Agreement re: Tax Allocation Agreement - Microsoft Corp., USA Networks Inc. and Expedia Inc.
THIS AGREEMENT ("Agreement") is entered into as of the 9th day of
November, 2001 (the "Effective Date"), by and between Microsoft Corporation, a
Washington corporation ("Microsoft"), USA Networks, Inc., a Delaware corporation
("USA") and Expedia, Inc., a Washington corporation ("Expedia"). Microsoft, USA
and Expedia are hereinafter referred to collectively as the "Parties" and
individually as a "Party".
WHEREAS, Microsoft and Expedia entered into that certain Tax Allocation
Agreement dated as of October 1, 1999, (the "Tax Allocation Agreement") a copy
of which is attached hereto; and
WHEREAS, Microsoft and Expedia have entered into that certain Amended and
Restated Agreement and Plan of Recapitalization and Merger by and among Expedia,
USA, Taipei, Inc., Microsoft and Microsoft E-Holdings, Inc., dated as of July
15, 2001 (the "July 15, 2001 Agreement"), pursuant to which Microsoft
E-Holdings, Inc. will dispose of all or a portion of its shares of Expedia
WHEREAS, pursuant to Section 8.13 of the July 15, 2001 Agreement, the
Parties agreed that Expedia's aggregate liability to make payments under the Tax
Allocation Agreement after July 15, 2001, with respect to any past, present or
future taxable period, shall not exceed $36,300,000 and that the term "Inherent
Bargain Element" (as used in the Tax Allocation Agreement) shall not include any
amount with respect to any option to purchase Expedia common stock granted on or
after November 16, 1999; and
WHEREAS, the Parties wish to set forth in this Agreement (i) the manner in
which Expedia is to compensate Microsoft for the compensation deductions
attributable to the Inherent Bargain Element (as defined herein) in any
compensatory options granted prior to November 16, 1999 by Microsoft to former
Microsoft employees that are employed by Expedia (collectively referred to as
the "Assumed Microsoft Options"), (ii) the manner in which the economic benefit
attributable to the Assumed Microsoft Options shall be determined, (iii) the
manner in which Expedia shall pay such economic benefit to Microsoft and (iv)
certain other rights and obligations of the Parties with respect to Taxes (as
such term is defined in the July 15, 2001 Agreement).
NOW THEREFORE, in consideration of the premises and of the mutual
covenants and agreements hereinafter set forth, effective as of the Effective
Time (as such term is defined in the July 15, 2001 Agreement), the Parties agree
1. COMPENSATION FOR DEDUCTIONS ATTRIBUTABLE TO INHERENT BARGAIN ELEMENT.
(a) Pursuant to Section 13(a) of the Tax Allocation Agreement, the
Parties hereby cancel, terminate and release any and all of their respective
rights and obligations under Section 9 of the Tax Allocation Agreement, and the
rights and obligations of the Parties with respect to the subject matter of such
Section 9 of the Tax Allocation Agreement shall be governed by the terms of this
Expedia shall compensate Microsoft for the U.S. federal and state
income tax deductions attributable to the Inherent Bargain Element in any
Assumed Microsoft Options as described below. The "Inherent Bargain Element" in
each Assumed Microsoft Option has been determined as of the date Expedia
employed the optionee and is equal to the excess of (i) the fair market value of
the shares (whether shares of
Microsoft common stock or Expedia stock) to be acquired on exercise of the
option, determined as of the date the optionee became employed by Expedia, over
(ii) the exercise price of the option, determined as of the date the optionee
became employed by Expedia; provided however, that such term shall not include
any amount with respect to any option to purchase Expedia common stock granted
on or after November 16, 1999. Notwithstanding anything to the contrary herein,
for any taxable year in which Expedia is not a member of the affiliated group
(within the meaning of Section 1504(a) of the Internal Revenue Code of 1986, as
amended (the "Code")) of which Microsoft is the common parent corporation,
Expedia will report on its U.S. federal and state income tax returns the
deductions attributable to the exercise of the Assumed Microsoft Options, and
Expedia will compensate Microsoft for the amount of such deductions attributable
to the Inherent Bargain Element in the Assumed Microsoft Options in the
Expedia shall initially compute the "Expedia Economic Benefit" (as
defined below) for such taxable year. The Expedia Economic Benefit for each
taxable year shall be equal to the excess, if any, of (x) the actual U.S.
federal and state income tax liability (including alternative minimum tax
liability) as calculated under Chapter 1 of the Code of Expedia that would have
been payable by Expedia for such taxable year taking into account all available
deductions (including, but not limited to, net operating loss carryforwards,
capital loss carryforwards, credits and credit carryforwards), but without
taking into account the compensation deductions attributable to the Inherent
Bargain Element in the Assumed Microsoft Options (the "Hypothetical Expedia Tax
Liability") over (y) its actual U.S. federal and state income tax liability
(including alternative minimum tax liability) for such taxable year as
calculated under Chapter 1 of the Code,
taking into account all available deductions, including the compensation
deductions attributable to the Inherent Bargain Element in the Assumed Microsoft
Options. For purposes of the foregoing calculation, the amount of compensation
deductions attributable to Inherent Bargain Element shall be calculated on a
first in, first out basis, i.e., all deductions arising upon the exercise of
Assumed Microsoft Options shall be deemed to be attributable to the Inherent
Bargain Element to the extent of the aggregate amount of such Inherent Bargain
Element in all such Assumed Microsoft Options, subject to the cap described in
Section 1(b) below.
Notwithstanding anything to the contrary herein, for any taxable
year after March 17, 2000 in which Expedia is a member of an affiliated group
within the meaning of Section 1504(a) of the Code of which Expedia is not the
common parent (the "New Group"), and which group files consolidated federal tax
returns, the Expedia Economic Benefit shall be the Expedia Economic Benefit
determined as set forth above as if Expedia paid taxes as corporation that was
not a member of the New Group, and Expedia shall use its reasonable best efforts
not to enter into any arrangement with any member of the New Group that would
have the effect of distorting Expedia's stand-alone tax liability.
(b) After determining the Expedia Economic Benefit, Expedia shall
submit the computation of the Expedia Economic Benefit for each taxable year
(with all appropriate supporting information) to Microsoft within ten days after
the filing of its U.S. federal income tax return for such taxable year. If
Microsoft does not object in writing to the computation of the Expedia Economic
Benefit for the taxable year within thirty days of receipt of the computation
from Expedia, Expedia's determination of the
Expedia Economic Benefit shall become final and binding. If Microsoft objects to
the computation, and the parties are unable to reach an agreement by the end of
such thirty-day period, the determination of the Expedia Economic Benefit shall
be made by a nationally-recognized accounting firm mutually agreeable to Expedia
and Microsoft, which shall endeavor to make the final determination within
thirty days. The determination of the independent accounting firm shall be final
and binding. Expedia shall pay to Microsoft within fifteen days of the final
determination (as provided above) of the Expedia Economic Benefit for a taxable
year an amount of cash equal to the Expedia Economic Benefit for such taxable
year; provided, however, that, notwithstanding any other provision contained in
this Agreement, the aggregate liability of Expedia to make payments under this
Agreement after July 15, 2001 shall not exceed $36,300,000.
2. MICROSOFT INDEMNITY.
Microsoft shall indemnify and hold harmless Expedia and USA from and
against (i) any and all liability for Taxes (as such term is defined in the July
15, 2001 Agreement) with respect to any "Consolidated Return," "Foreign Combined
Return" or "State/Local Combined Return" (as such terms are defined in the Tax
Allocation Agreement) and (ii) any and all liability under Treasury Regulation
Section 1.1502-6 (or any analogous provision of state, local or foreign law) as
a result of Expedia's membership in any consolidated, combined or unitary group
of which Microsoft or any of its Subsidiaries (as such term is defined in the
July 15, 2001 Agreement) is or was the common parent; provided, however, that
nothing herein shall be deemed to give Expedia, USA or any party related thereto
the right to review any Tax Return (as such term is
defined in the July 15, 2001 Agreement) of the MS Affiliated Group (as such term
is defined in the Tax Allocation Agreement) or any member thereof. Nothing in
this Section 2 is intended to diminish, increase or expand the obligations of
Microsoft set forth in the July 15, 2001 Agreement.
Microsoft agrees not to carry back for federal, state, local or
foreign tax purposes any net operating loss, capital loss or credit against Tax
(as such term is defined in the July 15, 2001 Agreement) of Expedia or any of
its Subsidiaries (as such term is defined in the July 15, 2001 Agreement) for
any "separate return year" (as defined in Treasury Regulation Section 1.1502-1).
4. MISCELLANEOUS PROVISIONS.
(a) This Agreement, together with the Tax Allocation Agreement,
constitutes the entire understanding of the Parties with respect to the subject
matter contained herein. No alternation, amendment or modification of any of the
terms of this Agreement shall be valid unless made by an instrument signed in
writing by an authorized officer of each Party.
(b) This Agreement has been made in and shall be construed and
enforced in accordance with the laws of the State of Washington from time to
time obtaining, without regard to any applicable conflicts of law principles.
(c) This Agreement shall be binding upon and inure to the benefit of
each Party hereto and its respective successors and assigns.
(d) This Agreement may be executed simultaneously in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
(e) All notices and other communications hereunder shall be deemed
to have been duly given if delivered by hand or mailed certified or registered
mail, postage prepaid:
(i) Microsoft Corporation
One Microsoft Way
Redmond, Washington 98052-6399
Telephone (425) 882-808
Fax (425) 936-7329
Attention: Chief Financial Officer
with copy to Law and Corporate Affairs
(ii) Expedia, Inc.
13810 SE Eastgate Way
Bellvue, WA 98005
Fax (425) 564-7240
Chief Financial Officer
(iii) USA Networks, Inc.
152 West 57th Street
New York, NY 10019
Attention: Vice President, Taxes
with copy to: General Counsel
Telephone (212) 314-7380
Fax (212) 414-7439
(f) The headings of the paragraphs of this Agreement are inserted for
convenience only and shall not constitute a part hereof.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be duly executed and their respective corporate seals to be affixed hereto, all
on the date and year first above written.
MICROSOFT CORPORATION EXPEDIA INC.
By /s/ Kevin Fay By /s/ Richard N. Barton
its authorized representative its authorized representative
USA NETWORKS, Inc.
By /s/ Julius Genachowski
its authorized representative