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USA NETWORKS, INC.
MEMORANDUM
TO: Transferring USA Entertainment Stock Option Holders
FROM: Julius Genachowski
DATE: February 20, 2002
RE: TREATMENT OF USAI OPTIONS
This memo describes what will happen to your USA Networks, Inc. ("USAI")
employee stock options when you transfer employment from USAi to Vivendi
Universal Entertainment ("VUE") upon the closing of the transaction (the "VUE
TRANSACTION") with Vivendi Universal ("VU").
We have agreed with VU on a program under which VU will grant options to
purchase VU American Depository Shares ("ADSS") -- the same kind of options held
by Universal Studios employees -- to replace USA Entertainment employees'
options that will terminate as a result of the VUE transaction. The replacement
grants will be designed to preserve the intrinsic or "spread" value of your
terminated USAi options - vested and unvested, "in-the-money" and "underwater" -
as well as the terms of those options. In addition, you will receive full credit
toward vesting for the service you have accumulated prior to the closing date of
the VUE Transaction (the "CLOSING DATE"). And finally, with regard to the
"special" options granted on April 25, 2001, in the spirit of the overall
transaction creating VUE, we have agreed with VU to allow for vesting upon the
Closing Date of the "special" options that would have vested during the 18-month
period following the Closing Date, and VU will grant vested VU options to
replace these USAi options (as well as granting unvested VU options to replace
the remaining unvested USAi options associated with that grant) when those
options terminate as a result of the VUE Transaction.
Upon the closing of the VUE Transaction, the various USAi subsidiaries
that comprise USA Entertainment will transfer in their entirety to VUE, and the
closing will accordingly have no legal effect on your employment with the USAi
subsidiary that you perform services for as of the Closing Date. However, your
employment with USAi will terminate. Accordingly, under the terms of the USAi
Stock Option Plans and the award agreements thereunder, your unvested USAi
options will terminate at the closing of the VUE Transaction, and your vested
USAi options will terminate 90 days (or three months, as applicable) after the
Closing Date (the "POST-CLOSING PERIOD"). Under the program described in this
memo, however, VU will replace, on the Closing Date, all unvested USAi options
that terminate at such time, and will replace, shortly after the Post-Closing
Period, all unexercised vested USAi options that terminate at the end of the
Post-Closing Period.
You need not take any action to receive grants of replacement VU options
in accordance with this memo, unless you hear otherwise from the Corporate
General Counsel's office.
Note that this memo and the replacement program it describes apply to
standard USAi options (i.e., options that vest in 25% increments over four
years; that, in the case of unvested options, terminate in their entirety upon
termination of employment with USAi; and that, in the case of vested options,
terminate 90 days (or three months, as applicable) after termination of
employment with USAi; as well as all of the "special" options granted on April
25, 2001, which all have identical terms), and all references to USAi options in
this memo refer to standard USAi options. Virtually all USAi option grants are
standard USAi options. The treatment of non-standard USAi options will be
handled individually among the option holder, USAi and VU.
1. UNVESTED USAI OPTIONS
A. REPLACEMENT VU OPTION GRANT. VU has agreed to grant, on the Closing
Date, unvested options to purchase VU ADSs ("VU OPTIONS") that are
intended to preserve the intrinsic (or "spread") value of the
unvested USAi options that will terminate on the closing of the VUE
Transaction, measured as described below during the ten-day trading
period immediately prior to the Closing Date. As noted above, under
the USAi Stock Option Plans and option agreements thereunder, all of
your USAi options that are unvested and outstanding on the Closing
Date will terminate. The number of VU Options that you will be
granted and the exercise prices of those options will be determined
by taking into consideration the average closing prices of USAi
common stock and VU ADSs during the 10-day trading period
immediately prior to the Closing Date. This is designed to preserve
the positive or negative intrinsic (or "spread") value in your
terminated USAi options - that is, to preserve both the
"in-the-money" or "underwater" spread of your terminated USAi
options. The specifics regarding the replacement VU Option grants
are discussed in detail below, and we have provided you with
hypothetical examples for illustrative purposes in Sections 5 and 6
of this memo.
B. VESTING AND OTHER TERMS OF REPLACEMENT VU OPTION GRANT. VU has
agreed that the vesting terms and vesting schedule (including credit
for the period of your service with USAi after the date of grant of
the USAi option and prior to the Closing Date) and all of the other
terms of the terminated USAi options will be preserved in the
replacement VU Option grants (including an expiration date identical
to the original expiration date of the terminated USAi options);
however, the definition of "change in control" that applied to your
USAi options will be replaced with the VU definition of change in
control (as set forth in the VU Stock Option Plan Regulations).
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C. FORM OF SHARES UNDERLYING REPLACEMENT VU OPTIONS. The form of VU
shares underlying your replacement VU Options will be VU ADSs, which
are publicly traded on the New York Stock Exchange. See Section 4 of
this memo for an explanation of what an ADS is.
2. VESTED USAI OPTIONS
A. REPLACEMENT VU OPTION GRANT. VU has agreed that, as soon as
administratively practicable following the expiration of the
Post-Closing Period (we expect it to be within a week after the
Post-Closing Period), VU will grant you fully vested VU Options
(assuming that you are employed by VUE or its affiliates on such
date of grant). The replacement VU Options are intended to preserve
the intrinsic (or "spread") value of the vested unexercised USAi
options that terminate at the end of the Post-Closing Period (that
is, those USAi options that are vested but have not been exercised
prior to or during the Post-Closing Period), measured as described
below during the ten-day trading period immediately prior to the
grant date. The number of VU Options that you will be granted and
the exercise prices of those options will be determined by taking
into consideration the average closing prices of USAi common stock
and VU ADSs during the 10-day trading period immediately prior to
the grant date of the replacement VU Options. This is designed to
preserve the positive or negative intrinsic (or "spread") value in
your terminated USAi options - that is to preserve both the
"in-the-money" or "underwater" spread of your terminated USAi
options. Of course, while you are permitted to exercise vested USAi
options during the Post-Closing Period, no replacement VU options
will be granted with respect to vested USAi options that have been
exercised. You will not be able to exercise your vested replacement
VU Options until VU actually grants such options.
B. TERMS OF REPLACEMENT VU OPTION GRANT. VU has agreed that the vested
replacement VU Options will contain the same terms as the
unexercised terminated USAi options (including an expiration date
identical to the original expiration date of the terminated USAi
options); however, the definition of "change in control" that
applied to your USAi options will be replaced with the VU definition
of change in control (as set forth in the VU Stock Option Plan
Regulations).
3. APRIL 25, 2001 "SPECIAL" USAI OPTIONS
A. TRIGGER ON CLOSING. The "special" USAi options granted on April 25,
2001 contained a provision under which, if you were terminated from
your job (as opposed to voluntarily leaving employment), you would
receive the benefit of accelerated vesting of the options that would
have vested 18 months after the termination. Even though the closing
of the VUE Transaction will not legally terminate your employment
with the employing entities being transferred to VUE, we have agreed
with VU that
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we will treat the closing as triggering the "18-month" vesting
provisions in the April 25, 2001 "special" grants. Thus, on the
closing of the VUE Transaction, the portion of the April 25, 2001
"special" grant that is not vested as of such date, but would have
become vested over the 18-month period following the Closing Date,
will become immediately vested as of the Closing Date.
B. TREATMENT AS VESTED USAI OPTIONS. The portion of your USAi options
that becomes vested as described in this Section 3 (if applicable to
you), and that remain unexercised at the end of the Post-Closing
Period will be considered part of your "vested options" and will be
treated in the same manner as any of your other vested but
unexercised USAi options under the terms as described in Section 2
above.
C. TREATMENT OF UNVESTED PORTION. A portion of the April 25, 2001
"special" grant will remain unvested after the application of the
18-month acceleration provision described above. These unvested USAi
options will be treated in the same manner as any of your other
unvested USAi options under the terms as described in Section 1
above and will vest as originally scheduled (i.e., 12.5% of the
original grant will vest on each of December 31, 2003, June 30, 2004
and December 31, 2004), except that the replacement VU Option
granted in respect of the remaining unvested "special" USAi option
will not contain an additional 18-month acceleration provision (as
you will have already received the benefit of the original
provision).
4. WHAT ARE AMERICAN DEPOSITORY SHARES
An ADS is a share of stock that represents the underlying ordinary share
of the issuer that is trading in a foreign issuer's home market. A VU ADS,
therefore, is a share of stock that is traded in the United States that
represents the underlying VU ordinary shares that are trading in France.
Each VU ADS represents one VU equity share that is traded on the Paris
Bourse Exchange. In order to facilitate an active market in the United
States for VU securities, VU deposited a number of VU ordinary shares with
a U.S. financial institution. The voting rights of ADS holders are the
same as those of holders of ordinary shares, except that instead of voting
directly, ADS holders instruct the depositary how to vote their shares. VU
ADSs are listed and traded on the New York Stock Exchange, Inc. ("NYSE")
under the symbol "V." For more information on VU and its shares as traded
on the NYSE, see VU's web site at: http://finance.vivendiuniversal.com.
Examples of companies whose shares are traded in the United States as
American Depository Shares include: News Corporation Ltd., British Airways
Plc, Honda Motor Co., Ltd., Fiat SPA, Heineken NV, Terra Networks SA,
Credit Suisse Group and Dresdner Bank AG. You may see references to
American Depository Receipts or "ADRs," but, for all practical purposes,
the terms ADS and ADR are interchangeable.
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5. DETERMINATION OF THE CONVERSION RATIO
A. PRESERVING THE INTRINSIC VALUE OF YOUR USAI OPTIONS. VU has agreed
to preserve the intrinsic (or "spread") value of the USAi options
that terminate in connection with the VUE Transaction as described
in this memo. Both the number of replacement VU Options that you
will receive and the exercise price of these new VU Options will be
determined based on a "Conversion Ratio," in order to preserve this
value. For your information, this type of conversion formulation is
similar to the conversion of stock options in mergers or stock
purchases.
B. DEFINITION OF CONVERSION RATIO. The Conversion Ratio means the ratio
(rounded up or down to the nearest fourth decimal place) of (i) the
price of a share of USAi common stock, divided by (ii) the price of
a VU ADS, with the price of each as of any applicable date of grant
of a replacement VU Option determined based on the average of the
closing sale prices of such shares during the 10-day trading period
ending on the trading day immediately prior to the applicable date
of grant.(1) For example, if the USAi common stock 10-day closing
price average as of the applicable date is $30 per share, and if the
VU ADS 10-day closing price average as of the applicable date is $40
per share, then the Conversion Ratio to be applied to the unvested
USAi options as of the Closing Date (described in Section 1 above)
under this hypothetical example would be 30/40, or .75.
6. APPLICATION OF THE CONVERSION RATIO/HYPOTHETICAL EXAMPLE
A. GENERAL. In order to preserve the intrinsic (or "spread") value of
your terminated USAi options, measured based on the average closing
prices of USAi common stock and VU ADSs during the 10-day trading
period prior to the grant date, VU will apply the Conversion Ratio
in the manner described in this Section 6. Both the number of shares
subject to your terminated USAi options and the exercise price of
such options will be adjusted in order to preserve your intrinsic
(or "spread") value.
B. NUMBER OF REPLACEMENT VU OPTION SHARES. The number of replacement VU
Options to purchase VU ADSs that will be granted to you (as
described in Sections 1 or 2 above, respectively) will be equal to
the Conversion Ratio multiplied by the number of shares of USAi
common stock subject to the terminated USAi option.
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(1) In the event that, prior to the grant of a replacement VU Option, there is a
change in capitalization, such as a stock split, of either USAi common stock or
VU ADSs, then the Conversion Ratio will be appropriately adjusted to reflect
such change.
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C. EXERCISE PRICE PER ADS OF REPLACEMENT VU OPTION. The exercise price
per VU ADS of a replacement VU Option granted to you will equal the
exercise price of the terminated USAi option divided by the
Conversion Ratio.
D. HYPOTHETICAL EXAMPLE OF UNVESTED USAI OPTION CONVERSION.
ASSUMPTIONS:
o Unvested USAi option for 15,000 shares with an exercise price
of $18 per share.
o The average of the closing sale prices of a share of USAi
common stock during the 10-day trading period in which the
Conversion Ratio is determined is $30.
o The average of the closing sale prices of a VU ADS during the
10-day trading period in which the Conversion Ratio is
determined is $40.
o The Conversion Ratio as of the Closing Date is .75 (30/40 =
.75).
NUMBER OF VU ADSS SUBJECT TO REPLACEMENT VU OPTION AND EXERCISE PRICE:
o NUMBER OF VU ADSS FOR WHICH THE REPLACEMENT VU OPTION WILL BE
GRANTED:
Conversion Ratio (.75) multiplied by the number of unvested
USAi option shares that are terminated (15,000) = .75 x
15,000 = 11,250.
o EXERCISE PRICE PER VU ADS:
Exercise price of terminated USAi option ($18) divided by
Conversion Ratio (.75) = $18/.75 = $24.
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COMPARISON OF TOTAL INTRINSIC (OR "SPREAD") VALUE OF TERMINATED USAI
OPTION AND REPLACEMENT VU OPTION BASED ON THE 10-DAY AVERAGE CLOSING
PRICES:
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USAI VIVENDI UNIVERSAL
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10-DAY AVERAGE CLOSING $30 $40
PRICE PER SHARE:
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LESS EXERCISE PRICE PER $18 $24
SHARE:
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INTRINSIC (OR "SPREAD")
VALUE PER SHARE: $12 $16
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MULTIPLIED BY NUMBER OF
OPTION SHARES: 15,000 11,250
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TOTAL INTRINSIC (OR
"SPREAD") VALUE:(2) $180,000 $180,000
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OTHER TERMS OF REPLACEMENT VU OPTION: As explained above, vested and
unvested replacement VU Options will have the same terms as the terminated
USAi options, with appropriate conforming changes in view of VU's control
of VUE. The unvested replacement VU Option will vest in accordance with
the vesting terms and schedule, and otherwise have the same terms, as the
terminated USAi option, as set forth in the applicable USAi Stock Option
Plan and the award agreement for such terminated USAi option. So, for
example, subject to your continued employment with VUE or its affiliates,
the replacement VU Option will vest on the dates that the terminated USAi
option would have vested, and will expire ten years from the original date
of grant of the terminated USAi option.
THE HYPOTHETICAL EXAMPLES IN SECTIONS 5 AND 6 OF THIS MEMO ARE FOR ILLUSTRATIVE
PURPOSES ONLY AND DO NOT REFLECT ACTUAL NUMBERS OF USAI OPTIONS OR THE ACTUAL
TRADING PRICES OR ANTICIPATED TRADING PRICES OF USAI COMMON STOCK OR VU ADSS.
7. INCOME TAX TREATMENT
Neither the termination of the USAi options (whether vested or unvested)
nor the grant of replacement VU Options to you will result in any income
recognition by you. There are also no special tax consequences to you with
respect to your receipt of options to purchase ADSs rather than options to
purchase shares of common stock, based on current stock prices of USAi
common stock and VU ADSs. As always, if you exercise options, your
"spread" value -- that is,
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(2) The actual intrinsic (or "spread") value of a replacement VU Option
immediately after grant will depend on the actual fair market value of VU ADSs
on the grant date, which may be different than the average of the closing prices
during the 10-day trading period.
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generally speaking, the difference between the fair market value of the
shares you receive upon exercise of the option and the aggregate exercise
price of the options that you pay for the shares -- will be ordinary
compensation income and will be subject to normal tax withholding. This
communication is a statement of our understanding of the tax consequences
that are generally applicable upon option terminations and option grants
as described in this memo. This information should not be construed by you
as individual tax advice regarding your particular situation. You are
urged to speak with your personal tax advisor if you have questions about
your taxes with regard to your options, or for any other tax advice that
is particular to your individual situation.
* * * * * *
Of course, this memo does not constitute a contract of employment and does
not confer any right to continued employment. The grant of replacement VU
Options in accordance with this memo is subject to your being employed by VUE or
its affiliates on the applicable date of grant of replacement VU Options.
Although neither USAi nor VU has any intention to do so, we reserve the right to
modify or amend the program described in this memo.
If you have any questions relating to the option replacement program,
please contact Steve Brunell at (310) 360-2575 or Steve.brunell@studiosusa.com.
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