60 days after receipt of the notice. The notice must specify the Default, demand that it be remedied and state that the notice is a "Notice of Default." SECTION 6.2 ACCELERATION (a) Subject to the provisions of Section 6.2(b) hereof, if an Event of Default (other than an Event of Default specified in clauses (f) and (g) of Section 6.1 hereof relating to the Company or any Significant Subsidiary) occurs and is continuing, the Trustee, by notice to the Company, or the Holders of at least 25% in principal amount of the then outstanding Debentures, by notice to the Company and the Trustee, may declare the unpaid principal of and any accrued interest on and all other Obligations with respect to all the Debentures to be due and payable. Upon such declaration the principal of, and interest and Additional Interest, if any, on the Debentures shall be due and payable immediately. Subject to the provisions of Section 6.2(b) hereof, if an Event of Default specified in clause (f) or (g) of Section 6.1 hereof occurs, such an amount shall ipso facto become and be immediately due and payable without any declaration or other act on the part of the Trustee or any Holder. (b) At any time when there is outstanding any Senior Debt, in the event of any "Event of Default" under this Article 6, neither the Trustee nor any Holder of a Debenture shall, for a period (the "Standstill Period") of 180 days commencing on the date of occurrence of such Event of Default (or such shorter period as is applicable if such Event of Default is cured or waived or ceases to exist): (i) by declaration accelerate (including pursuant to the last sentence of Section 6.2(a)), the maturity of the principal of and accrued interest on, or other amount with respect to any of the Indebtedness owing under the 36 43 Debenture or this Indenture, unless the Senior Debt shall have been accelerated, (ii) commence any judicial action or proceeding to collect the payment of principal of or interest on or other amount with respect to any of the Indebtedness owing under the Debentures or this Indenture, unless any holders of the Senior Debt shall have commenced judicial action or proceedings to collect payment of the principal of or interest on any Senior Debt or (iii) commence an involuntary case or proceeding in bankruptcy against the Company, unless any holders of the Senior Debt shall have commenced such a case or proceeding. After the end of the Standstill Period, but subject to all other terms and provisions of this Indenture (other than the preceding terms of this Section 6.2), the Trustee or Holders of Debentures shall be free to accelerate (if then permitted under this Indenture) the maturity of the Indebtedness under the Debentures or this Indenture, to commence any judicial action or proceeding to collect the Indebtedness under the Debentures or this Indenture or to commence an involuntary case or proceeding in bankruptcy against the Company. Notwithstanding the foregoing, no Standstill Period shall commence within 180 days after the expiration of any prior Standstill Period, if any. In addition to the foregoing, unless the maturity of the Senior Debt has already been accelerated, if the Trustee or the Holders of at least 25% in principal amount of the then outstanding Debentures desire to accelerate the maturity of the Debentures or the Indebtedness evidenced by this Indenture, it shall give at least two Business Days' prior written notice to the Representative of Senior Debt of its intent to accelerate prior to effecting such acceleration (which notice may be given during the Standstill Period). (c) At any time during the continuation of a Standstill Period arising from the occurrence of an "Event of Default" as defined in this Indenture, the Representative of Senior Debt or any of the holders of the Senior Debt may cure such Event of Default, and the Holders of the Debentures shall accept such cure. In addition, if (i) the Senior Debt has been accelerated as a result of any event of default under such Senior Debt and (ii) such event of default subsequently is cured or waived and any such acceleration is rescinded by the Representative of the Senior Debt or the holders of the Senior Debt, then (x) any Event of Default existing under Section 6.1(d) of this Indenture solely as a result of such event of default or acceleration under the Senior Debt shall be deemed cured (effective as of the date of the cure or waiver of such event of default under the Senior Debt) and (y) the Holders of the Debentures shall rescind any acceleration of the Debentures attributable solely thereto; provided, however, that such Event of Default under this Agreement shall be deemed cured and such rescission of the acceleration of the Debentures shall be effective only if the cure of the event of default under the Senior Debt and the rescission of any such acceleration under the Senior Debt occurs 37 44 prior to the time that the Trustee or the Holders of at least 25% in principal amount of the then outstanding Debentures has commenced any judicial action or proceeding or any involuntary case or proceeding in bankruptcy as permitted by Section 6.2(a) hereof. The Trustee or any Holder of a Debenture that desires to commence any judicial action or proceeding or any involuntary case or proceeding in bankruptcy as permitted by Section 6.2(a) hereof shall give at least five Business Days' prior written notice to the Representative of the Senior Debt before commencing such judicial action or proceeding or such involuntary case or proceeding in bankruptcy. SECTION 6.3 OTHER REMEDIES Subject to Section 6.2, if an Event of Default occurs and is continuing, the Trustee may pursue any available remedy to collect the payment of principal of, and interest and Additional Interest, if any, on the Debentures or to enforce the performance of any provision of the Debentures or this Indenture. The Trustee may maintain a proceeding even if it does not possess any of the Debentures or does not produce any of them in the proceeding. A delay or omission by the Trustee or any Holder of a Debenture in exercising any right or remedy accruing upon an Event of Default shall not impair the right or remedy or constitute a waiver of or acquiescence in the Event of Default. All remedies are cumulative to the extent permitted by law. SECTION 6.4 WAIVER OF PAST DEFAULTS Holders of not less than a majority in aggregate principal amount of the Debentures then outstanding by notice to the Trustee may on behalf of the Holders of all of the Debentures waive an existing Default or Event of Default and its consequences hereunder, except a continuing Default or Event of Default in the payment of the principal of, or interest on the Debentures, and Additional Interest, if any (provided, however, that the Holders of a majority in aggregate principal amount of the then outstanding Debentures may rescind an acceleration and its consequences, including any related payment default that resulted from such acceleration). Upon any such waiver, such Default shall cease to exist, and any Event of Default arising therefrom shall be deemed to have been cured for every purpose of this Indenture; but no such waiver shall extend to any subsequent or other Default or impair any right consequent thereon. SECTION 6.5 CONTROL BY MAJORITY Holders of a majority in principal amount of the then outstanding Debentures may direct the time, method and place of conducting any proceeding for exercising any remedy available to the Trustee or exercising any trust or power conferred on it. 38 45 However, the Trustee may refuse to follow any direction that (a) conflicts with law or this Indenture or (b) the Trustee determines may be unduly prejudicial to the rights of other Holders of Debentures or that may involve the Trustee in personal liability unless, in the case of clause (b) above, it is given satisfactory indemnity pursuant to Section 7.1(e) hereof. SECTION 6.6 LIMITATION ON SUITS Subject to the provisions of Section 6.2(b) and (c) hereof, a Holder of a Debenture may pursue a remedy with respect to this Indenture or the Debentures if, and only if all of the following occur: (a) the Holder of a Debenture gives to the Trustee written notice of a continuing Event of Default or the Trustee receives such notice from the Company; (b) the Holders of at least 25% in principal amount of the then outstanding Debentures make a written request to the Trustee to pursue the remedy; (c) such Holder of a Debenture or Holders of Debentures offer and, if requested, provide to the Trustee indemnity satisfactory to the Trustee against any loss, liability or expense; (d) the Trustee does not comply with the request within 60 days after receipt of the request and the offer and, if requested, the provision of indemnity; and (e) during such 60-day period the Holders of a majority in principal amount of the then outstanding Debentures do not give the Trustee a direction inconsistent with the request. A Holder of a Debenture may not use this Indenture to prejudice the rights of another Holder of a Debenture or to obtain a preference or priority over another Holder of a Debenture. Nothing contained in this Section 6.6 shall affect the right of a Holder of a Debenture to sue for enforcement of any overdue payment thereon. SECTION 6.7 RIGHTS OF HOLDERS OF DEBENTURES TO RECEIVE PAYMENT Notwithstanding any other provision of this Indenture , the right of any Holder of a Debenture to receive payment of principal of and interest on the Debentures, and Additional Interest, if any, on or after the respective due dates expressed in the Debentures, or to bring suit for the enforcement of any such payment on or after such respective dates, shall not be impaired or affected without the consent of such Holder. 39 46 SECTION 6.8 COLLECTION SUIT BY TRUSTEE Subject to Article 10, if an Event of Default specified in Section 6.1(a) or (b) hereof occurs and is continuing and the maturity of the Debentures is accelerated in accordance with Section 6.2, the Trustee is authorized to recover judgment in its own name and as trustee of an express trust against the Company for the whole amount of principal of, and interest remaining unpaid on the Debentures, premium thereon and Additional Interest, if any, to the extent lawful, interest and such further amount as shall be sufficient to cover the costs and expenses of collection, including the reasonable compensation, expenses disbursements and advances of the Trustee, its agents and counsel. SECTION 6.9 TRUSTEE MAY FILE PROOFS OF CLAIM Subject to Article 10, in case of the pendency of any receivership, insolvency, liquidation, bankruptcy, reorganization, arrangement, adjustment, composition or other similar judicial proceeding relative to the Company or any other obligor upon the Debentures or the property of the Company or of such other obligor or their creditors, the Trustee (irrespective of whether the principal of the Debentures shall then be due and payable as therein expressed or by declaration or otherwise and irrespective of whether the Trustee shall have made any demand on the Company for the payment of overdue principal or interest) shall be entitled and empowered, by intervention in such proceeding or otherwise, (a) to file and prove a claim for the whole amount of principal, interest and Additional Interest, if any, owing and unpaid in respect of the Debentures and to file such other papers or documents as may be necessary or advisable in order to have the claims of the Trustee (including any claim for the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel) and of the Holders allowed in such judicial proceeding, and (b) to collect and receive any moneys or other property payable or deliverable on any such claims and to distribute the same in accordance with the Indenture; and any custodian, receiver, assignee, trustee, liquidator, sequestrator or similar official in any such judicial proceeding is hereby authorized by each Holder of the Debentures to make such payments to the Trustee and, in the event that the Trustee shall consent to the making of such payments directly to the Holders, to pay the Trustee any amount due it for the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel, and any other amounts due the Trustee under Section 7.7 hereof. 40 47 Nothing herein contained shall be deemed to authorize the Trustee to authorize or consent to or accept or adopt on behalf of any Holder of any Debenture any proposal, plan of reorganization, arrangement, adjustment or composition or other similar arrangement affecting the Debentures or the rights of any Holder thereof, or to authorize the Trustee to vote in respect of the claim of any Holder in any such proceeding. SECTION 6.10 PRIORITIES If the Trustee collects any money pursuant to this Article, it shall pay out the money in the following order: First: to the holders of Senior Debt of the Company, to the extent required by Article 10 hereof. Second: to the Trustee, its agents and attorneys for amounts due under Section 7.7 hereof; Third: to Holders of Debentures for amounts due and unpaid on the Debentures for principal, and Additional Interest, if any, and interest, ratably, without preference or priority of any kind, according to the amounts due and payable on the Debentures for principal, and Additional Interest, if any, and interest, respectively, and any other Obligations due and payable; and Fourth: to the Company or to such party as a court of competent jurisdiction shall direct. The Trustee may fix a record date and payment date for any payment to Holders of Debentures pursuant to this Section 6.10. SECTION 6.11 UNDERTAKING FOR COSTS In any suit for the enforcement of any right or remedy under this Indenture or in any suit against the Trustee for any action taken or omitted by it as a Trustee, a court in its discretion may require the filing by any party litigant in the suit of an undertaking to pay the costs of the suit, and the court in its discretion may assess reasonable costs, including reasonable attorneys' fees, against any party litigant in the suit, having due regard to the merits and good faith of the claims or defenses made by the party litigant. This Section does not apply to a suit by the Trustee, a suit by a Holder of a Debenture pursuant to Section 6.7 hereof, or a suit by Holders of more than 10% in principal amount of the then outstanding Debentures. 41 48 ARTICLE 7. TRUSTEE SECTION 7.1 DUTIES OF TRUSTEE (a) If an Event of Default has occurred and is continuing, the Trustee shall exercise such of the rights and powers vested in it by this Indenture, and use the same degree of care and skill in its exercise, as a prudent man would exercise or use under the circumstances in the conduct of his own affairs. (b) Except during the continuance of an Event of Default: (i) the duties of the Trustee shall be determined solely by the express provisions of this Indenture and the TIA and the Trustee need perform only those duties that are specifically set forth in this Indenture and the TIA and no others, and no implied covenants or obligations shall be read into this Indenture against the Trustee; and (ii) in the absence of bad faith on its part, the Trustee may conclusively rely, as to the truth of the statements and the correctness of the opinions expressed therein, upon certificates or opinions furnished to the Trustee and conforming to the requirements of this Indenture. However, the Trustee shall examine the certificates and opinions to determine whether or not they conform to the requirements of this Indenture. (c) The Trustee may not be relieved from liability for its own negligent action, its own negligent failure to act, or its own willful misconduct, except that: (i) this paragraph does not limit the effect of paragraph (b) of this Section; (ii) the Trustee shall not be liable for any error of judgment made in good faith by a Responsible Officer, unless it is proved that the Trustee was negligent in ascertaining the pertinent facts; and (iii) the Trustee shall not be liable with respect to any action it takes or omits to take in good faith in accordance with a direction received by it pursuant to Section 6.5 hereof. (d) Whether or not therein expressly so provided, every provision of this Indenture that in any way relates to the Trustee is subject to paragraphs (a), (b), and (c) of this Section. 42 49 (e) No provision of this Indenture shall require the Trustee to expend or risk its own funds or incur any liability. The Trustee shall be under no obligation to exercise any of its rights and powers under this Indenture at the request of any Holders, unless such Holder shall have offered to the Trustee security and indemnity satisfactory to it against any loss, liability or expense. (f) The Trustee shall not be liable for interest on any money received by it except as the Trustee may agree in writing with the Company. Money held in trust by the Trustee need not be segregated from other funds except to the extent required by law. (g) Except with respect to Sections 4.1 (other than with respect to Additional Interest, if any) and 4.3 herein, the Trustee shall have no duty to inquire as to the performance of the Company's covenants in Article 4 hereof. In addition, the Trustee shall not be deemed to have knowledge of any Default or Event of Default except (i) any Event of Default occurring pursuant to Sections 6.1(a), 6.1(b), 4.1 (other than with respect to Additional Interest, if any), (ii) any Default or Event of Default as may be set forth in an Officer's Certificate provided pursuant to Section 4.4 hereof or of which the Trustee shall have received written notification or (iii) any Default or Event of Default under the Credit Agreement or the BNY Facility Agreement of which the Trustee shall have received written notification from the Representative. For purposes of the immediately preceding sentence, receipt by the Trustee of any report or document furnished pursuant to Section 4.3 hereof which contains information regarding any Default or Event of Default shall not constitute receipt by the Trustee of notice of such Default or Event of Default. SECTION 7.2 RIGHTS OF TRUSTEE (a) The Trustee may conclusively rely upon any document believed by it to be genuine and to have been signed or presented by the proper Person. The Trustee need not investigate any fact or matter stated in the document. (b) Before the Trustee acts or refrains from acting, it may require an Officers' Certificate or an Opinion of Counsel or both. The Trustee shall not be liable for any action it takes or omits to take in good faith in reliance on such Officers' Certificate or Opinion of Counsel. The Trustee may consult with counsel, the reasonable cost of which will be borne by the Company, and the written advice of such counsel or any Opinion of Counsel shall be full and complete authorization and protection from liability in respect of any action taken, suffered or omitted by it hereunder in good faith and in reliance thereon. 43 50 (c) The Trustee may act through its attorneys and agents and shall not be responsible for the misconduct or negligence of any agent appointed with due care. (d) The Trustee shall not be liable for any action it takes or omits to take in good faith that it believes to be authorized or within the rights or powers conferred upon it by this Indenture. (e) Unless otherwise specifically provided in this Indenture, any demand, request, direction or notice from the Company shall be sufficient if signed by an Officer of the Company. (f) Subject to the provisions of Section 7.1(g), the Trustee shall not be bound to make any investigation into the facts or matters stated in any resolution, certificate, statement, instrument, opinion, report notice, request, direction, consent, order, bond, debenture, note, other evidence of indebtedness or other paper or document, but the Trustee, in its discretion, may make such further inquiry or investigation into such facts or matters as it may see fit, and, if the Trustee shall determine to make such further inquiry or investigation, it shall be entitled to examine the books, records and premises of the Company personally or by agent or attorney; (g) The Trustee shall not be deemed to have knowledge of the occurrence of a Change of Control until the Trustee receives written notice thereof from the Company or the Representative. SECTION 7.3 INDIVIDUAL RIGHTS OF TRUSTEE The Trustee in its individual or any other capacity may become the owner or pledgee of Debentures and may otherwise deal with the Company, any of its Subsidiaries or any Affiliate of the Company with the same rights it would have if it were not the Trustee. However, in the event that the Trustee acquires any conflicting interest (as such term is used in the TIA) it must eliminate such conflict within 90 days, apply to the SEC for permission to continue as trustee or resign. Any Agent may do the same with like rights and duties. The Trustee is also subject to Sections 7.10 and 7.11 hereof. SECTION 7.4 TRUSTEE'S DISCLAIMER The Trustee shall not be responsible for and makes no representation as to the validity or adequacy of this Indenture or the Debentures, it shall not be accountable for the Company's use of the proceeds from the Debentures or any money paid to the Company or upon the Company's direction under any provision of this Indenture, it shall not be responsible for the use or application of any money received by any Paying Agent other than 44 51 the Trustee, and it shall not be responsible for any statement or recital herein or any statement in the Debentures or any other document in connection with the sale of the Debentures or pursuant to this Indenture other than its certificate of authentication. SECTION 7.5 NOTICE OF DEFAULTS If a Default or Event of Default occurs and is continuing and if it is known to the Trustee, the Trustee shall mail to the Holders of the Debentures a notice of the Default or Event of Default within 90 days after it occurs. Except in the case of a Default or Event of Default in payment of principal of, or interest or Additional Interest, if any, on any Debenture, the Trustee may withhold the notice if and so long as a committee of its Responsible Officers in good faith determines that withholding the notice is in the interests of the Holders of the Debentures. SECTION 7.6 REPORTS BY TRUSTEE TO HOLDERS OF THE DEBENTURES Within 60 days after each September 1st beginning with the September 1st following the date of this Indenture, and for so long as Debentures remain outstanding, the Trustee shall mail to the Holders of the Debentures a brief report dated as of such reporting date that complies with TIA Section 313(a) (but if no event described in TIA Section 313(a) has occurred within the twelve months preceding the reporting date, no report need be transmitted). The Trustee also shall comply with TIA Section 313(b)(2). The Trustee shall also transmit by mail all reports as required by TIA Section 313(c). A copy of each report at the time of its mailing to the Holders of Debentures shall be mailed to the Company and filed with the SEC and each stock exchange on which the Debentures are listed in accordance with TIA Section 313(d). The Company shall promptly notify the Trustee when the Debentures are listed on any stock exchange. SECTION 7.7 COMPENSATION AND INDEMNITY The Company shall pay to the Trustee from time to time reasonable compensation, as agreed upon by the Company and the Trustee prior to the date of this Indenture for its acceptance of this Indenture and services hereunder or as thereafter agreed upon. The Trustee's compensation shall not be limited by any law on compensation of a trustee of an express trust. In addition to compensation for its services, the Company shall reimburse the Trustee promptly upon request for all reasonable disbursements, advances and expenses incurred or made by it in accordance with any provisions of this Indenture, as agreed upon by the Company and the Trustee prior to the date of this Indenture or as 45 52 thereafter agreed upon, (including the reasonable compensation, disbursements and expenses of the Trustee's agents and counsel). The Company shall jointly and severally indemnify the Trustee and its officers, directors, employees and agents from and against any and all losses, liabilities or expenses incurred by it arising out of or in connection with the acceptance or administration of its duties under this Indenture, including the costs and expenses of enforcing this Indenture against the Company (including this Section 7.7), and of defending itself against any claim (whether asserted by the Company or any Holder or any other person) or liability in connection with the exercise or performance of any of its powers or duties hereunder, except to the extent any such loss, liability or expense is caused by the negligence or bad faith of the Trustee. The Trustee shall notify the Company promptly of any claim for which it may seek indemnity. Failure by the Trustee to so notify the Company shall not relieve the Company of its obligations hereunder (except to the extent any such failure prejudices the ability of the Company to defend against such claim). The Company shall defend the claim and the Trustee shall cooperate in the defense. The Trustee may have separate counsel and the Company shall pay the reasonable fees and expenses of such counsel. The Company need not pay for any settlement made without its consent, which consent shall not be unreasonably withheld. Any such payments and reimbursements shall be made with interest, accruing from the date any such payment or reimbursement is due up to and including the date such payment or reimbursement is paid, at the rate borne by the Debentures. The obligations of the Company under this Section 7.7 shall survive the satisfaction and discharge of this Indenture. To secure all payments due to the Trustee under this Indenture, the Trustee shall have a Lien prior to the Debentures but subordinate to the Senior Debt on all money or property held or collected by the Trustee, except that held in trust to pay principal, and interest on particular Debentures. Such Lien shall survive the satisfaction and discharge of this Indenture. Subject to Section 6.10, the Trustee's right to receive payment of any amounts due under this Section 7.7 shall not be subordinate to any other liability or Indebtedness of the Company (other than the Senior Debt) (even though the Debentures may be so subordinated). When the Trustee incurs expenses or renders services after an Event of Default specified in Section 6.1(g) or (h) hereof occurs, the expenses and the compensation for the services (including the fees and expenses of its agents and counsel) are intended to constitute expenses of administration under any Bankruptcy Law. 46 53 The Trustee shall comply with the provisions of TIA Section 313(b)(2) to the extent applicable. SECTION 7.8 REPLACEMENT OF TRUSTEE A resignation or removal of the Trustee and appointment of a successor Trustee shall become effective only upon the successor Trustee's acceptance of appointment as provided in this Section. The Trustee may resign in writing at any time and be discharged from the trust hereby created by so notifying the Company. The Holders of a majority in principal amount of the then outstanding Debentures may remove the Trustee by so notifying the Trustee and the Company in writing. The Company may remove the Trustee if: (a) the Trustee fails to comply with Section 7.10 hereof; (b) the Trustee is adjudged a bankrupt or an insolvent or an order for relief is entered with respect to the Trustee under any Bankruptcy Law: (c) a Custodian or public officer takes charge of the Trustee or its property; or (d) the Trustee becomes incapable of acting. If the Trustee resigns or is removed or if a vacancy exists in the office of Trustee for any reason, the Company shall promptly appoint a successor Trustee. Within one year after the successor Trustee takes office, the Holders of a majority in principal amount of the then outstanding Debentures may appoint a successor Trustee to replace the successor Trustee appointed by the Company. If a successor Trustee does not take office within 60 days after the retiring Trustee resigns or is removed, the retiring Trustee, the Company, or the Holders of Debentures of at least 10% in principal amount of the then outstanding Debentures may petition any court of competent jurisdiction for the appointment of a successor Trustee. If the Trustee, after written request by any Holder of a Debenture, fails to comply with Section 7.10 hereof, such Holder of a Debenture may petition any court of competent jurisdiction for the removal of the Trustee and the appointment of a successor Trustee. A successor Trustee shall deliver a written acceptance of its appointment to the retiring Trustee and to the Company. Thereupon, the resignation or removal of the retiring Trustee 47 54 shall become effective, and the successor Trustee shall have all the rights, powers and duties of the Trustee under this Indenture. The successor Trustee shall mail a notice of its succession to Holders of the Debentures. The retiring Trustee shall promptly transfer all property held by it as Trustee to the successor Trustee, provided all sums owing to the Trustee hereunder have been paid and subject to the Lien provided for in Section 7.7 hereof. Notwithstanding replacement of the Trustee pursuant to this Section 7.8, the Company's obligations under Section 7.7 hereof shall continue for the benefit of the retiring Trustee. SECTION 7.9 SUCCESSOR TRUSTEE BY MERGER, ETC. If the Trustee consolidates, merges or converts into, or transfers all or substantially all of its corporate trust business to, another corporation, the successor corporation without any further act shall be the successor Trustee. SECTION 7.10 ELIGIBILITY; DISQUALIFICATION There shall at all times be a Trustee hereunder that is a corporation organized and doing business under the laws of the United States of America or of any state thereof that is authorized under such laws to exercise corporate trustee power, that is subject to supervision or examination by federal or state authorities and that, together with its Subsidiaries, has a combined capital and surplus of at least $50,000,000 as set forth in its most recent published annual report of condition. If, at any time, the Trustee shall cease to be eligible in accordance with the provisions of this Section 7.10, the Trustee shall resign immediately in the manner and with the effects specified in this Article 7. Nothing in this Indenture shall prevent the Trustee from filing with the SEC the application referred to in the second to last paragraph of TIA Section 310(b). This Indenture shall always have a Trustee which satisfies the requirements of TIA Section 310(a)(1), (2) and (5). The Trustee is subject to TIA Section 310(b). SECTION 7.11 PREFERENTIAL COLLECTION OF CLAIMS AGAINST COMPANY The Trustee is subject to TIA Section 311(a), excluding any creditor relationship listed in TIA Section 311(b). A Trustee who has resigned or been removed shall be subject to TIA Section 311(a) to the extent indicated therein. 48 55 ARTICLE 8. REGISTRATION SECTION 8.1 SHELF REGISTRATION (a) The Company shall use its reasonable best efforts to cause to be filed on or prior to the date which is six months after the Issuance Date (the "Shelf Deadline Date"), the Shelf Registration Statement pursuant to Rule 415 under the Securities Act (which Shelf Registration Statement shall provide for resales of the Transfer Restricted Securities by the Holders thereof), on such form as the Company deems appropriate, and shall use its reasonable best efforts to cause such Shelf Registration Statement to be declared effective by the SEC. The Company shall use its reasonable best efforts to keep such Shelf Registration Statement effective, supplemented and amended as required by the provisions hereof, to the extent necessary to ensure that it is available for resales of the Transfer Restricted Securities entitled to the benefit of this Section 8.1, and to ensure that it conforms with the requirements of this Indenture, the Securities Act and the policies, rules and regulations of the SEC as announced from time to time, for the Effectiveness Period. (b) No Holder of Transfer Restricted Securities may sell any of its Transfer Restricted Securities pursuant to the Shelf Registration Statement pursuant to this Section 8.1 unless and until such Holder furnishes to the Company in writing, within 20 Business Days after receipt of a request therefor, such information as the Company may reasonably request for use in connection with the Shelf Registration Statement or Prospectus or preliminary Prospectus included therein or any amendment or supplement thereto. No Holder of Transfer Restricted Securities shall be entitled to Additional Interest pursuant to Section 8.2 hereof unless and until each such Holder shall have provided all such reasonably requested information. In connection with any sale of Transfer Restricted Securities pursuant to the Shelf Registration Statement, each Holder agrees to furnish as promptly as practicable to the Company all information required to be disclosed in order to make the information previously furnished to the Company by such Holder not materially misleading. (c) Notwithstanding anything to the contrary contained herein, if at any time after the filing of the Shelf Registration Statement or after it is declared effective by the SEC, the Company determines, in its reasonable business judgment, that such registration and offering could reasonably be expected to interfere with or otherwise adversely affect any financing, acquisition, corporate reorganization, or other material transaction or development involving the Company or any of its Affiliates require the Company to disclose matters that otherwise would not be required to be disclosed at such time, then the 49 56 Company may require the suspension of resales of the Transfer Restricted Securities by giving notice to the Trustee and Holders of Transfer Restricted Securities. Any such notice need not specify the reasons for such suspension if the Company determines, in its reasonable business judgment, that doing so could reasonably be expected to interfere with or adversely affect such transaction or development or would result in the disclosure of material non-public information. In the event that such notice is given, then until the Company has determined, in its reasonable business judgment, that such registration and offering would no longer interfere with the matters described in the preceding sentence and has given notice thereof to such Holders of Transfer Restricted Securities, the Company's obligations with respect to registration pursuant to Article 8 hereunder will be suspended. (d) The Company's obligations under this Indenture shall be conditioned upon the compliance with the following by Holders of the Debentures: (i) Each holder shall cooperate with the Company in connection with the preparation of the Shelf Registration Statement, and for so long as the Company is obligated to keep the Shelf Registration Statement effective, each Holder will provide to the Company, in writing, for use in the Shelf Registration Statement, all information regarding each Holder and such other information as may be necessary to enable the Company to prepare the Shelf Registration Statement and any Prospectus (including any supplement or amendment thereto) covering the Transfer Restricted Securities and to maintain the currency and effectiveness thereof; (ii) Each Holder shall permit the Company, the agents or broker-dealers in any offering or other distribution of Transfer Restricted Securities and their respective representatives and agents to examine such documents and records and shall supply any information as they may reasonably request in connection with the offering or other distribution of Transfer Restricted Securities in which such Holders propose to participate; (iii) Each Holder shall enter into such agreements with the Company and any agent, broker-dealer or similar securities industry professional containing representations, warranties, indemnities and agreements as are in each case customarily entered into and made by selling stockholders, and will cause its counsel to give any legal opinions customarily given, in secondary distributions under similar circumstances. 50 57 SECTION 8.2 ADDITIONAL INTEREST If the Shelf Registration Statement is not filed with the SEC by the Company on or prior to the Shelf Deadline Date (a "Registration Default"), the Company hereby agrees to pay each Holder of Debentures, Additional Interest on the principal amount of the Debentures held by such holders. Following a Registration Default, Additional Interest will accrue from and after the date of such Registration Default at an initial rate of 0.5% per annum on the principal amount of the Debentures and such rate will increase in increments of 0.5% per annum at each subsequent six month anniversary of such Registration Default until the date on which the Shelf Registration Statement is filed with the SEC, on which date such rate will be fixed and Additional Interest will continue to accrue at such fixed rate until the Shelf Registration Statement is declared effective by the SEC. Accrued and unpaid Additional Interest (together with stated interest on the Debentures) will be payable (as determined by the regular record dates for the payment of interest) by the Company along with and in the same manner as any accrued but unpaid interest on each subsequent interest payment date following the occurrence of the Registration Default or upon maturity of the Debentures or earlier redemption or repurchase pursuant to the terms hereof, notwithstanding a cure of such Registration Default prior to such interest payment date, date of maturity or earlier redemption or repurchase. SECTION 8.3 REGISTRATION PROCEDURE (a) In connection with the Shelf Registration Statement, the Company shall: (i) use its reasonable best efforts to cause the Shelf Registration Statement to remain effective during the Effectiveness Period; (ii) as expeditiously as practicable prepare and file with the SEC any amendments and supplements to the Shelf Registration Statement and the prospectus included in the Shelf Registration Statement as may be necessary to keep the Shelf Registration Statement effective for the Effectiveness Period; (iii) as expeditiously as practicable furnish to any selling Holder such reasonable numbers of copies of the Prospectus, including a preliminary Prospectus, in conformity with the requirements of the Securities Act, and such other documents as such selling Holder may reasonably request in order to facilitate the public sale or other disposition of the Transfer Restricted Securities owned by such selling Holder; 51 58 (iv) use its reasonable best efforts to qualify the Indenture under the TIA; and (v) as expeditiously as practicable use its reasonable best efforts to register or qualify the Transfer Restricted Securities covered by the Shelf Registration Statement under the securities or Blue Sky laws of such states as any selling Holder shall reasonably request, and to do any and all other acts and things that may be necessary or desirable to enable such selling Holder to consummate the public sale or other disposition in such states of the Transfer Restricted Securities owned by such selling Holder. (b) If the Company has delivered preliminary or final prospectuses to the selling Holders after requests therefor, and after having done so the Prospectus is amended to comply with the provisions of the Securities Act or sales are to be suspended under Section 8.1(c) hereof, the Company shall promptly notify such Holders and, if requested, such Holders shall immediately cease making offers of Transfer Restricted Securities and return all Prospectuses to the Company. The Company shall as promptly as practicable provide such Holders with revised Prospectuses and, following receipt of the revised Prospectuses, such Holders shall be free to resume making offers of the Transfer Restricted Securities. SECTION 8.4 INDEMNIFICATION (a) The Company will indemnify each Holder, each of its officers, directors and partners, and each person controlling such Holder within the meaning of Section 15 of the Securities Act, with respect to which registration, qualification or compliance has been effected pursuant to Section 8.1, against all expenses, claims, losses, damages or liabilities (or actions in respect thereof), including any of the foregoing incurred in settlement of any litigation, commenced or threatened, arising out of or based on any untrue statement (or alleged untrue statement) of a material fact contained in the Registration Statement, or other document (or any amendment or supplement thereto), incident to any such registration, qualification or compliance, or based on any omission (or alleged omission) to state therein a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances in which they were made, not misleading, or any violation by the Company of the Securities Act or any rule or regulation promulgated under the Securities Act applicable to the Company in connection with any such registration, qualification or compliance, and the Company will reimburse each such Holder, each of its officers and directors, and each person controlling such Holder, for any legal and any other expenses reasonably incurred in connection with investigating, preparing or defending any such claim, loss, damage, liability or action, provided that 52 59 the Company will not be liable in any such case to the extent that any such claim, loss, damage, liability or expense (i) arises out of or is based on any untrue statement or omission or alleged untrue statement or omission, made in reliance upon and in conformity with written information furnished to the Company by such Holder or controlling person specifically for use therein; (ii) arises out of or is based on the failure of such Holder to deliver the most recent Prospectus (or supplement or amendment thereto provided by the Company); or (iii) arises out of or is based upon the delivery of a Prospectus by such Holder following such time as the Company has notified the Holders that such Prospectus must be amended or supplemented or during a period when resales are suspended by the Company pursuant to Section 8.1(c) hereof. (b) Each Holder will indemnify the Company, each of its directors and officers, each person who controls the Company within the meaning of Section 15 of the Securities Act, and each other such Holder, each of its officers and directors and each person controlling such other Holder within the meaning of Section 15 of the Securities Act, against all claims, losses, damages and liabilities (or actions in respect thereof) arising out of or based on any untrue statement (or alleged untrue statement) of a material fact contained in the Registration Statement or other document (or any amendment or supplement thereto), incident to any such registration, qualification or compliance based on any omission (or alleged omission) to state therein a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances in which they were made, not misleading, and will reimburse the Company, such other Holders, such directors, officers or control persons for any legal or any other expenses reasonably incurred in connection with investigating or defending any such claim, loss, damage, liability or action, in each case to the extent, but only to the extent, (i) that such untrue statement (or alleged untrue statement) or omission (or alleged omission) is made in the Registration Statement or other document (or any amendment or supplement thereto) in reliance upon and in conformity with written information furnished to the Company by such Holder specifically for use therein; (ii) arises out of or is based on the failure of such Holder to deliver the most recent Prospectus available or supplement or amendment thereto provided by the Company; or (iii) arises out of or is based upon the delivery of a Prospectus by such Holder following such time as the Company has notified the Holders that such Prospectus must be amended or supplemented or during a period when resales are suspended by the Company pursuant to Section 8.1(c) hereof. Notwithstanding the foregoing, the liability of each Holder under this Section 8.4(b) shall be limited to an amount equal to the gross proceeds received by such Holder in connection with the sale of shares by such Holder, unless such liability arises out of or is based on willful conduct by such Holder. 53 60 (c) Each party seeking indemnification under this Section 8.4 (the "Indemnified Party") shall give notice to the party from which it is seeking indemnification (the "Indemnifying Party") promptly after such Indemnified Party has actual knowledge of any claim as to which indemnity may be sought, and shall permit the Indemnifying Party to assume the defense of any such claim or any litigation resulting therefrom, provided that the Indemnified Party may participate in such defense at such party's expense, and provided further that the failure of any Indemnified Party to give notice as provided herein shall not relieve the Indemnifying Party of its obligations under this Section 8.4 unless the failure to give such notice is materially prejudicial to an Indemnifying Party's ability to defend such action and provided further, that the Indemnifying Party shall not assume the defense for matters as to which, it has been advised by a written opinion of counsel to such Indemnified Party there is a conflict of interest or separate and different defenses that result in such a conflict of interest. No Indemnifying Party, in the defense of any such claim or litigation, shall, except with the consent of each Indemnified Party, consent to entry of any judgment or enter into any settlement which does not include as an unconditional term thereof the giving by the claimant or plaintiff to such Indemnified Party of a release from all liability in respect to such claim or litigation. SECTION 8.5 REGISTRATION EXPENSES All expenses incident to the Company's performance of or compliance with the registration requirements of this Indenture will be borne by the Company, regardless of whether a Registration Statement becomes effective, including without limitation: (i) all registration and filing fees and expenses (including filings made by any Holder with the NASD; (ii) all fees and expenses of compliance with federal securities and state Blue Sky or securities laws; (iii) all expenses of printing, messenger and delivery services and telephone; (iv) all fees and disbursements of counsel for the Company; (v) any application and filing fees in connection with listing the Transfer Restricted Securities on a national securities exchange or automated quotation system including the listing of the Common Stock issuable upon conversion of the Debentures; and (vi) all fees and disbursements of independent certified public accountants of the Company (including the expenses of any special audit and comfort letters required by or incident to such performance). The Company will, in any event, bear its internal expenses (including, without limitation, all salaries and expenses of its officers and employees performing legal or accounting duties), the expenses of any annual audit and the fees and expenses of any Person, including special experts, retained by the Company. 54 61 ARTICLE 9. AMENDMENT, SUPPLEMENT AND WAIVER SECTION 9.1 WITHOUT CONSENT OF HOLDERS OF DEBENTURES Notwithstanding Section 9.2 of this Indenture, the Company and the Trustee may amend or supplement this Indenture or the Debentures without the consent of any Holder of a Debenture: (a) to cure any ambiguity, defect or inconsistency; (b) except as otherwise provided in this Indenture; to provide for uncertificated or book entry Debentures in addition to or in place of certificated Debentures; (c) to provide for the assumption of the Company's obligations to the Holders of the Debentures in the case of a merger or consolidation pursuant to Article 5 or Article 11 hereof, as the case may be; (d) to make any change that would provide any additional rights or benefits to the Holders of the Debentures or that does not adversely affect the legal rights hereunder of any Holder of the Debenture; or (e) to comply with requirements of the SEC in order to effect or maintain the qualification of this Indenture under the TIA. Upon the request of the Company accompanied by a resolution of its Board of Directors authorizing the execution of any such amended or supplemental Indenture, and upon receipt by the Trustee of the documents described in Section 7.2 hereof, the Trustee shall join with the Company in the execution of any amended or supplemental Indenture authorized or permitted by the terms of this Indenture and to make any further appropriate agreements and stipulations that may be therein contained, but the Trustee shall not be obligated to enter into such amended or supplemental Indenture that affects its own rights, duties or immunities under this Indenture or otherwise. SECTION 9.2 WITH CONSENT OF HOLDERS OF DEBENTURES Except as provided below in this Section 9.2, the Company and the Trustee may amend or supplement this Indenture or the Debentures with the consent of the Holders of at least a majority in principal amount of the Debentures then outstanding (including consents obtained in connection with a tender offer or exchange offer for the Debentures), and, subject to Sections 6.4 and 6.7 hereof, any existing Default or Event of Default (other than a Default or Event of Default in the payment of the principal of, or Additional Interest, if any, or interest on the 55 62 Debentures, except a payment default resulting from an acceleration that has been rescinded) or compliance with any provision of this Indenture or the Debentures may be waived with the consent of the Holders of a majority in principal amount of the then outstanding Debentures (including consents obtained in connection with a tender offer or exchange offer for the Debentures). Upon the request of the Company accompanied by a resolution of its Board of Directors authorizing the execution of any such amended or supplemental Indenture, and upon the filing with the Trustee of evidence reasonably satisfactory to the Trustee of the consent of the Holders of Debentures as aforesaid, and upon receipt by the Trustee of the documents described in Section 7.2 hereof, the Trustee shall join with the Company in the execution of such amended or supplemental Indenture unless such amended or supplemental Indenture affects the Trustee's own rights, duties or immunities under this Indenture or otherwise, in which case the Trustee may in its discretion, but shall not be obligated to, enter into such amended or supplemental Indenture. It shall not be necessary for the consent of the Holders of Debentures under this Section 9.2 to approve the particular form of any proposed amendment or waiver, but it shall be sufficient if such consent approves the substance thereof. After an amendment, supplement or waiver under this Section becomes effective, the Company shall mail to the Holders of Debentures affected thereby a notice briefly describing the amendment, supplement or waiver. Any failure of the Company to mail such notice, or any defect therein, shall not, however, in any way impair or affect the validity of any such amended or supplemental Indenture or waiver. Subject to Sections 6.4 and 6.7 hereof, the Holders of a majority in aggregate principal amount of the Debentures then outstanding may waive compliance in a particular instance by the Company with any provision of this Indenture or the Debentures. However, without the consent of each Holder affected, an amendment or waiver may not (with respect to any Debentures held by a non-consenting Holder): (a) reduce the principal amount of Debentures whose Holders must consent to an amendment, supplement or waiver; (b) reduce the principal of or change the fixed maturity of any Debenture or alter any of the provisions with respect to the redemption of the Debentures in a manner adverse to the Holders of the Debentures; (c) reduce the rate of or change the time for payment of interest, on any Debenture; 56 63 (d) waive a Default or Event of Default in the payment of principal of or interest or Additional Interest, if any, on the Debentures (except a rescission of acceleration of the Debentures by the Holders of at least a majority in aggregate principal amount of the then outstanding Debentures and a waiver of the payment default that resulted from such acceleration); (e) make any Debenture payable in money other than that stated in the Debentures; (f) make any change in the provisions of this Indenture relating to waivers of past Defaults or Events of Default or the rights of Holders of Debentures to receive payments of principal of, or interest or Additional Interest, if any, on the Debentures; or (g) make any change in Section 6.4 or 6.7 hereof or in the foregoing amendment and waiver provisions. SECTION 9.3 COMPLIANCE WITH TRUST INDENTURE ACT Every amendment or supplement to this Indenture or the Debentures shall be set forth in an amended or supplemental Indenture that complies with the TIA as then in effect. SECTION 9.4 REVOCATION AND EFFECT OF CONSENTS Until an amendment, supplement or waiver becomes effective, a consent to it by a Holder of a Debenture is a continuing consent by the Holder of a Debenture and every subsequent Holder of a Debenture or portion of a Debenture that evidences the same debt as the consenting Holder's Debenture, even if notation of the consent is not made on any Debenture. However, any such Holder of a Debenture or subsequent Holder of a Debenture may revoke the consent as to its Debenture if the Trustee receives written notice of revocation before the date the waiver, supplement or amendment becomes effective. An amendment, supplement or waiver becomes effective in accordance with its terms and thereafter binds every Holder. SECTION 9.5 NOTATION ON OR EXCHANGE OF DEBENTURES The Company may place an appropriate notation about an amendment, supplement or waiver on any Debenture thereafter authenticated. The Company in exchange for all Debentures may issue and the Trustee shall authenticate new Debentures that reflect the amendment, supplement or waiver. Failure to make the appropriate notation or issue a new Debenture shall not affect the validity and effect of such amendment, supplement or waiver. 57 64 SECTION 9.6 TRUSTEE TO SIGN AMENDMENTS, ETC. The Trustee shall sign any amended or supplemental Indenture authorized pursuant to this Article 9 if the amendment or supplement does not adversely affect the rights, duties, liabilities or immunities of the Trustee. The Company may not sign an amendment or supplemental Indenture until the Board of Directors of the Company approves it. In executing any amended or supplemental Indenture, the Trustee shall be entitled to receive and (subject to Section 7.1 hereof) shall be fully protected in relying upon, an Officers' Certificate and an Opinion of Counsel stating that the execution of such amended or supplemental indenture is authorized or permitted by this Indenture. ARTICLE 10. SUBORDINATION SECTION 10.1 AGREEMENT TO SUBORDINATE The Company, the Trustee and each Holder by accepting a Debenture agrees that the Indebtedness evidenced by the Debentures is subordinated in right of payment, to the extent and in the manner provided in this Article, to the prior payment in full, in cash or cash equivalents, of all Senior Debt of the Company (whether outstanding on the date hereof or hereafter created, incurred, assumed or guaranteed), and that the subordination is for the benefit of the holders of Senior Debt of the Company. SECTION 10.2 LIQUIDATION; DISSOLUTION; BANKRUPTCY (a) In the event of (i) any insolvency or bankruptcy proceeding, or any receivership, liquidation, reorganization or other similar proceeding in connection therewith, relative to the Company or its property, or (ii) any proceeding for voluntary liquidation, dissolution or other winding up of the Company, and whether or not involving insolvency or bankruptcy, or (iii) any assignment for the benefit of creditors, or (iv) any distribution, division, marshaling or application of any of the properties or assets of the Company or the proceeds thereof, to creditors, voluntary or involuntary, and whether or not involving legal proceedings, then and in any such event: (1) holders of Senior Debt of the Company shall be entitled to receive payment in full, in cash or cash equivalents, of all Obligations due in respect of such Senior Debt of the Company (including interest after the commencement of any such proceeding at the rate specified in the applicable Senior Debt of the Company, regardless 58 65 of whether such post-petition interest is allowed in such proceeding) before Holders shall be entitled to demand or receive any payment with respect to the Debentures (except that Holders may receive securities including, without limitation, Subordinated Reorganization Securities, that are subordinated on terms no less favorable than the Debentures to (a) Senior Debt of the Company and (b) any securities issued in exchange for Senior Debt of the Company); and (2) until all Obligations with respect to Senior Debt of the Company (as provided in subsection (1) above) are paid in full, any distribution to which Holders would be entitled but for this Article shall be made to holders of Senior Debt of the Company (except that Holders may receive securities including, without limitation, Subordinated Reorganization Securities, that are subordinated on terms no less favorable than the Debentures to (a) Senior Debt of the Company and (b) any securities issued in exchange for Senior Debt of the Company), ratably according to the respective aggregate amounts remaining unpaid thereon, and the Holders of Debentures hereby irrevocably authorize, empower and direct all receivers, trustees, liquidators, conservators and others having authority in the premises to effect all such payments and deliveries. As used herein the term "Subordinated Reorganization Securities" means securities issued to the holders of the Debentures pursuant to a court order or decree made by a court of competent jurisdiction in a reorganization under applicable federal bankruptcy law which order or decree (1) gives effect to, and states that effect is given to, the subordination of the Debentures to the Senior Debt and the rights conferred to the holders of the Senior Debt set forth herein and (2) states that the total distribution to the holders of the Senior Debt provides for full payment of all of the allowed claims of the holders of the Senior Debt. (b) Following the occurrence of an event of default in respect of the Designated Senior Debt (but only during the continuation thereof or until such default is waived or such Designated Senior Debt is paid in full or all Obligations related thereto are deemed satisfied), the holders of the Debentures irrevocably authorize and empower (without imposing any obligation on) each holder of Designated Senior Debt at the time outstanding and such holder's Representative to demand, sue for, collect and receive such holder's ratable share of all such payments and distributions and to receipt therefor, and to file 59 66 and prove all claims therefor and take all such other action (including the right to vote such Designated Senior Debt holder's ratable share of the Debentures) in the name of the Holders of the Debentures or otherwise, as such Designated Senior Debt holder or such holder's Representative may determine to be necessary or appropriate for the enforcement of this Section 10.2. (c) Following the occurrence of an event of default in respect of the Designated Senior Debt (but only during the continuance thereof or until such default is waived or such Designated Senior Debt is paid in full or all Obligations related thereto are deemed satisfied), the Holders of the Debentures shall execute and deliver to each holder of Designated Senior Debt and such holder's Representative all such further instruments confirming the above authorization, and all such powers of attorney, proofs of claim, assignments of claim and other instruments, and shall take all such other action as may be reasonably requested by such holder or such holder's Representative, in order to enable such holder to enforce all claims upon or in respect of such holder's ratable share of the Debentures. SECTION 10.3 DEFAULT ON SENIOR DEBT The Company may not make any payment or distribution to the Trustee or any Holder in respect of Obligations with respect to the Debentures and may not acquire from the Trustee or any Holder (whether pursuant to Section 3.6 or Section 4.7 hereof or otherwise) any Debentures for cash or property other than securities, including without limitation, Subordinated Reorganization Securities, that are subordinated on terms no less favorable than the Debentures to (a) Senior Debt of the Company and (b) any securities issued in exchange for Senior Debt of the Company) until all principal and other Obligations with respect to the Senior Debt of the Company have been paid in full, or otherwise satisfied, in cash (or such other manner satisfactory to the holders thereof), if: (i) a default in the payment of any principal of, premium, if any, or interest on or fees relating to Senior Debt of the Company occurs through maturity, acceleration or otherwise and is continuing beyond any applicable grace period under the agreement, indenture or other document governing such Senior Debt of the Company; or (ii) a default, other than a payment default, on Senior Debt of the Company (including, but not limited to, a default on Senior Debt which results from the acceleration of the Debentures) occurs and is continuing that would give rise to the right of holders of such Senior Debt of the Company to accelerate such Senior Debt and the Trustee 60 67 receives a notice of the default (a "Payment Blockage Notice") from a Person who may give it pursuant to Section 10.11 hereof; no such non-payment default that existed or was continuing on the date of delivery of any such notice to the Trustee shall be, or be made, the basis for a subsequent notice. The Company may and shall resume payments on and distributions in respect of the Debentures and may acquire them upon the earlier of: (1) the date upon which the default to which reference is made in the preceding sentence of this Section 10.3 is cured or waived or such Senior Debt is paid in full or all obligations thereunder are otherwise satisfied, or (2) in the case of a default referred to in Section 10.3(ii) hereof, on the 180th calendar day after receipt of a Payment Blockage Notice; if this Article otherwise permits the payment, distribution or acquisition at the time of such payment or acquisition. Any payment of interest on the Debentures that is prohibited by operation of this Section 10.3 shall, for a period of up to a cumulative, aggregate of 180 days from the time such payment or payments would otherwise be due, be added to the principal of the Debentures and shall bear interest at the stated rate of interest on the Debentures from the date that such interest payment would otherwise have been payable as provided in this Indenture. SECTION 10.4 ACCELERATION OF DEBENTURES If payment of the Debentures is accelerated because of an Event of Default, the Company shall promptly notify holders of Senior Debt of the Company of the acceleration. SECTION 10.5 WHEN DISTRIBUTION MUST BE PAID OVER In the event that the Trustee or any Holder receives any payment of any Obligations in respect of the Debentures at a time such payment is prohibited by Section 10.3 hereof, such payment shall be held by the Trustee or such Holder, in trust for the benefit of, and shall be paid forthwith over and delivered, upon written request, to, the holders of Senior Debt of the Company as their interests may appear or their Representative under the indenture or other agreement (if any) pursuant to which Senior Debt of the Company may have been issued, as their respective interests may appear, for application to the payment of all Obligations with respect to Senior Debt of the Company 61 68 remaining unpaid to the extent necessary to pay such Obligations in full in accordance with their terms, after giving effect to any concurrent payment or distribution to or for the holders of Senior Debt of the Company. Upon any payment or distribution of assets or securities referred to in this Article 10, the Holders of the Debentures shall be entitled to rely upon an order or decree of a court of competent jurisdiction in which such dissolution, winding up, liquidation or reorganization proceedings are pending, and upon a certificate of the receiver, trustee in bankruptcy, liquidating trustee, agent or other person making any such payment or distribution, delivered to the Holders of the Debentures for the purpose of ascertaining the Persons entitled to participate in such distribution, the holders of Senior Debt and other indebtedness of the Company, the amount thereof or payable thereon, the amount or amounts paid or distributed thereon and all other facts pertinent thereto or this Article 10. With respect to the holders of Senior Debt of the Company, the Trustee undertakes to perform only such obligations on the part of the Trustee as are specifically set forth in this Article 10, and no implied covenants or obligations with respect to the holders of Senior Debt of the Company shall be read into this Indenture against the Trustee. The Trustee shall not be deemed to owe any fiduciary duty to the holders of Senior Debt of the Company, and shall not be liable to any such holders if the Trustee shall pay over or distribute to or on behalf of Holders or the Company or any other Person, money or assets to which any holders of Senior Debt of the Company shall be entitled by virtue of this Article 10, except if such payment is made as a result of the willful misconduct or gross negligence of the Trustee. SECTION 10.6 NOTICE BY COMPANY The Company shall promptly notify the Trustee, the Representative and the Paying Agent of any facts known to the Company that would cause a payment of any Obligations with respect to the Debentures to violate this Article, but failure to give such notice shall not affect the subordination of the Debentures to the Senior Debt of the Company as provided in this Article. SECTION 10.7 SUBROGATION Upon the payment in full of all amounts payable under or in respect of the Senior Debt of the Company, each Holder of a Debenture shall be subrogated to the rights of the holders of such Senior Debt to receive payments or distributions of the Company made on such Senior Debt until the Debentures shall be paid in full; and for the purposes of such subrogation, no payments or distributions to holders of such Senior Debt to which 62 69 such Holder of a Debenture would be entitled except for the provisions of this Indenture, and no payment over pursuant to the provisions of this Indenture to holders of such Senior Debt by such Holder of a Debenture, shall, as between the Company, its creditors other than holders of such Senior Debt and the Holder of a Debenture, be deemed to be a payment by the Company to or on account of such Senior Debt, it being understood that the provisions of this Article 10 are solely for the purpose of defining the relative rights of the holders of such Senior Debt, on the one hand, and the Holders of the Debentures, on the other hand. If any payment or distribution to which any Holder of a Debenture would otherwise have been entitled but for the provisions of this Article 10 shall have been applied, pursuant to the provisions of this Article 10, to the payment of all amounts payable under the Senior Debt of the Company, then and in such case, such Holder of a Debenture shall be entitled to receive from the holders of such Senior Debt at the time outstanding any payments or Distributions received by such holders of such Senior Debt in excess of the amount sufficient to pay all amounts payable under or in respect of, the Senior Debt of the Company in full. SECTION 10.8 RELATIVE RIGHTS This Article defines the relative rights of Holders and holders of Senior Debt of the Company. Nothing in this Indenture shall: (1) impair, as between the Company and the Holders, the obligation of the Company, which is absolute and unconditional, to pay principal of, interest and Additional Interest, if any, on the Debentures in accordance with their terms; (2) affect the relative rights of Holders and creditors of the Company other than their rights in relation to holders of Senior Debt of the Company; or (3) prevent the Trustee or any Holder from exercising its available remedies upon a Default or Event of Default, subject to the rights of holders and owners of Senior Debt of the Company to exercise their rights with respect to such Senior Debt or to receive distributions and payments otherwise payable to Holders. If the Company fails because of this Article 10 to pay principal of or interest or Additional Interest, if any, on a 63 70 Debenture on the due date, the failure is still a Default or Event of Default. SECTION 10.9 SUBORDINATION NOT AFFECTED The terms of this Article 10, the subordination effected hereby and the rights of the holders of Senior Debt shall not be affected by (i) any amendment of or addition or supplement to any Senior Debt or any instrument or agreement relating thereto; (ii) any exercise or non-exercise of any right, power or remedy under or in respect of any Senior Debt or any instrument, agreement or document relating thereto; (iii) any sale, exchange, release or other transaction affecting all or any part of any property at any time pledged or mortgaged to secure, or however securing, Senior Debt; (iv) any waiver, consent, release, indulgence, extension, renewal, modification, delay or other action, inaction or omission, in respect of any Senior Debt or any instrument, agreement or document relating thereto; or (v) any application by any holder or holders of Senior Debt thereof of any amount or sum (by whomsoever paid or however realized) to Senior Debt, whether or not any Holder of Debentures shall have had notice or knowledge of any of the foregoing. For all purposes of this Article 10, Senior Debt shall not be deemed to have been paid in full unless the holders thereof (or their duly authorized representatives) shall have received cash or cash equivalents equal to the amount of all principal, interest, premium and all other amounts due in respect of Senior Debt at the time outstanding. SECTION 10.10 DISTRIBUTION OR NOTICE TO REPRESENTATIVE Whenever a distribution is to be made or a notice given to holders of Senior Debt of the Company, the distribution may be made and the notice given to the Representative of the Senior Debt. Upon any payment or distribution of assets of the Company referred to in this Article 10, the Trustee and the Holders shall be entitled to rely upon any order or decree made by any court of competent jurisdiction or upon any certificate of such Representative or of the liquidating trustee or agent or other Person making any distribution to the Trustee or to the Holders for the purpose of ascertaining the Persons entitled to participate in such distribution, the holders of the Senior Debt of the Company and other Indebtedness of the Company, the amount thereof or payable thereon, the amount or amounts paid or distributed thereon and all other facts pertinent thereto or to this Article 10. 64 71 SECTION 10.11 RIGHTS OF TRUSTEE AND PAYING AGENT Notwithstanding the provisions of this Article 10 or any other provision of this Indenture, the Trustee shall not be charged with knowledge of the existence of any facts that would prohibit the making of any payment or distribution by the Trustee under Section 10.3, and the Trustee and the Paying Agent may continue to make payments on the Debentures, unless the Trustee shall have received at its Corporate Trust Office prior to the date of such payment a Payment Blockage Notice. Only a Representative of Senior Debt of the Company may give a Payment Blockage Notice. Nothing in this Article 10 shall impair the claims of, or payments to, the Trustee under or pursuant to Section 7.7 hereof. The Trustee in its individual or any other capacity may hold Senior Debt of the Company with the same rights it would have if it were not Trustee. Any Agent may do the same with like rights. SECTION 10.12 AUTHORIZATION TO EFFECT SUBORDINATION Each Holder of a Debenture by the Holder's acceptance thereof authorizes and directs the Trustee on the Holder's behalf to take such action as may be necessary or appropriate to effectuate the subordination as provided in this Article 10, and appoints the Trustee to act as the Holder's attorney-in-fact for any and all such purposes. If the Trustee does not file a proper proof of claim or proof of debt in the form required in any proceeding referred to in Section 6.9 hereof relating to the Company at least 30 days before the expiration of the time to file such claim, any Representative of Senior Debt of the Company is hereby authorized, but is not required, to file an appropriate claim for and on behalf of the Holders of the Debentures. SECTION 10.13 NOTICE OF SUBORDINATION Each Debenture shall include a statement to the effect that payments of such Debenture are subordinate to the payment in full of Senior Debt. SECTION 10.14 AMENDMENTS The provisions of Sections 4.7, 6.2 and this Article 10 and the definitions of Designated Senior Debt, Senior Debt, Change of Control, BNY Facility Agreement, Credit Agreement and Representative and the provisions of the Debentures relating to the subordination terms thereof, in each case, shall not be amended or modified without the written consent of the Representative of the then outstanding Senior Debt of the Company. 65 72 SECTION 10.15 NO WAIVER, ETC. No right of any present or future holder of any Senior Debt to enforce subordination as herein provided shall at any time in any way be prejudiced or impaired by any act or failure to act by the Representative or any such holder, or by any noncompliance by the Company, the Trustee or any Holder of a Debenture with the terms and provisions and covenants herein or in the Credit Agreement or in the BNY Facility Agreement or in any one or more documents or instruments creating or evidencing the Senior Debt regardless of any knowledge thereof any such holder may have or otherwise be charged with. SECTION 10.16 NO SECURITY Other than as expressly provided in favor of the Trustee in Section 7.7 hereof, so long as any of the Senior Debt shall not have been paid in full, the Company shall not, and shall not permit any of its Subsidiaries to, give, and no Holder of Debentures shall demand, accept or receive, any security, including any Lien on any of the assets of the Company nor its Subsidiaries, whether direct or indirect, for any Debenture. The provisions of this Article 10 are intended to be for the benefit of, and shall be enforceable directly by, the Representative and the holders of the Senior Debt. ARTICLE 11. CONVERSION OF DEBENTURES SECTION 11.1 CONVERSION PRIVILEGES AND CONVERSION PRICE Subject to and upon compliance with the provisions of this Article, at the option of the Holder thereof, (i) at any time after 60 days following the Issuance Date or (ii) in case the Debentures, or any portion thereof, are called for redemption or repurchased by the Company upon the occurrence of a Change of Control then (a) in the case of redemption, until and including, but not after the close of business on the date of redemption (unless the Company defaults in making the payment due upon redemption) or (b) in the case of a Holder that has exercised its right to require the Company to purchase such Debenture in connection with a Change of Control Offer pursuant to Section 4.7 hereof to (but not including) the close of business on the Change of Control Purchase Date (unless the Company defaults in making the payments due upon such purchase), but only if such Holder withdraws its election to exercise such right prior to such time, then any Debenture or any portion of the principal amount thereof that is $1,000 or an integral multiple of $1,000 in excess thereof may be converted at the principal amount thereof, or of such portion thereof, into fully paid and non-assessable shares 66 73 (calculated as to each conversion to the nearest 1/100 of a share) of Common Stock of the Company, at the Conversion Price, determined as hereinafter provided, in effect at the time of conversion. In case a Debenture or portion thereof is called for redemption or is repurchased upon the occurrence of a Change of Control, such conversion right in respect of the Debenture, or portion so called, shall expire at the close of business on the redemption date or the repurchase date, unless the Company defaults in making the payment due upon redemption or such repurchase. The price at which shares of Common Stock shall be delivered upon conversion (herein called the "Conversion Price") shall be initially $12.00 per share of Common Stock. This Conversion Price shall be adjusted from time to time as provided in this Article 11. SECTION 11.2 EXERCISE OF CONVERSION PRIVILEGE In order to exercise the conversion privilege, the Holder of any Debenture to be converted shall surrender such Debenture, duly endorsed or assigned to the Company or in blank at any office or agency of the Company maintained for that purpose pursuant to Section 2.3, accompanied by written notice to the Company at such office or agency that the Holder elects to convert such Debenture or, if less than the entire principal amount thereof is to be converted, the portion thereof to be converted. Debentures surrendered for conversion during the period from the close of business on any interest record date next preceding any interest payment date shall (except in the case of Debentures or portions thereof that have been called for redemption, on such interest payment date or on a redemption date within the period beginning on such interest record date and ending on such interest payment date) be accompanied by payment to the Company by wire transfer or certified check or other funds acceptable to the Company of an amount equal to the interest payable on such interest payment date on the principal amount of Debentures being surrendered for conversion. Subject to the provisions of Section 2.12 relating to the payment of defaulted interest by the Company, the interest payment with respect to a Debenture called for redemption on a redemption date during the period from the close of business on any interest record date next preceding any interest payment date to the opening of business on such interest payment date shall be payable on such interest payment date to the Holder of such Debenture at the close of business on such interest record date notwithstanding the conversion of such Debenture after such interest record date and prior to such interest payment date, and the Holder converting such Debenture need not include a payment of such interest payment amount upon surrender of such Debenture for conversion. Except as provided in the preceding sentence and subject to Section 2.12, no payment or adjustment shall be made 67 74 upon any conversion on account of any interest accrued on the Debentures surrendered for conversion or on account of any dividends on the Common Stock issued upon conversion. Debentures shall be deemed to have been converted immediately prior to the close of business on the day of surrender of such Debentures for conversion in accordance with the foregoing provisions, and at such time, the rights of the Holder of such Debentures as Holders shall cease; and the Person or Persons entitled to receive the Common Stock, issuable upon conversion shall be treated for all purposes as the record holder or holders of such Common Stock at such time. As promptly as practicable on or after the conversion date, the Company shall issue and shall deliver at such office or agency, a certificate or certificates for the number of full shares of Common Stock issuable upon conversion, together with payment in lieu of any fraction of a share, as provided in Section 11.3. In the case of any Debenture that is converted in part only, upon such conversion the Company shall execute and the Trustee shall authenticate and deliver to the Holder thereof, at the expense of the Company, a new Debenture or Debentures of authorized denominations in an aggregate principal amount equal to the unconverted portion of the principal amount of such Debenture. SECTION 11.3 FRACTIONAL SHARES No fractional shares of Common Stock shall be issued upon conversion of Debentures. If more than one Debenture shall be surrendered for conversion at one time by the same Holder the number of full shares of Common Stock that shall be issuable upon conversion thereof shall be computed on the basis of the aggregate principal amount of the Debentures (or, specified portions thereof) so surrendered. Instead of any fractional share of Common Stock that would otherwise be issuable upon conversion of any Debenture or Debentures (or, specified portions thereof), the Company shall pay a cash adjustment in respect of such fraction in an amount equal to the same fraction of the Closing Price on the last day prior to the date of conversion. SECTION 11.4 ADJUSTMENT OF CONVERSION PRICE (a) The Conversion Price shall be adjusted from time to time as follows: (i) In case the Company shall (i) declare a dividend or make a distribution in shares of its Common Stock payable in shares of its Common Stock; (ii) subdivide its outstanding Common Stock into a greater number of shares, or (iii) combine its outstanding Common Stock into a smaller number of shares, the Conversion Price in effect immediately 68 75 prior thereto shall be adjusted so that the Holder of any Debenture thereafter surrendered for conversion shall be entitled to receive the number of shares of Common Stock of the Company which he would have owned or have been entitled to receive after the happening of any of the events described above had such Debenture been converted immediately prior to the happening of such event. An adjustment made pursuant to this subsection (i) shall become effective immediately after the record date in the case of a dividend or distribution and shall become effective immediately after the effective date in the case of subdivision or combination; (ii) In case the Company shall issue rights, options, warrants or securities convertible into Common Stock ("Convertible Securities") to all holders of its Common Stock entitling them to subscribe for or purchase Common Stock, at a price per share less than the current market price per share of Common Stock (as defined in subsection (iv) below) at the record date for the determination of shareholders entitled to receive such Convertible Securities, the Conversion Price in effect immediately prior thereto shall be adjusted so that the same shall equal the price determined by multiplying the Conversion Price in effect immediately prior to the date of issuance of such Convertible Securities by a fraction of which the numerator shall be the number of shares of Common Stock outstanding on the date of the issuance of such Convertible Securities plus the number of shares which the aggregate offering price of the total number of shares of Common Stock purchasable under such Convertible Securities so offered would purchase at such current market price, and of which the denominator shall be the number of shares of Common Stock outstanding on the date of issuance of such Convertible Securities plus the number of additional shares of Common Stock purchasable under such Convertible Securities offered for subscription or purchase. Such adjustment shall be made successively whenever any such Convertible Securities are issued, and shall become effective retroactively as of the record date for the determination of shareholders entitled to receive such Convertible Securities. In determining whether any Convertible Securities entitle the holder to subscribe for or purchase shares of Common Stock at the less than such current market price, and in determining the aggregate offering price of such shares of Common Stock, there shall be taken into account any consideration received by the Company for such Convertible Securities and any amount payable upon the conversion or exercise thereof, the value of such consideration, if other than cash, to be determined by the Board of Directors; 69 76 (iii) In case the Company shall distribute to all holders of its Common Stock or all holders of Common Stock shall otherwise become entitled to receive, shares of capital stock of the Company (other than dividends or distributions on its Common Stock referred to in paragraph (i) above) or evidences of its indebtedness or rights, options, warrants or convertible securities providing the right to subscribe for or purchase any shares of the Company's Common Stock or evidences of its indebtedness (other than Convertible Securities referred to in paragraph (ii) above), or assets (including securities (other than Common Stock), but excluding cash dividends or distributions paid from retained earnings of the Company), then in each such case the Conversion Price shall be adjusted so that the same shall equal the price determined by multiplying the Conversion Price in effect immediately prior to the date of such distribution by a fraction of which the numerator shall be the current market price per share (as defined in subsection (iv) below) of the Common Stock on the record date mentioned below less the then fair market value (as determined in good faith by the Board of Directors of the Company, and described in a certificate filed with the Trustee) of the capital stock or assets or evidences of indebtedness so distributed or of such rights, options, warrants or convertible securities applicable to one share of Common Stock and the denominator shall be the current market price per share (as defined in subsection (iv) below) of the Common Stock. Such adjustment shall be made whenever any such distribution is made, and shall become effective retroactively as of the record date for the determination of shareholders entitled to receive such distribution; (iv) For the purpose of any computation under subsections (ii) and (iii) above, the current market price per share of the Common Stock at any date shall mean the Closing Price for the trading day next preceding the day in question; (v) No adjustment in the Conversion Price shall be required unless such adjustment would require an increase or decrease of at least 1% in such price; provided, however, that any adjustments which by reason of this subsection (v) are not required to be made shall be carried forward and taken into account in any subsequent adjustment. All calculations under this Article 11 shall be made to the nearest cent. Anything in this Section 11.4 to the contrary notwithstanding, the Company shall be entitled to make such reductions in the Conversion Price, (in addition to those required by this Section 11.4) as it in its discretion shall determine to be advisable in order that any stock dividends, subdivision of shares, distribution of rights to purchase stock or securities, or a distribution of securities 70 77 convertible into or exchangeable for stock hereafter made by the Company to its shareholders shall not be taxable; (vi) In any case in which this Section 11.4 provides that an adjustment shall become effective retroactively as of a record date for an event, the Company may defer until the occurrence of such event (i) issuing to the Holder of any Debenture converted after such record date and before the occurrence of such event the additional shares of Common Stock issuable upon such conversion by reason of the adjustment required by such event over and above the Common Stock issuable upon such conversion before giving effect to such adjustment and (ii) paying to such Holder any amount in cash in lieu of any fractional share pursuant to Section 11.3; (vii) The Trustee shall not be responsible for any calculation made under this Section. (b) The Company from time to time may, to the extent permitted by law and to the extent the Board of Directors of the Company has determined that such decrease would be in the best interests of the Company, reduce the Conversion Price by any amount for any period of at least 20 days, in which case the Company shall give the Trustee and the Holders of the Debentures at least 15 days' notice of such decrease. SECTION 11.5 NOTICE OF ADJUSTMENTS OF CONVERSION PRICE. Whenever the Conversion Price is adjusted as herein provided: (a) The Company shall compute the adjusted Conversion Price in accordance with Section 11.4 and shall prepare a certificate signed by the Treasurer of the Company setting forth the adjusted Conversion Price and showing in reasonable detail the facts upon which such adjustment is based, and such certificate shall forthwith be delivered to the Trustee and filed at each office or agency maintained for the purpose of conversion of Debentures pursuant to Section 2.3; and (b) a notice setting forth that the Conversion Price has been adjusted and setting forth the adjusted Conversion Price shall forthwith be prepared by the Company and mailed to all Holders of Debentures at their last address as they shall appear in the Debenture Register. 71 78 SECTION 11.6 NOTICE OF CERTAIN CORPORATE ACTION In case: (a) the Company shall declare a dividend (or any other distribution) on its Common Stock payable otherwise than in cash; or (b) the Company shall authorize the granting to the holders of its Common Stock generally of rights, options warrants or convertible securities to subscribe for or purchase any shares of Capital Stock of any class or of any other rights; or (c) of any reclassification of the Common Stock of the Company (other than a subdivision or combination of its outstanding shares of Common Stock), or of any consolidation or merger to which the Company is a party and for which approval of any shareholders of the Company is required, or of the sale or transfer of all or substantially all of the assets of the Company; or (d) of the voluntary or involuntary dissolution, liquidation or winding up of the Company; or (e) the Company or any Subsidiary of the Company shall commence a tender offer for all or a portion of the Company's outstanding shares of Common Stock (or shall amend any such tender offer); then, the Company shall notify the Trustee and cause to be filed at such office or agency maintained for the purpose of conversion of Debentures pursuant to Section 2.3, and shall cause to be mailed to all Holders of Debentures at their last addresses as they shall appear in the Debenture Register, at least 20 days (or 10 days in any case specified in Section 11.6(a) or 11.6(b) above) prior to the applicable date specified in (x), (y) or (z) below, as applicable, a notice stating (x) the date on which a record is to be taken for the purposes of such dividends, distribution, rights or warrants, or, if a record is not to be taken, the date as to which the holders of Common Stock of record to be entitled to such dividend, distribution, rights or warrants are to be determined or (y) the date on which such reclassification, consolidation, merger, sale, transfer, liquidation or winding up is expected to become effective, and the date on which it is expected that holders of Common Stock of record shall be entitled to exchange their shares of Common Stock for securities, cash or other property deliverable upon such reclassification, consolidation, merger, sale, transfer, dissolution, liquidation or winding up, or (z) the date on which such tender offer commenced, the date on which such tender offer is scheduled to expire unless extended, the consideration offered and the 72 79 material terms thereof (or the material terms of any amendment thereto). SECTION 11.7 COMPANY TO RESERVE COMMON STOCK The Company shall at all time reserve and keep available, free from preemptive rights, out of its authorized but unissued Common Stock, for the purpose of effecting the conversion of Debentures, the full number of shares of Common Stock then issuable upon the conversion of all outstanding Debentures. SECTION 11.8 TAXES ON CONVERSION The Company will pay any and all taxes, other than any franchise or income taxes, that may be payable in respect of the issue or delivery of stock certificates representing shares of Common Stock on conversion of Debentures pursuant hereto. The Company shall not, however, be required to pay any tax that may be payable in respect of any transfer involved in the issue and delivery of shares of Common Stock in name other than that of the Holder of the Debenture or Debentures to be converted, and no such issue or delivery shall be made unless and until the Person requesting such issue has paid to the Company the amount of any such tax, or has established to the satisfaction of the Company that such tax has been paid. SECTION 11.9 COVENANT AS TO COMMON STOCK The Company covenants that all shares of Common Stock that may be issued upon conversion of Debentures will, upon issue, be fully paid and non-assessable and, except as provided in Section 11.8, the Company will pay all taxes, liens and charges with respect to the issue thereof. SECTION 11.10 CANCELLATION OF CONVERTED DEBENTURES All Debentures delivered for conversion shall be delivered to the Trustee to be cancelled by or at the direction of the Trustee, which shall dispose of the same as provided in Section 2.11. SECTION 11.11 EFFECT OF RECLASSIFICATION, CONSOLIDATION, MERGER, SHARE EXCHANGE OR SALE If any of the following events occur, namely (i) any reclassification or change of outstanding shares of Common Stock issuable upon conversion of the Debentures (other than a change in par value, or from par value to no par value, or from no par value to par value, or as a result of a subdivision or combination), (ii) any consolidation with or merger of the Company with or into another corporation shall be effected as a 73 80 result of which holders of Common Stock issuable upon conversion of the Debentures shall be entitled to receive stock, securities or other property or assets (including cash) with respect to or in exchange for such Common Stock or (iii) any sale or conveyance of all or substantially all of the properties and assets of the Company to any other corporation, then the Company or such successor or purchasing corporation, as the case may be, shall execute with the Trustee a supplemental indenture providing that each Debenture shall be convertible into the kind and amount of shares of stock and other securities or property or assets (including cash) receivable upon such reclassification, change, consolidation, merger, sale or conveyance by a holder of a number of shares of Common Stock issuable upon conversion of such Debentures immediately prior to such reclassification, change, consolidation, merger, statutory share exchange, sale or conveyance assuming such holder of the Debentures did not exercise any rights of election as to the stock, other securities or property or assets receivable in connection therewith. Such supplemental indenture shall provide adjustments which shall be as nearly equivalent as may be practicable to the adjustments provided for in this Article. The Company shall cause notice of the execution of such supplemental indenture to be mailed to each Holder of Debentures, at his/her address appearing on the Debenture Register. The above provisions of this Section shall similarly apply to successive reclassifications, consolidations, mergers and sales. ARTICLE 12. DEFEASANCE SECTION 12.1 DEFEASANCE AND DISCHARGE The Company shall, subject to the satisfaction of the conditions set forth in Section 12.2 hereof, be deemed to have been discharged from its obligations with respect to all outstanding Debentures on the date the conditions set forth below are satisfied (hereinafter, "Defeasance"). For this purpose, Defeasance means that the Company shall be deemed to have paid and discharged the entire Indebtedness represented by the outstanding Debentures, which shall thereafter be deemed to be "Outstanding" only for the purposes of Section 12.3 hereof and the other Sections of this Indenture referred to in (a) and (b) below, and to have satisfied all its other Obligations under such Debentures and this Indenture (and the Trustee, on demand of and at the expense of the Company, shall execute proper instruments acknowledging the same), except for the following provisions which shall survive until otherwise terminated or discharged hereunder: (a) the rights of Holders of outstanding Debentures to receive solely from the trust fund described in Section 12.4 74 81 hereof, and as more fully set forth in such Section, payments in respect of the principal of, and interest or Additional Interest, if any, on such Debentures when such payments are due, (b) the Company's obligations with respect to such Debentures under Article 2, Sections 4.1, 4.2, 4.3, 4.4, 4.5, 4.7 (but such obligation shall continue only with respect to the Company's obligations relating to a Change of Control described in clause (ii) of the definition of such term) and Articles 8 and 11 hereof, (c) the rights, powers, trusts, duties and immunities of the Trustee hereunder and the Company's obligations in connection therewith and (d) this Article 12. SECTION 12.2 CONDITIONS TO DEFEASANCE The following shall be the conditions to the application of Section 12.1 hereof to the outstanding Debentures: In order to exercise Defeasance: (a) the Company must irrevocably deposit with the Trustee, in trust, for the benefit of the Holders, cash in United States dollars or Government Obligations, in an amount as will be sufficient, in the opinion of a nationally recognized firm of independent public accountants, to pay the principal of, and interest and Additional Interest if any, on the outstanding Debentures on the stated date for payment thereof or on the applicable redemption date or date of repurchase, as the case may be, of such principal of, Additional Interest, if any, and interest on the outstanding Debentures; (b) the Company shall have delivered to the Trustee an Opinion of Counsel (which counsel may be an employee of the Company or any Subsidiary of the Company) reasonably acceptable to the Trustee confirming that (A) the Company has received from, or there has been published by, the Internal Revenue Service a ruling or (B) since the Issuance Date, there has been a change in the applicable federal income tax law, in either case to the effect that, and based thereon, such Opinion of Counsel shall confirm that, the Holders of the outstanding Debentures will not recognize income, gain or loss for federal income tax purposes as a result of such Defeasance and will be subject to federal income tax on the same amounts, in the same manner and at the same times as would have been the case if such Defeasance had not occurred; (c) no Default or Event of Default shall have occurred and be continuing on the date of such deposit or, insofar as Sections 6.1(f) and 6.1(g) hereof are concerned, at any time in the period ending on the 91st day after the date of deposit (or greater period of time in which any such deposit of trust funds may remain subject to Bankruptcy Law insofar as those apply to the deposit by the Company); 75 82 (d) such Defeasance shall not result in a breach or violation of, or constitute a default under, any material agreement or instrument (other than this Indenture) to which the Company or any of its Subsidiaries is a party or by which the Company or any of its Subsidiaries is bound; (e) the Company shall have delivered to the Trustee an Opinion of Counsel to the effect that after the 91st day (or such later day referred to in (c) above) following the deposit, the trust funds will not be subject to the effect of any applicable bankruptcy, insolvency, reorganization or similar laws affecting creditors' rights generally; (f) the Company shall have delivered to the Trustee an Officers' Certificate stating that the deposit was not made by the Company with the intent of preferring the Holders of Debentures over any other creditors of the Company with the intent of defeating, hindering, delaying or defrauding creditors of the Company or others; and (g) the Company shall have delivered to the Trustee an Officers' Certificate and an Opinion of Counsel, each stating that all conditions precedent provided for or relating to the Legal Defeasance or the Covenant Defeasance have been complied with. SECTION 12.3 DEPOSITED MONEY TO BE HELD IN TRUST; OTHER MISCELLANEOUS PROVISIONS Subject to Section 12.4 hereof, all money deposited with the Trustee (or other qualifying trustee, collectively for purposes of this Section 12.3 the "Trustee") pursuant to Section 12.2 hereof in respect of the outstanding Debentures shall be held in trust and applied by the Trustee, in accordance with the provisions of such Debentures and this Indenture, to the payment, either directly or through any Paying Agent (including the Company acting as Paying Agent) as the Trustee may determine, to the Holders of such Debentures of all sums due and to become due thereon in respect of principal, Additional Interest, if any, and interest, but such money need not be segregated from other funds except to the extent required by law. The Company shall pay and indemnify the Trustee against any tax, fee or other charge imposed on or assessed against the cash deposited pursuant to Section 12.2 hereof or the principal and interest received in respect thereof other than any such tax, fee or other charge which by law is for the account of the Holders of the outstanding Debentures. Anything in this Article 12 to the contrary notwithstanding, the Trustee shall deliver or pay to the Company from time to time upon the request of the Company any money held 76 83 by it as provided in Section 12.2 hereof which, in the opinion of a nationally recognized firm of independent public accountants expressed in a written certification thereof delivered to the Trustee (which may be the opinion delivered under Section 12.2(a) hereof) is in excess of the amount thereof that would then be required to be deposited to effect an equivalent Defeasance. SECTION 12.4 REPAYMENT TO COMPANY Any money deposited with the Trustee or any Paying Agent, or then held by the Company, in trust for the payment of the principal of, Additional Interest, if any, or interest, on any Debenture and remaining unclaimed for one year after such principal, interest or Additional Interest, if any, have become due and payable provided, however, that any funds held in respect of Debentures which have been converted, or repurchased by the Company pursuant to Section 4.7 or which have otherwise been acquired by the Company or have otherwise ceased to be outstanding, shall be paid to the Company on its request or (if then held by the Company) shall be discharged from such trust; and the Holder of such Debenture shall thereafter, as an unsecured general creditor, look only to the Company for payment thereof, and all liability of the Trustee or such Paying Agent with respect to such trust money, and all liability of the Company as trustee thereof, shall thereupon cease; provided, however, that the Trustee or such Paying Agent, before being required to make any such repayment, may at the expense of the Company cause to be published once in The Wall Street Journal (national edition) or if no longer published, in a national newspaper of general circulation, notice that such money remains unclaimed and that, after a date specified therein, which shall not be less than 30 days from the date of such notification or publication, any unclaimed balance of such money then remaining will be repaid to the Company. SECTION 12.5 REINSTATEMENT If the Trustee or Paying Agent is unable to apply any United States dollars in accordance with Section 12.1 hereof, as the case may be, by reason of, any order or judgment of any court or governmental authority enjoining, restraining or otherwise prohibiting such application, then the Company's obligations under this Indenture and the Debentures shall be revived and reinstated as though no deposit had occurred pursuant to Section 12.1 hereof until such time as the Trustee or Paying Agent is permitted to apply all such money in accordance with Section 12.1 hereof, as the case may be; provided, however, that, if the Company makes any payment of principal of, Additional Interest, if any, or interest, on any Debenture following the reinstatement of its obligations, the Company shall be subrogated to the rights of the Holders of such Debentures to receive such payment from the money held by the Trustee or Paying Agent. 77 84 ARTICLE 13. MISCELLANEOUS SECTION 13.1 TRUST INDENTURE ACT CONTROLS If any provision of this Indenture limits, qualifies or conflicts with the duties imposed by TIA Section 318(c), the imposed duties shall control. SECTION 13.2 NOTICES Any notice or communication by the Company or the Trustee to the other is duly given if in writing and delivered in Person or mailed by first class mail (registered or certified, return receipt requested), telex, telecopier or overnight air courier guaranteeing next day delivery, to the others' address: If to the Company: Home Shopping Network, Inc. 11831 30th Court North St. Petersburg, Florida 33716 Telecopier No.: (813) 573-0866 With copies to: Home Shopping Network, Inc. 11831 30M Court North St. Petersburg, Florida 33716 Telecopier No.: (813) 573-0866 Attention: General Counsel and Baker & Botts, L.L.P. 885 Third Avenue New York, New York 10022 Telecopier No.: (212) 705-5125 Attention: Frederick H. McGrath, Esq. If to the Trustee: United States Trust Company of New York 114 West 47th Street New York, New York 10036 Telecopier No.: (212) 852-1625 Attention: Mr. Gerard F. Ganey 78 85 With copies to: Dow, Lohnes & Albertson 1200 New Hampshire Avenue, N.W. Suite 800 Washington, D.C. 20036-6802 Telecopier No.: (202) 776-2222 Attention: Joseph Kelly, Jr., Esq. The Company or the Trustee by notice to the other may designate additional or different addresses for subsequent notices or communications. All notices and communications (other than those sent to Holders) shall be deemed to have been duly given: at the time delivered by hand, if personally delivered; five Business Days after being deposited in the mail, postage prepaid, if mailed; when answered back, if telexed; when receipt acknowledged, if telecopied; and the next Business Day after timely delivery to the courier, if sent by overnight air courier guaranteeing next day delivery. Any notice or communication to a Holder shall be mailed by first class mail, certified or registered, return receipt requested, or by overnight air courier guaranteeing next day delivery to its address shown on the register kept by the Registrar. Any notice or communication shall also be so mailed to any Person described in TIA Section 313(c), to the extent required by the TIA. Failure to mail a notice or communication to a Holder or any defect in it shall not affect its sufficiency with respect to other Holders. If a notice or communication is mailed in the manner provided above within the time prescribed, it is duly given, whether or not the addressee receives it. If the Company mails a notice or communication to Holders, it shall mail a copy to the Trustee and each Agent at the same time. SECTION 13.3 COMMUNICATION BY HOLDERS OF DEBENTURES WITH OTHER HOLDERS OF DEBENTURES Holders may communicate pursuant to TIA Section 312(b) with other Holders with respect to their rights under this Indenture or the Debentures. The Company, the Trustee, the Registrar and anyone else shall have the protection of TIA Section 312(c). 79 86 SECTION 13.4 CERTIFICATE AND OPINION AS TO CONDITIONS PRECEDENT Upon any request or application by the Company to the Trustee to take any action under this Indenture, the Company shall furnish to the Trustee: (a) an Officers' Certificate in form and substance reasonably satisfactory to the Trustee (which shall include the statements set forth in Section 13.5 hereof) stating that, in the opinion of the signers, all conditions precedent and covenants provided for in this Indenture relating to the proposed action have been satisfied; and (b) an Opinion of Counsel in form and substance reasonably satisfactory to the Trustee (which shall include the statements set forth in Section 13.5 hereof) stating that, in the opinion of such counsel, all such conditions precedent and covenants have been satisfied. SECTION 13.5 STATEMENTS REQUIRED IN CERTIFICATE OR OPINION Each certificate or opinion with respect to compliance with a condition or covenant provided for in this Indenture (other than a certificate provided pursuant to TIA Section 314(a)(4)) shall comply with the provisions of TIA Section 314(e) and shall include: (a) a statement that the Person making such certificate or opinion has read such covenant or condition; (b) a brief statement as to the nature and scope of the examination or investigation upon which the statements or opinions contained in such certificate or opinion are based; (c) a statement that, in the opinion of such Person, he or she has made such examination or investigation as is necessary to enable him or her to express an informed opinion as to whether or not such covenant or condition has been satisfied; and (d) a statement as to whether or not, in the opinion of such Person, such condition or covenant has been satisfied. 80 87 SECTION 13.6 RULES BY TRUSTEE AND AGENTS The Trustee may make reasonable rules for action by or at a meeting of Holders. The Registrar or Paying Agent may make reasonable rules and set reasonable requirements for its functions. SECTION 13.7 NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND STOCKHOLDERS No past, present or future director, officer, employee, incorporator or stockholder of the Company, as such, shall have any liability for any obligations of the Company under the Debentures, this Indenture or for any claim based on, or in respect of such obligations or their creation. Each Holder of Debentures by accepting a Debenture waives and releases all such liability. The waiver and release are part of the consideration for issuance of the Debentures. SECTION 13.8 GOVERNING LAW THE INTERNAL LAW OF THE STATE OF NEW YORK SHALL GOVERN AND BE USED TO CONSTRUE THIS INDENTURE AND THE DEBENTURES WITHOUT REGARD TO THE CONFLICTS OF LAW RULES OR PROVISIONS THEREOF. SECTION 13.9 NO ADVERSE INTERPRETATION OF OTHER AGREEMENTS This Indenture may not be used to interpret any other indenture, loan or debt agreement of the Company or its Subsidiaries or of any other Person. Any such indenture, loan or debt agreement may not be used to interpret this Indenture. SECTION 13.10 SUCCESSORS All agreements of the Company in this Indenture and the Debentures and the Debentures shall bind their respective successors. All agreements of the Trustee in this Indenture shall bind its successors. SECTION 13.11 SEVERABILITY In case any provision in this Indenture or in the Debentures shall be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. SECTION 13.12 COUNTERPART ORIGINALS The parties may sign any number of copies of this Indenture. Each such copy shall be an original, but all of them together shall represent the same agreement. 81 88 SECTION 13.13 TABLE OF CONTENTS HEADINGS, ETC. The Table of Contents, Cross-Reference Table and Headings of the Articles and Sections of this Indenture have been inserted for convenience of reference only, are not to be considered a part of this Indenture and shall in no way modify or restrict any of the terms or provisions hereof. SIGNATURES: March 1, 1996 HOME SHOPPING NETWORK, INC. - -------- By: /s/ James G. Held --------------------------------------------- Name: James G. Held Title: President and Chief Executive Officer March 1, 1996 UNITED STATES TRUST COMPANY - -------- OF NEW YORK By: /s/ Gerard F. Ganey --------------------------------------------- Name: Gerard F. Ganey Title: Senior Vice President 82 EX-10.29 4 HSN - FOURTH AMENDMENT DATED DECEMBER 13, 1996 1 EXHIBIT 10.37 FOURTH AMENDMENT, dated as of February 13, 1996, to the SECOND AMENDED AND RESTATED CREDIT AGREEMENT, dated as of August 30, 1994 (as amended by the First Amendment thereto, dated as of March 29, 1995, as further amended by the Second Amendment thereto, dated as of June 28, 1995, and as further amended by the Third Amendment thereto, dated as of September 28, 1995, the "Credit Agreement"), among HOME SHOPPING NETWORK, INC., a Delaware corporation, as borrower (the "Company"), HOME SHOPPING CLUB, INC., a Delaware corporation ("HSC"), HSN REALTY, INC., a Delaware corporation ("HSNR"; together with HSC, the "Guarantors"), the banks signatory thereto (individually, a "Bank" and collectively, the "Banks"), LTCB TRUST COMPANY, as Agent, THE BANK OF NEW YORK COMPANY, INC., TORONTO DOMINION [TEXAS], INC. and BANK OF MONTREAL, each as a Co-Agent (each in such capacity, a "Co-Agent"), LTCB TRUST COMPANY, as Administrative Agent for the Banks (in such capacity, the "Administrative Agent"), and LTCB TRUST COMPANY, as collateral agent for the Banks (in such capacity, the "Collateral Agent"). WHEREAS, the Company and each of the Guarantors have requested, and the Banks and the Administrative Agent are willing, to amend certain provisions of the Credit Agreement. NOW, THEREFORE, in consideration of the foregoing, and for other good and valuable consideration the receipt of which is hereby acknowledged, the parties hereby agree as follows: Section 1. Certain Defined Terms. Except as expressly set forth in this Fourth Amendment, terms defined in the Credit Agreement and used herein shall have their respective defined meanings when used herein. Section 2. Amendments to the Credit Agreement. Subject to the fulfillment of the conditions precedent set forth in Section 5 hereof, the Credit Agreement is hereby amended as follows: (a) Section 1.1 of the Credit Agreement is hereby amended by inserting the parenthetical "(except for any such other event relating to the Contemplated Change of Control)" immediately after the words "or any other event" appearing in clause (i) of the definition of "Change in Control" set forth in such Section. (b) Section 1.1 of the Credit Agreement is hereby further amended by inserting the words "and Section 2.8(c)" immediately after the reference to "Section 2.3" appearing within the parenthetical appearing in the definition of "Commitment" set forth in such Section. (c) Section 1.1 of the Credit Agreement is hereby further amended by inserting the following new sentence at the 2 end of the definition of "Operating Cash Flow" set forth in such Section: Operating Cash Flow for each of the following Fiscal Quarters, and for any period including any such Fiscal Quarter, shall be calculated without giving effect to in the case of (a) the Fiscal Quarter ending on September 30, 1995, $5,427,000 of severance and restructuring charges, (b) the Fiscal Quarter ending on December 31, 1995, up to but not exceeding $21,000,000 in the aggregate of non-recurring charges as reflected in the Company's financial statements for such Fiscal Quarter (the nature of which charges shall be substantially the same as those described by the Company to the Administrative Agent and the Banks prior to the Fourth Amendment Effective Date), and (c) to the extent less than $21,000,000 of such non-recurring charges occurred in the Fiscal Quarter ending on December 31, 1995, the Fiscal Quarter ending on March 31, 1996, up to but not exceeding the lesser of (x) such remainder and (y) $2,500,000 of such non-recurring charges as reflected in the Company's financial statements for such Fiscal Quarter. (d) Section 1.1 of the Credit Agreement is hereby further amended by adding the following new definitions thereto in the appropriate alphabetical position as follows: "Contemplated Change of Control" shall have the meaning assigned to that term in Section 3 of the Fourth Amendment. "Fourth Amendment" shall mean the Fourth Amendment to this Agreement dated as of February 13, 1996. "Permitted Indebtedness" shall mean, for any Person (but without duplication): (a) loans, not under this Agreement, outstanding on the Third Amendment Effective Date, but not any extension, renewal, refinancing or replacement thereof; (b) Loans to the Company under this Agreement in accordance with Section 9.20(e) hereof; (c) Indebtedness of the Company and the Guarantors under the BNY L/C Facility and in connection with the Insurance Standby Letter of Credit; and (d) the Permitted Subordinated Debentures of the Company. "Permitted Subordinated Debentures" shall mean Indebtedness of the Company under convertible subordinated debentures up to approximately an aggregate principal amount of $100,000,000; provided that the Permitted Subordinated -2- 3 Debentures (a) shall have a final maturity at least six months after the Commitment Termination Date under each of this Agreement and the BNY Facility Agreement, (b) shall be issued at par and shall bear interest at a rate per annum not greater than 8.5%, (c) shall be unsecured and (d) shall be expressly subordinated in all respects to the payment in full in cash of all of the Obligations and all of the obligations of the Company and the other obligors under the BNY L/C Facility; and, provided, further, that the terms of subordination of the Permitted Subordinated Debentures, including, without limitation, stop payment provisions which shall become effective upon the occurrence of an Event of Default under this Agreement, shall have been approved in writing in advance by the Majority Banks. The Banks agree to respond promptly to any such request for approval made by the Company. "Schedule 13D" shall have the meaning assigned to that term in Section 3 of the Fourth Amendment. (e) Section 2.4 of the Credit Agreement is hereby amended by adding the following new subparagraph (c) at the end thereof: (c) On March 31, 1996, if by such date the Company has not received cash proceeds in an aggregate principal amount of at least $50,000,000 from the issuance of Permitted Subordinated Debentures, the Company shall pay to the Administrative Agent for the account of each Bank a fee in an amount equal to .075% of such Bank's outstanding Commitment (whether or not utilized) as in effect on such date. (f) Section 2.8 of the Credit Agreement is hereby amended by adding the following new subparagraph (c) at the end thereof: (c) The Company shall apply an amount equal to 30% of the principal amount of any Permitted Subordinated Debentures that the Company issues to permanently reduce the Commitments. If any such reduction in the Commitments shall result in the aggregate principal amount of the Loans exceeding the Commitments, the Company shall prepay the Loans in an amount equal to such excess so that the aggregate principal amount of the Loans does not exceed the Commitments. Each such prepayment shall be made within five Business Days after the date on which cash proceeds are received by the Company from each issuance of the Permitted Subordinated Debentures. (g) Section 8.2 of the Credit Agreement is hereby amended by (i) deleting the reference to "June 30, 1995" appearing in the first sentence thereof and inserting "September -3- 4 30, 1995" in lieu thereof, (ii) deleting the words "two-Fiscal Quarter period" appearing in the first sentence thereof and inserting the words "three-Fiscal Quarter period" in lieu thereof and (iii) deleting the words "Third Amendment" appearing at the end of the last sentence thereof and inserting the words "Fourth Amendment" in lieu thereof. (h) Section 9.13 of the Credit Agreement is hereby amended by inserting the following proviso immediately before the period appearing at the end thereof: ; and, provided, further, that Consolidated Net Worth for the Fiscal Quarter ending on December 31, 1995 and each subsequent Fiscal Quarter shall be calculated without giving effect to an amount equal to the after-tax effect of up to but not exceeding $29,300,000 of pre-tax non-recurring charges including non-Operating Cash Flow items (the nature of which charges shall be substantially the same as those described by the Company to the Administrative Agent and the Banks prior to the Fourth Amendment Effective Date) as reflected in the Company's financial statements for such Fiscal Quarter (i) Section 9.18 of the Credit Agreement is hereby amended by inserting the following new sentence at the end thereof: In addition, the Company shall not prepay, redeem or otherwise repurchase any of the Permitted Subordinated Debentures. (j) Section 9.20(a) of the Credit Agreement is hereby amended by deleting the proviso set forth in such Section in its entirety. (k) Section 9.20(d) of the Credit Agreement is hereby amended by deleting the parenthetical set forth in such Section and inserting "(other than Permitted Indebtedness)" in lieu thereof. (l) Section 9 of the Credit Agreement is hereby further amended by adding the following new Section 9.24: 9.24. Permitted Subordinated Debentures. The Company shall not amend, modify, terminate or waive any of the terms and conditions of the Permitted Subordinated Debentures or any agreement or document related thereto or any term thereof in any manner which would have any adverse effect upon the rights of the Banks. -4- 5 (m) Section 10 of the Credit Agreement is hereby amended by (i) inserting the word "or" immediately after the semi-colon appearing at the end of subparagraph (m) set forth in such Section and (ii) adding the following new subparagraph (n): (n) The Contemplated Change of Control shall be consummated in a manner other than substantially as described in the Schedule 13D; (n) References in the Credit Agreement to "this Agreement" and the words "hereof", "herein", "hereto" and the like, shall refer to the Credit Agreement as amended by this Fourth Amendment; provided that the words "the date of this Agreement" and "the date hereof" shall continue to refer to the date of the Credit Agreement (being August 30, 1994). Section 3. Consent of the Administrative Agent and the Banks to the Contemplated Change of Control. Subject to the fulfillment of the conditions set forth in Sections 5 and 6 of this Fourth Amendment, the Administrative Agent and the Banks hereby consent to the consummation of (i) the transfer by Liberty Media Corporation, a Wholly-Owned Subsidiary of TCI, of all of its shares of the Company's common stock to Silver King Communications, Inc. substantially in the manner described in Amendment No. 2 to the Schedule 13D of TCI (as filed with the Securities and Exchange Commission on November 30, 1995, a copy of which has been provided to the Administrative Agent and the Banks (the "Schedule 13D")), and (ii) the other transactions described in the Schedule 13D substantially in the manner described therein (collectively, the "Contemplated Change of Control"). No other transaction affecting the assets, shares or agreements of the Company is hereby authorized by the Administrative Agent and the Banks. Section 4. Representations and Warranties. To induce the Administrative Agent and each Bank to consent to the Contemplated Change of Control and to enter into this Fourth Amendment, each of the Company and the Guarantors hereby represents and warrants that each of the representations and warranties set forth in Section 8 of the Credit Agreement is true, correct and complete on and as of the date of this Fourth Amendment (whether or not the Fourth Amendment Effective Date (as defined in Section 5 hereof) occurs), and on and as of the Fourth Amendment Effective Date, both before and after giving effect to the amendments set forth in Section 2 of this Fourth Amendment on either such date, as if each reference therein to "this Agreement" were a reference to "this Agreement as amended by the Fourth Amendment", except that the representations and warranties in the last sentence of Section 8.2 of the Credit Agreement shall, each time when they are made under this Section 4, be deemed to have been amended as provided in Section 2(f) of this Fourth -5- 6 Amendment. Each of the Company and the Guarantors further represents and warrants that, as of the date of this Fourth Amendment and as of the Fourth Amendment Effective Date, no Default or Event of Default has occurred and is continuing. Section 5. Conditions Precedent to Effectiveness. The amendments set forth in Section 2 of this Fourth Amendment and the consent of the Administrative Agent and the Banks set forth in Section 3 of this Fourth Amendment shall become effective as of the date (the "Fourth Amendment Effective Date"), as specified by the Administrative Agent, when counterparts hereof shall have been duly executed and delivered by the Majority Banks, the Administrative Agent, the Company and each of the Guarantors, and when each of the conditions precedent set forth in this Section 5 shall have been fulfilled to the satisfaction of the Administrative Agent; provided that, as of the Fourth Amendment Effective Date, (i) the amendment set forth in Section 2(a) of this Fourth Amendment shall be deemed to be effective as of November 27, 1995 and (ii) the amendments set forth in Sections 2(c) and 2(h) of this Fourth Amendment shall be deemed to be effective as of December 31, 1995: A. The Administrative Agent shall have received each of the following documents, each of which shall be satisfactory to the Administrative Agent in form and substance: (1) Certified copies of all corporate action and (if necessary) stockholder action taken by the Company and each Guarantor approving this Fourth Amendment and the Credit Agreement, as amended hereby, and the consummation of the transactions contemplated hereby and thereby (including, without limitation, a certificate setting forth the resolutions of the Boards of Directors of the Company and each Guarantor adopted in respect of the transactions contemplated hereby and thereby). (2) A certificate of each of the Company and each Guarantor in respect of each of the officers (i) who is authorized to sign this Fourth Amendment on its behalf and (ii) who will, until replaced by another officer or officers duly authorized for that purpose, act as its representative for the purposes of signing documents and giving notices and other communications in connection with the Credit Agreement, as amended hereby, and the transactions contemplated thereby and hereby. The Administrative Agent, the Agent, the Co-Agents and the Banks may conclusively rely on such certificate until the Administrative Agent receives notice in writing from the Company or either Guarantor, respectively, to the contrary. (3) A certificate of each of the Company and each Guarantor as to (i) the absence of changes to the -6- 7 certified copies of the certificate of incorporation and by-laws of the Company and each Guarantor delivered to the Administrative Agent and the Banks on the Third Amendment Effective Date and (ii) the continued good standing of the Company and each Guarantor in each jurisdiction in which the Company and each Guarantor are incorporated or qualified to do business. (4) An opinion of Counsel to the Company and the Guarantors, substantially in the form of Annex A hereto. (5) A certificate of a senior officer of each of the Company and each Guarantor to the effect set forth in Section 5.C of this Fourth Amendment. (6) Evidence of the payment of the fees provided for in Section 5.B of this Fourth Amendment, and of all other fees and expenses then payable, including, without limitation, pursuant to Section 12.3 of the Credit Agreement. (7) Evidence of payment (to the extent then payable) of (a) all interest on the Loans outstanding under the Credit Agreement and (b) all facility fees accrued through the Fourth Amendment Effective Date. (8) Evidence of the fulfillment of all the conditions precedent to the effectiveness of the consent to the Contemplated Change of Control under, and the amendments to, the BNY Facility Agreement, which shall be substantially in the same form as the consent and amendments set forth in this Fourth Amendment. (9) Such other documents and information as the Administrative Agent or any Bank may reasonably request, including, without limitation, all requisite governmental approvals and filings. B. The Company shall have paid to the Administrative Agent, for the account of each Bank, a non-refundable amendment fee in an amount equal to .05% of the amount of such Bank's Commitment (whether or not utilized) as in effect immediately prior to the Fourth Amendment Effective Date. C. As of such date: (1) No Default or Event of Default shall have occurred and be continuing; and (2) The representations and warranties made by the Company and each of the Guarantors in Section 4 hereof and -7- 8 in any other certificate or other document delivered in connection with this Fourth Amendment or the Credit Agreement, as amended hereby, shall be true, correct and complete on and as of each such date with the same force and effect as if made on and as of such date. The Administrative Agent will promptly notify the other parties of the occurrence of the Fourth Amendment Effective Date. Section 6. Condition Subsequent to Effectiveness. The consent of the Administrative Agent and the Banks to the Contemplated Change of Control set forth in Section 3 of this Fourth Amendment shall be subject to receipt by the Company on or before March 31, 1996 of cash proceeds in an aggregate principal amount of at least $50,000,000 from the issuance of Permitted Subordinated Debentures. Section 7. Miscellaneous. A. This Fourth Amendment may be executed in any number of counterparts, all of which taken together and when delivered to the Administrative Agent shall constitute one and the same instrument, and any of the parties hereto may execute this Fourth Amendment by signing any such counterpart. B. Each of the Company and each Guarantor hereby confirms its obligation, pursuant to Section 12.3(a) of the Credit Agreement, to pay all of the Administrative Agent's costs and expenses (including, without limitation, the reasonable fees and expenses of all special counsels to the Administrative Agent) in connection with this Fourth Amendment, whether or not the Fourth Amendment Effective Date occurs. C. THIS FOURTH AMENDMENT AND THE CREDIT AGREEMENT AS AMENDED HEREBY SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK. -8- 9 D. Except as expressly set forth in this Fourth Amendment, the Credit Agreement as amended prior to the date hereof shall remain unmodified and in full force and effect. IN WITNESS WHEREOF, the parties hereto have caused this Fourth Amendment to be duly executed as of the date first above written. HOME SHOPPING NETWORK, INC., as Borrower By /s/ Kevin J. McKeon ---------------------------------- Title: Sr. V.P. of Accounting and Finnace and Treasurer HOME SHOPPING CLUB, INC., as a Guarantor By /s/ Kevin J. McKeon ---------------------------------- Title: Secretary and Treasurer HSN REALTY, INC., as a Guarantor By /s/ Kevin J. McKeon ---------------------------------- Title: Secretary and Treasurer The Banks --------- LTCB TRUST COMPANY, as a Bank and as Agent By /s/ John A. Knob ---------------------------------- Title: Senior Vice President THE BANK OF NEW YORK COMPANY, INC., as a Bank and as a Co-Agent By /s/ Kalpana Raina ---------------------------------- Title: Senior Vice President TORONTO DOMINION [TEXAS], INC., as a Bank and as a Co-Agent By /s/ Diane Bailey ---------------------------------- Title: Vice President -9- 10 BANK OF MONTREAL, as a Bank and as a Co-Agent By /s/ Yvonne Bos ---------------------------------- Title: Managing Director FIRST UNION NATIONAL BANK OF NORTH CAROLINA By /s/ J. F. Nelson ---------------------------------- Title: Senior Vice President PNC BANK, KENTUCKY, INC. By /s/ Ralph A. Phillips ---------------------------------- Title: Vice President THE DAIWA BANK, LIMITED By: THE SUMITOMO BANK, LIMITED, as Agent for The Daiwa Bank, Limited By /s/ Sybil H. Weldon ------------------------------- Title: Vice President & Manager By /s/ Allen L. Harvell, Jr. ------------------------------- Title: Vice President -10- 11 The Administrative Agent ------------------------ LTCB TRUST COMPANY, as Administrative Agent By /s/ John A. Knob ---------------------------------- Title: Senior Vice President The Collateral Agent -------------------- LTCB TRUST COMPANY, as Collateral Agent By /s/ John A. Knob ---------------------------------- Title: Senior Vice President -11- 12 FIRST AMENDMENT, dated as of February 13, 1996, to the LETTER OF THE CREDIT FACILITY AGREEMENT, dated as of September 28, 1995 (the "Agreement"), among HOME SHOPPING CLUB, INC., a Delaware corporation ("HSC"), HSN MAIL ORDER, INC., A Delaware corporation ("HSN Mail Order"), and HSN DIRECT, INC., a Delaware corporation ("HSN Direct"; together with HSC and HSN Mail Order, the "Applicants"), HSN REALTY, INC., a Delaware corporation ("HSNR"), and HOME SHOPPING NETWORK, INC., a Delaware corporation ("HSN"); together with HSNR, the "Guarantors"), THE BANK OF NEW YORK, (the "Issuer"), THE BANK OF NEW YORK COMPANY, INC. (the "Participant"), and THE BANK OF NEW YORK, as Administrative Agent (in such capacity, together with its successors, the "Administrative Agent"). WHEREAS, each of the Applicants and each of the Guarantors have requested, and the Issuer, the Participant and the Administrative Agent are willing, to amend certain provisions of the Agreement. NOW, THEREFORE, in consideration of the foregoing, and for other good and valuable consideration the receipt of which is hereby acknowledged, the parties hereby agree as follows: Section 1. Certain Defined Terms. Except as expressly set forth in this First Amendment, terms defined in the Agreement and used herein shall have their respective defined meanings when used herein. Section 2. Amendments to the Agreement. Subject to the fulfillment of the conditions precedent set forth in Section 5 hereof, the Agreement is hereby amended as follows: (a) Section 1.1 of the Credit Agreement is hereby amended by deleting the words "even date herewith" appearing in the third line of the definition of "Amended Revolving Credit Agreement" set forth in such Section and inserting the phrase "September 28, 1995, as further amended by the Fourth Agreement, dated as of February 13, 1996" lieu thereof. (b) Section 1.1 of the Agreement is hereby further amended by adding the following new definitions thereto in the appropriate alphabetical position as follows: "First Amendment" shall mean the First Amendment to this Agreement dated as of February 13, 1996. "First Amendment Effective Date" shall have the meaning assigned to that term in Section 5 of the First Amendment. "Permitted Subordinated Debentures" shall mean Indebtedness of HSN under convertible subordinated debentures up to approximately an aggregate principal amount of $100,000,000; provided that the Permitted Subordinated 13 Debentures (a) shall have a final maturity at least six months after the Commitment Termination Date under each of this Agreement and the Amended Revolving Credit Agreement, (b) shall be issued at par and shall bear interest at a rate per annum not greater than 8.5%, (c) shall be unsecured and (d) shall be expressly subordinated in all respects to the payment in full in cash of all of the Secured Obligations and all of the obligations of HSN and the other obligors under the Amended Revolving Credit Agreement; and, provided, further, that the terms of subordination of the Permitted Subordinated Debentures, including, without limitation, stop payment provisions which shall become effective upon the occurrence of an Event of Default under this Agreement, shall have been approved in writing in advance by the Issuer and the Participants holding a majority of the Participation Percentages hereunder. The Issuer and the Participants agree to respond promptly to any such request for approval made by HSN. (c) Section 6 of the Agreement is hereby amended by inserting the phrase ", except that the representations and warranties set forth in the last sentence of Section 8.2 of the Amended Revolving Credit Agreement shall be as in effect on the First Amendment Effective Date" immediately after the words "date hereof" appearing in the fifth line of the first sentence thereof. (d) Section 7 of the Agreement is hereby amended by (i) deleting the words "to a waiver" in both places where they appear in the provided, however clause of the first sentence thereof and inserting the words "or waivers" in lieu thereof and (ii) deleting the word "to" in the second sentence thereof and inserting the word "the" in lieu thereof. (e) Section 7 of the Agreement is hereby further amended by adding the following new Section 7.4: 7.4. Permitted Subordinated Debentures. HSN shall not amend, modify, terminate or waive any of the terms and conditions of the Permitted Subordinated Debentures or any agreement or document related thereto or any term thereof in any manner which would have any adverse effect upon the rights of the Issuer and the Participants. (f) Section 8(e) of the Agreement is hereby amended by deleting the parenthetical appearing therein and inserting " (as in effect on the First Amendment Effective Date") in lieu thereof. (g) References in the Agreement to "this Agreement" and the words "hereof", "herein", "hereto" and the like, shall refer to the Agreement as amended by this First Amendment; -2- 14 provided that the words "the date of this Agreement" and "the date hereof" shall continue to refer to the date of the Agreement (being September 28, 1995). Section 3. Consent of the Administrative Agent, the Issuer and the Participant to the Contemplated Change of Control and the Amendments to the Amended Revolving Credit Agreement. (a) Subject to the fulfillment of the conditions set forth in Sections 5 and 6 of this First Amendment, the Administrative Agent, the Issuer and the Participant hereby consent to the consummation of (i) the transfer by Liberty Media Corporation, a Wholly-Owned Subsidiary of Tele-Communications, Inc., a Delaware corporation (formerly called TCI/Liberty Holdings, Inc., "TCI"), of all of its shares of HSN's common stock to Silver King Communications, Inc. substantially in the manner described in Amendment No. 2 to the Schedule 13D of TCI (as filed with the Securities and Exchange Commission on November 30, 1995, a copy of which has been provided to the Administrative Agent, the Issuer and the Participant (the "Schedule 13D")), and (ii) the other transactions described in the Schedule 13D substantially in the manner described therein (collectively, the "Contemplated Change of Control"). No other transaction affecting the assets, shares or agreements of HSN is hereby authorized by the Administrative Agent, the Issuer and the Participant. (b) Subject to the fulfillment of the conditions set forth in Section 5 of this First Amendment, the Administrative Agent, the Issuer and the Participant hereby consent to the amendments to be made to the Amended Revolving Credit Agreement, including, without limitation, the amendments to be made to Sections 9.13, 9.18, 9.20(a) and 9.20(d) thereof, set forth in the Fourth Amendment thereto, dated as of the date hereof, a copy of which has been provided to the Administrative Agent, the Issuer and the Participant. No other amendment to the Amended Revolving Credit Agreement is hereby authorized by the Administrative Agent, the Issuer and the Participant. Section 4. Representations and Warranties. To induce the Administrative Agent, the Issuer and the Participant to consent to the Contemplated Change of Control and each of the amendments to the Amended Revolving Credit Agreement set forth in the Fourth Amendment thereto, dated as of the date hereof, and to enter into this First Amendment, each of the Applicants and the Guarantors hereby represents and warrants that each of the representations and warranties set forth in Section 6 of the Agreement is true, correct and complete on and as of the date of this First Amendment (whether or not the First Amendment Effective Date (as defined in Section 5 hereof) occurs), and on and as of the First Amendment Effective Date, both before and after giving effect to the amendments set forth in Section 2 of this First Amendment on either such date, as if each reference -3- 15 therein to "this Agreement" were a reference to "this Agreement as amended by the First Amendment", except that the representations and warranties in the last sentence of Section 8.2 of the Amended Revolving Credit Agreement incorporated in the Agreement by reference shall, each time when they are made under this Section 4, be deemed to have been amended as provided in Section 2(c) of this First Amendment. Each of the Applicants and the Guarantors further represents and warrants that, as of the date of this First Amendment and as of the First Amendment Effective Date, no Default or Event of Default has occurred and is continuing. Section 5. Conditions Precedent to Effectiveness. The amendments set forth in Section 2 of this First Amendment and the consents of the Administrative Agent, the Issuer and the Participant set forth in Section 3 of this First Amendment shall become effective as of the date (the "First Amendment Effective Date"), as specified by the Administrative Agent, when counterparts hereof shall have been duly executed and delivered by the Participant, and the Administrative Agent, the Issuer, each of the Applicants and each of the Guarantors, and when each of the conditions precedent set forth in this Section 5 shall have been fulfilled to the satisfaction of the Administrative Agent: A. The Administrative Agent shall have received each of the following documents, each of which shall be satisfactory to the Administrative Agent in form and substance: (1) Certified copies of all corporate action and (if necessary) stockholder action taken by each Applicant and each Guarantor approving this First Amendment and the Agreement, as amended hereby, and the consummation of the transactions contemplated hereby and thereby (including, without limitation, a certificate setting forth the resolutions of the Boards of Directors of each Applicant and each Guarantor adopted in respect of the transactions contemplated hereby and thereby). (2) A certificate of each Applicant and each Guarantor in respect of each of the officers (i) who is authorized to sign this First Amendment on its behalf and (ii) who will, until replaced by another officer or officers duly authorized for that purpose, act as its representative for the purposes of signing documents and giving notices and other communications in connection with the Agreement, as amended hereby, and the transactions contemplated thereby and hereby. The Administrative Agent, the Issuer and the Participant may conclusively rely on such certificate until the Administrative Agent receives notice in writing from -4- 16 any Applicant or either Guarantor, respectively, to the contrary. (3) A certificate of each Applicant and each Guarantor as to (i) the absence of changes to the certified copies of the certificate of incorporation and by-laws of each Applicant and each Guarantor delivered to the Administrative Agent, the Issuer and the Participant on September 28, 1995 and (ii) the continued good standing of each Applicant and each Guarantor in each jurisdiction in which each Applicant and each Guarantor are incorporated or qualified to do business. (4) A certificate of a senior officer of each Applicant and each Guarantor to the effect set forth in Section 5.B of this First Amendment. (5) Evidence of the fulfillment of all the conditions precedent to the effectiveness of the consent to the Contemplated Change of Control under, and the amendments to, the Amended Revolving Credit Agreement, which shall be substantially in the same form as the consent and amendments set forth in this First Amendment. (6) Such other documents and information as the Administrative Agent, the Issuer or the Participant may reasonably request, including, without limitation, all requisite governmental approvals and filings. B. As of such date: (1) No Default or Event of Default shall have occurred and be continuing; and (2) The representations and warranties made by each of the Applicants and each of the Guarantors in Section 4 hereof and in any other certificate or other document delivered in connection with this First Amendment or the Agreement, as amended hereby, shall be true, correct and complete on and as of each such date with the same force and effect as if made on and as of such date. The Administrative Agent will promptly notify the other parties of the occurrence of the First Amendment Effective Date. Section 6. Condition Subsequent to Effectiveness. The consent of the Administrative Agent, the Issuer and the Participant to the Contemplated Change of Control set forth in Section 3 of this First Amendment shall be subject to receipt by HSN on or before March 31, 1996 of cash proceeds in an aggregate -5- 17 principal amount of at least $50,000,000 from the issuance of Permitted Subordinated Debentures. Section 7. Miscellaneous A. This First Amendment may be executed in any number of counterparts, all of which taken together and when delivered to the Administrative Agent shall constitute one and the same instrument, and any of the parties hereto may execute this First Amendment by signing any such counterpart. B. Each Applicant and each Guarantor hereby confirms its obligation, pursuant to Section 11.3(a) of the Agreement, to pay all of the Administrative Agent's costs and expenses (including, without limitation, the reasonable fees and expenses of all special counsels to the Administrative Agent) in connection with this First Amendment, whether or not the First Amendment Effective Date occurs. C. THIS FIRST AMENDMENT AND THE AGREEMENT AS AMENDED HEREBY SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK. D. Except as expressly set forth in this First Amendment, the Agreement as amended prior to the date hereof shall remain unmodified and in full force and effect. IN WITNESS WHEREOF, the parties hereto have caused this First Amendment to be duly executed as of the date first above written. HOME SHOPPING CLUB, INC., as an Applicant By /s/ Kevin J. McKeon -------------------------------- Title: Treasurer HSN MAIL ORDER, INC., as an Applicant By /s/ Kevin J. McKeon -------------------------------- Title: Treasurer HSN DIRECT, INC., as an Applicant By /s/ Kevin J. McKeon -------------------------------- Title: Treasurer -6- 18 HSN REALTY, INC., as a Guarantor By /s/ Kevin J. McKeon -------------------------------- Title: Treasurer HOME SHOPPING NETWORK, INC., as a Guarantor By /s/ Kevin J. McKeon -------------------------------- Title: Treasurer THE BANK OF NEW YORK, as the Issuer By /s/ Wade Layton -------------------------------- Title: THE BANK OF NEW YORK, as the Administrative Agent By /s/ Wade Layton -------------------------------- Title: THE BANK OF NEW YORK COMPANY, INC., as the Participant By Kalpana Raina -------------------------------- Title: Senior Vice President -7- 19 ANNEX A [Form of Opinion of Counsel to the Company and the Guarantors] February 13, 1996 To the Banks party to the Credit Agreement referred to below and LTCB Trust Company, as Administrative Agent and as Collateral Agent Ladies and Gentlemen: I am the General Counsel to Home Shopping Network, Inc., a Delaware corporation (the "Company"), Home Shopping Club, Inc., a Delaware corporation ("HSC"), and HSN Realty, Inc., a Delaware corporation ("HSNR"; together with HSC, the "Guarantors"), and have acted as such in connection with the Fourth Amendment, dated as of February 13, 1996 (the "Fourth Amendment"), to the Second Amended and Restated Credit Agreement, dated as of August 30, 1994 (as amended by the First Amendment, dated as of March 29, 1995, as further amended by the Second Amendment, dated as of June 28, 1995, and as further amended by the Third Amendment, dated as of September 28, 1995, the "Credit Agreement"), among the Company, the Guarantors, the Banks named therein, LTCB Trust Company, as Agent, The Bank of New York Company, Inc., Toronto Dominion [Texas], Inc. and Bank of Montreal, as Co-Agents, LTCB Trust Company, as Administrative Agent, and LTCB Trust Company, as Collateral Agent, providing for loans to be made to the Company in the aggregate principal amount of $150,000,000 under the joint and several guarantee of the Guarantors. Terms defined in the Credit Agreement are used herein as defined therein. In rendering the opinions expressed below, we have examined and relied upon the originals or conformed copies of such corporate records, agreements and instruments of the Company and the Guarantors, certificates of public officials and of officers of the Company and the Guarantors, and such other documents and records, and such matters of law, as we have deemed appropriate as a basis for the opinions hereinafter expressed. Based upon the foregoing, I am of the opinion that: 20 1. Each of the Company and each of the Guarantors is a corporation duly incorporated, validly existing and in good standing under the laws of the State of Delaware; each of them has the necessary corporate power to enter into and perform the Fourth Amendment and the Credit Agreement as amended thereby and, in the case of the Company, to borrow under the Credit Agreement as amended by the Fourth Amendment. Each of the Guarantors is a Wholly-Owned Subsidiary of the Company. 2. The execution, delivery and performance by each of the Company and each of the Guarantors of the Fourth Amendment and the Credit Agreement as amended by the Fourth Amendment and the borrowings under the Credit Agreement as amended by the Fourth Amendment have been duly authorized by all necessary corporate action, and do not and will not violate any provision of law, regulation, order, writ, injunction or decree of any court or governmental authority or agency or any provision of the certificate of incorporation or by-laws of the Company or either Guarantor or result in the breach of, or constitute a default or require any consent under, or result in the creation of any Lien upon any of its respective properties, revenues or assets pursuant to, any indenture or other agreement or instrument to which the Company, either Guarantor or any Subsidiary of any thereof is a party or by which the Company or either Guarantor or any Subsidiary of any thereof or its respective properties may be bound, except pursuant to the Pledge Agreement. 3. The Fourth Amendment and the Credit Agreement as amended by the Fourth Amendment have been duly executed and delivered by the Company and each Guarantor and, assuming due execution and delivery thereof by the Administrative Agent and the Banks, constitute the legal, valid and binding obligations of the Company and each Guarantor enforceable in accordance with their respective terms, except as such enforceability may be limited by (a) bankruptcy, insolvency, reorganization, moratorium or other similar laws of general applicability affecting the enforcement of creditors' rights and (b) the application of general principles of equity (regardless of whether such enforceability is considered in a proceeding in equity or at law), and except that no opinion is expressed as to the fourth sentence of Section 4.7 of the Credit Agreement. 4. Except as disclosed to the Administrative Agent and the Banks in SEC Reports delivered to the Administrative Agent and the Banks prior to the date hereof, to my knowledge after due inquiry, there are no legal or arbitral proceedings, and no proceedings by or before any governmental or regulatory authority or agency, pending or threatened against or affecting the Company or either Guarantor or any of the Subsidiaries of any thereof, or any properties or rights of the Company or either Guarantor or any of the Subsidiaries of any thereof, which, if adversely determined, would have a material adverse effect on the -2- 21 consolidated financial condition or operations, or the business taken as a whole, of the Company, the Guarantors and the Subsidiaries. 5. As of February 13, 1996, there were 1,000 shares of capital stock of HSC and 1,000 shares of capital stock of HSNR issued and outstanding. All of such outstanding shares of capital stock constitute the Pledged Securities and are duly authorized, validly issued, fully paid and non-assessable and owned of record and beneficially by the Company, free and clear of any Lien, other than that created by the Pledge Agreement. I am admitted to practice law in the State of New York and the Commonwealth of Pennsylvania. The opinions expressed herein relate only to the laws of the State of New York, the General Corporation Law of the State of Delaware and the federal laws of the United States. The opinions expressed in this letter are based upon the law in effect on the date hereof, and I assume no obligation to revise or supplement this opinion should such law be changed in any respect by legislative action, judicial decision or otherwise. This opinion is being furnished to you solely for your benefit and only with respect to the transactions referred to herein. Accordingly, it may not be relied upon by any other person or entity without, in each instance, my prior written consent. Very truly yours, ------------------------------ Barry S. Augenbraun General Counsel -3- EX-10.35 5 HSN - EMPLOYMENT AGREEMENT DATED NOV. 11, 1995 1 EXHIBIT 10.35 EMPLOYMENT AGREEMENT EMPLOYMENT AGREEMENT dated as of November 24, 1995 between HOME SHOPPING NETWORK, INC., a Delaware corporation (the "Company"), and JAMES HELD ("Executive"). This Agreement sets forth the terms and conditions of Executive's employment by the Company as the Company's President and Chief Executive Officer. In consideration of the mutual covenants and agreements herein contained and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties, intending to be legally bound, do hereby agree as follows: 1. Term and Termination. (a) Term. The term of Executive's employment under this Agreement (the "Employment Term") shall commence on December 1, 1995 (the "Effective Date") and end on the fourth anniversary of such date. The Employment Term shall be automatically extended beyond the original four year term for successive one year periods unless at least one hundred eighty (180) days prior to the expiration of the original Employment Term or any subsequent renewal thereof, either party notifies the other party in writing that it is electing to terminate this Agreement at the expiration of the then current term. During the Employment Term, the Company agrees to employ Executive and Executive agrees to serve the Company upon and subject to the terms and conditions set forth in this Agreement. (b) Termination by the Company. Executive's employment by the Company may be terminated by the Company only as provided in clauses (i), (ii), (iii) and (iv) below. (i) Upon the death of Executive. (ii) Upon six (6) months' prior written notice from the Company to Executive (the "Notice Period"), in the event of an illness or other disability which has incapacitated Executive from performing his duties hereunder, as determined in good faith by the Board of Directors of the Company, for an aggregate of one hundred eighty (180) consecutive days during the twelve calendar months preceding the month in which such notice is given; provided, however, that in the event that prior to the end of the Notice Period, Executive recovers from such illness or other disability to an extent permitting him to perform his duties hereunder, the notice of termination pursuant to this clause (ii) shall be of no further force and effect. 2 (iii) At any time upon giving written notice of such termination to Executive and by (x) paying to Executive in a lump sum upon such termination an amount equal to Annual Base Salary (as hereinafter defined) that would have been payable to Executive had his employment by the Company continued until the expiration of the Employment Term and (y) committing to pay to Executive (as and when due as provided in Section 4) the amount of Annual Bonus (as hereinafter defined) that Executive would have been entitled to receive had his employment by the Company continued until the end of the fiscal year in which such termination occurred (such amount of Annual Bonus is hereinafter referred to as the "Remainder Bonus"). (iv) At any time for "Cause", which for purposes of this Agreement shall be deemed to have occurred only on the happening of any of the following: (A) the plea of guilty to, or conviction for, the commission of a felony offense by Executive; provided, however, that after indictment, the Company may suspend Executive from the rendition of services, but without limiting or modifying in any other way the Company's obligations under this Agreement; (B) a material breach by Executive of a material fiduciary duty owed to the Company; (C) a material breach by Executive of any of the covenants made by him in Sections 6 and 7 hereof; or (D) the willful and gross neglect by Executive of the material duties specifically and expressly required by this Agreement; provided, however, that any claim that "Cause", within the meaning of clauses (B), (C) or (D) above, exists for the termination of Executive's employment may be asserted on behalf of the Company only by a resolution duly adopted by two-thirds of the total number of members of the Board of Directors of the Company, and only after 15 days prior written notice to Executive during which period he may cure the breach or neglect that is the basis of any such claim, if curable; provided, further, that no state of facts that, with or without notice to Executive or the passage of time or both, would give rise to the right of the Company to terminate Executive's employment pursuant to clause (ii) of this Section 1(b) may, directly or indirectly, in whole or in part, be the basis for a claim that Cause, within the meaning of clause (D) above, exists for the termination of Executive's employment; provided, further, that during the period of twelve (12) months following a Change in Control (as hereinafter defined), Cause shall be deemed to have occurred only upon the happening of an event referred to in clause (A) above; and provided, further, that the term "material" as used in clauses (B), (C) and (D) above and in Section 10 hereof shall be -2- 3 construed by reference to the effect of the relevant action or omission on the Company and its subsidiaries taken as a whole. (c) Effect of Termination by the Company. If Executive's employment is terminated by the Company pursuant to Section 1(b) hereof, all Annual Base Salary and Annual Bonus (to the extent not otherwise included in Remainder Bonus) that has accrued in favor of Executive as of the date of such termination, to the extent unpaid or delivered, shall be paid or delivered to Executive on the date of termination. If Executive dies while employed by the Company or during the period that he is receiving payments pursuant to the immediately succeeding sentence and, in either case, prior to the expiration of the Employment Term, the Company shall, as promptly as practicable following Executive's death, pay to Executive's designated beneficiary or beneficiaries in a lump sum an amount equal to the Annual Base Salary that would have been payable to Executive had his employment by the Company continued until the expiration of the Employment Term plus the Remainder Bonus and his beneficiary or beneficiaries shall be eligible to receive benefits under the Company's life insurance and death benefit plans or practices in which he is participating, to the extent provided in such plans or practices. If Executive's employment is terminated pursuant to Section 1(b)(ii) of this Agreement, the Company shall (i) continue to pay to Executive his Annual Base Salary as and when the same would otherwise be due in accordance with Section 4 of this Agreement until the first to occur of the expiration of the Employment Term or the date of Executive's death and (ii) pay the Remainder Bonus to Executive on the date such payment is due pursuant to the terms of Section 4. The amounts payable by the Company pursuant to the foregoing two sentences shall be reduced by the amount of any long term disability benefits paid directly to Executive pursuant to any benefit or welfare plans maintained by the Company for Executive's benefit. The phrase "designated beneficiary or beneficiaries" shall mean the person or persons named from time to time by Executive in a signed instrument filed for this purpose with the Company. If the designation made in any such signed instrument shall for any reason be ineffective, of if there is no such designation, the phrase "designated beneficiary or beneficiaries" shall mean Executive's estate. With respect to the payment of Annual Base Salary in respect of time periods subsequent to the date of termination of Executive's employment with the Company, such amount shall be calculated at the annual rate of Executive's Annual Base Salary in effect at the time of termination and the calculation of the remaining Employment Term shall be made without consideration of any renewal thereof, unless at the time of such termination such renewal would otherwise be automatic. With respect to the payment of the Remainder Bonus, such amount shall be the amount which would have been payable to Executive as his Annual Bonus in accordance with this Agreement had Executive's employment continued until the end of the fiscal year of the Company in which such termination occurred, but without regard to any requirement that Executive be employed by the Company at any time following the conclusion of such succeeding fiscal year in order to receive his Annual Bonus; provided, however, that in the event Executive's employment is terminated as a result of his death or disability, the amount of the Remainder Bonus shall be not less than the minimum amount of Annual Bonus specified in Section 4. Notwithstanding the foregoing, in the event Executive's employment is terminated for Cause, Executive shall be entitled only to the amount specified in the first sentence of this paragraph (c) and shall not be entitled to any Remainder Bonus. -3- 4 (d) Termination by Executive. The Executive's employment may be terminated during the Employment Term by the Executive (i) for Good Reason or (ii) without any reason during the twelve (12) month period immediately following a Change in Control. For purposes of this Agreement, "Good Reason" shall mean: (A) the assignment to the Executive of any duties inconsistent in any respect with the Executive's position (including status, offices, titles and reporting requirements), authority, duties or responsibilities as contemplated by Section 2 of this Agreement, or any other action by the Company which results in a diminution in such position, authority, duties or responsibilities, excluding for this purpose an isolated, insubstantial and inadvertent action not taken in bad faith and which is remedied by the Company promptly after receipt of notice thereof given by the Executive; (B) any material breach of this Agreement by the Company which is not remedied by the Company promptly after receipt of notice thereof given by the Executive; (C) any purported termination by the Company of the Executive's employment otherwise than as expressly permitted by this Agreement; (D) any failure by the Company to comply with and satisfy Section 13 of this Agreement; or (E) failure to elect or appoint Executive to the Board of Directors within ninety (90) days of the Effective Date or failure to reelect Executive as a member of the Board of Directors or the removal of Executive as a member of such Board, in each case during the Employment Term; provided, however, that such failure to reelect or removal shall not constitute "Good Reason" during any period of the suspension of Executive's services pursuant to the proviso set forth in Section 1(b)(iv)(A). For purposes of this subsection (d), a determination of "Good Reason" by the Executive which is reasonable and is made in good faith shall be conclusive. (e) Effect of Termination by the Executive. If Executive terminates his employment with the Company pursuant to Section 1(d) of this Agreement, or if the Company terminates the Executive's employment under this Agreement in any way that is a breach of this Agreement by the Company, the Company shall (i) pay to Executive in a lump sum upon such termination an amount in cash equal to (x) all Annual Base Salary and Annual Bonus (to the extent not otherwise included in the Remainder Bonus) that has accrued in favor of Executive as of the date of termination, to the extent unpaid or delivered and (y) the Annual Base Salary that would have been payable to Executive had his employment by the Company continued until the expiration of the Employment Term, and (ii) commit to pay to Executive (as and when due as provided in Section 4) the Remainder Bonus. Amounts payable pursuant to the preceding sentence shall not be reduced by any amounts received by Executive from a subsequent employer in respect of any period -4- 5 subsequent to such termination. In addition, if the Executive is terminated under the circumstances set forth in the first sentence of this Section 1(e), the Company shall reimburse Executive for the costs and expenses (which shall be limited to the costs and expenses of physically relocating, such as moving expenses, but shall not include matters such as the reimbursement of temporary housing expenses) relating to the relocation of Executive and his family to an area within the continental United States specified by Executive. In the event Executive terminates his employment other than for Good Reason or pursuant to Section 1(d)(ii), Executive shall be entitled to receive only the amount specified in clause (i)(x) in the second preceding sentence. (f) Survival. Upon termination of Executive's employment and payment of the amounts due Executive pursuant to Section 1 of this Agreement, the obligations of the Company and the Executive under this Agreement shall terminate, except that the Company's obligations with respect to the payment of amounts upon the death or disability of Executive set forth in the second and third sentences of Section 1(c) (if and to the extent applicable), Section 1(h) (Continuation of Benefits), Section 4(e) (Indemnification), Section 5 (Reimbursement of Expenses) (as it relates to expenses incurred prior to such termination, including, without limitation, relocation expenses incurred pursuant to Section 5(c) and Schedule 5(c)), Section 12 (Options) and Section 13 (Successors), and the Executive's obligations under Sections 6 (Noncompetition), 7 (Confidentiality), 8 (Delivery of Materials) and 9 (Noninterference), will survive (in accordance with the terms and conditions thereof) any such termination. (g) Change of Control. For purposes of this Agreement, a "Change of Control" shall mean the acquisition following the date hereof by any individual, entity or group within the meaning of Section 13(d)(3) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")(a "Person")(other than Barry Diller ("Diller"), Liberty Media Corporation ("Liberty") or Tele-Communications, Inc. ("TCI") or any of their respective subsidiaries (which, for purposes of this Section 1(g) shall be deemed to include any entity in which such person, directly or indirectly, owns at least a majority of the outstanding equity securities, without regard to the voting power of such securities or any proxy or other voting agreement granting voting power of such securities to any other person) or affiliates (within the meaning of Rule 12b-2 promulgated under the Exchange Act)), of (i) beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of a majority of the combined voting power of the then-outstanding voting securities of the Company entitled to vote generally upon matters submitted to the stockholders of the Company, (ii) all or substantially all of the assets of the Company, or (iii) in the event that Diller, Liberty, TCI or their respective subsidiaries or affiliates collectively cease to own, directly or indirectly, equity securities of the Company representing a majority of the voting power of the then-outstanding equity securities of the Company, beneficial ownership of the greatest of (x) equity securities of the Company representing 10 percent of the voting power of the then-outstanding equity securities of the Company, (y) equity securities of the Company having an aggregate voting power in excess of the aggregate voting power represented by the equity securities of the Company then owned, directly or indirectly, by Liberty and the members of its Stockholder Group (as defined in the Agreement, dated as of August 24, 1995, as amended, between Liberty and Diller), and (z) equity securities of the Company having an aggregate voting power in excess of the aggregate voting power represented -5- 6 by the equity securities of the Company then owned, directly or indirectly, by Diller and the members of his Stockholder Group. (h) Continuation of Certain Benefits. In the event Executive's employment is terminated due to death or disability or for any reason other than for Cause, or if Executive terminates under Section 1(d), then for the remainder of the Employment Term the Company shall continue benefits to the Executive and/or the Executive's family at least equal to those which would have been provided to them in accordance with this Agreement if the Executive's employment had not been terminated, in accordance with the most favorable plans, practices, programs or policies of the Company as in effect and applicable generally to other executives and their families; provided, however, that the Company may terminate such benefits if the Executive becomes reemployed with another employer and is eligible to receive similar benefits under such subsequent employer's benefit plans. For purposes of determining eligibility of the Executive for retiree benefits pursuant to the Company's plans, practices, programs and policies, the Executive shall be considered to have remained employed until the end of the Employment Term and to have retired on the last day of such period. 2. Services to be Rendered by Executive. The Company and Executive agree that Executive will serve the Company as its President and Chief Executive Officer and shall have the rights, powers, duties and obligations relating to such offices as is specified in the By-laws of the Company as in effect on the date of this Agreement. In such capacity, Executive shall perform all reasonable acts customarily associated with such positions, or necessary or desirable to protect and advance the best interests of the Company. Executive shall perform such acts and carry out such duties, and shall in all other respects serve the Company faithfully and to the best of his ability (subject, however, during the Transition Period (as defined below) to Executive fulfilling his duties to his prior employer as provided in the first sentence of Section 3 hereof). The Company and Executive acknowledge and agree that the Executive's primary reporting responsibility shall be to the current Chairman of the Board of Directors of the Company, and if the person currently serving as Chairman ceases to be Chairman, then to the Board of Directors. 3. Time to be Devoted by Executive. Executive agrees to devote substantially all of his business time, attention, efforts and abilities to the business of the Company and to use his best efforts to promote the interests of the Company; provided, however, that during the period from the Effective Date to January 3, 1996 (the "Transition Period"), the parties acknowledge and agree that the Executive shall be employed on a part-time basis while Executive fulfills certain obligations to his prior employer. During the Employment Term it shall not be a violation of this Agreement for the Executive to (i) serve on corporate, civic or charitable boards or committees, (ii) fulfill speaking engagements and (iii) manage personal investments, so long as such activities do not significantly interfere with the performance of the Executive's responsibilities as an employee of the Company in accordance with this Agreement. -6- 7 4. Compensation. (a) Salary. During the Employment Term, the Executive shall receive an annual base salary of not less than $500,000 ("Annual Base Salary"), which amount shall be reviewed at least annually and may not be decreased during the Employment Term and which shall be paid in accordance with the Company's customary payroll practices for salaried employees. (b) Annual Bonus. In addition to Annual Base Salary, the Executive shall be entitled to receive an annual bonus (the "Annual Bonus") calculated in accordance with the provisions set forth on Exhibit A hereto. The Annual Bonus shall be paid as soon as practicable following the Company's receipt of audited financial results in each year and in any event not later than 90 days after the conclusion of each fiscal year. All payments of Annual Bonus shall be made in cash, without liability for interest on any such payment by the Company. All payments of Annual Bonus shall, when paid, be subject to a deduction for any or all taxes required by any government to be withheld by the Company and paid over to such government for the account of Executive. The payment to any such government of an amount so withheld shall be deemed a payment thereof to Executive. Executive acknowledges and agrees that the Company's obligation to pay the Annual Bonus is an unfunded, unsecured obligation of the Company, and that nothing contained herein shall give the Executive any rights greater than those of a general creditor of the Company. (c) Benefits. During the Employment Term, the Executive (including, where applicable, Executive's family) shall be entitled to benefits in accordance with the welfare benefit and incentive plans, practices, programs and policies of the Company (including, but not limited to, retirement, savings, incentive and stock compensation plans, employee stock purchase plans, medical, death and disability, and life and other insurance plans and policies), and the minimum service eligibility conditions of such plans shall be waived unless such a waiver would adversely affect the plan or the participants therein. (d) Vacation. During the Employment Term, the Executive shall be entitled to four weeks of paid vacation per year or such longer period as may be provided by the Company in accordance with the plans, policies, programs and practices of the Company applicable to executives of the Company generally. (e) Indemnification. (i) In addition to any separate agreements between Executive and the Company relating to indemnification, the Company will indemnify and hold harmless Executive, to the fullest extent permitted by applicable law, but subject to the provisions of clause (iv) below, in respect of any liability, damage, cost or expense (including reasonable counsel fees) incurred in connection with the defense of any claim, action, suit or proceeding to which he is a party, or threat thereof, by reason of his being or having been an officer or director of the Company or any subsidiary or affiliate of the Company, or his serving or -7- 8 having served at the request of the Company as a director, officer, employee or agent of another corporation or of a partnership, joint venture, trust, business organization, enterprise or other entity, including service with respect to employee benefit plans. Without limiting the generality of the foregoing, the Company will pay the expenses (including reasonable counsel fees) of defending any such claim, action, suit or proceeding in advance of its final disposition, upon receipt of an undertaking by Executive to repay all amounts advanced if it should ultimately be determined that Executive is not entitled to be indemnified under this Section. (ii) In addition to the foregoing, the Company agrees to pay promptly as incurred, to the full extent permitted by law, all legal fees and expenses incurred by Executive in connection with the defense (including in connection with the defense of counterclaims or cross-claims) of any claim, action, suit or proceeding relating to the enforcement by the Company (including claims, actions, suits or proceedings brought in the right of the Company) of the provisions of Sections 6, 7, 8 or 9 of this Agreement; provided, however, that in the event that the Company (or any person asserting the Company's right) is the prevailing party in such enforcement action (as determined by a court of competent jurisdiction in a final adjudication not subject to appeal), the Executive shall reimburse the Company for all payments made by it pursuant to this Section 4(e)(ii). (iii) Except as otherwise provided in Section 4(e)(ii) above, the Company agrees to pay promptly as incurred, to the full extent permitted by law, all legal fees and expenses which Executive may reasonably incur as a result of any contest (regardless of the outcome thereof) by the Company, Executive or others of the validity or enforceability of, or liability under any provision of this Agreement or any guarantee of performance thereof (including as a result of any contest by Executive about the amount of any payment pursuant to this Agreement), plus in each case interest on any delayed payment at the applicable Federal rate provided for in Section 7872(f)(2)(A) of the Internal Revenue Code of 1986, as amended. (iv) Notwithstanding anything contained herein to the contrary, the Company shall not be obligated to indemnify Executive or advance or reimburse expenses pursuant to this Section 4(e) with respect to any claims, actions, suits or proceedings which arise out of, or relate to any termination of Executive's employment or other arrangements with any prior employer, including, but not limited to, matters relating to non-competition and confidentiality agreements. 5. Expenses; Relocation Expenses; Loan; Automobile. (a) During the Employment Term, the Executive shall be entitled to receive prompt reimbursement for all reasonable expenses incurred by the Executive in accordance with the policies, practices and procedures of the Company. -8- 9 (b) In addition, the Company shall reimburse Executive for the costs and expenses relating to the temporary and permanent relocation of Executive and his family to the Tampa, Florida area, including, but not limited to, reimbursement of Executive for all reasonable temporary housing expenses for Executive and his family during the period of their temporary relocation, not to exceed a reasonable period, plus any taxes imposed upon Executive with respect to such reimbursed expenses. (c) In connection with Executive's relocation to the Tampa, Florida area, the Company agrees to make a loan to the Executive in the principal amount of $1,000,000 for the purpose of purchasing and, if applicable, making improvements upon, a residence in the area. In the event that, after completion of the improvements to be undertaken by Executive within a reasonable period of time following the purchase of such residence, the fair market value of such residence is less than $800,000, the Executive shall repay a portion of the principal amount of the loan in an amount equal to the difference between such fair market value and $800,000. The other terms of such loan shall be as follows: (i) The loan shall be evidenced by a note executed by Executive and secured by a first mortgage upon such residence. (ii) The loan shall bear interest at 5.0% per annum. (iii) Executive shall be required to pay only the interest payable (which shall be payable on a monthly basis) on such loan prior to the principal amount of such loan becoming due and payable as provided below. (iv) The principal amount of such loan, together with any accrued and unpaid interest thereon, shall become due and payable (x) in the event Executive's employment with the Company is terminated for any reason, on the first anniversary of such termination or (y) in the event such residence is sold or transferred, immediately upon the consummation of such sale or transfer. (d) Executive shall be entitled during the Employment Term to the use of a luxury automobile supplied to him by the Company. The Company shall bear all costs and expenses associated with the acquisition and use of such automobile, including but not limited to, fuel, maintenance and insurance. 6. Noncompetition. Executive agrees that while in the employ of the Company and, if Executive terminates his employment with the Company prior to the expiration of the Employment Term in breach of his obligations hereunder, for the period beginning on the date Executive terminates his employment and ending on the date the Employment Term was otherwise scheduled to expire (the "Subject Period"), Executive will not, directly or indirectly, as principal or agent, or in any other capacity, own, manage, operate, participate in or be employed by or otherwise be interested in, or connected in any manner with, any person, firm, corporation or other enterprise which directly competes in a material respect with the business of the Company or any of its -9- 10 majority-owned subsidiaries as it is conducted while Executive is employed by the Company, except as provided in Schedule 6 hereto. Nothing herein contained shall be construed as denying Executive the right to own securities of any such corporation which is listed on a national securities exchange or quoted in the National Association of Security Dealers, Inc. Automated Quotation System to the extent of an aggregate of 5% of the total number or voting power of such securities outstanding. 7. Confidentiality. Executive agrees that while in the employ of the Company (otherwise than in the performance of his duties hereunder) and during the period of two years following the scheduled expiration of the Employment Term, he shall not, directly or indirectly, make use of, or divulge to any person, firm, corporation, entity or business organization, and shall use his best efforts to prevent the publication or disclosure of, any Confidential Information (as hereinafter defined) concerning the Company, but this Section 7 shall not prevent Executive from responding to any subpoena, court order or threat of other legal duress, provided Executive notifies the Company thereof with reasonable promptness so that the Company may seek a protective order or other appropriate relief. The term "Confidential Information" shall mean information disclosed to Executive by the Company in connection with his employment relating to the business of the Company, including its accounts and finances, customers and customer lists, and its future plans and proposals, to the extent that the foregoing matters are considered proprietary by the Company; provided, however, that the following shall not be deemed to be Confidential Information: (a) information which is or becomes publicly known other than as a result of a breach of this provision by Executive; (b) information lawfully in the possession of Executive prior to disclosure to him by the Company; (c) information disclosed to Executive by any third party who is not affiliated with the Company or otherwise subject to a confidentiality obligation in favor of the Company; or (d) information developed independently by Executive subsequent to the termination of Executive's employment by the Company. 8. Delivery of Materials. Executive agrees that upon the termination of his employment he will deliver to the Company all documents, papers, materials and other property of the Company relating to its affairs which may then be in his possession or under his control. 9. Noninterference. Executive agrees that he will not, while in the employ of the Company and, in the event Executive terminates his employment with the Company prior to the expiration of the Employment Term in breach of his obligations hereunder, during the Subject Period, solicit the employment of any employee of the Company on behalf of any other person, firm, corporation, entity or business organization, or otherwise interfere with the employment relationship between any employee or officer of the Company and the Company. -10- 11 10. Remedies of the Company. Executive agrees that, in the event of a material breach by Executive of this Agreement, in addition to any other rights that the Company may have pursuant to this Agreement, the Company shall be entitled, if it so elects, to institute and prosecute proceedings at law or in equity to obtain damages with respect to such breach or to enforce the specific performance of this Agreement by Executive or to enjoin Executive from engaging in any activity in violation hereof. Executive agrees that because Executive's services to the Company are of such a unique and extraordinary character, a suit at law may be an inadequate remedy with respect to a breach by Executive of Sections 6, 7, 8 and 9 hereof, and that upon any such breach or threatened breach by him of such Sections the Company shall be entitled, in addition to any other lawful remedies that may be available to it, to injunctive relief. 11. Notices. All notices to be given hereunder shall be deemed duly given when delivered personally in writing or mailed, certified mail, return receipt requested, postage prepaid and addressed as follows: (a) If to be given to the Company: Home Shopping Network, Inc. 2501 118th Avenue North St. Petersburg, Florida 33716 Attention: Chairman of the Board of Directors With a separate copy addressed to the Legal Department, Attention: General Counsel (b) If to be given to Executive: Home Shopping Network, Inc. 2501 118th Avenue North St. Petersburg, Florida 33716 Attention: President With a separate copy to: Kronish, Lieb, Weiner & Hellman L.L.P. 1114 Avenue of the Americas New York, New York 10036 Attention: Paul M. Ritter, Esq. and to: -11- 12 Steven M. Gerber, Esq. 1114 Avenue of the Americas 45th Floor New York, NY 10036-7798 or to such other address as a party may request by notice given in accordance with this Section 11. 12. Stock Options. (a) The Company hereby grants to Executive, effective November 24, 1994 (the "Grant Date"), but subject to (x) Executive having entered into this Agreement no later than December 7, 1995, and (y) the receipt of stockholder approval of a new Stock Option Plan (the "Plan") of the Company (which has been approved in principle by the Board of Directors of the Company), options (the "Options") to purchase up to 2,500,000 (the "Total Number of Options") shares of the Company's common stock, par value $.01 per share (the "Common Stock", which term shall include the Common Stock of the Company as it exists on the date hereof and any class or series into which it may hereafter have been changed). The Options granted hereunder (i) shall have an exercise price per share of $8.50 (such price being the closing price of the Common Stock on the trading day prior to the Grant Date); (ii) shall vest and become exercisable, subject to the provisions of Section 12(b) hereof, over four years as follows: 1/4 of the Total Number of Options shall vest and become exercisable on the first anniversary of the Grant Date, and an additional 1/4 of the Total Number of Options shall vest and become exercisable on each subsequent anniversary of the Grant Date, such that the Total Number of Options shall have become vested and exercisable upon the fourth anniversary of the Grant Date; and (iii) shall have a term expiring 10 years from the Grant Date. The Company covenants and agrees to use its reasonable best efforts to cause such Plan to be approved by the stockholders of the Company at the next annual or special meeting of stockholders. (b) Options granted hereunder shall provide that upon termination of Executive's employment by the Company without Cause, or by Executive for Good Reason or during the period described in Paragraph 1(d)(ii), or by reason of Executive's death or pursuant to Section 1(b)(ii), all outstanding but unexercised Options will immediately vest and be exercisable for one year; provided, however, that all Options shall terminate upon the 10th anniversary of the Grant Date. If Executive is terminated for Cause, the Options will be exercisable for not more than three months following the date of termination and then only to the extent vested as of the date of termination. If Executive terminates in violation of this Agreement, all Options shall immediately terminate and cease to be exercisable. (c) In the event of a stock dividend, recapitalization, reorganization, split-up, spin-off, combination, exchange of shares, warrants or rights offering to purchase Common Stock or other similar corporate event affecting the Common Stock such that an adjustment is required in order to preserve the benefits of this Section 12, an adjustment shall be made to increase or decrease any or all of (i) the number and kind of shares subject to the Options granted hereunder and/or (ii) the exercise price of the Options, in such manner as the Company's board of directors may deem -12- 13 reasonable and appropriate; provided, however, that the number of shares subject to the Options granted hereunder shall always be a whole number. (d) The grant of Options hereunder shall not affect in any way the right or power of the Company to make reclassifications, reorganizations or other changes of or to its capital or business structure or to merge, consolidate, liquidate, sell or otherwise dispose of all or any part of its business or assets. (e) Subject to the provisions hereof, the Executive may exercise one or more Options at any time when they are exercisable by giving written notice of exercise to the Company specifying: (i) the number of shares of Common Stock with respect to which the Options are being exercised; (ii) the method of withholding of taxes that the Executive has chosen in accordance with the Plan, if not previously specified; and (iii) whether the Executive elects to pay the exercise price by (A) tendering to the Company previously owned shares of Common Stock with an aggregate Fair Market Value (calculated as of the day before the date of exercise) equal to the aggregate exercise price of the Options being exercised or (B) delivering to the Company (1) a copy of an irrevocable instruction from the Executive to an underwriter or broker directing such underwriter or broker to sell shares of Common Stock to be acquired by the exercise of such Options in an amount, net of brokers' and underwriters' fees, commissions or discounts, sufficient to pay such exercise price in full, and promptly remit to the Company the amount of such exercise price, all of which arrangements shall be reasonably satisfactory to the Company, (2) irrevocable instructions from the Executive to the Company to withhold from the shares of Common Stock to be acquired by the exercise of such Options a number of shares having a Fair Market Value on the date of exercise sufficient to pay such exercise price in full or (3) a combination of the foregoing (in the case of (1), (2) or (3), a "Cashless Exercise"). The term "Fair Market Value" shall mean, as of any given date, the mean between the highest and lowest reported sales prices 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 that date or, if there are no reported sales on that date, on the next day after that date on which there are such reported sales. 13. Successors. (a) This Agreement is personal to the Executive and without the prior written consent of the Company shall not be assignable by the Executive otherwise than by will or the laws of descent and distribution. This Agreement shall inure to the benefit of and be enforceable by the Executive's legal representatives. However, no rights or obligations of the Company under this Agreement may be assigned or transferred by the Company except that such rights or obligations may be assigned or transferred pursuant to a merger or consolidation in which the Company is not the continuing entity or the sale or liquidation of all or substantially all of the assets of the Company. -13- 14 (b) This Agreement shall inure to the benefit of and be binding upon the Company and its successors and assigns. (c) The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to assume expressly and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. As used in this Agreement, "Company" shall mean the Company as hereinbefore defined and any successor to its business and/or assets as aforesaid which assumes and agrees to perform this Agreement by operation of law, or otherwise. 14. Miscellaneous. (a) This Agreement constitutes the entire agreement between the parties with respect to the subject matter hereof and replaces and supersedes as of the date hereof any and all prior agreements and understandings with respect to Executive's employment by the Company, whether oral or written, between the parties hereto. This Agreement may not be changed nor may any provision hereof be waived except by an instrument in writing duly signed by the party to be charged. This Agreement shall be interpreted, governed and controlled by the law of the State of Florida, without reference to principles of conflict of laws. (b) The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement. (c) The Company may withhold from any amounts payable under this Agreement such Federal, state or local taxes as shall be required to be withheld pursuant to any applicable law or regulation. (d) The Executive's or the Company's failure to insist upon strict compliance with any provision hereof or any other provision of this Agreement or the failure to assert any right the Executive or the Company may have hereunder, including, without limitation, the right of the -14- 15 Executive to terminate employment for Good Reason pursuant to Section 1(d) of this Agreement, shall not be deemed to be a waiver of such provision or right or any other provision or right of this Agreement. (e) This Agreement may be executed in counterparts, each of which shall be deemed to be an original, and all of which together shall be deemed to be one and the same instrument. IN WITNESS WHEREOF, this Agreement has been executed as of the day and year first above written. ATTEST: HOME SHOPPING NETWORK, INC. - -------------------------- By: Name: --------------------------- Title: Name: Title: --------------------------- James Held -15- 16 EXHIBIT A DETERMINATION OF ANNUAL BONUS The Executive's Annual Bonus for each fiscal year of the Company during the Employment Term shall be calculated as follows: The Executive's Annual Bonus shall equal the greater of (x) $150,000 or (y) in the event Actual EBITDA equals or exceeds Target EBITDA, $250,000 plus 1.25% of the amount by which Actual EBITDA exceed Target EBITDA for such fiscal year. Where: (i) "Actual EBITDA" means the earnings for the Company and its subsidiaries on a consolidated basis for the fiscal year in question, determined in accordance with generally accepted accounting principles consistently applied (except to the extent described in clause (ii) below), before interest, taxes, depreciation, amortization and any net extraordinary gains or losses of the Company or any such subsidiary for the fiscal year in question. (ii) "Target EBITDA" means $66.57 million (or such other amount as the Chairman of the Board and the Executive shall agree in good faith, based upon certain adjustments to the 1996 projected budget, constitutes the revised Target EBITDA, which revised budget a2and Target EBITDA shall have been approved by the Board of Directors), as such amount may be adjusted in good faith by the Board of Directors from time to time in order to give effect to (x) any accounting or other financial reporting changes adopted by the Company for periods subsequent to fiscal year 1995 or (y) without limiting in any manner the Company's ability to operate its business and structure the timing and amounts of income and expenses, changes in the calculation of EBITDA resulting from the inclusion of an item into income or expense which item had in fiscal year 1995 been included in a category which was not includable in the calculation of EBITDA. (By way of example, if the Company were to restructure its payments to cable system operators in such a way that, without effecting the Company's aggregate obligations to such operators, a higher percentage of the amount payable would be included as an expense item than is currently includable (by, for example, determining not to amortize such payments), then the calculation of EBITDA would be appropriated adjusted such that the basis upon which EBITDA is calculated from year to year is consistent). All determinations of EBITDA and Target EBITDA shall be based upon the information contained in the Company's audited financial statements, or in the event the Company is not required to publish financial information which has been audited by the Company's independent accountants 17 in any such year, the financial results of the Company for such year, prepared in accordance with generally accepted accounting practices consistently applied (except to the extent set forth in clause (ii) above), and certified by the Company's Chief Financial Officer. -2- EX-10.36 6 HSN - EMPLOYMENT AGREEMENT DECEMBER 15, 1995 1 EXHIBIT 10.36 EMPLOYMENT AGREEMENT This Employment Agreement ("Agreement") is entered into as of the 15th day of December, 1995, (the "Effective Date") by and between Mary Ellen Pollin ("Employee") and Home Shopping Network, Inc. ("the Company"). WHEREAS, the Company desires to employ Employee; and WHEREAS, Employee desires to be employed by the Company and commit to serve the Company on the terms herein provided. NOW, THEREFORE, in consideration of the foregoing and of the respective covenants and agreements of the parties herein contained, the parties agree as follows: 1. Position, Responsibilities and Term of Employment. 1.01 Employment and Duties. Subject to the terms and conditions of this Agreement, the Company agrees to employ Employee as Executive Vice President of Human Resources and Employee accepts such employment and agrees to perform in a diligent, careful and proper manner the responsibilities and duties of such position commencing December 15, 1995 (the "Commencement Date"). As long as employment with the Company continues, Employee shall comply with the Company's policies and procedures as in effect from time to time. 1.02 Term. Subject to the provisions of this Agreement, the term of this Agreement shall commence upon the Effective Date and shall continue for a four (4) year period from the Commencement Date (the "Term"), unless sooner terminated as provided in Section 4. Thereafter, this Agreement shall automatically renew for one (1) year on each December 15, unless either party provides notice of non-renewal, on or before October 15 of each year. 2. Compensation. 2.01 Signing Bonus. Upon execution hereof by both parties, the Company shall pay to Employee Fifty Thousand Dollars ($50,000), less applicable deductions pursuant to Section 2.06, as a one time signing bonus. 2 2.02 Salary. From and after the Commencement Date and during the remaining Term of this Agreement, the Company shall pay Employee a salary at the rate of Two Hundred Thirty-Five Thousand Dollars ($235,000) per year in accordance with the Company policy. Salary may be reviewed during the Term of this Agreement in accordance with the Company's policy and adjusted accordingly. Employee shall be paid once every two (2) weeks or in such other regular periodic installments, at least as frequently as monthly, as salary payments are generally made by the Company to its senior executives. 2.03 Participation in Benefit Plans. Employee shall be entitled to participate in, or receive benefits under, any of the Company's employee benefit plans as made available to other senior executives of the Company. 2.04 Stock Options. (a) Employee shall receive stock options to purchase fifty thousand (50,000) shares of the Company's common stock at an exercise price of $8.50 per share pursuant to the Company's 1986 Stock Option Plan for Employees, or the successor stock option plan thereto (the "Options"). The Options will be reflected in a separate agreement which shall provide, among other things, the terms set forth below. (b) Upon any termination of Employee's employment (i) by the Company for any reason other than death, disability or for Cause, or (ii) by Employee for Good Reason, all Options granted hereunder shall vest immediately and remain exercisable for a period of one year after such termination. Upon a termination of Employee's employment by the Company for Cause, or by Employee for other than Good Reason, any non-vested Options shall immediately expire and any vested Options shall expire three (3) months following such termination. Upon a termination of Employee's employment by reason of death or disability, the provisions of the Stock Option Plan as interpreted by the Compensation/Benefits Committee of the Board of Directors of the Company shall govern the exercisability of the Options and the period for which the Options are exercisable. 2.05 Vacation. Employee shall be entitled to four weeks of paid vacation per year, including during Employee's first year 2 3 of employment. Employee shall receive paid holidays and sick days in accordance with the Company's policies and procedures. 2.06 Deductions. All amounts payable under this Agreement shall be subject to such deductions as may from time to time be required to be made pursuant to law or governmental regulation or by agreement with or consent of Employee. 3. Relocation The Company shall pay to Employee her moving expenses from New York, New York to the Tampa Bay area in accordance with the Company's policies and procedures. 4. Termination of Employment. 4.01 Termination for Cause. Employee's employment under this Agreement may be terminated by the Company, prior to expiration of the Term, for Cause upon at least 30 days' prior written notice. The term "Cause" shall mean only one or more of the following: (a) Employee's conviction by a court of competent jurisdiction (which conviction, through lapse of time or otherwise, is not subject to appeal) of any felony, fraud or business crime; (b) Employee's possession or use of illegal drugs or prohibited substance, or Employee's excessive drinking of alcoholic beverages that impairs her ability to perform her duties under this Agreement; (c) Employee's commission of a tort or act of fraud upon the Company or material breach of her fiduciary duty to the Company; (d) a breach by Employee of any of the covenants made by Employee in Sections 5 and 6 hereof; or (e) Employee's continued failure or refusal to perform her duties under this Agreement, as determined by the Chief Executive Officer of the Company in good faith. If the Company terminates this Agreement for Cause, the Company shall pay to Employee her salary under this Agreement 3 4 through the date of termination specified in the Company's notice of termination, and her Options shall be exercisable as described in section 2.04(b). 4.02 Termination without Cause. The Company may terminate Employee's employment under this Agreement without Cause, in which case Employee's Options shall vest and be exercisable as described in section 2.04(b) and the Company shall pay to Employee: (a) Employee's salary under this Agreement through the date of termination and (b) the amount of salary Employee would have received under this Agreement during the remainder of the then current Term if this Agreement had not been terminated, payable periodically as provided in Section 2.02. The Company shall also maintain or pay the cost of maintaining during the remainder of the then current Term all medical and other health insurance benefits and coverage previously provided to Employee by the Company. Employee shall be required to mitigate the amount of any payment provided for in this Section 4.02 by seeking other employment, and the amount of any payment or benefits due hereunder shall be reduced by any compensation or benefits received by Employee as a result of her employment by any other person, firm or corporation. Employment as used in this paragraph includes self-employment and activities as a consultant, independent contractor or otherwise. As a condition precedent to receipt of any payment hereunder, Employee shall be required, at the time of termination, to execute a general release and waiver in favor of the Company. 4.03 Disability. In the event that Employee shall be physically or mentally disabled so as not to be able to perform her duties pursuant to this Agreement for any period of ninety (90) consecutive days or more, the Company shall have the right to terminate Employee's employment upon ninety (90) days prior written notice (the "Notice Period") of such termination to Employee, whereupon the Company shall continue to pay Employee her salary under this Agreement through the date of termination specified in the Company's notice of termination; provided, however, that in the event Employee, during the Notice Period, recovers from such disability to an extent permitting her to perform her duties hereunder, the notice of termination pursuant to this clause shall be of no further force and effect. 4.04 Death. This Agreement shall terminate upon the date of death of Employee, and the Company shall be obligated to 4 5 pay to Employee's estate her salary under this Agreement through the end of the calendar month in which her death occurred, as well as vacation and sick days in accordance with the Company policy. 4.05 By Employee. Employee may terminate her employment for Good Reason. The term "Good Reason" shall mean: (a) the assignment to Employee of any duties inconsistent with Employee's position as Executive Vice President of Human Resources, including status, title and reporting requirements, or any other action by the Company which results in a material diminution in Employee's position, authority, duties or responsibilities, excluding for this purpose an isolated, insubstantial or inadvertent action which is remedied by the Company promptly after receipt of notice thereof given by Employee; (b) any material breach of this Agreement by the Company which is not remedied by the Company promptly after receipt of notice thereof given by Employee; or (c) any purported termination by the Company of Employee's employment otherwise than as expressly permitted by this Agreement. If Employee believes "Good Reason" exists hereunder, Employee shall give written notice to the Chief Executive Officer of the Company specifying the reason for such belief. The Company shall have ten (10) business days after receipt of said notice to cure or respond to this notice, and during such period, Employee shall respond in good faith to any efforts made by the Company to respond to her concerns. Upon failure of the Company to redress the concerns within said ten (10) days, Employee may terminate her employment upon notice to the Company. If Employee terminates her employment with the Company in accordance with this Section 4.05, she shall receive the benefits described in Section 4.02, subject to the conditions specified in Section 4.02.. 5. Covenant and Confidential Information. (a) Non-Competition. During Employee's employment with the Company and for eighteen (18) months thereafter (but in no event less than 66 months from the Commencement Date), Employee shall not, directly or indirectly, on behalf of Employee or on 5 6 behalf of or with any other person, enterprise or entity, in any individual or representative capacity, engage or participate in any business, anywhere in the United States of America, that is engaged (a) in the sale of goods or services through broadcast or cable television or over telephone, cable, satellite transmission, computer network, or other communication system, or (b) in the business of mail order or catalog sales. Employee's obligations under this Section shall continue during the Term and for the period after the Term set forth above, and shall not, for any reason, cease upon termination of Employee's employment with the Company (whether for Cause, without Cause, Good Reason or otherwise). (b) Non-Solicitation. During Employee's employment with the Company and for eighteen (18) months thereafter (but in no event less than 66 months from the Commencement Date), Employee shall not solicit the employment of any employee of the Company or its subsidiaries on behalf of any other person, firm, corporation, entity or business organization, or otherwise interfere with the employment relationship between any employee of the Company and the Company. (c) Confidential Information. (i) Definition. "Confidential Information" means any information that relates to or is used in the business or operations of the Company or any of its affiliates and that is not generally known to the public, or that is competitively sensitive to the Company or any of its affiliates, including without limitation, personnel and employment information, customer lists, marketing methods, merchandise sources, methods of merchandising deemed proprietary by the Company, product and assortment selection, sales and price lists, product research or data, vendors, contractors, financial information, business plans and methods or other trade secrets of the Company, and all information that the Company or any of its affiliates is required to keep confidential pursuant to any confidentiality or non-disclosure agreement or that is otherwise delivered to the Company or any of its affiliates in confidence. Confidential Information includes information in any form whatsoever, including without limitation oral information, any notes, documents, files, records and information in any other written form, any magnetic, electric, digital and 6 7 other recording medium, and any products, equipment, technology and any other tangible object. (ii) Confidentiality Obligation. Employee shall preserve and protect the confidentiality of all Confidential Information and shall not, without the prior written consent of an executive officer of the Company or except as required in the course of Employee's employment with the Company, (i) remove any Confidential Information from the Company's premises or disclose, make available or transmit in any manner any Confidential Information to any other person, enterprise or entity, or (ii) use, directly or indirectly, any Confidential Information for Employee's own benefit or for the benefit of any other person, enterprise or entity. Employee's obligations under this Section 5(c) shall continue during the term and indefinitely after the term, and shall not, for any reason, cease upon termination of Employee's employment with the Company (whether by wrongful discharge or otherwise). (d) Proprietary Rights; Assignment. All Employee Developments shall be work made for hire by Employee for the Company. "Employee Developments" means any idea, discovery, invention, design, method, technique, improvement, enhancement, development, computer program, machine, algorithm or other work or authorship that (1) relates to the business or operations of the Company or any of its affiliates, or (2) results from or is suggested by any undertaking assigned to Employee or work performed by Employee for or on behalf of the Company or any of its affiliates, whether created alone or with others, during or after working hours. All Confidential Information and all Employee Developments shall remain the sole property of the Company and its affiliates. Employee shall acquire no proprietary interest in any Confidential Information or Employee Developments developed or acquired during the term. To the extent Employee may, by operation of law or otherwise, acquire any right, title or interest in or to any Confidential Information or Employee Development, Employee hereby assigns to the Company all such proprietary rights. Employee shall, both during and after the Term, upon the Company's request, promptly execute and deliver to the Company all such assignments, certificates and instruments, and shall promptly perform such other acts, as the Company may from time to time in 7 8 its discretion deem necessary or desirable to evidence, establish, maintain, perfect, protect, enforce or defend the Company's rights in Confidential Information and the Company Developments. (e) Remedies for Breach. Employee expressly agrees and understands that the remedy at law for any breach by Employee of this Section 5 will be inadequate and that damages flowing from such breach are not usually susceptible to being measured in monetary terms. Accordingly, it is acknowledged that upon Employee's violation of any provision of this Section 5, the Company shall be entitled to obtain from any court of competent jurisdiction (including without limitation in Pinellas or Hillsborough County, Florida) immediate injunctive relief and obtain a temporary order restraining any threatened or further breach as well as an equitable accounting of all profits or benefits arising out of such violation. Nothing in this Section 5 shall be deemed to limit the Company's remedies at law or in equity for any breach by Employee of any of the provisions of this Section 5 which may be pursued or available of by the Company. (f) Tolling of Periods. In the event Employee shall violate any provision of this Section 5 as to which there is a specific time period during which Employee is prohibited from taking certain actions or from engaging in certain activities, as set forth in such provision, then, such violation shall toll the running of such time period from the date of such violation until such violation shall cease. (g) Acknowledgment. Employee has carefully considered the nature and extent of the restrictions upon Employee and the rights and remedies conferred upon the Company under this Section 5, and Employee acknowledges and agrees that the same are reasonable in time and territory, are designed to eliminate competition, which otherwise would be unfair to the Company, do not stifle the inherent skill and experience of Employee, would not operate as a bar to Employee's sole means of support, are fully required to protect the legitimate interests of the Company, do not confer a benefit upon the Company disproportionate to the detriment to Employee and are material provisions without which the Company would not employ Employee pursuant to this Agreement. 6. Time to be Devoted by Employee. Employee agrees to devote substantially all of her business time, attention, efforts 8 9 and abilities to the business of the Company and to use her best efforts to promote, protect and advance the interests of the Company. 7. Delivery of Materials. Employee agrees that upon the termination of her employment she will deliver to the Company all documents, papers, materials and other property of the Company relating to its affairs which may then be in her possession or under her control. 8. Indemnification. In addition to any separate agreements between Employee and the Company relating to indemnification, or any indemnification provided under the Company's certificate of incorporation or by-laws, the Company will indemnify and hold harmless Employee, to the fullest extent permitted by applicable law, in respect of any liability, damage, cost or expense (including reasonable counsel fees) incurred in connection with the defense of any claim, action, suit or proceeding to which she is a party, or threat thereof, by reason of her being or having been an officer or director of the Company or any subsidiary or affiliate of the Company, or her serving or having served at the request of the Company as a director, officer, employee or agent of another corporation or of a partnership, joint venture, trust, business organization, enterprise or other entity, including service with respect to employee benefit plans. Without limiting the generality of the foregoing, the Company will pay the expenses (including reasonable counsel fees) of defending any such claim, action, suit or proceeding in advance of its final disposition, upon receipt of Employee's written agreement to repay all amounts advanced if it should ultimately be determined that Employee is not entitled to be indemnified under this Section. 9. Assignment. Neither this Agreement nor any rights or benefits hereunder may be assigned by the Company or Employee except that this Agreement may be assigned to a successor upon the Company's merger, consolidation or disposition of substantially all of its assets. 10. Miscellaneous. 10.01 Entire Agreement. This Agreement embodies the entire agreement and understanding between the Company and Employee relating to the subject matter hereof. This Agreement supersedes 9 10 and cancels all prior agreements between the Company and Employee, whether written or oral, relating to the employment of Employee. 10.02 Governing Law. This Agreement shall be construed in accordance with and governed for all purposes by the laws of the State of Florida without giving effect to Florida's choice of law principles. 10.03 Notice. Any notice, request, or instruction to be given hereunder shall be in writing and shall be deemed given when person ally delivered or sent by telecopy transmission or three days after being sent by United States mail, postage prepaid to the parties at their respective addresses set forth below: (a) To the Company: Home Shopping Club, Inc. 2501 118th Avenue North St. Petersburg, FL 33716 Attn: Legal Department (b) To Employee: Mary Ellen Pollin ------------------------ ------------------------ 10.04 Severability. If any section, subsection or provision hereof is found for any reason whatsoever to be invalid or inoperative, that section, subsection or provision shall be deemed severable and shall not affect the force and validity of any other provision of this Agreement. If any covenant herein is determined by a court to be overly broad thereby making the covenant unenforceable, the parties agree and it is their desire that such court shall substitute a reasonable judicially enforceable limitation in place of the offensive part of the covenant and that as so modified the covenant shall be as fully enforceable as if set forth herein by the parties themselves in the modified form. The covenants of Employee in this Agreement shall each be construed as an agreement independent of any other provision in this Agreement, and the existence of any claim or cause of action of Employee against the Company, whether predicated on this Agreement or otherwise, shall not constitute a defense to the enforcement by the Company of the covenants in this Agreement. 10 11 10.05 Amendment and Waiver. This Agreement may not be amended, supplemented or waived except by a writing signed by the party against which such amendment or waiver is to be enforced. The waiver by any party of a breach of any provision of this Agreement shall not operate to, or be construed as a waiver of, any other breach of that provision nor as a waiver of any breach of another provision. 10.06 Arbitration of Dispute. Except as set forth in Section 5, any controversy or claim arising out of or relating to this Agreement or to the breach thereof or to Employee's employment by the Company (other than claims expressly excluded by statute) shall be settled exclusively by binding arbitration conducted in the City of Tampa, Florida in accordance with the commercial rules of the American Arbitration Association then in effect (the "Rules"), by a single, independent arbitrator selected by the Company and Employee . If the parties can not agree on an arbitrator, within thirty (30) days of the commencement of an arbitration proceeding hereunder, either party may request that the American Arbitration Association select a candidate, with experience in employment law, in accordance with the Rules. The decision of the arbitrator shall be final and binding. Judgment upon the award rendered by the arbitrator may be entered in any court having jurisdiction thereof. The cost of any arbitration proceeding conducted hereunder shall be borne equally between Employee and the Company unless otherwise determined by the arbitrator. By signing this Agreement, Employee agrees that all disputes, except as set forth in the first sentence hereof, will be decided by mutual arbitration, and Employee is giving up any right to a jury trial or court trial. 10.07 Survival of Rights and Obligations. All rights and obligations of Employee or the Company arising during the Term of this Agreement shall continue to have full force and effect after the date that this Agreement terminates or expires. 10.08 Counterparts. This Agreement may be executed in two counterparts, each of which is an original but which shall together constitute one and the same instrument. 11 12 IN WITNESS WHEREOF, the parties have entered into this Agreement as of the Effective Date. HOME SHOPPING NETWORK, INC. By: ------------------------ JAMES G. HELD President and Chief Executive Officer EMPLOYEE ------------------------ MARY ELLEN POLLIN 12 EX-27 7 HSN - FINANCIAL DATA SCHEDULE (FOR SEC USE ONLY)
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE COMPANY'S FINANCIAL STATEMENTS ON FORM 8-K AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1000 YEAR DEC-31-1995 JAN-01-1995 DEC-31-1995 25,164 0 23,634 0 101,564 182,995 227,484 118,710 436,295 175,424 135,810 0 0 777 124,284 436,295 1,018,625 1,018,625 701,678 707,678 397,227 0 10,077 (95,205) (33,322) (61,883) 0 0 0 (61,883) (.69) (.69)
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