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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 9, 1997.
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[ ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1997
OR
[X] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from October 1, 1996 to June 30, 1997(1).
COMMISSION FILE NUMBER 0-22815
TCI MUSIC, INC.(1)
(Exact name of registrant as specified in its charter)
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DELAWARE 84-1380293
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
8101 EAST PRENTICE AVENUE, SUITE 500 80111
ENGLEWOOD, CO (Zip Code)
(Address of principal executive offices)
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Registrant's telephone number, including area code: (303) 267-5500
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act: Common Stock,
$0.01 Par Value
Indicate by check mark whether 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 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]
Unless otherwise specifically indicated, all monetary references in this
filing are in U.S. dollars.
As of June 30, 1997 the aggregate market value of the Common Stock held by
non-affiliates of DMX Inc. was approximately $39,763,000.
Number of shares of Common Stock of DMX Inc. outstanding as of June 30,
1997: 59,586,594 shares, excluding 85,630 shares held as Treasury Stock.
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(1) This Transition Report on Form 10-K is filed by TCI Music, Inc. with respect
to its predecessor DMX Inc. TCI Music, Inc. became the successor to DMX Inc.
on July 11, 1997 upon the consummation of the merger of DMX Inc. with a
wholly owned subsidiary of TCI Music, Inc., pursuant to which DMX Inc.
became a wholly owned subsidiary of TCI Music, Inc. Such merger was deemed
effective July 1, 1997 for accounting purposes and the reporting period
covers the transition period from the end of DMX Inc.'s last fiscal year,
September 30, 1996 through June 30, 1997.
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TABLE OF CONTENTS
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PART I
Item 1. Business.................................................... 3
Item 2. Properties.................................................. 19
Item 3. Legal Proceedings........................................... 20
Item 4. Submission of Matters to a Vote of Security Holders......... 20
PART II
Item 5. Market for DMX Inc.'s Common Equity and Related Stockholder
Matters..................................................... 21
Item 6. Selected Financial Data..................................... 22
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of
Operations.................................................. 23
Item 8. Financial Statements and Supplementary Data................. 27
Item 9. Changes In and Disagreements with Accountants on Accounting
and Financial
Disclosure.................................................. 27
PART III
Item 10. Directors and Executive Officers of DMX Inc................. 28
Item 11. Executive Compensation...................................... 30
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 34
Item 13. Certain Relationships and Related Transactions.............. 36
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form
8K.......................................................... 38
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PART I
ITEM 1. BUSINESS.
GENERAL DEVELOPMENT OF BUSINESS.
On July 11, 1997, DMX Inc. and TCI Music, Inc. ("TCI Music"), a wholly
owned subsidiary of Tele-Communications, Inc. ("TCI") consummated a merger
pursuant to an Agreement and Plan of Merger, dated February 6, 1997, as amended
by Amendment One to Merger Agreement dated May 29, 1997 (the "Merger
Agreement"), among DMX Inc., TCI, TCI Music, and TCI Merger Sub, Inc. ("Merger
Sub"), a wholly owned subsidiary of TCI Music, whereby Merger Sub was merged
with and into DMX Inc. (the "Merger") with DMX Inc. as the surviving
corporation.
In connection with the Merger, TCI and TCI Music entered into a
Contribution Agreement dated July 11, 1997 (the "Contribution Agreement").
Pursuant to the Contribution Agreement: (i) TCI Music issued to TCI (as designee
of certain of its indirect subsidiaries) 62,500,000 shares of Series B Common
Stock, par value $0.01 per share, of TCI Music and a promissory note in the
amount of $40 million; (ii) until December 31, 2006 certain subsidiaries of TCI
will transfer to TCI Music the right to receive all revenue from sales of DMX
Inc.'s music services to their residential and commercial subscribers, net of an
amount equal to 10% of the revenue from such sales to residential subscribers
and net of the revenue otherwise payable to DMX Inc. as license fees for DMX
Inc.'s music services under affiliation agreements currently in effect
("Contributed Net DMX Revenues"); (iii) TCI contributed to TCI Music certain
digital commercial tuners that are not in service; and (iv) TCI granted to each
stockholder of DMX Inc. who became a stockholder of TCI Music pursuant to the
Merger, one right (a "Right") with respect to each whole share of Series A
Common Stock, $.01 par value per share, of TCI Music ("TCI Music Series A Common
Stock") acquired by such stockholder in the Merger pursuant to the terms of the
Rights Agreement among TCI, TCI Music and the Bank of New York, as Rights Agent.
Each Right entitles the holder to require TCI to purchase from such holder one
share of TCI Music Series A Common Stock at a purchase price of $8.00 per share,
payable at the election of TCI, in cash, a number of shares of TCI Series A TCI
Group Common Stock ("Series A TCI Group Common Stock") having an equivalent
value or a combination thereof, if during the one-year period beginning on July
11, 1997, the effective date of the Merger, the price of TCI Music Series A
Common Stock does not equal or exceed $8.00 per share for a period of at least
20 consecutive trading days.
Upon consummation of the Merger, each outstanding share of common stock,
$.01 par value per share, of DMX Inc. was converted into the right to receive
(i) one-quarter share of TCI Music Series A Common Stock, (ii) one Right with
respect to each whole share of TCI Music Series A Common Stock and (iii) cash in
lieu of fractional shares of TCI Music Series A Common Stock and Rights. Until
the Rights expire or are exercised, the Rights will be evidenced by a legend on
the certificates for shares of TCI Music Series A Common Stock issued in the
Merger. Accordingly, the Rights associated with the shares of TCI Music Series A
Common Stock will be represented solely by, and will not be separable from, such
shares of TCI Music Series A Common Stock, and the surrender or transfer of any
such certificate for shares of TCI Music Series A Common Stock will also
constitute the surrender or transfer of the Rights associated with the TCI Music
Series A Common Stock represented by such certificate.
The outstanding shares of TCI Music Series A Common Stock represent
approximately 19.25% of, and 2.3% of the voting power related to, the total
outstanding shares of TCI Music Series A Common Stock and TCI Music Series B
Common Stock (together, the "TCI Music Common Stock"); and the outstanding
shares of TCI Music Series B Common Stock represent approximately 80.75% of, and
97.7% of the voting power related to the total outstanding shares of TCI Music
Common Stock. TCI beneficially owns approximately 45.7% of the outstanding
shares of TCI Music Series A Common Stock and 100% of the outstanding shares of
TCI Music Series B Common Stock, which collectively represent approximately
89.6% of the outstanding shares of TCI Music Common Stock and 98.7% of the
voting power of the outstanding shares of TCI Music Common Stock.
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Effective July 11, 1997, TCI Music, as the successor registrant to DMX
Inc., determined to change its fiscal year end from September 30 to December 31,
and reports the nine month transition period ended June 30, 1997 on the
Transition Report on Form 10-K, herein.
TCI Music, TCI Music Acquisition Sub, Inc., a Florida corporation and a
wholly-owned subsidiary of TCI Music ("Acquisition Sub"), and The Box Worldwide,
Inc., a Florida corporation ("The Box"), have entered into an Agreement and Plan
of Merger dated as of August 12, 1997 (the "Box Merger Agreement"). Pursuant to
the Box Merger Agreement, Acquisition Sub will be merged with and into The Box
with The Box as the surviving corporation (the "Box Merger"). Outstanding shares
of common stock of The Box will be converted into a number of shares of TCI
Music Series A Convertible Preferred Stock ("Music Preferred Stock") based on
the formula described below, and all common stock of The Box outstanding
immediately after the Box Merger (the number of which will be equal to the
number of outstanding shares of common stock of The Box outstanding immediately
before the Box Merger) will be owned by TCI Music. Unless converted into shares
of common stock of The Box or unless the holder thereof exercises dissenters'
rights under the Florida Business Corporation Act (the "FBCA"), the 1,666,667
shares of 6% Convertible Redeemable Preferred Stock of The Box will remain
outstanding after the Box Merger.
Consummation of the Box Merger will be subject to the satisfaction or
waiver of various conditions, including, among others, the approval of the Box
Merger by shareholders of The Box holding more than 75% of its voting shares and
receipt of governmental and other third-party approvals and consents. There are
no assurances that the Box Merger will be consummated.
Common stock of The Box will be valued at $1.50 per share for purposes of
the Box Merger, and each share of common stock of The Box will be convertible
into the number of shares of Music Preferred Stock equal to the product of (i)
$1.50 divided by the average trading price of the TCI Music Series A Common
Stock over a period of 20 consecutive trading days ending on the third trading
day prior to the closing of the Box Merger and (ii) one-third. Assuming that
none of the holders of common stock of The Box exercise dissenters' rights under
the FBCA, and that no outstanding options, warrants or other rights to acquire
common stock of The Box are exercised prior to the Box Merger, the aggregate
value of the consideration to be paid to the holders of common stock of The Box
would be approximately $36 million. Each share of Music Preferred Stock will
initially be convertible at the option of the holder into three shares of TCI
Music Series A Common Stock subject to certain antidilution adjustments, and
will be entitled to the number of votes equal to the number of shares of TCI
Music Series A Common Stock into which the Music Preferred Stock is convertible
on all matters submitted to TCI Music stockholders for a vote, voting together
with the TCI Music Series A Common Stock and Series B Common Stock of TCI Music.
Unlike the shares of TCI Music Series A Common Stock issued to former
stockholders of DMX Inc., the shares of TCI Music Series A Common Stock into
which the Music Preferred Stock is convertible will not have any rights
associated therewith pursuant to which the holders thereof will have the right
to require TCI to purchase their shares of TCI Music Series A Common Stock.
Three of The Box's shareholders, H.F. Lenfest, J. Patrick Michaels, Jr. and
StarNet/CEA II Partners (the "Voting Shareholders") have entered into a Voting
Agreement with TCI Music dated as of August 12, 1997 (the "Voting Agreement").
Pursuant to the Voting Agreement, the Voting Shareholders, who collectively
beneficially own 60.5% of the outstanding shares of common stock of The Box,
have agreed to vote such shares, which represent 56.7% of the voting stock of
The Box, in favor of the adoption and approval of the Box Merger and to vote
against any proposal that would compete or interfere with the Box Merger.
On September 18, 1997, TCI Music and Paradigm Music Entertainment Company,
a Delaware corporation ("Paradigm"), entered into a binding letter of intent
(the "LOI"). Pursuant to the LOI, a wholly-owned subsidiary of TCI Music will be
merged with and into Paradigm with Paradigm as the surviving corporation (the
"Paradigm Merger"). Outstanding shares of common stock of Paradigm (other than
shares with respect to which dissenters' rights have been demanded) will be
converted into shares of TCI Music Series A Common Stock, and all common stock
of Paradigm outstanding immediately after the Paradigm Merger will be owned by
TCI Music.
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Consummation of the Paradigm Merger will be subject to the satisfaction or
waiver of various conditions, including, among others, the approval of the
Paradigm Merger by stockholders of Paradigm holding more than a majority of its
voting shares and receipt of governmental and other third-party approvals and
consents. There are no assurances that the Paradigm Merger will be consummated.
The TCI Music Series A Common Stock to be issued to existing stockholders
of Paradigm in connection with the Paradigm Merger will have an aggregate market
value of approximately $24 million (determined by the average of the mean daily
closing bid and asked prices of TCI Music Series A Common Stock during the 20
consecutive trading days ending on the third trading day prior to the closing of
the Paradigm Merger). TCI Music will also either assume debt of, or contribute
cash to, Paradigm in connection with the Paradigm Merger, in either case in the
amount of approximately $5,000,000.
Pursuant to the LOI, TCI Music loaned approximately $2.2 million, and is
obligated to advance additional amounts of up to $550,000 per month for the
months of October, November and December 1997 (collectively the "Advances"), to
Paradigm to fund operations pending closing of the Paradigm Merger. The Advances
bear interest at 10% per annum, are secured by all of Paradigm's assets, and are
due and payable no later than June 30, 1998.
At the effective time of the Paradigm Merger, Thomas McPartland, President
and Chief Executive Officer of Paradigm, will be appointed President and Chief
Executive Officer of, and will become a director of, TCI Music.
Three of Paradigm's principal stockholders (the "Paradigm Voting
Stockholders") have entered into a Voting Agreement with Paradigm and TCI Music
dated as of September 18, 1997 (the "Paradigm Voting Agreement"). Pursuant to
the Paradigm Voting Agreement, the Paradigm Voting Stockholders, who
collectively beneficially own 39.2% of the outstanding shares of common stock of
Paradigm have agreed to vote such shares, which represent 70.3% of the voting
stock of Paradigm, in favor of the adoption and approval of the Paradigm Merger
and to vote against any proposal that would compete or interfere with the
Paradigm Merger.
The Paradigm Merger is intended to qualify as a tax-free reorganization
under the Internal Revenue Code of 1986, as amended.
BUSINESS OF DMX INC.
DMX Inc. was incorporated pursuant to the laws of the State of Delaware in
May 1990 under the name of International Cablecasting Technologies Inc. ("ICT")
to accomplish a corporate reorganization which effected a change of situs of its
predecessor company of the same name ("ICT-Canada"). ICT-Canada was incorporated
pursuant to the laws of British Columbia on April 26, 1979, under the name of
Can-Am Entertainment Corporation and on November 14, 1986, changed its name to
International Cablecasting Technologies Inc. On April 27, 1995, ICT changed its
name to DMX Inc.
DMX Inc.'s operations are comprised of those of DMX Inc. and its three (3)
wholly owned subsidiaries: 450714 B.C. Ltd., a British Columbia corporation,
formed for the purpose of holding DMX Inc.'s equity interest in its Canadian
joint venture with Shaw Communications Inc. ("Shaw"), the second largest cable
operator in Canada (see "Business -- International Business"); TEMPO Sound, Inc.
("TEMPO"), an Oklahoma corporation, which DMX Inc. acquired from TCI in April
1979, in exchange for approximately 224,000 shares of common stock of DMX Inc.
TEMPO is engaged in a joint venture with an affiliate of Jones International,
Inc. ("Jones"), the eighth largest cable operator in the United States, to
program and deliver Superaudio(R), a basic analog cable music and information
service (currently consisting of nine formats) for a monthly license fee, to
cable operators for distribution to cable subscribers. TEMPO and Jones each own
50% of the joint venture (See "Domestic Business -- The Superaudio Service");
DMX-Europe N.V. of which the remaining 49% interest was acquired from TCI in
exchange for 10.8 million shares of DMX Inc.'s common stock on May 17, 1996,
making it a wholly owned subsidiary effective on such date.
DMX-Europe N.V. ("DMX-E NV") and its subsidiary DMX-Europe (UK) Limited
("DMX-E UK"), collectively ("DMX-E"), ceased operation on July 1, 1997. DMX-E UK
was placed into receivership on
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July 1, 1997 and into liquidation proceedings on July 18, 1997. DMX-E NV,
although inactive since July 1, 1997, is scheduled for liquidation proceedings
to commence during the fourth calendar quarter of 1997.
As a result of the DMX-E cessation of operations, the Subscription and
Shareholder Agreement dated as of December 18, 1996 (the "Definitive
Agreements") between DMX Inc.; Mr. Jerold H. Rubinstein, an individual; and XTRA
Music Limited, a corporation under laws of England ("XTRA") was put into place
whereby a termination certificate was executed in July 1997, which terminated
the Stock Purchase Agreement dated December 18, 1996 that provided for the
disposition of DMX-E to Mr. Jerold H. Rubinstein. Pursuant to the Definitive
Agreements, DMX Inc. obtained a 10% interest in XTRA and a Channel Distribution
Agreement was executed between XTRA and DMX Inc. The Channel Distribution
Agreement provided XTRA an exclusive, five-year, royalty-free license to
distribute the DMX music service in Europe, the former Soviet Union and in the
Middle East and the right to use DMX Inc.'s trade marks for two years. The music
service is currently not being distributed by XTRA as Mr. Jerold H. Rubinstein
is seeking financial partners. At June 30, 1997 the estimated loss on disposal
of DMX-E was accounted for in DMX Inc.'s consolidated financial statements.
Certain statements in this Transition Report on Form 10-K (this "Report")
constitute "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. Such forward-looking statements
involve known and unknown risks, uncertainties and other important factors that
could cause the actual results, performance or achievements of TCI Music, Inc.
and subsidiaries ("the Company"), or industry results, to differ materially from
any future results, performance or achievements expressed or implied by such
forward-looking statements. Such risks, uncertainties and other factors include,
among others: general economic and business conditions and industry trends; the
continued strength of the multichannel video programming distribution industry
and the satellite services industry; uncertainties inherent in proposed business
strategies and development plans; future financial performance, including
availability, terms and deployment of capital; availability of qualified
personnel; changes in, or the failure or the inability to comply with,
government regulation, including, without limitation, regulations of the Federal
Communications Commission, and adverse outcomes from regulatory proceedings;
changes in the nature of key strategic relationships with partners and joint
venturers; competitor responses to the Company's products and services, and the
overall market acceptance of such products and services, including acceptance of
the pricing of such products and services; and other factors referenced in this
Report. These forward-looking statements speak only as of the date of this
Report. The Company expressly disclaims any obligation or undertaking to
disseminate any updates or revisions to any forward-looking statement contained
herein to reflect any change in the Company's expectations with regard thereto
or any change in events, conditions or circumstances on which any such statement
is based.
DMX Inc. is primarily engaged in programming, distributing and marketing a
digital music service, Digital Music Express(R) ("DMX(R)"), which provides
continuous (24-hours per day), commercial free, CD quality music programming.
The DMX music formats are programmed within various music genres which include:
Classical, Jazz, Rock, Oldies, Country, Latin, Urban, Pop/Adult Contemporary,
Instrumental, International and Specialty. Within each music genre, DMX offers a
variety of format selections which are more unique and narrowly defined than
typically would be found on a commercial radio station. Depending on the
distribution method, cable or Ku-Band direct broadcast satellite ("DBS"), DMX
currently offers 30 or 96 formats, respectively. In addition DMX Inc. currently
has over 133 titles in its DMX-Disc library catalogue for on-premise
distribution. DMX Inc. programs each DMX format to provide more music within
each music format than a consumer typically would find on a radio station,
without the high level of repetition commonly found in radio programming. DMX
also offers subscribers the ability to match a "mood" or social environment with
music at the touch of a button. As an example, a restaurant may choose to play
Chamber Music at breakfast, Lite Jazz at lunch, and Great Singers at dinner. DMX
is currently delivered using three different distribution methods.
Cable Distribution -- DMX is delivered, for a monthly per subscriber
license fee, direct to cable operators by C-Band satellite for distribution to
residential and commercial cable subscribers. The DMX signal is received by
subscribers through their existing coaxial cable wire which is connected through
a DMX tuner to their stereo systems. DMX is delivered in 30 different music
formats for cable distribution. DMX Inc. expects
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the existing analog technology used in this form of distribution to gradually be
replaced by digital compression technology using a wider bandwidth and
potentially allowing for carriage of significantly more music formats.
Direct Broadcast Satellite -- Since the June 1994 launch of the music
services on the Ku-Band satellite, DMX Inc. has delivered DMX to business
establishments, for a monthly per subscriber fee, by DBS direct to small
satellite dishes (approximately one meter or less in diameter) which connect
through a DMX receiver to a subscriber's sound system. Currently, DMX offers 96
different music formats through this DBS distribution. In October 1995, DMX Inc.
expanded the marketing of its DBS service to include residential subscribers.
This extends the residential distribution of DMX into: areas not currently wired
for cable; markets served by a cable operator affiliated with a competitive
digital audio service; and markets served by a cable operator not affiliated
with a digital audio provider. Additionally, the music service is also available
through digital program providers such as PRIMESTAR Partners, L.P.
("PRIMESTAR"), and Headend In the Sky by TCI ("HITS"), where DMX programming is
combined with video programming as part of a basic package. With these DBS
distributors, the technology incorporated into their satellite receiver enables
subscribers to receive the DMX signal through their satellite provider's
standard equipment package.
DMX-Disc -- DMX is offered as an on-premise business music service via
DMX-Disc(R). The DMX-Disc service offers flexibility in situations where rooftop
satellite dish installations are not possible, or where another building might
block the signal path from DMX Inc.'s satellite, through the use of on-premise
equipment and custom DMX programmed CDs. DMX-Disc uses a compact disc
interactive ("CD-I") player and a custom programmed library of CDs. These CDs
are manufactured especially by DMX Inc. using a compression scheme which allows
for over four hours of pre-recorded music to be played from one CD. Through the
distribution and rotation of library CDs, a DMX-Disc customer is ensured of
always having a fresh DMX playlist, mirroring the playlist from the DBS
satellite feed.
DMX Inc. believes that DMX is differentiated from other sources of audio
programming currently available to residential and commercial consumers.
Subscribers currently receive preprogrammed music in CD quality fidelity with no
commercials or disc jockey interruptions of any kind. The playlists for most DMX
formats include more music cuts than would typically be heard on a radio
broadcast or other competing preprogrammed music service. (See
"Business -- Competition".)
DMX is carried by more than 885 affiliates comprised of cable systems,
owned and operated offices, DBS program providers and independent franchises in
49 states. DMX currently is accessible to more than 18 million cable subscribers
and 11 million businesses in the United States.
GOALS AND STRATEGIES.
DMX Inc.'s goal is to continue to build DMX as a brand name consumer and
business service and become the established standard for digital audio services.
Its primary strategies are: (1) to continue to acquire residential and
commercial subscribers in as many markets as possible via its available
distribution methods, (2) to establish and maintain relationships with third
party organizations in related industries which support and enhance the
marketing, distribution and subscriber penetration levels of DMX and, (3) to
maintain its market position as a leader in digital audio through an emphasis on
superior programming and technology.
DMX Inc. views the strategy of being the first entrant into a market and
quickly securing distribution commitments for DMX as a key factor during the
start up and development phase of any marketplace. DMX Inc. has focused much of
its efforts during the start-up period on securing distribution agreements with
cable operators and satellite programming distributors. From 1989 to the present
DMX Inc. has: (i) entered into affiliation agreements with over 50 U.S. cable
operators; (ii) entered into distribution agreements with a DBS programming
provider; (iii) entered into distribution agreements for DMX in Canada, Mexico,
Latin America, Africa and the Caribbean; and (iv) obtained distribution on HITS,
a new distribution technology utilizing digital compression. The focus to gain
wide distribution of DMX is intended to provide DMX Inc. with greater market
share and limit the market development potential of its competitors.
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DOMESTIC BUSINESS.
Since its launch in September 1991, DMX has been distributed by C-Band
satellite to cable systems, which in turn deliver the service over existing
cable networks to cable subscribers. With the launch of DMX on the Ku-Band
satellite in June 1994, DMX Inc. has been able to expand the market access of
its commercial service, DMX for Business and its residential DBS service DMX
Direct. Ku-Band satellites transmit signals using a higher power than C-Band
satellites, which allows reception by substantially smaller satellite dishes.
The ability to distribute DMX directly to the end user gives DMX Inc. much
broader market access and the choice of delivering the DMX signal either by
existing cable or Ku-Band satellite. The DMX signal is distributed by DMX Inc.
from its studio and uplinking facility housed in TCI's National Digital
Television Center located in Littleton, Colorado. Additionally, the
implementation of the on-premise DMX-Disc program and the expansion of the Disc
catalogue has allowed DMX Inc. to market DMX in the commercial marketplace in
situations where cable and DBS distribution may not be an option (e.g., in
situations where roof-top rights or a cable signal may not be available).
Residential Service.
Today, the cable television industry in the United States is comprised of
more than 11,220 cable systems which serve more than 61.7 million households,
according to the 1996 Television and Cable Fact Book. This represents
approximately 63% of all television households in the country. Of those
households subscribing to cable, nearly 70% subscribe to one or more premium
cable services. It is expected that cable systems will transition from analog to
digital technology in coming years, resulting in a wider selection of
programming and services available to subscribers due to increased band-width.
This transition will commence with the roll-out of TCI's digital programming
package in the latter part of 1997.
Cable Affiliate Sales. The acquisition of subscribers is a joint effort
between DMX Inc. and the cable affiliate. To support its affiliates' marketing
efforts, DMX Inc. contributes marketing materials and/or cooperative marketing
funds. The retail price of DMX is established in each local market by the cable
operator. Many different pricing strategies such as separate equipment rental
charges, promotional discounts and special offers may affect the ultimate retail
price to the consumer. In the future, DMX Inc. expects DMX to be offered as part
of a basic package or as a tier programming option, as cable affiliates migrate
from analog to digital technology.
Cable operators have recently begun to launch a new method of distributing
video and other programming using digital compression technology. Digital
compression technology can compress, on average, as many as 14 of the current
analog video signals into the space normally occupied by one. Such technology
improves picture quality and allows for carriage of significantly more video
product offerings ("Digital Distribution") without cable operators having to
build a new cable plant. The technology is distributed through HITS, that
enables TCI and each other participating cable operator to increase their
program offerings and create new packages that could include, if they so choose,
DMX music services as part of a package of video and music services. The
technology permits subscribers to receive video and music signals through a
single standard set-top-tuner or "box" without the use of a separate tuner for
music, as is currently the case. TCI conducted a beta test of its Digital
Distribution in late 1996 and began offering such service to selected paying
customers in three test markets during the first quarter of 1997.
The launch of digital compression technology has the potential to provide
an additional distribution market for DMX music services if cable operators
utilizing Digital Distribution, such as TCI, elect to offer DMX music services
as part of one or more digital video programming packages, thereby capturing as
subscribers customers who might not otherwise elect to subscribe to DMX music
services on an a la carte basis. However, the launch of and the transition to
Digital Distribution may also have the effect of materially reducing residential
subscriber fee revenues as a result of the expected change from the a la carte
fee structure currently in effect. DMX Inc. does not expect the launch of
Digital Distribution to affect the current rate structure for commercial cable
subscribers or DBS Distribution.
DMX Inc. expects that license fees paid by cable operators for Digital
Distribution that include DMX music services in their digital packages will be
much lower than the a la carte fees now paid under affiliation
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agreements currently in effect. While a substantial increase in the overall
number of residential subscribers purchasing digital packages that include DMX
music services could result in revenues equal to or exceeding the revenues from
residential subscribers currently electing to purchase DMX services for a
separate a la carte fee, such a result depends on a number of factors over which
TCI Music has no control, including whether cable operators elect to include DMX
music services as part of their digital packages, the acceptance by consumers of
the digital products and whether those electing to purchase the digital packages
are already DMX subscribers. Neither TCI Music nor DMX Inc. can predict the
number of DMX residential subscribers that will elect to receive a digital
package that includes DMX when it is offered.
DMX was launched in the U.S. cable market in September 1991 to residential
subscribers. DMX Inc. currently has distribution commitments representing
approximately 50% of the U.S. cable marketplace. Such distribution commitments
are represented by contracts, or "affiliation agreements" reached between DMX
Inc. and cable operators which give the operators the right to distribute DMX to
residential subscribers within their franchise territories in exchange for a
monthly per subscriber license fee. Commercial rights are granted under a
separate contract. DMX Inc. has reached affiliation agreements with more than 50
multiple system operators ("MSO"). The term of the affiliation agreements range
from one to ten years and require monthly license fees be paid to DMX Inc. for
each DMX residential subscriber. Certain of the MSOs affiliated with DMX Inc.
have also made direct equity investments in the common stock of DMX Inc.
In 1989, TCI entered into a series of agreements with DMX Inc. which
resulted in the acquisition of approximately 2.0 million shares of DMX Inc.'s
common stock and the right to earn up to approximately 1.4 million additional
shares based on distribution goals, all of which were earned during the fiscal
year ended September 30, 1992. During 1995 and 1996, TCI increased their
interest to approximately 45% of the outstanding common stock of DMX Inc.
through a series of private placements, and through a transaction completed in
May 1996 whereby 10.8 million shares of common stock in DMX Inc. were exchanged
for TCI's 49% interest in DMX-E. On July 11, 1997, DMX Inc. and TCI Music
consummated a merger pursuant to an Agreement and Plan of Merger, dated February
6, 1997, as amended by Amendment One to Merger Agreement dated May 29, 1997
among DMX Inc., TCI, TCI Music, and Merger Sub, whereby Merger Sub was merged
with and into DMX Inc. with DMX Inc. as the surviving corporation. During fiscal
years 1995, 1996 and for the nine months ended June 30, 1997, TCI accounted for
approximately 61%, 53% and 50% of DMX Inc.'s residential cable revenues,
respectively.
Direct-to-Home ("DTH") Sales.
Direct Sales. In October 1995, DMX Inc. launched its in-house direct sales
effort, DMX-Direct, a DBS service, commonly referred as direct-to-home ("DTH")
to the residential marketplace. DMX-Direct uses DMX Inc.'s DBS technology
launched to commercial customers and offers the same programming availability.
Customers purchase the required equipment and subscribe to DMX-Direct for a
monthly or annual prepaid subscription.
Direct to home sales extend the distribution potential of DMX's residential
service to: areas not currently wired for cable; markets served by a cable
operator affiliated with a competitive digital audio service; and markets served
by cable operators not affiliated with any digital audio provider.
Third Party DBS Sales. In October 1995, PRIMESTAR, a DBS distributor of
packaged programming to the residential market, launched its service with
carriage of DMX. DMX Inc.'s agreement with PRIMESTAR requires PRIMESTAR to pay a
per subscriber license fee to DMX Inc. based on the number of basic subscribers,
or based on the number of basic and premium subscribers when PRIMESTAR expands
the DMX format offerings to include a premium tier option. PRIMESTAR
distribution gives the DMX brand name nationwide consumer exposure through the
marketing campaigns for PRIMESTAR. No additional equipment is required over and
above the standard satellite equipment in order for a subscriber to receive the
DMX signal. As of July 1997, there were approximately 1,800,000 PRIMESTAR DMX
subscribers.
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Commercial Service.
The U.S. business marketplace has approximately 7.4 million business
establishments in the top 337 metropolitan statistical areas, according to
Equifax/National Data Systems. Approximately 60% of these businesses use some
form of background music, based on marketing research performed by DMX Inc.
DMX distributes its programming services to the commercial marketplace
through its Commercial Division under the brand name DMX for Business(R). The
division distributes DMX for Business through three sales departments: Affiliate
Sales, an indirect sales channel of both cable and non-cable franchised
affiliates; National Account Sales; and two regional direct sales channels owned
and operated by DMX Inc.
Affiliate Sales. The Affiliate Sales department was the first sales channel
developed by the Commercial Division. Distribution of DMX for Business began in
1992 through DMX Inc.'s relationships with cable affiliates. Sales of DMX for
Business via cable distribution was limited by the access to businesses by cable
plant as well as cable distribution to major business markets throughout the
United States. When DBS distribution of DMX became available via AT&T's Telstar
402R satellite, Affiliate Sales began immediate expansion of its distribution of
DMX for Business, both within the existing cable franchise network as well as to
all non-affiliated U.S. markets. DMX for Business has licensed many of its
residential cable affiliates, as well as independent, third party affiliates,
with the rights to sell DMX for Business on a non-exclusive basis, thus
expanding its network of licensed distributors to cover markets where it is not
affiliated with a cable operator, or where there is distribution of a
competitive service. Affiliates may be licensed to distribute DMX via all three
distribution methods: cable, DBS and DMX-Disc.
DMX Inc.'s Commercial Division offers its affiliates the non-exclusive
right to sell DMX for Business and requires its affiliates to dedicate a minimum
level of resources and meet specified performance criteria to become a qualified
distributor and maintain a qualified status for distributing DMX for Business.
For cable affiliates, the typical commercial affiliation agreement runs
concurrently with the residential affiliation agreement. Non-cable affiliates
have a five year agreement to distribute DMX with a performance evaluation
annually. If the affiliate has not met DMX Inc.'s performance standards, it
could lose its DMX affiliation. DMX Inc. requires its affiliates to pay a set
minimum monthly license fee per commercial subscriber, or a percentage of the
subscriber's monthly retail rate, whichever is greater. The typical contract
term with a commercial establishment is for a 60 months at a retail rate of
approximately $55 per month. The retail pricing is determined by the affiliate
and depends upon many factors such as the square footage of the business, the
number of tuners or receivers used in the business and the contract length.
National Accounts. The National Account Sales department was launched
concurrently with the distribution of DMX for Business via DBS. The department
has been marketing DMX for approximately 3 years, selling DMX services to large
national chain accounts, such as retail and restaurant chains, that require or
demand centralized sales, installation, and customer services. The department
employs an in-house sales force specially trained for selling to national
accounts. DMX Inc.'s commercial non-exclusive affiliation agreements allow its
national accounts sales force to sell directly to commercial establishments
within existing affiliated franchise territories. Sales efforts are being
concentrated at the senior management level of these national account prospects.
National Account contracts generally provide for the DMX for Business service to
be delivered to all of the subscriber's locations for a monthly fee generally
ranging from $40-$55 per location depending upon many factors such as the number
of locations and the number of receivers used within each location. Contract
terms generally range from 36 to 60 months. DMX Inc. has signed multiple
national account agreements with various nationwide and regional business
chains, primarily in the hospitality and retail industries.
DMX Inc. has established strategic sales alliances to create name branding
and establish DMX for Business as a viable and credible competitive service for
national chains. Alliances in the cross-branding of DMX include: Bose
Corporation for packaged sound systems; AT&T Tridom in VSAT data and video
network applications; and PRIMESTAR for entertainment, news information and
sports TV video services. The DMX national account sales team works in
conjunction with these strategic sales alliances to cross-promote services and
to make joint sales presentations in selling packaged business communication
services and products.
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Owned and Operated Accounts. In May 1995, DMX Inc. launched its first owned
and operated sales group ("O&O") in the Southern California market, covering a
seven county area extending from Ventura to San Diego. DMX Inc. is expanding its
O&O markets and has recently opened three new offices in Phoenix, Arizona,
Atlanta, Georgia and Miami, Florida. The O&OS sell DMX and related business
communication services and products direct to both local and regional chain
accounts located in its territory through its own sales, installation and
service team. The O&OS also generates revenue from sound system equipment sales
and labor sales from installations and handles all equipment set-up and
follow-up service for new and existing accounts. The O&O's customer contracts
are for a monthly fee generally ranging from $55 to $150 depending on many
factors such as number of locations and the number of receivers installed in the
business, and length of contract. The average contract term ranges from 48 to 60
months for such customer contracts.
The Sound Solutions Center. DMX Inc. has established a customer service
center, The Sound Solutions Center which provides ongoing professional
management, training and support required to ensure that DMX subscribers receive
the high quality service demanded by the competitive marketplace. The support
services required by the music subscribers are often very specialized and
require a highly trained music consultant to support their music needs, as well
as general field installation and service requirements for music, sound system
and related communication equipment.
INTERNATIONAL BUSINESS.
Although DMX Inc. has recently focused on domestic growth, it continues to
review opportunities in distributing DMX in foreign markets. DMX Inc. has
licensing and royalty arrangements that cover Canada, Mexico, Latin America, the
Caribbean and Sub-Saharan Africa and continues to evaluate other possible joint
relationships to enhance the international distribution of DMX.
Europe.
In connection with the ceased operations of DMX-E on July 1, 1997 and the
definitive agreements entered into between DMX Inc., Jerold H. Rubinstein and
XTRA, XTRA has an exclusive five-year, royalty-free license to distribute the
DMX music service in Europe, the former Soviet Union, and in the Middle East and
will have the right to use DMX Inc.'s trademarks for two years. However, the
music service is currently not being distributed. (See "Business -- General
Development of Business".)
Canada.
The Canadian cable market is comprised of approximately 7.6 million basic
cable subscribers which represents approximately 76% of households passed by
cable. Pay service penetration, including extended basic service penetration,
reached approximately 88% during 1995 according to Media STATS September 1995
data. In addition to the residential subscriber potential for DMX, the Canadian
market has approximately 920,000 businesses, according to Statistics Canada.
In 1992, Shaw entered into a licensing and royalty agreement with DMX Inc.
which provides for a monthly per subscriber royalty for both residential and
commercial distribution. DMX Inc., through its subsidiary 450714 B.C. Ltd., is a
partner in The DMX-Canada Partnership ("DMX-Canada"), a partnership with
DMX-Canada Ltd., an affiliate of Shaw. DMX-Canada is the operating entity that
distributes the DMX service in Canada and its territories.
The residential DBS direct-to-home market in Canada is regulated by the
Canadian Radio/Television and Telecommunications Commission ("CRTC"). During
1996, the CRTC issued a license to DMX Inc. to provide subscription-based music
service to homes in Canada which requires special programming mandated by the
CRTC for the Canadian residential market. DMX is currently offered by DMX-Canada
to residential subscribers.
The CRTC does not regulate programming delivered to commercial
establishments by direct broadcast satellite. DMX-Canada launched DMX for
Business by DBS in November 1994, and has acquired over 2,000 commercial
subscribers in Canada since that date.
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In addition to forming DMX-Canada, Shaw has invested in DMX Inc. by
purchasing stock in private placements and making open market purchases, and
held approximately 14% of the outstanding common stock of DMX Inc. as of June
30, 1997. (See "Security Ownership of Certain Beneficial Owners and
Management".)
Latin America and The Caribbean.
On December 10, 1996, DMX Inc. entered into a letter agreement with Sky
Entertainment Services in Latin America ("Sky-LA"), pursuant to which Sky-LA was
granted the right to carry up to 40 DMX music formats on the Mexican, Brazilian
and South American platforms of Sky-LA. Sky Entertainment Services is the brand
name for the direct-to-home service offered by the strategic alliance formed by
Organzacoes Globo, Brazil's leading entertainment group; Mexico's Grupo Televisa
S.A.; The News Corporation, Limited; and Tele-Communications International, Inc.
(the "Sky Entertainment Alliance"). Tele-Communications International, Inc. is a
subsidiary of TCI.
Africa.
During 1995, DMX Inc. reached an agreement with TML-Bluestar ("TML-B"), a
South African joint venture company, for distribution of the DMX service in
Sub-Saharan Africa. TML-B then entered into a licensing arrangement with
MultiChoice Africa ("MultiChoice") for distribution of DMX to MultiChoice
subscribers by Ku-Band DBS. MultiChoice is the only subscriber management
services ("SMS") provider in South Africa, and offers SMS services to more than
2 million pay TV subscribers in Africa and Europe. In South Africa alone,
MultiChoice provides SMS to approximately 950,000 subscribers, according to data
provided by MultiChoice.
TML-B launched DMX in December 1995 and carries 40 music formats. DMX is
sold to both residential and commercial subscribers in exchange for per
subscriber license fees. DMX is being included as part of the MultiChoice basic
package of digital audio and video programs distributed via satellite to
customers in South Africa. DMX Inc. does not incur any incremental costs in
providing the signal for distribution to this market, nor is it responsible for
the payment of music rights, pursuant to the terms of its agreement. TML-B plans
to expand its distribution throughout other territories in Sub-Saharan Africa as
these areas develop. Currently TML-B has over 100,000 subscribers.
THE SUPERAUDIO SERVICE.
In May 1990, DMX Inc.'s subsidiary, Tempo, entered into the Galactic/Tempo
joint venture agreement with an affiliate of Jones (the eighth largest MSO), for
up to fifteen years to distribute Superaudio, a basic cable audio service. Each
company owns a 50% interest in the joint venture. The joint venture began
operation in July 1990 and combined DMX Inc.'s basic cable audio service, TEMPO
Sound, with its only direct competitor, Galactic Radio. In connection with the
joint venture arrangement, Jones provides both satellite space and uplinking
service for Superaudio.
Superaudio is a basic cable audio service which is distributed in analog
fidelity and currently provides nine formats of popular music and information
services, including news, children's programming and a reading service for the
visually impaired. The programming line-up includes the use of announcers and
some limited commercial announcements. The Superaudio service is distributed by
satellite from Jones' studio facilities in Englewood, Colorado to cable systems,
which deliver it to their cable subscribers.
The joint venture has entered into affiliation agreements with cable
operators which provide for a monthly license fee per basic subscriber. The
service is generally marketed as a basic cable audio service at no additional
charge to the subscriber. However, ultimate product placement and retail pricing
is left up to the individual cable operator.
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PROGRAMMING.
DMX Inc. believes that the primary consumer appeal of DMX is its
programming content. DMX Inc. has researched and refined each of its current 96
custom designed music formats. In contrast to radio, the programming content of
the DMX service is continuous music, without commercial or other interruption,
made available in distinct formats that are more narrowly tailored to fit the
music listener's specific taste. DMX is delivered in CD standard fidelity.
DMX appeals to a wide variety of listeners by providing multiple music
formats within each music genre. By offering defined music formats, DMX
subscribers can easily select the formats that appeal to them most. For example,
a classical music enthusiast may enjoy symphonies and chamber music, but may not
have the same interest in opera. DMX allows listeners to make these musical
choices without compromising their listening experience. The following table
shows the current format offering by genre:
CLASSICAL
Chamber Music
- - -Classical Guitar
- - -Lite Classical
- - -Opera
Symphonic
INSTRUMENTAL
Beautiful Instrumentals
- - -Contemporary Instrumentals
New Age
- - -Piano
JAZZ
- - -Acid Jazz
Classic Jazz
- - -Dixieland
- - -Jazz Vocal Blends
- - -Lite Jazz
COUNTRY
- - -Bluegrass
- - -Hot Country
Modern Country
Traditional Country
POP/ADULT CONTEMPORARY
Adult Contemporary
- - -Classic Hits Blend
Folk Rock
- - -Hit Sweep
Hottest Hits
Love Songs
- - -New Adult Contemporary
- - -New Music
- - -Power Hits
- - -Soft Hits
OLDIES
50's Oldies
60's Oldies
- - -70's Oldies
- - -80's Oldies
Big Band/Swing
- - -Euro Oldies
- - -Upbeat Oldies
ROCK
Album Rock
Alternative Rock
Classic Rock
Heavy Metal
URBAN
Dance
Gospel
- - -Motor City Sound
- - -R&B/Rap Hits
Rap
Traditional Blues
Urban Adult Contemporary
SPECIALTY
- - -Beach Party
- - -Cajun
- - -Children's
Christian Inspirational
- - -Contemporary Christian
- - -Contemporary Blues
- - -Environmental Sounds
- - -Folk Music
Great Singers
- - -Hawaiian Music
- - -Polka
Show Tunes
Holiday Music
- - -The Mirage Channel**
LATIN
- - -Brazilian Music
- - -Cumbia
- - -Flamenco Music
- - -Latin Contemporary
- - -Mariachi
- - -Rock en Espanol
Salsa
Tejano
INTERNATIONAL
- - -African Rhythms
- - -Caribbean Music
- - -Chinese Music
- - -Danish Hits
- - -Dutch Hits
- - -Euro Hits
- - -Flemish Music
- - -French Hits
- - -German Easy Listening
- - -German Folk Music
- - -German Oldies/Schlager
- - -German Rock
- - -Greek Music
- - -Hebrew Music
- - -Indian Music
- - -Irish Music
- - -Italian Hits
- - -Japanese Music
- - -Norwegian Music
- - -Oriental/Eastern Mediterranean
- - -Quebec Hits
- - -Quebec Pop/Rock
- - -Quebec Soft Hits
Reggae
- - -Traditional Italian
- - -Turkish Music
- - -U.K. Hits
- - -World Beat
- - - Expanded formats available only on DBS service
** The Mirage Channel is for the exclusive use of Mirage Resorts Incorporated
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DMX Inc. seeks consumer feedback on DMX programming to help determine when
to add or change formats to meet the ever changing tastes of its listeners. DMX
Inc. uses an 800 number for DMX subscribers to call as a means of gathering
customer's suggestions, addressing technical problems or complaints and at the
same time providing DMX Inc. with demographic and subscriber preference
information.
DMX Inc. programs its music using an in-house programming staff. This staff
is responsible for music research, on-going acquisition of new music material,
programming, scheduling and interfacing with DMX Inc.'s studio operations where
the DMX service is originated. DMX Inc. has developed a sophisticated system of
programming, originating and distributing the DMX service. This process involves
the use of certain software and hardware for selecting songs and encoding the
music information into a data stream, which then is uplinked to DMX Inc.'s
satellites for delivery to its cable affiliates and DBS customers. The same
programming process is used in developing DMX-Disc custom four hour CDs, which
are maintained in a library catalogue for replication and distribution to DMX
Inc.'s DMX-Disc customers.
DMX appeals to a wide variety of businesses by providing multiple music
programs within each music format. To help DMX subscribers in selecting the
appropriate music for their business, DMX for Business utilizes its Music
Application Program (MAP(TM)). MAP assists DMX subscribers in analyzing their
business image, demographics and desired energy level to create a custom music
program to enhance the business' atmosphere, making it simple to tailor the
audio atmosphere of any business.
In conjunction with the launch of DMX on a Ku-Band satellite, DMX Inc.
expanded its DMX programming from the 30 formats available by cable to a 120
channel capacity DBS system. There are currently 96 channels available for
commercial subscribers and DMX Inc. plans to continue expanding its music
line-up. DMX Inc. believes this will further enhance the appeal of DMX by
offering greater choice and flexibility to commercial subscribers. As part of
the DMX programming process, the programming staff constantly reviews and
modifies the programming line-up to meet the needs of its commercial
subscribers.
MARKETING.
DMX Inc.'s marketing strategy is to create and implement marketing and
promotional programs that establish DMX as the branded name and recognizable
leader in digital music services. This is being accomplished through the
development and deployment of training, sales management, and sales support
programs; business-to-business marketing programs; and the development of a
unique multimedia network of digital business communication services through
strategic sales and marketing alliances with some of the world's most recognized
companies.
DMX Inc.'s affiliate marketing focus is to support cable operators and
other DMX distributors by providing creative and integrated marketing campaigns
and music consulting advice. DMX Inc. has developed various marketing campaigns,
in addition to ongoing special promotions, to assist cable operators with the
acquisition and retention of DMX subscribers.
A typical acquisition program's target marketing materials include such
items as newspaper and cable guide advertising; point of purchase materials;
demonstration units; direct mail inserts; training programs for affiliate
customer service representatives; specialty holiday promotion materials; and
press releases and assistance with public relations events. Retention materials
include: a listener's guide to promote product understanding; a DMXODJ(R)
program guide explaining the use of the DMXODJ and format description.
DMX for Business marketing programs include: sales literature, trade
advertising, participation in local trade shows, and direct mail. Within
National Accounts and O&O, the Commercial Divisions' marketing programs include
attendance at national trade shows, trade advertising, and direct sales through
presentations, demonstrations and trials of DMX for Business. DMX also has
marketing relationships with: Bose Corporation, one of the world's leading
manufacturers of consumer and professional packaged sound systems and
loudspeaker products; AT&T Tridom for VSAT data and video network applications;
and Audiocom, one of the nation's leading providers of customized business
messaging, for message production services. All of these relationships form a
powerful alliance for the delivery of multimedia services to the commercial
marketplace and have validated DMX as a premiere digital music service in the
commercial market. In addition, the sales
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and marketing teams of each organization have increased DMX's market presence
and brand identification and have added reciprocal value to each other through
the distribution of these packaged services.
TECHNOLOGY.
DMX Inc. has rights to use the technology used in the origination,
distribution and reception of DMX via cable, DBS, and DMX-Disc. Affiliated cable
operators use special equipment designed to receive the DMX signal and then
deliver it over the existing cable network to cable subscribers in the
affiliated operator's system. Each subscriber (other than there receiving DMX
via Digital Distribution) must be equipped with a special DMX cable tuner (the
"DM-2000" tuner), which is designed to connect to the existing coaxial cable
used for other cable programming services and to any commercial stereo system
using industry standard audio jacks. Subscribers receiving DMX via direct
broadcast satellite must be equipped with a small satellite dish antenna and a
DMX DBS receiver (the "DR-200" receiver), which like the DM-2000 tuner connects
directly to any stereo system. Either tuner allows the subscriber to select any
of the available formats at any time. The tuner can be controlled manually, or
by a hand held remote control device. One such remote control device, the
DMXODJ(R), compatible with both tuners, provides the subscriber with complete
programming information about any song being heard on DMX. The information is
shown in a display window on the DMXODJ using a liquid crystal display.
Programming information provided includes: song title, artist, composer, album
title, record company label, DMX identification number and chart position, if
any. A basic remote control is also available which controls the necessary
functions on each tuner, but does not include the display of programming
information.
DMX is transmitted using multiple distribution technologies based on
various compression algorithms which allow the signal to be delivered to the
subscriber in CD quality fidelity. These compression technologies are known as
SuperSound, AC-3 and MUSICAM. The SuperSound scheme is currently used for U.S.
cable transmission and was also used for European cable transmission. AC-3 is
currently used for U.S. DBS transmission. MUSICAM was used for European DTH
transmission and could ultimately replace SuperSound for European cable
transmission. DMX Inc. expects to be in a position to offer the U.S. Cable
operators currently using SuperSound the option of migrating to AC-3 or MUSICAM,
based on the standard adopted for the U.S. market as digital compression
technology becomes widely-used.
RESEARCH & DEVELOPMENT.
DMX Inc. views its research and development efforts as a key component of
maintaining its leadership position in digital audio. In order to keep its
technology at the forefront and to deliver DMX using multiple distribution
paths, DMX Inc. is continuing research and development activities which include
refinements to its residential and commercial DBS technology and the development
of AC-3 and MUSICAM compression compatible technology for use in distribution of
its cable delivered signal.
An example of recent Research and Development efforts was the design and
testing of the DMX Adnet Storecasting system as well as the development of the
"What's on DMX" addition to DMX Inc.'s web page. In addition, DMX Inc. will
continue to develop enhancements to the DMX service and other upgrades to its
technology as may be required. DMX Inc. is currently testing its audio encoding
for compatibility with HITS, and has been through a series of technology
revisions since testing commenced in August 1996. The audio signal is Dolby AC-3
encoded under the M-Peg transmission technology, to be compatible with the
General Instrument digital boxes being used with HITS. The current DMXODJ is in
the process of being redesigned as the existing remote does not work with the
new digital boxes.
SATELLITES.
C-Band Transmission. DMX Inc. sub-leases space on a U.S. domestic
communications satellite known as Satcom C-3, Transponder 24. The sub-lease was
entered into in December 1992 with a subsidiary of TCI, Western
Tele-Communications, Inc. ("WTCI"), which in turn has leased the satellite
transponder from GE American Communications, Inc. DMX Inc. began using the
satellite in Spring 1993. This satellite is used
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by other cable industry program providers and its signal can be received by most
U.S. cable operators. The satellite areas of coverage include Hawaii, Alaska,
Mexico and Central and Northern South America.
Ku-Band Transmission. In March 1996 DMX completed the signal migration from
the AT&T Telstar 401 satellite to the Loral Telstar 4 satellite, formerly known
as the AT&T 402R satellite. The satellite sub-lease was entered into in May 1994
with WTCI, which in turn has leased the satellite transponder service operated
by Loral.
Although there has never been sustained interruption of DMX Inc.'s signals
due to transponder failure or satellite unavailability, failure or loss, no
assurance can be given that such event will not occur in the future. If such an
event were to occur or if WTCI were unable to provide transponder services to
DMX Inc., DMX Inc. would have to seek alternative transponder or satellite
facilities. However, alternative facilities may not be available on a timely or
cost-effective basis and may require the expense of repositioning each DBS
subscriber's satellite dish in order to receive signals from another satellite.
Any one or more of these events would require DMX Inc. to incur additional
expenditures and could degrade DMX Inc.'s ability to serve its customer base and
have may have a material adverse effect on DMX Inc.'s financial condition and
results of operations. If DMX Inc. is required to enter into new transponder
lease agreements, no assurance can be given that it will be able to do so on
terms as favorable as those in its current agreements with WTCI.
MUSIC RIGHTS.
DMX Inc. has entered into agreements or is operating under interim
agreements with the American Society of Composers, Authors and Publishers
("ASCAP"), Broadcast Music Inc. ("BMI"), and SESAC. The agreements provide for
performance royalties to be paid by DMX Inc. for all music played on DMX in the
United States.
DMX Inc.'s agreement with ASCAP for commercial distribution was previously
governed by an interim industry wide agreement. A final form of the agreement
covering commercial distribution was finalized in 1995. DMX Inc. signed that
agreement and thus effected a new agreement term through May 1999. The
residential agreement with ASCAP is currently governed by an interim, industry
wide agreement which will remain in effect until such time as new industry rates
are determined. During 1995, DMX Inc. entered into a new residential agreement
with BMI, with a term extending through September 30, 1999. DMX Inc.'s agreement
with BMI for commercial distribution has expired, and DMX Inc. is currently
operating under a month-to-month extension. DMX is part of an industry-wide
negotiating group currently discussing renewal terms, and expects this to be
finalized in the near future. DMX Inc.'s agreements with SESAC for residential
and commercial distribution both expired in June 1997. Certain of the agreements
that are being negotiated on an industrywide basis over new rate structures may
require retroactive rate increases. DMX Inc. has continued to accrue royalties
that are under negotiations based on its best estimates, after consultation with
legal counsel and consideration of the terms and rates of the expired contracts.
DMX Inc. is currently involved in an arbitration with the Recording
Industry Association of America regarding royalty rates which will be payable to
the sound recordings owners pursuant to the Digital Performance Right in Sound
Recordings Act of 1995 (see "Business -- Copyright and Royalty Provisions").
COMPETITION.
Digital audio services compete for consumers' time and discretionary income
that is spent on other sources of entertainment, such as radio, other
pre-recorded music services, on-air television, basic and premium television
services, and in-home video and audio systems. Competition for cable system
relationships to increase distribution is based primarily on the relative
quality and quantity of programming, financial strength, quality of marketing to
attract and retain subscribers, technical reliability and performance and the
overall cost of the services to affiliated distributors taking into account the
purchase cost of the hardware, the operating cost of the technology and the
monthly license fees.
DMX Inc. currently has one main competitor in the residential marketplace,
Music Choice, formerly known as Digital Cable Radio, a digital audio service
similar to DMX. DMX Inc. principally competes for
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third party cable and DBS affiliations with Music Choice. Once a decision is
made to affiliate with a digital audio provider, a substantial capital
investment must be made in cable system headend receiving equipment and
individual subscriber tuners and remote controls which are unique to that
digital audio provider's service. In addition, the channel capacity of many
cable systems might not permit the systems to carry two digital audio services.
In addition, most of DMX Inc.'s affiliation agreements prohibit a distributor
from offering a competitive music service. Therefore, DMX Inc. believes it is
unlikely that a cable operator or other affiliated distributor would introduce a
competitive digital audio service and, to date, none has done so. As a result,
DMX Inc. does not directly compete with Music Choice for subscribers once an
affiliation agreement is signed.
In the direct-to-home residential DBS marketplace, DMX is carried on the
PRIMESTAR networks. Music Choice is carried on DirecTV. Muzak, one of DMX Inc.'s
competitors in the commercial marketplace, secured residential DBS distribution
with Echostar Communication Corporation's DISH Network. DMX Inc. entered into an
agreement with Sky-LA and DMX is currently being offered in Mexico and Latin
America.
DMX Inc. also has competition in the commercial marketplace from other
pre-programmed business music providers, such as Muzak and AEI. However, the
distribution technology and the quality and quantity of music programming is
significantly different. As an example, Muzak does not offer cable distribution
and only has 16 channels on its standard analog DBS system. Although Muzak does
have 30 channels on the Echostar DISH Network, that service does not provide the
management control functions required by the commercial marketplace. AEI only
offers 6 channels from its analog DBS service. Also, all other competitors offer
fewer music programming options, compared to DMX's 96 options available on DBS.
DMX for Business is competitively priced with other business music services.
DMX-Disc, DMX Inc.'s CD technology, provides an additional distribution
method to better compete in situations which require an on-premise music service
solution. This technology is superior to the tape programs offered by AEI and
Muzak, and the only competitor to offer a similar product is AEI which also
offers an on-premise CD system.
REGULATION.
DMX Inc.'s operations generally are not of a type subject to regulation by
any government agency other than the routine regulations applicable to any
business. Although programming providers, such as DMX Inc., are not directly
regulated by the Federal Communications Commission ("FCC"), the operations of
cable television and satellite distribution systems are subject to the
Telecommunications Act of 1996 (the "Telecommunications Act"), the Cable
Television Consumer Protection and Competition Act of 1992 (the "1992 Act"), the
Communications Act of 1934, as amended, and the Cable Communications Policy Act
of 1984, as amended (the "Cable Act"), and to regulation thereunder by the FCC.
The FCC regulates the providers of satellite communications services and
facilities for the transmission of programming services, the cable television
systems that carry such services and to some extent the programming services
themselves. Cable television systems are also regulated by municipalities or
other state and local government authorities. Municipalities generally have the
jurisdiction to grant and to review the transfer of franchises, to review rates
charged to subscribers, and to require public, educational, governmental or
leased-access channels, except to the extent that such jurisdiction is preempted
by federal law. Any such rate regulation or other franchise conditions could
place downward pressure on subscriber fees earned by the providers of cable
television programming, and such regulatory carriage requirements could
adversely affect the number of channels available to carry such programming.
The 1992 Cable Act directed the FCC to promulgate regulations regarding the
sale and acquisition of cable programming between multichannel video program
distributors (including cable operators) and programming services in which a
cable operator has an attributable interest. The legislation and the
implementing regulations adopted by the FCC preclude virtually all exclusive
programming contracts between cable operators and programmers affiliated with
any cable operator (unless the FCC first determines the contract serves the
public interest) and generally prohibit a cable operator which has an
attributable interest in a programmer from improperly influencing the terms and
conditions of sale to unaffiliated multichannel video
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distributors. Further, the 1992 Cable Act requires that such affiliated
programmers make their programming services available to cable operators and
competing video technologies such as MMDS and DBS services on terms and
conditions that do not unfairly discriminate among such technologies. The 1996
Telecom Act has extended this requirement to programming services in which
telephone companies and other common carriers have attributable ownership
interests.
Any laws or regulations that adversely affect satellite or transmission
services, copyright or royalty agreements, or which would have an adverse effect
on the growth of the cable television and satellite industries may also have an
adverse effect on DMX Inc.
DMX Inc. believes certain revisions to the Communications Act of 1934
promulgated under the more recent legislative acts set forth above undoubtedly
will have an effect on cable television. The Telecommunications Act removes
regulatory restrictions which for years have kept the cable, telephone, long
distance and broadcast industries segregated. The reforms also provide for
removal of the price controls on cable television rates within three years of
enactment. It is still unclear if the changes made will significantly affect
programmers, such as DMX Inc.
Program Access and Carriage Agreements.
Program Access and Carriage Agreement provisions in the 1992 Act designed
to protect programmers, and ultimately consumers, from discriminatory practices
by cable system operators, affect programmers such as DMX Inc. For example,
cable operators are prohibited from requiring or coercing programmers to give
them exclusive carriage agreements, unfair pricing or financial interests in the
programming company in exchange for carrying a particular programming services.
While these provisions generally benefit DMX Inc. by guaranteeing it access to a
broader market, the MSOs with which DMX Inc. has affiliation agreements, and
which have ownership interests in DMX Inc., are also subject to these provisions
and may not discriminate against other programmers for the benefit of DMX Inc.
In the 103rd and 104th Congress, legislation was introduced which would
repeal the program access requirements of the 1992 Act; however, those efforts
have been unsuccessful to date and any future action is uncertain.
Copyright and Royalty Provisions.
On November 1, 1995, President Clinton signed into law Senate Bill 227, the
Digital Performance Right in Sound Recordings Act of 1995 ("1995 Act"). The law
amends U.S. copyright law to provide sound recording owners with an exclusive
performance right in sound recordings that are performed by means of
subscription service digital transmissions. The legislation was drafted to
protect performers and copyright owners in sound recordings, who were
potentially disadvantaged by the birth of the digital subscription services.
The 1995 Act establishes a new right of owners of the performance rights,
such as the performers and record companies, to control digital transmission of
sound recordings. The 1995 Act provides a compulsory license for non-interactive
subscription services, but does not provide a compulsory license for interactive
services which allow the listener to select performance of a musical piece based
on a menu or schedule. As a general matter, the digital performance right does
not apply to traditional radio and TV broadcasts, background music services such
as MUZAK, or to music transmitted at restaurants, department stores, hotels or
amusement parks in the traditional manner.
An arbitration proceeding relating to residential digital music
distribution is pending before the United States Copyright Office. The purpose
of the proceeding is to determine the statutory license royalty rate to be paid
under the 1995 Act by DMX Inc. (and other digital music residential subscription
services) on services transmitted to non-business subscribers. The proceeding
commenced August 2, 1996. The royalty rate would be retroactive to February
1996, and accordingly, DMX Inc. has been accruing 3% of residential subscriber
fee revenue since such date. Royalty rates of 0.5% by Muzak L.P., 1.25% by DMX
Inc., 2% by Digital Cable Radio Associates, and 41.5% by the Recording Industry
Association of America have been proposed to the
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<PAGE> 19
arbitrators. The results of the arbitration could have an adverse effect on DMX
Inc. if DMX Inc. is required to pay a higher license royalty rate than the rate
at which DMX Inc. has been accruing.
DMX Inc. is not aware of any new legislation that may be introduced in 1997
which would adversely impact its business. Any other changes in U.S. law or
regulations which would impose new or higher royalty fees, or cause compliance
with copyright and royalty regulations to be more burdensome, could have a
material adverse effect on DMX Inc.
TRADEMARKS.
DMX Inc. has filed for worldwide trademark registration (including DMX,
Digital Music Express, DMX for Business, DMXODJ and, through its joint venture
with Jones, Superaudio). DMX Inc. believes that its trademarks are valuable
properties and intends to defend them vigorously.
Under DMX Inc.'s agreements with XTRA, the European company will have the
right to use DMX Inc.'s trademarks for two years (See "Business -- General
Development of Business".)
PERSONNEL.
As of June 30, 1997, DMX Inc. had 125 full-time employees, 33 of whom were
engaged in administration, 58 in sales and marketing, 31 in studio and
programming and 3 in engineering. DMX Inc.'s employees are not covered by any
collective bargaining agreement, and DMX Inc. considers its relations with its
employees to be satisfactory.
ITEM 2. PROPERTIES.
TCI Music's, the successor Registrant, principal executive offices are
located at 8101 East Prentice Avenue, Suite 500, Englewood, Colorado 80111.
DMX Inc.'s corporate offices are located at 11400 West Olympic Boulevard,
Suite 1100 and Suite 1400, Los Angeles, California 90064-1507. The five year
lease agreement expires in September 2001 and contains a five year renewal
option. The premises are approximately 26,505 square feet and the monthly rental
rate is approximately $49,700 which is subject to certain cost of living
adjustments and pro rata property taxes.
DMX Inc. maintained a regional sales and marketing office in New York City,
located at 342 Madison Avenue, Suite 902, New York, New York 10173-0002. The New
York regional office occupied approximately 2,500 square feet and the monthly
rental rate was approximately $4,500. The office was closed in June 1997.
DMX Inc. leases studio facilities in Colorado for the origination and
uplinking of the DMX service. The studio is located at the facilities of
National Digital Television Center, Inc. a subsidiary of TCI ("NDTC"), at 4100
East Dry Creek Road, Littleton, Colorado 80122. The six year lease agreement
with NDTC, that expires on the last day of February 2000, has an automatic one
year renewal and is subject to DMX Inc.'s right to terminate the origination and
uplinking services at any time with 60 days prior notice and upon payment of
early termination fees. NDTC charges DMX Inc. approximately $6,700 for space
rental. In addition, NDTC has provided a capital lease for studio equipment at
the facility which totaled up to $2.2 million with interest at 9.5%. The
outstanding balance of the lease obligation at June 30, 1997 was $1,386,000.
DMX Inc. leased engineering facilities in Southern California located at
3551 Voyager Street, Suites 104 D and F, Torrance, California 90503. These
facilities contained approximately 4,400 square feet and the monthly rental was
$3,400. The office was closed in June 1997.
DMX Inc. maintains a regional sales office in Schaumberg, Illinois located
at 2300 North Barrington Road, Suite 555, Schaumberg, Illinois 60195. The office
is approximately 1,062 square feet and the monthly rental rate is approximately
$1,800. The five year lease expires in January 2001.
DMX Inc. maintains a regional sales office and its DMX-Disc operations in
Seattle, located at 1417 Fourth Avenue, Suite 800, Seattle, Washington 98101.
The office is approximately 2,400 square feet and the monthly rental rate is
approximately $2,600. The five year lease expires in September 2001.
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DMX Inc. maintains its Southern California O&O sales office in Irvine,
located at 15235 Alton Parkway, Suite 100, Irvine, California 92618. The office
is approximately 4,280 square feet and the monthly rental rate is approximately
$3,200. The four year lease expires in July 1999.
ITEM 3. LEGAL PROCEEDINGS.
From time to time DMX Inc. may be a party to legal actions arising in the
ordinary course of business, including claims by former employees. Although some
of these actions could be expected to involve claims for substantial amounts,
except as set forth in the next paragraph, DMX Inc. does not believe that any
currently pending litigation to which it is a party will have a materially
adverse effect on its financial condition or results of operations.
On September 8, 1996, a purported class action lawsuit entitled Brickell
Partners v. Jerold H. Rubinstein, Donne F. Fisher, Leo J. Hindery, Jr., James R.
Shaw, Sr., Kent Burkhart, J.C. Sparkman, Bhaskar Menon, DMX Inc., and
Tele-Communications, Inc. (Civil Action No. 15206) was filed in the Delaware
Chancery Court alleging, among other things, that the proposed acquisition of
DMX Inc. by TCI is wrongful, unfair and harmful to DMX Inc.'s public
stockholders and seeking to enjoin the consummation of the Merger. DMX Inc.
believes that this action is without merit and intends to defend it vigorously.
On July 23, 1997, Jeri L. Amstutz, a former employee of DMX Inc., filed a
complaint in Superior Court of California, County of Los Angeles, Jeri L.
Amstutz v. DMX Inc., Otis Smith, Jerold Rubinstein and Does 1 to 100. The
plaintiff alleges certain wrongful employment practices. The plaintiff seeks
compensatory damages for lost wages and benefits, foreseeable consequential and
incidental damages in an unspecified amount, as well a attorneys' fees, costs
and prejudgment interest. The plaintiff also seeks punitive damages and damages
for emotional distress (and similar harm) in unspecified amounts which the
plaintiff claims to believe will exceed $2,000,000.
On July 23, 1997, Marnie Tenden, a former employee of DMX Inc., filed a
complaint in Superior Court of California, County of Los Angeles, Marnie Tenden
v. DMX Inc., Otis Smith, Jerold Rubinstein and Does 1 to 100, which alleges sex
discrimination and retaliatory harassment. The plaintiff seeks compensatory
damages for lost wages and benefits, foreseeable consequential and incidental
damages, as well as attorneys' fees, costs and prejudgment interest. The
plaintiff also seeks punitive damages and damages for emotional distress (and
similar harm) in unspecified amounts which the plaintiff claims to believe will
exceed $500,000.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There were no matters submitted to a vote of DMX Inc.'s security holders
during the third quarter of DMX Inc.'s nine months ended June 30, 1997. However,
on July 11, 1997, a special meeting of the shareholders was held to vote upon
the approval and adoption of the Agreement and Plan of Merger, dated as of
February 6, 1997, as amended by Amendment One to Merger Agreement dated May 29,
1997, among DMX Inc., TCI, TCI Music and TCI Merger Sub, pursuant to which TCI
Merger Sub was merged with and into DMX Inc. with DMX Inc. as the surviving
Corporation. (See "Business -- General Development of Business".)
There were 48,192,420 shares represented by properly executed proxies out
of 59,586,594 shares outstanding and entitled to vote; of which 48,114,895
shares voted in favor, 58,550 shares voted against and 18,975 shares abstained.
There were no broker non-votes with respect to this proposal.
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PART II
ITEM 5.MARKET FOR DMX INC.'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
DMX Inc.'s Common Stock was quoted on the OTC Bulletin Board from April 8,
1997 to July 11, 1997. From May 28, 1996 to April 8, 1997, the DMX Common Stock
was quoted in the Nasdaq SmallCap Market under the symbol "TUNE". Until May 28,
1996, the DMX Common Stock was traded on the Nasdaq National Market System.
The following table sets forth the range of high and low sales prices of
DMX Common Stock for the periods indicated:
<TABLE>
<CAPTION>
QUARTER ENDED HIGH LOW
------------- ----- -----
<S> <C> <C>
December, 1994.............................................. 3.000 1.500
March, 1995................................................. 4.000 2.438
June, 1995.................................................. 3.375 2.000
September, 1995............................................. 3.313 2.125
December, 1995.............................................. 3.000 2.125
March, 1996................................................. 2.875 1.750
June, 1996.................................................. 2.250 0.813
September, 1996............................................. 1.938 0.563
December, 1996.............................................. 1.938 0.813
March, 1997................................................. 1.183 0.969
June, 1997.................................................. 1.780 1.680
</TABLE>
On June 30, 1997, the closing price reported by Nasdaq was $1.74. As of
June 30, 1997 there were 418 Stockholders of record of DMX Inc. with
approximately 35.3% of the shares held in "street name."
DIVIDENDS.
No dividends have been paid by DMX Inc. as of June 30, 1997.
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ITEM 6. SELECTED FINANCIAL DATA.
The following is a summary of selected financial data. See the financial
statements included herein for more detailed information.
<TABLE>
<CAPTION>
NINE MONTHS
ENDED FISCAL YEAR ENDED SEPTEMBER 30,
------------- ---------------------------------------------------------
JUNE 30, 1997 1996 1995 1994 1993
------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA
Revenue.......................... $ 16,594,278 $ 17,326,603 $ 12,773,384 $ 9,377,059 $ 4,792,527
Operating, selling, general and
administrative expenses........ 27,438,525 30,459,586 22,166,898 20,558,849 17,726,103
Depreciation and amortization.... 1,789,024 1,883,415 1,341,775 1,065,666 790,229
Loss on disposal of DMX-
Europe N.V..................... 1,737,554 7,153,278 -- -- --
------------ ------------ ------------ ------------ ------------
Net operating loss............... (14,370,825) (22,169,676) (10,735,289) (12,247,456) (13,723,805)
Equity earnings in Galactic/
TEMPO.......................... 203,436 197,227 306,640 223,852 143,622
Equity loss in DMX-Europe N.V.... -- (11,853,686) (13,271,599) (4,746,239) (3,553,932)
Interest income (expense), net... (397,409) (188,507) 73,540 38,168 85,943
Other income (expense), net...... (142,946) 159,865 547,179 226,461 640,197
------------ ------------ ------------ ------------ ------------
Net loss......................... $(14,707,744) $(33,854,777) $(23,079,529) $(16,505,214) $(16,407,975)
============ ============ ============ ============ ============
Loss per share................... $ (0.25) $ (0.68) $ (0.60) $ (0.48) $ (0.52)
============ ============ ============ ============ ============
BALANCE SHEET DATA
(AT END OF YEAR)
Current assets................... $ 6,186,452 $ 7,719,069 $ 12,122,658 $ 9,650,493 $ 3,102,741
Investments in Galactic/TEMPO
Sound Partnership.............. 557,592 504,156 456,929 450,289 476,448
Goodwill, net of accumulated
amortization................... -- 4,535,658 -- -- 15,459
Other assets, net of accumulated
depreciation................... 109,678 99,148 166,419 55,169 54,000
Property and equipment, net of
accumulated depreciation....... 4,132,173 5,893,988 4,336,378 4,443,995 3,225,093
------------ ------------ ------------ ------------ ------------
Total assets..................... $ 10,985,895 $ 18,752,019 $ 17,082,384 $ 14,599,946 $ 6,873,741
============ ============ ============ ============ ============
Current liabilities.............. $ 22,599,513 $ 16,636,107 $ 3,250,042 $ 3,405,082 $ 3,714,835
Royalty payable.................. 1,773,275 1,773,275 1,251,983 713,421 267,770
Deferred revenue................. 308,895 295,461 376,395 418,540 --
Capital lease obligation......... 821,548 1,401,426 1,446,085 1,502,990 --
Notes payable.................... 1,784,889 -- -- 201,090 382,545
Investment in and advances to
DMX-Europe N.V................. -- -- 15,886,116 8,175,171 3,428,932
------------ ------------ ------------ ------------ ------------
Total liabilities................ 27,288,120 20,106,269 22,210,621 14,416,294 7,794,082
Net stockholders' (deficit)
equity......................... (16,302,225) (1,354,250) (5,128,237) 183,652 (920,341)
------------ ------------ ------------ ------------ ------------
Total liabilities and
stockholders'
equity......................... $ 10,985,895 $ 18,752,019 $ 17,082,384 $ 14,599,946 $ 6,873,741
============ ============ ============ ============ ============
</TABLE>
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ITEM 7.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
RESULTS OF OPERATIONS.
Revenue DMX Inc.
Total revenues, exclusive of revenue from DMX-Europe N.V., for the nine
months ended June 30, 1997 increased to $14.4 million from $12 million for the
nine months ended June 30, 1996. The $2.4 million or 20% increase was primarily
attributed to: (i) continued growth in commercial subscriber fee revenue as a
result of increased sales and marketing activity in the affiliate sales,
national accounts, and O&O groups; (ii) continued growth in PRIMESTAR
residential subscriber fees; and (iii) increased other revenue representing
equipment sales and lease revenue related to the growth and increased sales and
marketing activity of the commercial sales group.
Commercial subscriber fees represented approximately 44% as compared to 34%
of total subscriber fee revenue for the nine months ended June 30, 1997 and
1996, respectively. Residential subscriber fees represented approximately 56%
and 66% of total subscriber fee revenue for the nine months ended June 30, 1997,
and 1996, respectively. Subscriber fee revenue from TCI and its affiliates
represented approximately 50% and 57% of total subscriber fees, for the nine
months ended June 30, 1997 and 1996, respectively.
Total revenues, exclusive of revenue from DMX-Europe N.V., for the fiscal
year ended September 30, 1996 increased to $16.5 million from $12.8 million for
the fiscal year ended September 30, 1995. The $3.7 million or 29% increase was
primarily attributed to: (i) increased residential subscriber fees resulting
from the launch of DMX on PRIMESTAR in the first fiscal quarter of 1996 (this
added source of revenue did not exist in the prior year); (ii) continued growth
in commercial subscriber fee revenue as a result of increased sales and
marketing activity in the affiliate sales, national accounts, and O&O groups;
and (iii) increased other revenue representing equipment sales and lease revenue
related to the growth and increased sales and marketing activity of the
commercial sales group. In June, 1994, DMX Inc. launched on the Ku-Band
satellite which enabled DMX for Business to gain access to nearly 100% of the
business marketplace in the United States. Concurrent with this launch, DMX
Inc.'s commercial division implemented its national accounts sales program, and
in May 1995 launched its first O&O sales group in the Southern California
business market.
Commercial subscriber fees represented approximately 36% as compared to 31%
of total subscriber fee revenue for the fiscal years ended September 30, 1996
and 1995, respectively. Residential subscriber fees represented approximately
64% and 69% of total subscriber fee revenue for the fiscal years ended September
30, 1996, and 1995, respectively. Subscriber fee revenue from TCI and its
affiliates represented approximately 55% and 61% of total subscriber fees, for
the years ended September 30, 1996 and 1995, respectively.
Cable operators have recently begun to launch a new method of distributing
video and other programming using digital compression technology. The technology
enables TCI and each other participating cable operator to increase their
program offerings and create new packages that could include, if they so choose,
DMX music services as part of a package of video and music services.
The launch of digital compression technology has the potential to provide
an additional distribution market for DMX music services if cable operators
utilizing Digital Distribution, such as TCI, elect to offer DMX music services
as part of one or more digital video programming packages, thereby capturing as
subscribers customers who might not otherwise elect to subscribe to DMX music
services on an a la carte basis. However, the launch of and the transition to
Digital Distribution may also have the effect of materially reducing residential
subscriber fee revenues as a result of the expected change from the a la carte
fee structure currently in effect.
DMX Inc. expects that license fees paid by cable operators for Digital
Distribution that include DMX music services in their digital packages will be
much lower than the a la carte fees now paid under affiliation agreements
currently in effect. While a substantial increase in the overall number of
residential subscribers purchasing digital packages that include DMX music
services could result in revenues equal to or exceeding the revenues from
residential subscribers currently electing to purchase DMX services for a
separate a la carte
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fee, such a result depends on a number of factors over which TCI Music has no
control, including whether cable operators elect to include DMX music services
as part of their digital packages, the acceptance by consumers of the digital
products and whether those electing to purchase the digital packages are already
DMX subscribers. Neither TCI Music nor DMX Inc. can predict the number of DMX
residential subscribers that will elect to receive a digital package that
includes DMX when it is offered. Accordingly, DMX Inc. and TCI Music's revenue
could be materially adversely affected.
General and Administrative Expenses.
General and administrative expenses increased to $5.3 million for the nine
months ended June 30, 1997 from $3.9 million for the nine months ended June 30,
1996. The net increase of $1.4 million or 36% was primarily attributed to
increased legal expenses of $978,000 due to issues related to the possible
restructure of DMX-E and the Merger with TCI Music a provision for bad debts of
$810,000; and reduced by decreased salaries expense of $422,000 due to a
performance bonus that was paid to Mr. Rubinstein, the Chairman of DMX Inc. in
the first quarter of the 1996 fiscal year and two executives and other staff
leaving DMX Inc. in the latter half of the 1996 fiscal year; increased rent
expense of $158,000 as DMX Inc. expanded its office premises in the Spring of
1996; and decreased public and shareholder relations expenses of $129,000 as the
Merger transaction was first announced in September 1996 and activities related
to those activities were curtailed.
General and administrative expenses increased to $5.8 million for the
fiscal year ended September 30, 1996 from $5.5 million for 1995. The $291,000
net increase was primarily attributed to net increases in personnel cost of
$290,000 which included an increased performance bonus paid to Mr. Rubinstein, a
reclassification of a certain executive's compensation from sales and marketing
to general and administrative, and increases due to additional staff which all
occurred in the first half of the fiscal year and was partially offset by
decreases in salaries because of an executive officer and other staff leaving
DMX Inc. in the second half of the fiscal year. Other net changes in general and
administrative expenses included increased legal fees of $161,000 and increased
printing and investor materials of $100,000 due to the DMX-E merger and special
shareholders meeting regarding such merger and other business development
activities; partially offset by a reduction in occupancy expense of $77,000
which resulted from the negotiation of more favorable lease terms; decreased
consultant fee expense of $74,000; decreased other shareholder relations expense
of $63,000 and decreased public relations expense of $26,000.
Sales and Marketing Expenses.
Sales and marketing expense decreased to $5.3 million for the nine months
ended June 30, 1997 from $6.7 million for the nine months ended June 30, 1996.
The $1.4 million or 21% decrease was attributed to a decrease in the Scientific
Atlanta royalty expense of $422,000 as the manufacture, distribution and
servicing agreement with Scientific Atlanta, Inc. terminated in August 1996; a
decrease in net installation cost of $66,000 for commercial accounts as DMX Inc.
typically recoups the cost of installations; decreased warranty service expense
of $112,000; and decreases in marketing and advertising expenses of $224,000,
trade shows and conferences of $170,000, travel and entertainment of $151,000,
and office and other expenses of due to DMX Inc.'s effort to reduce overhead
expenses.
Sales and marketing expense increased to $8.6 million for the fiscal year
ended September 30, 1996 from $7.4 million for 1995. The $1.2 million or 16%
increase included an increase of $477,000 in salaries and commissions resulting
from increased sales and marketing activities of DMX Inc.'s commercial division,
which added sales and support staff for the national account sales program and
the O&O group. Other sales and marketing expense increases primarily represented
increased office, rent and telephone of $221,000 related to the commercial
division expansion; increased travel and entertainment and convention and
conferences totaling $363,000, reflecting growth in the sales force and direct
marketing activities for both the residential and commercial divisions,
including DMX Inc.'s contribution and marketing activities related to the 1996
Summer Olympics.
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<PAGE> 25
Studio and Programming Expenses.
Studio and programming expense increased to $7.5 million for the nine
months ended June 30, 1997 from $6.6 million for the nine months ended June 30,
1996. The net increase of $932,000 or 14% increase was primarily attributed to
increased music rights expense of $765,000 commensurate with the growth in
subscribers and fee revenue and $334,000 relating to programming expenses
incurred on behalf of DMX-E for the nine months ended June 30, 1997. Prior to
the consolidation of DMX-E financial statements with DMX Inc.'s, these expenses
were charged to DMX-E; however, the benefit of DMX-E's reimbursement has been
eliminated in the consolidated financial statements for the nine months ended
June 30, 1997. These increases were offset by decreased satellite and uplinking
expense of $275,000 due to the double illumination cost as DMX Inc. migrated
from the AT&T Telstar 401 Ku-Band satellite to the Loral Telstar 4 satellite,
formerly known as the AT&T Telstar 402R Ku-Band in 1996.
Studio and programming expense increased to $9.0 million for the fiscal
year ended September 30, 1996 from $7.8 million for 1995 The $1.2 million or 15%
increase represented increased music rights expense of $776,000 commensurate
with the growth in subscribers and fee revenue; increased uplink and satellite
cost of $156,000, representing the cost of double illumination as DMX Inc.
migrated from the AT&T Telstar 401 Ku-Band satellite to the AT&T Telstar 402R
Ku-Band satellite in the second quarter of the fiscal year. The remainder of the
net increase of $231,000 represented increased salaries, program consultant
expenses and the direct costs related to DMX Inc.'s increase in music formats
from approximately 69 to over 90 over the last year and DMX-Disc production cost
incurred to establish the new on-premise DMX-Disc product line.
Research and Development Expenses.
Research and development expenses included costs incurred for the ongoing
development of new technologies and refinements of existing technology used in
the distribution of DMX both in the U.S. and in Europe including the DTH
technology developed for DMX-E's launch on the ASTRA satellite in 1995. Overhead
and project development costs of the engineering department were allocated on a
shared benefit basis with DMX-E in previous years.
Research and development expense was $630,000 for the nine months ended
June 30, 1997 as compared to $588,000 for the nine months ended June 30, 1996.
The increase was primarily related to the severance and cost related to the
close of the engineering office on June 30, 1997.
Research and development expense of $778,000 for the fiscal year ended
September 30, 1996 remained comparable with the prior year's expense of $725,000
as the infrastructure for both DMX Inc. and DMX-E had been established and new
development of major projects was curtailed.
Stock Bonus and Options Compensation.
Stock bonus and option compensation expense decreased to $137,000 for the
nine months ended June 30, 1997 from $412,000 for nine months ended June 30,
1996 as the expiration date of the grant was December 31, 1996. The expense
related to the extension of the exercise date to December 31, 1996 on options to
purchase 350,000 shares of common stock granted to Mr. Rubinstein in October
1990.
Operating Expenses -- DMX-E.
DMX Inc. has not previously consolidated the operations of DMX-E and such
amounts for 1996 represent the activities from acquisition date of May 17, 1996
through September 30, 1996. As discussed below, DMX-E ceased operations on July
1, 1997.
Disposal of DMX-E.
DMX-E NV and its subsidiary DMX-E UK, ceased operation on July 1, 1997.
DMX-E UK was placed into receivership on July 1, 1997 and into liquidation
proceedings on July 18, 1997. DMX-E NV, although inactive since July 1, 1997, is
scheduled for liquidation proceedings to commence during the fourth calendar
quarter of 1997.
25
<PAGE> 26
As a result of the DMX-E cessation of operations, the Definitive Agreements
between DMX Inc.; Mr. Jerold H. Rubinstein, an individual; and XTRA were put
into place whereby the termination certificate was executed in July 1997, which
terminated the Stock Purchase Agreement dated December 18, 1996 that provided
for the disposition of DMX-E to Mr. Jerold H. Rubinstein. Pursuant to the
Definitive Agreements, DMX Inc. obtained a 10% interest in XTRA and the Channel
Distribution Agreement was executed between XTRA and DMX Inc. The Channel
Distribution Agreement provided XTRA an exclusive, five-year, royalty-free
license to distribute the DMX music service in Europe, the former Soviet Union
and in the Middle East and the right to use DMX Inc.'s trademarks for two years.
The music service is currently not being distributed by XTRA as Mr. Jerold H.
Rubinstein is seeking financial partners. At June 30, 1997 the loss on disposal
of DMX-E of $1.7 million represented the write down of assets to their net
realizable values.
At September 30, 1996 the estimated loss on disposal of DMX-E was accounted
for in DMX Inc.'s consolidated financial statements. The estimated loss on the
disposal of DMX-E includes DMX Inc.'s net investment in these subsidiaries of
$5.7 million and other obligations guaranteed by DMX Inc. of $1.4 million.
The net loss from DMX-E operations decreased to $6.4 million for the nine
months ended June 30, 1997 compared to $14 million for the nine months ended
June 30, 1996. In the fourth quarter ended September 30, 1996, DMX Inc. ceased
funding the operations of DMX-E. The net losses since that period were primarily
related to accrued expenses for their uplink and satellite business and
associated advertising and marketing commitments.
The net loss from DMX-E operations increased to $16.8 million for the
fiscal year ended September 30, 1996 from $13.3 million for 1995. The increase
of $3.5 million was attributed to DMX Inc. recording 100% of DMX-E net loss for
the fiscal year ended September 30, 1996 as compared to recording 100% of DMX-E
loss for the fourth quarter of the fiscal year ended September 30, 1995 and 51%
for the first three quarters of the fiscal year 1995. In the fiscal year ended
September 30, 1995, DMX-E fully utilized all funds available under the $25
million credit facility provided by TCI Euromusic, Inc., an indirect affiliate
of TCI. In the fourth quarter of the fiscal year ended September 30, 1995, DMX
Inc. funded operating losses of DMX-E and accordingly the equity in loss of
DMX-E included operating losses funded by DMX Inc. in excess of its guaranteed
portion of the debt.
LIQUIDITY AND CAPITAL RESOURCES.
The decrease in cash of $288,000 for the nine months ended June 30, 1997,
was the net result of $2.5 million provided by financing activities and used to
purchase equipment of $1.1 million, primarily related to the obtaining of
commercial customers, $229,000 used to pay DMX Inc.'s capital lease obligation
and approximately $1.5 million of cash used in operating activities.
Historically DMX Inc. has used cash provided by financing activities to
fund its operating and investing activities. With the discontinuance of the
operations of DMX-E and the implementation of certain cost reduction measures,
management believes that DMX Inc. will begin to generate cash from its operating
activities on a prospective basis. However, there can be no assurances that DMX
Inc.'s operating activities will in fact generate cash.
DMX Inc. has borrowed $3.5 million from TCI pursuant to a February 6, 1996
loan agreement. The loan bears interest at an annual interest rate of 12.5% and
is being paid in 34 monthly installments commencing on September 1, 1997. DMX
Inc. presently has no plans to seek additional financing as it intends to
primarily rely on funds provided by its parent, TCI Music.
As more fully described under "Business -- General -- Development of
Business," on July 11, 1997, DMX Inc. and TCI Music consummated a merger
pursuant to which DMX Inc. became a wholly-owned subsidiary of TCI Music. In
connection with the merger, TCI Music issued a $40 million promissory note
payable to TCI. The promissory note is due and payable on the January 10, 1998
maturity date. TCI Music is seeking to obtain debt financing to fund the
repayment of such promissory note and to provide TCI Music with working capital.
No assurance can be given that such financing will be obtained on terms
acceptable to TCI Music or that such financing will be obtained prior to the
maturity date of the promissory note. Also in
26
<PAGE> 27
connection with the Merger, and pursuant to a Contribution Agreement between TCI
and TCI Music, TCI will transfer to TCI Music among other things, the revenue it
derives from its business of distributing services to DMX Inc.'s subscribers.
During the two months ended August 31, 1997, TCI Music has received $3 million
of revenue contributions from TCI. However, there can be no assurance that the
revenues will continue at the current historical levels as the launch of and the
transition to Digital Distribution may have the effect of materially reducing
residential subscriber fee revenue as a result of the expected change from the a
la carte fee structure currently in effect. (See "Business -- Business of DMX
Inc. -- Residential Service" and "Management Discussion and Analysis -- Results
of Operations -- Revenue DMX Inc.") TCI Music also anticipates that it will use
the funds provided by the above-described source of liquidity to supplement the
sources of liquidity of DMX Inc. and to satisfy other liquidity requirements,
including those that may arise as the result of the proposed acquisition of The
Box and Paradigm, as further described below.
As further described under "Business -- General Development of Business,"
TCI Music has entered into separate agreement to merge with The Box and
Paradigm. The consideration for the Box Merger is anticipated to be
approximately $36 million and is to be satisfied by the issuance of Music
Preferred Stock. The consideration for the Paradigm Merger is anticipated to be
approximately $24 million of TCI Music Series A Common Stock and the assumption
of debt or contribution in cable of approximately $5 million. Although there is
no assurance, it is currently anticipated that the Box Merger and the Paradigm
Merger will be consummated during the fourth quarter of 1997 or the first
quarter of 1998.
As described in notes 5 and 11 to DMX Inc.'s consolidated financial
statements and in the disposal of DMX-E above, DMX-E has ceased operations on
July 1, 1997. DMX-E UK was placed into receivership on July 1, 1997 and into
liquidation proceedings on July 18, 1997. DMX-E NV, although inactive since July
1, 1997, is scheduled for liquidation proceedings to commence during the fourth
calendar quarter of 1997. In such circumstances, claims may be filed under the
guarantees. Such adjustments could have a material adverse effect upon the
financial position and results of operations of DMX Inc.
Inflation.
Management believes that the effect of inflation has not been material to
DMX Inc. However, inflation in the costs of personnel, marketing, programming or
certain other operating expenses could significantly affect DMX Inc.'s future
operations. Current economic conditions indicate a relatively low inflationary
period and as a result, inflation is not expected to materially affect DMX Inc.
in fiscal year 1998.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
See Item 14. Exhibits, Financial Statement Schedules and Reports on Form
8-K for DMX Inc.'s Consolidated Financial Statements, the notes thereto and
Schedules filed as part of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
27
<PAGE> 28
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF DMX INC.
DMX Inc.'s Certificate of Incorporation and Bylaws provide that the number
of directors shall be determined from time to time by the Board of Directors but
may not be less than three. The Board of Directors at June 30, 1997 was composed
of seven members. The Bylaws further provide for the division of the directors
into three classes of approximately equal size, with directors in each class
elected for a three-year term and approximately one-third of the directors
elected each year.
None of the directors or executive officers were selected pursuant to any
arrangement or understanding, other than with the directors and executive
officers of DMX Inc. acting within their capacity as such. There are no family
relationships among directors or executive officers of DMX Inc. as of the date
hereof.
The following table sets forth biographical information of the directors of
DMX Inc.:
<TABLE>
<CAPTION>
YEAR FIRST
BECAME
PRINCIPAL OCCUPATION OR EMPLOYMENT DIRECTOR/
DIRECTORS AND OCCUPATION FOR THE PAST FIVE YEARS TERM EXPIRES
--------- -------------------------------------- ------------
<S> <C> <C>
Kent Burkhart.................. Chairman of Burkhart/Douglas and Associates since 1973. He 1990(2)
Born: July 22, 1934 is also President and a Director of Degree
Communications.(1)
Donne F. Fisher................ Director of TCI Music effective January 1997. He has served 1996(2)
Born: May 24, 1938 as a director of TCI since 1994 and a director of TCI
Communications, Inc. ("TCIC") since 1980. Mr. Fisher was
Executive Vice President and Treasurer of TCI from January
1994 until January 1, 1996; served as Executive Vice
President of TCIC from December 1991 to October 1994; and
was previously Senior Vice President of TCIC since 1982 and
Treasurer since 1970. Since January 1, 1996 he has provided
consulting services to TCI. Mr. Fisher also serves as a
director of General Communication, Inc. and United Video
Satellite Group Inc.
Leo J. Hindery, Jr............. Chairman of the Board of TCI Music effective January 1997. 1996(2)
Born: October 31, 1947 He was appointed director of TCI in May 1997 and President
and Chief Operating Officer of TCI effective March 1, 1997
and was appointed Director and President of TCIC in March
1997. From 1988 to 1997 he was the managing general partner
of InterMedia Partners and its affiliated entities.
InterMedia Partners is a multi-system cable television
operator.
Bhaskar Menon.................. Formerly Chairman and Chief Executive Officer of EMI Music 1991(2)
Born: May 29, 1934 Worldwide from 1979 through July 1990; President and
Chairman of the International Federation of the Phonographic
Industry (IFPI) from 1989 through June 1991; private
businessman since June 1991; Chairman of I.M.I. Incorporated
since 1995.
Jerold H. Rubinstein........... Chairman of the Board and Chief Executive Officer of DMX 1986(2)
Born: July 7, 1938 Inc. since May 1986; Director of United Services Advisors,
Inc. since 1989; Director of Spatializer Audio Laboratories,
Inc. since 1992; Chairman of the Board of DMX-Europe since
May 1993.
James R. Shaw, Sr.............. Founder, President and Chief Executive Officer of Shaw 1993(2)
Born: August 14, 1934 Communications Inc. since 1970.
J.C. Sparkman.................. Appointed director of TCI Music effective May 1997. He has 1989(2)
Born: September 12, 1932 been a director of TCI since December 1996. He served as
Executive Vice President of TCI from January 1994 through
March 1995. Mr. Sparkman retired in March of 1995 and has
provided consulting services to TCI since March 1995. He
served as Executive Vice President of TCIC from 1987 to
October 1995. He also serves as a director of Shaw
Communications Inc. and United Video Satellite Group Inc.
</TABLE>
28
<PAGE> 29
- - ---------------
(1) A radio venture, which Mr. Burkhart was involved with through Degree
Communications, defaulted on its loan obligation in the amount of
$6,000,000. The secured lender asserted its rights to have a receiver
appointed in August 1991. The receivership closed September 29, 1992.
(2) Effective July 11, 1997, upon consummation of DMX Inc.'s merger with a
subsidiary of TCI Music, (See "Business -- General Development of
Business".) the directorship ceased.
The following table sets forth biographical information of the executive
officers of DMX Inc. For a discussion of the biographical information of Mr.
Rubinstein, see "Directors" immediately above.
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION OR EMPLOYMENT
EXECUTIVE OFFICERS AND OCCUPATION FOR THE PAST FIVE YEARS
------------------ --------------------------------------
<S> <C>
Lon A. Troxel.................. Appointed a director of TCI Music effective May 1997. He was
Born: October 14, 1947 appointed Chief Operating Officer of DMX in April 1997 and
served as Executive Vice President, Commercial Division from
April 1994 to April 1997. Mr. Troxel served as Vice
President, U.S./Canada Dealer Sales of AEI Music Networks,
Inc. during 1991 and as Chief Executive Officer and
President of Protection One Alarm Services from May 1988 to
October 1990.(1)
Joanne Wendy Kim............... Corporate Secretary and Chief Financial Officer since 1995.
Born: March 2, 1955 Formerly Senior Vice President, Chief Financial Officer of
Bank of San Pedro from 1992 to 1994. Formerly Senior Manager
at KPMG Peat Marwick LLP from 1981 to 1992.(2)
Douglas G. Talley.............. Executive Vice President and Chief Technical Officer of DMX
Born: April 14, 1947 Inc. since January 1995. Formerly Vice President and Chief
Technical Officer from October 1992 to January 1995.
Formerly Chairman and founder of Digital Radio Labs from
1988 to 1992.
Otis Smith..................... Executive Vice President, Programming and Residential
Born: June 4, 1941 Division since June 1995, Executive Vice President,
Programming of DMX Inc. since December 1992. Formerly a
record industry executive.(3)
</TABLE>
- - ---------------
(1) Effective July 11, 1997, Mr. Troxel was appointed President and Chief
Executive Officer of DMX Inc.
(2) Effective July 11, 1997, Ms. Kim was appointed Executive Vice President and
Chief Financial Officer of DMX Inc.
(3) Effective July 11, 1997, Mr. Smith was no longer an officer or employee of
DMX Inc.
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.
Under Section 16(a) of the Exchange Act, DMX Inc.'s directors, executive
officers and any persons holding ten percent or more of the Common Stock are
required to report their ownership of Company Stock and any changes in that
ownership to the Securities and Exchange Commission (the "SEC") and to furnish
DMX Inc. with copies of such reports. Specific due dates for these reports have
been established and DMX Inc. is required to report in its Proxy Statement any
failure to file on a timely basis by such persons. Based solely upon a review of
copies of reports filed with the SEC during the fiscal year ended September 30,
1996, all persons subject to the reporting requirements of Section 16(a) filed
all required reports on a timely basis.
29
<PAGE> 30
ITEM 11. EXECUTIVE COMPENSATION.
SUMMARY OF CASH AND CERTAIN OTHER COMPENSATION.
The following table sets forth certain summary information concerning
compensation paid or accrued by DMX Inc. to or on behalf of DMX Inc.'s Chief
Executive Officer and for the four most highly compensated executive officers of
DMX Inc. (the "Named Executives") for the nine months ended June 30, 1997 and
for each of the fiscal years ended September 30, 1996 and 1995:
Summary Compensation Table.
<TABLE>
<CAPTION>
LONG TERM COMPENSATION
---------------------------------------
ANNUAL COMPENSATION AWARDS PAYOUT
------------------------------ ------------------------------ ------
OTHER SECURITIES
ANNUAL RESTRICTED UNDERLYING LTIP ALL OTHER
NAME AND PRINCIPAL/POSITION YEAR SALARY(1) BONUS COMP STOCK AWARDS OPTIONS/SARS(#) PAYOUT COMP(2)
- - --------------------------- ---- --------- -------- ------- ------------ --------------- ------ ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
JEROLD H. RUBINSTEIN....... 1997(3) $386,538 -- -- -- -- -- --
Chairman of the Board 1996 509,600 $250,000 -- -- -- -- $579
Chief Executive Officer 1995 509,615 200,000 -- -- 1,000,000 -- 924
LON A. TROXEL.............. 1997(3) 209,135 -- -- -- -- -- --
Chief Operating Officer 1996 256,377 -- -- -- -- -- --
1995 241,673 -- -- -- 25,000 -- --
JOANNE WENDY KIM........... 1997(3) 110,096 101,250 -- -- -- -- --
Chief Financial Officer 1996 110,975 -- -- -- -- -- --
1995(4) 26,654 -- -- -- 20,000 -- --
DOUGLAS G. TALLEY.......... 1997(3) 215,288 -- -- -- -- -- --
Executive Vice President, 1996 248,077 -- -- -- -- -- --
Chief Technical Officer 1995 223,077 -- -- -- 75,000 -- --
OTIS SMITH................. 1997(3) 211,538 -- -- -- -- -- --
Executive Vice President, 1996 280,289 -- -- -- -- -- --
Programming and 1995 263,200 -- -- -- 50,000 -- --
Residential
</TABLE>
- - ---------------
(1) Includes salary, accrued vacation and amounts deferred by the named
executive pursuant to the DMX Inc. Savings Plan.
(2) Amounts contributed by DMX Inc. to the Savings Plan on behalf of the Named
Executives.
(3) Nine months ended June 30, 1997.
(4) Ms. Kim's employment with DMX Inc. commenced July 1995.
Employment Agreements and Termination of Employment Arrangements.
Jerold H. Rubinstein was employed on an at-will basis and effective July
11, 1997 his employment was terminated. DMX Inc. and Mr. Rubinstein entered into
a Deferred Compensation Agreement as of October 15, 1991 (the "Rubinstein
Agreement"), the terms of which were ratified by the stockholders at the 1992
Annual Meeting. Under the Rubinstein Agreement, DMX Inc. accrued, for the
benefit of Mr. Rubinstein, $200,000 per year plus annual interest at the rate of
1% over prime, compounded quarterly, on December 31 of each year from 1992
through 1996. In December 1993, the Compensation Committee rescinded the
Rubinstein Agreement, effective October 1, 1993, and accelerated the payment of
the outstanding compensation at September 30, 1993, with interest through
November 30, 1993. In addition, Mr. Rubinstein's annual salary was adjusted to
$500,000 through September 30, 1996, coinciding with the original term of the
Rubinstein Agreement.
DMX Inc. and Mr. Rubinstein also entered into a Stock Bonus Agreement (the
"Stock Bonus Agreement") as of October 15, 1991. Under the Stock Bonus
Agreement, Mr. Rubinstein was granted a stock bonus in the aggregate amount of
1,027,520 shares of Common Stock (the "Restricted Shares"). Pursuant to
30
<PAGE> 31
the Stock Bonus Agreement, Mr. Rubinstein's rights in the Restricted Shares
originally vested over a period of three years, beginning September 15, 1992. In
August 1993, the Stock Bonus Agreement was amended to change the vesting
schedule to provide that no shares would vest in fiscal 1993 and 685,013 shares
would vest in fiscal 1994. In consideration of Mr. Rubinstein's agreement for
the deferral in the vesting of the shares, DMX Inc. granted Mr. Rubinstein a
non-qualified option, pursuant to the 1993 Stock Option Plan, to purchase 70,000
shares of Common Stock at an exercise price of $5.00 per share, the fair market
value of the stock on the date of the grant.
DMX Inc. and Lon A. Troxel entered into an Employment Agreement dated
October 1, 1991 (the "Troxel Agreement"), pursuant to which Mr. Troxel received
an annual base salary of $175,000 for the period from October 1, 1991 to
September 30, 1995. Pursuant to the Troxel Agreement, Mr. Troxel was reimbursed
$18,000 for moving expenses and was granted an employee stock option to purchase
50,000 shares of Stock. Based on contributions to DMX Inc. and its management,
effective December 1, 1993, the Troxel Agreement was extended to December 31,
1996, and his annual salary was adjusted to $225,000 for 1994, $240,000 for
1995, and $255,000 for 1996. In addition, Mr. Troxel was granted an employee
stock option to purchase 75,000 shares of Common Stock. On September 16, 1996, a
second amendment to the Troxel Agreement was entered into which adjusted his
annual salary to $275,000 effective December 1, 1996 and extended the Troxel
Agreement to November 30, 1999. On August 22, 1997, a third amendment to the
Troxel Agreement was entered into which adjusts his annual salary to $300,000
June 1, 1998 through May 31, 1999 and $325,000 during the years ending May 31,
2000, 2001 and 2002. Mr. Troxel has agreed not to acquire more than a 10% direct
or indirect ownership in any cable company, other than DMX Inc., without the
prior written consent of DMX Inc. Mr. Troxel receives basic and extended
benefits commensurate with other senior management employees such as vacation
pay and other fringe benefits. If Mr. Troxel becomes disabled during the term of
the agreement, he shall receive the same compensation he is entitled to under
the agreement for a time period not exceeding six months.
DMX Inc. and Douglas G. Talley entered into an Employment Agreement dated
January 1, 1995 (the "Talley Agreement"), pursuant to which Mr. Talley is
entitled to receive an annual base salary of $225,000 for the period from
January 1, 1995 through December 31, 1995; $250,000 for 1996; and $275,000 for
1997. Pursuant to the Talley Agreement, Mr. Talley received a grant of an
employee stock option to purchase up to 75,000 shares of Common Stock. Mr.
Talley receives basic and extended benefits commensurate with other senior
management employees such as vacation pay and other fringe benefits. If Mr.
Talley becomes disabled during the term of the agreement, he shall receive the
same compensation he is entitled to under the agreement for a time period not
exceeding six months.
DMX Inc. and DigiTempo, Inc., a California corporation, entered into an
Employment Agreement dated October 17, 1994, whereby DigiTempo, Inc. furnished
the services of Otis Smith, in the capacity of Executive Vice President, to DMX
Inc., and DigiTempo, Inc. received annual compensation of $275,000 for the
period from October 17, 1994 to October 16, 1997. Mr. Smith received basic and
extended benefits commensurate with other senior management level employees such
as vacation pay and other fringe benefits. The Agreement also included a
provision that in case Mr. Smith was disabled during the term of the agreement,
DigiTempo, Inc. would receive the same compensation it was entitled to under the
agreement for a time period not exceeding six months. Effective July 11, 1997,
the Mr. Smith/DigiTempo, Inc. relationship with DMX Inc. terminated.
Stock Options.
No stock option grants were issued to Named Executives for the nine months
ended June 30, 1997.
Mr. Troxel received a grant effective as of July 11, 1997, of options to
acquire 200,000 shares of TCI Music Series A Common Stock pursuant to the TCI
Music 1997 Stock Incentive Plan and all of the existing options to acquire
shares of Common Stock of DMX Inc. were canceled in exchange therefor. Ms. Kim
received a grant effective as of July 11, 1997 to acquire 50,000 shares of TCI
Music Series A Common Stock pursuant to the TCI Music 1997 Stock Incentive Plan.
31
<PAGE> 32
Option Exercises and Holdings.
The following table provides information with respect to the Named
Executives concerning the exercise of options during the nine months ended June
30, 1997 and unexercised options held by the Named Executives as of June 30,
1997:
AGGREGATED OPTION EXERCISES IN THE NINE MONTHS ENDED JUNE 30, 1997
AND JUNE 30, 1997 OPTION VALUES
<TABLE>
<CAPTION>
SHARES ACQUIRED VALUE
ON EXERCISE REALIZED
NAME (#) ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- --------------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Jerold H. Rubinstein..... N/A N/A 2,170,000(2) -- -- --
Lon A. Troxel............ N/A N/A 150,000(3) -- -- --
Joanne Wendy Kim......... N/A N/A 20,000(4) -- -- --
Douglas G. Talley........ N/A N/A 183,333(5) -- -- --
Otis Smith............... N/A N/A 100,000(6) -- -- --
</TABLE>
- - ---------------
(1) Value of unexercised "in-the-money" options is the difference between the
market price of the Common Stock on June 30, 1997 ($1.74 per share) and the
exercise price of the option, multiplied by the number of shares subject to
the option. At June 30, 1997 no options were "in-the-money."
(2) Includes 333,334 shares which Mr. Rubinstein had the right to acquire prior
to July 11, 1997 due to the acceleration of options. By terms of the DMX
Inc. 1993 Stock Option Plan, options issued, outstanding and unexercised
were terminated upon consummation of the Merger. Includes stock options to
purchase 400,000 shares of DMX Inc.'s Common Stock which were under the DMX
Inc. 1991 Stock Option Plan and were carried over in the Merger and can be
exercisable for 100,000 shares of TCI Music Series A Common Stock and
Rights. However, all such options terminate and are not exercisable three
months after the holder is no longer employed or serving as director of DMX
Inc.
(3) Includes 8,334 shares which Mr. Troxel had the right to acquire prior to
July 11, 1997 due to the acceleration of options. By terms of the DMX Inc.
1993 Stock Option Plan, options issued, outstanding and unexercised were
terminated upon consummation of the Merger. Includes stock options to
purchase 50,000 shares of DMX Inc.'s Common Stock which were issued under
the DMX Inc. 1991 Stock Option Plan and were canceled in exchange for stock
options granted, effective with the Merger, to acquire 200,000 shares of TCI
Music Series A Common Stock.
(4) Includes 6,667 shares which Ms. Kim had the right to acquire prior to July
11, 1997 due to the acceleration of options. By terms of the DMX Inc. 1993
Stock Option Plan, options issued, outstanding and unexercised were
terminated upon consummation of the Merger.
(5) Includes 25,000 shares which Mr. Talley had the right to acquire prior to
July 11, 1997 due to the acceleration of options. By terms of the DMX Inc.
1993 Stock Option Plan, options issued, outstanding and unexercised were
terminated upon consummation of the Merger.
(6) Includes 16,667 shares which Mr. Smith had the right to acquire prior to
July 11, 1997 due to the acceleration of options. By terms of the DMX Inc.
1993 Stock Option Plan, options issued, outstanding and unexercised were
terminated upon consummation of the Merger.
Compensation Committee Interlocks and Insider Participation.
Jerold H. Rubinstein, Chairman of the Board and Chief Executive Officer of
DMX Inc., was appointed to the Compensation Committee for the 1996 fiscal year.
Mr. Rubinstein beneficially owns 5.1% of the outstanding shares of Common Stock.
(See "summary Compensation Table and Employment Agreements and Termination of
Employment Agreements" for a discussion of the compensation Mr. Rubinstein
received.)
J.C. Sparkman, a Director and Chairman of the Compensation Committee,
retired in 1995 as a senior executive officer and Director of TCI. Mr. Sparkman
is currently a director of Shaw Communications Inc. Mr. Sparkman beneficially
owns less than 1% of the outstanding Common Stock of DMX Inc., which includes
32
<PAGE> 33
100,000 shares acquired at $2.50 per share in a private placement on September
21, 1995. TCI directly through its subsidiaries beneficially owns 45.7% of the
outstanding shares of Common Stock.
DMX Inc. and a subsidiary of TCI entered into a ten year network
affiliation agreement in 1989 under which DMX Inc.'s basic audio and Digital
Music Express services are made available to TCI cable television subscribers.
DMX Inc. continues to pursue commercial applications of its DMX service for
businesses, stores, restaurants, hotels and other establishments through its
existing affiliation agreements both in areas wired for cable and by direct
broadcast satellite. TCI and its various subsidiaries' payments of license fees
to DMX Inc. accounted for approximately 50% of DMX Inc.'s consolidated gross
revenues during the nine months ended June 30, 1997.
DMX Inc. leases studio facilities in Colorado for the origination and
uplinking of the DMX service. The studio is located at the facilities of NDTC,
at 4100 East Dry Creek Road, Littleton, Colorado 80122. The six year lease
agreement with NDTC, that expires on the last day of February 2000, has an
automatic one year renewal and is subject to DMX Inc.'s right to terminate the
origination and uplinking services at any time, with 60 days prior notice and
upon payment of early termination fees. NDTC charges DMX Inc. approximately
$54,600 per month, which includes approximately $6,700 for space rental and
$45,400 for satellite uplinking services. In addition, NDTC provided a capital
lease for studio equipment at the facility, up to a total of $2.2 million with
interest at 9.5%. The outstanding balance of the lease obligation at June 30,
1997 was $1,386,000.
DMX Inc. sub-leases space on a U.S. domestic communications satellite known
as C-3 Transponder 24. The sublease was entered into in December 1992 with WTCI,
which in turn leases the satellite transponder from GE American Communications,
Inc. WTCI's monthly charge for the satellite, uplink and management fee is
approximately $204,100.
DMX Inc. sub-leases space on a Ku-Band satellite Loral Telstar 4, formerly
known as AT&T 402R. The sub-lease was entered into in March 4, 1994 with WTCI,
which in turn leases the transponder from Loral. Monthly sub-lease charges for
the transponder and uplink is approximately $167,000.
Director Compensation.
DMX Inc. does not pay fees to its directors for their service on the Board
of Directors or for attendance at meetings of the Board or committees. Directors
who were not full-time salaried employees of DMX Inc. or its subsidiaries
received a grant of options to acquire 50,000 shares of Common Stock, under the
DMX Inc. 1993 Stock Option Plan, upon their effective date of service as a
director and after each twelve month period of continuous service as director of
DMX Inc. thereafter, received an additional option to acquire 50,000 shares up
to a maximum of two such periods.
33
<PAGE> 34
ITEM 12.SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth the beneficial ownership of Common Stock as
of June 30, 1997 by each person known to DMX Inc. to be the beneficial owner of
more than five percent of the outstanding shares of Common Stock by each
executive officer and director of DMX Inc., and by all directors and executive
officers as a group.
<TABLE>
<CAPTION>
AMOUNT AND NATURE PERCENT
NAME OF BENEFICIAL OWNERSHIP(1) OF CLASS(2)
---- -------------------------- -----------
<S> <C> <C>
Tele-Communications, Inc.................................... 27,249,575(3) 45.7%
Shaw Communications Inc..................................... 7,600,000(4) 12.8%
Jerold H. Rubinstein, Chairman of the Board and Chief
Executive Officer......................................... 3,124,148(5) 5.1%
Kent Burkhart, Director..................................... 200,000(6) *
V. Bhaskar Menon, Director.................................. 200,000(7) *
James R. Shaw, Sr., Director................................ 8,530,500(8) 14.3%
J.C. Sparkman, Director..................................... 350,000(9) *
Otis Smith, Executive Vice President........................ 100,000(10) *
Douglas G. Talley, Executive Vice President................. 183,333(11) *
Lon A. Troxel, Chief Operating Officer...................... 150,000(12) *
Joanne Wendy Kim, Chief Financial Officer................... 20,000(13) *
Directors and Executive Officers (a group of 11 persons).... 12,857,981(14) 20.4%
</TABLE>
- - ---------------
* Less than 1%
(1) Each named person has sole voting and investment power with respect to the
shares listed, except as noted below and provided by community property
laws, where applicable.
(2) Shares which the person (or group) has the right to acquire within 60 days
after June 30, 1997 or prior to July 11, 1997, are deemed to be outstanding
in calculating the percentage ownership of the person (or group) but are
not deemed to be outstanding as to any other person (or group).
(3) Shares held by Tele-Communications, Inc. and its subsidiaries and
affiliates were based upon a Schedule 13D, Amendment No. 3, filed on June
6, 1996. The business address of Tele-Communications, Inc. is 5619 DTC
Parkway, Englewood, Colorado 80111.
(4) Based upon a Schedule 13D, filed on March 15, 1995, and a Form 4 filed on
January 9, 1996. Does not include 276,080 shares held by James R. Shaw
Securities Limited, 128,580 shares held by Brasha Holdings Ltd., 128,580
shares held by Jay-Shaw Holdings Ltd., 128,580 shares held by Julmar
Holdings Ltd., and 118,680 shares held by Shawnee Estates Ltd., which
entities are affiliates of Shaw Communications Inc. Shaw Communications
Inc. is a public company whose non-voting securities are listed on the
Toronto Stock Exchange and the Alberta Stock Exchange. Mr. Shaw, Sr. and
members of his family and members of Leslie E. Shaw's (Mr. Shaw, Sr.'s
brother) family hold directly and indirectly, a majority of the voting
shares of Shaw Communications Inc. and such shares are governed by the
terms of a voting trust. Mr. Shaw, Sr. and members of his family do not,
directly or indirectly, hold a majority of the publicly traded non-voting
shares. The business address of Shaw Communications Inc. is 630-3rd Avenue,
Suite 900, Calgary, Alberta T2P4L4.
(5) Includes 9,000 shares owned of record by Mr. Rubinstein's wife and minor
child and 333,334 shares which Mr. Rubinstein had the right to acquire
prior to July 11, 1997 due to the acceleration of options. By terms of the
DMX Inc. 1993 Option Plan, options issued, outstanding and unexercised were
terminated upon consummation of the Merger. Includes stock options to
purchase 400,000 shares of DMX Inc.'s Common Stock which were issued under
the DMX Inc. 1991 Stock Option Plan and were carried over in the Merger and
can be exercisable for 100,000 shares of TCI Music Series A Common Stock
and Rights. However, all such options terminate and are not exercisable
three months after the holder is no longer employed or serving as director
of DMX Inc. Mr. Rubinstein's business address was 11400 West Olympic
Boulevard, Suite 1100, Los Angeles, California 90064-1507.
34
<PAGE> 35
(6) Represented 200,000 shares which Mr. Burkhart had the right to acquire
prior to July 11, 1997, by the exercise of vested stock options. By terms
of the DMX Inc. 1993 Stock Option Plan, options issued, outstanding and
unexercised were terminated upon consummation of the Merger. Includes stock
options to purchase 50,000 shares of DMX Inc.'s Common Stock which were
issued under the DMX Inc. 1991 Stock Option Plan and was carried over in
the Merger. However, all such options terminate and are not exercisable
three months after the holder is no longer employed or serving as director
of DMX Inc.
(7) Represented 200,000 shares which Mr. Menon had the right to acquire within
prior to July 11, 1997, by the exercise of vested stock options. By terms
of the DMX Inc. 1993 Stock Option Plan, options issued, outstanding and
unexercised were terminated upon consummation of the Merger. Includes stock
options to purchase 50,000 shares of DMX Inc.'s Common Stock which were
issued under the DMX Inc. 1991 Stock Option Plan and was carried over in
the Merger. However, all such options terminate and are not exercisable
three months after the holder is no longer employed or serving as director
of DMX Inc.
(8) Includes the following shares, to which Mr. Shaw, Sr. disclaims beneficial
ownership: 7,600,000 shares held by Shaw Communications Inc., 276,080
shares held by James R. Shaw Securities Limited, 128,580 shares held by
Brasha Holdings Ltd., 128,580 shares held by Julmar Holdings Ltd., 128,580
shares held by Shawana Estates Ltd., and 118,680 shares held by Jay-Shaw
Holdings Ltd. Mr. Shaw, Sr. holds a majority of the shares of Jay-Shaw
Holdings Ltd., Brasha Holdings Ltd. and Shawana Estates Ltd. The remaining
shares of each such entities, other than certain preferred shares held by
Julmar Holdings Ltd., a corporation wholly owned by Mr. Shaw, Sr., are held
by children of Mr. Shaw, Sr. Each of the children has reached the age of
majority. Mr. Shaw, Sr. holds 48% of the voting shares of James R. Shaw
Securities Limited. The balance of voting shares are held by and for the
benefit of Mr. Shaw, Sr.'s family members. Includes 150,000 shares which
Mr. Shaw, Sr. has the right to acquire prior to July 11, 1997, by the
exercise of vested stock options. By terms of the DMX Inc. 1993 Stock
Option Plan, options issued, outstanding and unexercised were terminated
upon consummation of the Merger. Mr. Shaw, Sr.'s business address is
630-3rd Avenue, Suite 900, Calgary, Alberta T2P4L4.
(9) Represented 200,000 shares which Mr. Sparkman had the right to acquire
prior to July 11, 1997, by the exercise of vested stock options. Includes
stock options to purchase 50,000 shares of DMX Inc.'s Common Stock which
were issued under the DMX Inc. 1991 Stock Option Plan and were canceled in
exchange for stock options granted, effective with the Merger, to acquire
100,000 shares of TCI Music Series A common Stock.
(10) Represented 100,000 shares which Mr. Smith had the right to acquire prior
to July 11, 1997, by the exercise of vested stock options. Included 16,667
shares which Mr. Smith had the right to acquire prior to July 11, 1997 due
to the acceleration of options. By terms of the DMX Inc. 1993 Stock Option
Plan, options issued, outstanding and unexercised were terminated upon
consummation of the Merger.
(11) Represented 183,333 shares which Mr. Talley had the right to acquire prior
to July 11, 1997 by the exercise of vested stock options. Included 25,000
shares which Mr. Talley had the right to acquire prior to July 11, 1997 due
to the acceleration of options. By terms of the DMX Inc. 1993 Stock Option
Plan, options issued, outstanding and unexercised were terminated upon
consummation of the Merger.
(12) Represented 150,000 shares which Mr. Troxel had the right to acquire prior
to July 11, 1997, by the exercise of vested stock options. Included 8,334
shares which Mr. Troxel had the right to acquire prior to July 11, 1997 due
to the acceleration of options. By terms of the DMX Inc. 1993 Stock Option
Plan, options issued, outstanding and unexercised were terminated upon
consummation of the Merger. Included stock options to purchase 50,000
shares of DMX Inc.'s Common Stock which were issued under the DMX Inc. 1991
Stock Option Plan and were canceled in exchange for stock option granted,
effective with the Merger, to acquire 200,000 shares of TCI Music Series A
Common Stock.
(13) Represented 20,000 shares which Ms. Kim had the right to acquire prior to
July 11, 1997 due to the acceleration of options. By terms of the DMX Inc.
1993 Stock Option Plan, options issued, outstanding or unexercised were
terminated upon consummation of the Merger.
(14) Represented 2,983,333 shares which members of the group had the right to
acquire prior to July 11, 1997, by the exercise of vested stock options and
390,000 shares which members of the group had the right to acquire prior to
July 11, 1997 due to acceleration of options. By terms of the DMX Inc. 1993
35
<PAGE> 36
Stock Option Plan, options issued, outstanding and unexercised were
terminated upon consummation of the Merger. Includes those shares described
in note 8, to which Mr. Shaw, Sr. has disclaimed beneficial ownership and
includes stock options to purchase 600,000 shares of DMX Inc.'s stock that
were issued under DMX Inc. 1991 Stock Option Plan and described in notes 5,
6, 7, 9 and 12.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
At June 30, 1997 TCI beneficially owns 45.7% of the outstanding shares of
Common Stock which includes 2,000,000 shares acquired at $2.50 per share in a
private placement on August 29, 1995 and 4,500,000 shares acquired at $2.00 per
share in a private placement on May 17, 1996. As a result of the merger in 1996
of TCI-E into DMX Inc. upon the terms set forth in the Agreement and Plan of
Merger among TCI-E, United Artists Programming International, Inc. ("UAPI") and
DMX Inc., UAPI, an affiliate of TCI, was issued 10,841,624 shares of Common
Stock.
DMX Inc. under an agreement with NDTC has a capital lease to lease
equipment for its studio and uplinking facility in Littleton, Colorado. The
obligation under the capital lease at June 30, 1997 was $1,386,000 with terms
which extend to 2000 at an interest rate of 9.5%. DMX Inc. is also obligated to
WTCI under various operating leases for uplinking and satellite services. The
total expense under those leases for the nine months ended June 30, 1997 and the
fiscal year ended September 30, 1996 and 1995 were $3,358,000, $4,831,000 and
$4,489,000, respectively.
Total subscriber fee revenue from TCI and its affiliates represented
approximately 50%, 57%, 56% and 61% of total subscriber fee revenue for the nine
months ended June 30, 1997 and 1996 and the fiscal years ended September 30,
1996 and 1995, respectively, with accounts receivable due from TCI and its
affiliates at June 30, 1997 and September 30, 1996 totaling approximately
$1,482,000 and $1,829,000, respectively.
Shaw beneficially owns 12.8% of the outstanding shares of Common Stock of
DMX Inc., which includes shares acquired through various stock purchase
agreements, including 1,100,000 shares acquired at $2.13 per share in a private
placement on March 9, 1995, and 2,000,000 shares acquired at $2.50 per share in
a private placement on August 25, 1995. James R. Shaw, Sr., President and Chief
Executive Officer of Shaw, is a director of DMX Inc. Mr. Sparkman, a director of
DMX Inc., is a director of Shaw. In March 1992, Shaw, the second largest cable
operator in Canada, entered into a license and distribution agreement with DMX
Inc. which grants to DMX-Canada Ltd. the exclusive license and right to
distribute DMX Inc.'s premium service in Canada, and was amended on November 1,
1994 by the Commercial License and Distribution Agreement and was amended on
April 14, 1997 by the Residential License and Distribution Agreement. In
addition, Shaw formed a Canadian company, DMX-Canada Ltd. which is a partner in
"The DMX-Canada Partnership", a partnership with 450714 B.C. Ltd., a subsidiary
of DMX Inc.
During 1995, DMX Inc. and Shaw entered into a series of agreements to
accomplish a reorganization by which Shaw could take full advantage of the
Canadian tax losses incurred in Canada, during the market development period and
based on Shaw's commitment to fund such development costs. This was accomplished
through the transfer of each company's respective equity interests, and the
formation of a new Canadian partnership (also referred to herein as DMX-Canada).
DMX Inc. continues to hold an equity interest in the new partnership through its
wholly owned subsidiary, a British Columbia corporation, 450714 B.C. Ltd. There
is no impact from the reorganization on the operations of DMX-Canada, other than
to accomplish the tax structure as outlined above. After Shaw recoups its
initial funding, each company will share in the profits based on their
respective equity interests.
In April 1996 DMX Inc. entered into two capital leases with DMX-Canada, the
proceeds of which were used to purchase DMX-Disc equipment leased to two DMX
Inc. customers, 9-West and Coach. The obligation under the capital lease was for
a term which extended to May 2001 at an effective interest rate of 27.21%. In
May 1997, the lease balance of $268,625 was paid in full through an offset of
license fees due to DMX Inc. totaling $220,714 and cash for the balance of
$47,911.
In August 1994, the CRTC, which regulates the broadcast industry in Canada,
revoked the license previously granted to DMX-Canada for Canadian distribution
of DMX. DMX-Canada reapplied to the CRTC
36
<PAGE> 37
during 1995 for a license to distribute DMX to Canadian residential cable
subscribers. The CRTC issued a favorable ruling in December 1995 and requires a
one to one ratio of Canadian content to non Canadian content. DMX-Canada and DMX
Inc. have negotiated an agreement to distribute DMX service to the Canadian
residential cable market. The service includes a total of 30 formats and is
distributed through Shaw Cable Systems and their affiliates. DMX-Canada will
also license other Canadian third party distributors such as Star Choice. The
launch of the DMX service for residential distribution was July 1997.
The CRTC does not regulate programming delivered to commercial
establishments by DBS and DMX-Canada has been distributing the DMX service to
the commercial sector since 1994. DMX Inc. and DMX-Canada have negotiated a new
license and distribution agreement which grants an exclusive license and right
to distribute the DMX service to commercial establishments in Canada. The term
of the new agreement coincides with the original agreement dated March 9, 1992
and terminates March 31, 2012. DMX Inc. received total license fees of
approximately $370,000 for the nine months ended June 30, 1997 under the
agreements.
Stephen A. Wynn, Chairman of the Board, President and Chief Executive
Officer, Mirage Resorts, Incorporated, resigned as a director of DMX Inc. in May
1996 concurrently with his sale of 5,700,000 shares of DMX Inc. Common Stock to
TCI at $2.00 per share, which included 2,200,000 shares acquired by him at $2.13
per share in a private placement on February 21, 1995 and 500,000 shares
acquired at $2.00 per share in a private placement on March 15, 1996. In April
1995, DMX Inc. entered into a five year commercial music service agreement with
Mirage Resorts, Inc. whereby DMX Inc. provides its DMX for Business music
service for a monthly fee.
DMX Inc. entered into definitive agreements dated December 18, 1996 with
Jerold H. Rubinstein, Chairman of the Board and Chief Executive Officer, of DMX
Inc., which provided for Mr. Rubinstein to either purchase a 90% interest in
DMX-E in a transaction referenced as the "Reorganization Plan", or if an
agreement cannot be reached with the creditors of DMX-E, then Mr. Rubinstein
would organize a new company that would distribute DMX service in Europe. As a
result of the DMX-E cessation of operation on July 1, 1997, the Definitive
Agreements between DMX Inc.; Mr. Jerold H. Rubinstein, an individual; and XTRA
were put into place whereby a termination certificate was executed in July 1997,
which terminated the Stock Purchase Agreement dated December 18, 1996 that
provided the disposition of DMX-E to Mr. Jerold H. Rubinstein. Pursuant to the
Definitive Agreement, DMX Inc. obtained a 10% interest in XTRA and a Channel
Distribution Agreement was executed between XTRA and DMX Inc. The Channel
Distribution Agreement provided XTRA an exclusive, five-year, royalty-free
license to distribute the DMX music service in Europe, the former Soviet Union
and in the Middle East and the right to use DMX Inc.'s trade marks for two
years. The music service is currently not being distributed by XTRA as Mr.
Jerold H. Rubinstein is seeking financial partners.
37
<PAGE> 38
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8K.
(a) Consolidated Financial Statements and Schedules. Reference is made to
the Index to Consolidated Financial Statements of DMX Inc. and Subsidiaries and
Schedules for the nine month period ended June 30, 1997, for a list of financial
statements and schedules filed as part of this report at page F-1.
(b) Reports on Form 8-K. None.
(c) Exhibits. Following is a list of Exhibits filed with this report.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
2.1(1) -- Form of Arrangement Agreement [2.1]*
2.2(2) -- Certificate of Discontinuance issued by Department of
Consumer and Corporate Affairs, Canada [2.2]*
2.3(2) -- Certificates of Domestication, Merger, Name Change and
Correction filed in Delaware by ICT-Canada and
ICT-Delaware to implement the Reorganization as of
September 28, 1990 [2.3]*
3.1(12) -- Amended and Restated Certificate of Incorporation of DMX
Inc.
3.2(1) -- Bylaws of the DMX Inc. [3.2]*
4.1(3) -- Articles IV, VI, VII, VIII, XI, XII of the Certificate of
Incorporation of the DMX Inc. (filed as part of Exhibit
3.1)
4.2(1) -- Articles II, III, VII and XI of the Bylaws of DMX Inc.
(filed as part of Exhibit 3.2)
4.3(4) -- Form of Agent's Warrant to Cruttenden & Company and
Robert S. London [4.3]*
4.4(1) -- Broker's Warrant to Merit Investment Corporation [4.4]*
4.5(1) -- Form of Option Agreement for Director, Officer and
Employee Options [4.5]*
4.6(5) -- TCI Equity Participation Agreement [4.6]*
4.7(1) -- Viacom Equity Participation Agreement [4.7]*
4.8(1) -- KBL Services Equity Participation Agreement [4.8]*
4.9**(11) -- Loan Agreement between ICT-Europe and TCI-Euromusic
("TCI-E"), (without exhibits) dated May 19, 1993
4.10(11) -- Contribution Agreement between TCI-Euromusic and DMX Inc.
dated May 19, 1993
10.1(5) -- TCI Equity Participation Agreement (filed as Exhibit 4.6)
10.2(1) -- Viacom Equity Participation Agreement (filed as Exhibit
4.7)
10.3(1) -- KBL Services Equity Participation Agreement (filed as
Exhibit 4.8)
10.4**(11) -- Affiliation Agreement between DMX Inc. and Colony
Communications dated May 1, 1992 [10.4]*
10.5**(11) -- Affiliation Agreement between DMX Inc. and Crown Media,
Inc., dated July 1, 1992 [10.5]*
10.6**(11) -- Affiliation Agreement between DMX Inc. and Prime II
Management, L.P. [10.6]*
10.7(11) -- Stock Purchase Agreement between DMX Inc. and various
private parties, dated August 2, 1991 [10.7]*
10.8(11) -- Stock Purchase Agreement between DMX Inc. and Scudder
Development Fund, dated August 23, 1993 [10.8]*
10.9(11) -- Stock Purchase Agreement between DMX Inc. and Crown
Media, Inc. dated July 22, 1992 [10.9]*
</TABLE>
38
<PAGE> 39
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.10(11) -- Stock Purchase Agreement between DMX Inc. and Crown
Media, Inc. dated August 30, 1993 [10.10]*
10.11(11) -- Stock Purchase Agreement between DMX Inc. and Brahman
Partners, II, L.P. dated September 15, 1993 [10.11]*
10.12(11) -- Stock Purchase Agreement between DMX Inc. and Quota Fund,
N.V.-Brahman, dated September 15, 1993 [10.12]*
10.13(11) -- Stock Purchase Agreement between DMX Inc. and Genesis
Capital Fund, dated September 15, 1993 [10.13]*
10.14(11) -- Stock Purchase Agreement between DMX Inc. and Shaw
Cablesystems, dated March 9, 1992 [10.14]*
10.15(11) -- Stock Purchase Agreement between DMX Inc. and Shaw
Communications, Inc., dated September 30, 1993 [10.15]*
10.16(6) -- Stock Bonus Agreement with Jerold H. Rubinstein****
[10.15]*
10.17(11) -- Amendment to Stock Bonus Agreement****
10.18(6) -- Deferred Compensation Agreement with Jerold H.
Rubinstein**** [10.16]*
10.19(1) -- Employment Agreement with W. Thomas Oliver*** [10.11]*
10.20(11) -- Employment Agreement with Robert M. Manning***
10.21(5) -- SSI Affiliation Agreement [10.2]*
10.22(5) -- Viacom Affiliation Agreement [10.3]*
10.23(5) -- KBLCOM Residential Affiliation Agreement [10.4]*
10.24(2) -- Western Tele-Communications ("WTCI") Security Agreement
and Promissory Note [10.14]*
10.25(7) -- Studio Facility and Uplinking Agreement between Western
Tele-Communications, Inc. and DMX Inc.
10.26**(11) -- [10.15]* Agreement for Acquisition of Capital Stock and
for the Governance of ICT-Europe N.V. ("ICT-E") (without
exhibits), dated May 19, 1993
10.27**(11) -- ICT-Europe Technology License and Services Agreement
(without exhibits), dated May 19, 1993
10.28**(11) -- ICT-Europe Trademark Agreement (without exhibits), dated
May 19, 1993
10.29**(11) -- ICT-Europe Loan Agreement, dated May 19, 1993 (filed as
Exhibit 4.9)
10.30(11) -- Contribution Agreement between TCI-Euromusic and ICT,
dated May 19, 1993 (filed as Exhibit 4.10)
10.31(11) -- ICT-Europe Equipment Lease, dated May 18, 1993 (without
exhibits)
10.32(11) -- DMX Inc. Promissory Note in favor of TCI-E, dated May 19,
1993
10.33(11) -- DMX Inc. Security Agreement in favor of TCI-E, (without
exhibits) dated May 19, 1993
10.34**(11) -- License and Distribution Agreement between ICT-Europe and
Broadcom International Holdings, as amended,
10.35**(11) -- dated March 31, 1992 License and Distribution Agreement
between DMX Inc. and DMX-Canada, dated March 9, 1992
10.36(4) -- NACR License and Marketing Agreement [10.10]*
10.37(2) -- Manufacturing and Sales Agreement between DMX Inc. and
Scientific-Atlanta, Inc. [10.12]*
</TABLE>
39
<PAGE> 40
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.38(2) -- License and Technical Assistance Agreement between DMX
Inc. and Scientific-Atlanta [10.13]*
10.39(1) -- FSL Development and Licensing Agreement, as amended
[10.8]*
10.40(1) -- GE American Communication, Inc. Agreement Regarding
Satellite Carriage [10.9]*
10.41**(11) -- COMSTREAM Agreement between DMX Inc. and COMSTREAM
Corporation, dated July 22, 1993
10.42**(11) -- COMSTREAM Option Agreement between DMX Inc. and COMSTREAM
Corporation, dated July 22, 1993
10.43(1) -- Joint Venture Agreement with Galactic Radio, Partners,
Inc. [10.7]*
10.44**(11) -- Sky Subscribers Management and Access Agreement between
ICT-Europe and Sky Subscribers Services Limited, 1993
10.45**(11) -- NDC Technology License Agreement between News Datacom
Limited, ICT-Europe and ICT-Europe UK, dated July 26,
1993
10.46(6) -- Employee Stock Purchase Plan**** [10.17]*
10.47(6) -- 1991 Incentive Stock Option Plan**** [10.18]*
10.48(8) -- 1991 Non-Qualified Stock Option Plan**** [4.10]*
10.49(8) -- 1991 Non-Qualified Stock Option Plan for Non-Employee
Directors**** [4.11]
10.50(9) -- 1993 Stock Option Plan**** [28.1]*
10.51(9) -- Form of ICT Non-Qualified Stock Option Agreement****
(Non-Employee Director) [28.2]*
10.52(9) -- Form of ICT Non-Qualified Stock Option Agreement****
(Employee and Employee-Director) [28.3]*
10.53(9) -- Form of ICT Incentive Stock Option Agreement**** [28.4]*
10.54(11) -- Principal Executive Office Lease, California
10.55(11) -- C-3 Satellite Transponder Sub-Lease Agreement between
WTCI and DMX Inc.
10.56(10) -- Satellite Transponder Management Agreement between WTCI
and DMX Inc., dated December 2, 1992
10.57(10) -- Satellite Transponder Management Agreement between WTCI
and DMX Inc., dated January 27, 1993
10.58(10) -- Assignment and Assumption Agreement between WTCI and
ICT-Europe (without exhibits)
10.59**(10) -- Assignment Agreement between IDB and WTCI, dated January
21, 1993
10.60(10) -- Agreement between DMX Inc. and the American Society of
Composers, Authors & Publishers, dated December 20, 1991
10.61**(10) -- Agreement between DMX Inc. and Broadcast Music Inc.,
dated October 11, 1991, as supplemented and amended
10.62**(10) -- Agreement between DMX Inc. and SESAC, dated December 26,
1991
10.63**(11) -- Affiliation Agreement between DMX Inc. and Scripps
Howard, Inc. dated April 30, 1994
10.64***(11) -- Employment Agreement between DMX Inc. and Lon Troxel,
dated October 1, 1991, as amended.
10.65***(11) -- Employment Agreement between DMX Inc. and Keno Thomas,
dated January 24, 1994
</TABLE>
40
<PAGE> 41
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.66(11) -- International Cablecasting Technologies Inc. Savings
Plan, as amended
10.67(11) -- Addendum to KBLCOM Affiliation Agreement
10.68***(12) -- Employment Agreement between DMX Inc. and DigiTempo,
Inc., dated October 17, 1994
10.69***(12) -- Employment Agreement between DMX Inc. and Doug Talley,
dated January 1, 1995
10.70***(13) -- Employment Agreement between DMX Inc. and Lon Troxel,
dated October 1, 1991, as amended September 16, 1996
10.71*****(13) -- Affiliation Agreement between DMX Inc. and PRIMESTAR
Partners, dated January 25, 1995
10.72*****(13) -- Affiliation Agreement between DMX Inc. and AlphaStar
Television Network, Inc., dated November 29, 1995
10.73*****(13) -- Stock Purchase and Shareholders Agreement between DMX
Inc., DMX-Europe (UK) Limited, DMX-Europe N.V. and Jerold
H. Rubinstein
10.74(13) -- Subscription and Shareholders Agreement between DMX Inc.,
Jerold H. Rubinstein and XTRA Music Limited
10.75***** -- Commercial License and Distribution Agreement between DMX
Inc. and DMX Canada Partnership, dated November 1, 1994
10.76***** -- Residential License and Distribution Agreement between
DMX Inc. and DMX-Canada (1995) Ltd., dated March 9, 1992,
as amended April 18, 1997
10.77 -- Channel Distribution Agreement between DMX Inc. and XTRA
Music Limited, dated July 3, 1997
10.78 -- Termination Certificate between DMX Inc. and Jerold H.
Rubinstein (Stock Purchase Agreement, dated December 18,
1996), dated July 3, 1997
10.79 -- Termination Agreement between DMX Inc. and DMX-Europe
N.V., a Netherlands corporation (Technology License and
Services Agreement, Dated May 19, 1993), dated July 3,
1997
10.80 -- Termination Agreement between DMX Inc. and DMX-Europe
N.V., a Netherlands corporation (Trademark Agreement,
dated May 19, 1993), dated July 3, 1997
10.81 -- Assignment Agreement between DMX Inc. and Jerold H.
Rubinstein, dated July 8, 1997
10.82*** -- Employment Agreement between DMX Inc. and Lon Troxel,
dated October 1, 1991, as amended August 22, 1997
10.83 -- TCI Music, Inc. 1997 Stock Incentive Plan
11.1 -- Statement Regarding Computation of Per Share Earnings
(included in DMX Inc.'s Financial Statements)
21.1 -- Listing of All Subsidiaries of DMX Inc.
27. -- Financial Data Schedule
</TABLE>
- - ---------------
(1) Incorporated by Reference to DMX Inc.'s Registration Statement on Form
S-1, July 10, 1990, file #33-35690
(2) Incorporated by Reference to DMX Inc.'s Post-Effective Amendment No. 2 to
Registration Statement on Form S-1, May 24, 1991, file #33-35690
(3) Incorporated by Reference to DMX Inc.'s Post-Effective Amendment No. 1 to
Registration Statement on Form S-1, filed on October 15, 1990, file
#33-35690
41
<PAGE> 42
(4) Incorporated by Reference to DMX Inc.'s Amendment No. 2 to Registration
Statement on Form S-1, September 28, 1990, file #33-35690
(5) Incorporated by Reference to DMX Inc.'s Amendment No. 1 to Registration
Statement on Form S-1, August 31, 1990, file #33-35690
(6) Incorporated by Reference to DMX Inc.'s Registration Statement on Form
S-1, February 24, 1992, file #33-35690
(7) Incorporated by Reference to DMX Inc.'s Post-Effective Amendment No. 3 to
Registration Statement on Form S-1, August 15, 1991, file #33-35690
(8) Incorporated by Reference to DMX Inc.'s 1992 10-K, December 13, 1992
(9) Incorporated by Reference to DMX Inc.'s 1993 Registration Statement on
Form S-8, May 3, 1993
(10) Incorporated by Reference to DMX Inc.'s 1993 10-K, December 23, 1993
(11) Incorporated by Reference to DMX Inc.'s 1994 10-K, December 29, 1994
(12) Incorporated by Reference to DMX Inc.'s 1995 10-K, January 9, 1996
(13) Incorporated by Reference to DMX Inc.'s 1996 10-K, January 14, 1997
* Indicates exhibit number of document in original filing
** DMX Inc. has received confidential treatment for a portion of the
referenced exhibit
*** Indicates Management Contract
**** Indicates Compensatory Plan
***** DMX Inc. has requested confidential treatment for a portion of the
referenced exhibit
42
<PAGE> 43
DMX INC.
AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997 AND SEPTEMBER 30, 1996
(WITH INDEPENDENT AUDITORS' REPORT THEREON)
<PAGE> 44
DMX INC.
AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report................................ F-2
Consolidated Financial Statements of DMX Inc.:
Consolidated Balance Sheets -- June 30, 1997 and September
30, 1996............................................... F-3
Consolidated Statements of Operations -- Nine months ended
June 30, 1997 and 1996 (unaudited) and years ended
September 30, 1996 and 1995............................ F-4
Consolidated Statements of Stockholders' Deficit -- Nine
months ended June 30, 1997 and years ended September
30, 1996 and 1995...................................... F-5
Consolidated Statements of Cash Flows -- Nine months ended
June 30, 1997 and 1996 (unaudited) and years ended
September 30, 1996 and 1995............................ F-6
Notes to Consolidated Financial Statements................ F-7
Financial Statement Schedules have not been provided as any
required information has been included in the financial
statements and notes thereto
</TABLE>
F-1
<PAGE> 45
INDEPENDENT AUDITORS' REPORT
We have audited the consolidated financial statements of DMX Inc. and
subsidiaries as listed in the accompanying index. These consolidated financial
statements are the responsibility of DMX Inc.'s management. Our responsibility
is to express an opinion on these consolidated financial statements based on our
audits.
We have 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 DMX Inc. and
subsidiaries as of June 30, 1997 and September 30, 1996 and the results of their
operations and their cash flows for the nine months ended June 30, 1997 and the
years ended September 30, 1996 and 1995, in conformity with generally accepted
accounting principles.
KPMG PEAT MARWICK LLP
Los Angeles, California
September 26, 1997
F-2
<PAGE> 46
DMX INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1997 AND SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
ASSETS
JUNE 30, SEPTEMBER 30,
1997 1996
------------- -------------
<S> <C> <C>
Current assets, excluding DMX-Europe N.V.:
Cash and cash equivalents................................. $ 664,340 $ 928,399
Prepaid expenses.......................................... 827,233 464,545
Equipment inventory....................................... 491,573 438,163
Accounts receivable:
Trade related party (note 2)............................ 1,481,748 1,828,973
Other trade............................................. 3,003,586 2,732,018
Allowance for doubtful accounts (note 3)................ (450,455) (251,247)
------------- -------------
Total current assets, excluding DMX-Europe N.V........ 6,018,025 6,140,851
Current assets DMX-Europe N.V.:
Cash...................................................... 168,427 192,635
Prepaid expenses.......................................... -- 851,586
Equipment inventory....................................... -- 98,517
Accounts receivable (net)................................. -- 435,480
------------- -------------
Total current assets DMX-Europe N.V................... 168,427 1,578,218
------------- -------------
Total current assets.................................. 6,186,452 7,719,069
Investment in Galactic/TEMPO Sound (note 4)................. 557,592 504,156
Property and equipment, net (note 6)........................ 3,968,053 4,418,799
Property and equipment DMX-Europe N.V., net (note 6)........ 164,120 1,475,189
Goodwill, net............................................... -- 4,535,658
Other assets................................................ 109,678 99,148
------------- -------------
Total Assets....................................... $ 10,985,895 $ 18,752,019
============= =============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities, excluding DMX-Europe N.V.:
Accounts payable.......................................... $ 1,815,066 $ 1,097,476
Accrued liabilities (note 7).............................. 7,523,802 4,886,837
Accrued obligations on disposal -- DMX-Europe N.V......... 2,826,950 1,468,530
Note payable due to related party (note 8)................ 731,611 --
Current portion of capital lease obligation (note 11)..... 571,600 410,108
------------- -------------
Total current liabilities, excluding DMX-Europe
N.V.............................................. 13,469,029 7,862,951
Current liabilities DMX-Europe N.V.:
Accounts payable.......................................... 1,014,269 7,284,664
Accrued liabilities....................................... 1,525,461 1,488,492
Investment in and advances to DMX-Europe (UK)............. 6,590,754 --
------------- -------------
Total current liabilities DMX-Europe N.V........... 9,130,484 8,773,156
------------- -------------
Total current liabilities.......................... 22,599,513 16,636,107
Deferred revenue............................................ 308,895 295,461
Royalty payable (note 11)................................... 1,773,275 1,773,275
Note payable due to related party (note 8).................. 1,784,889 --
Capital lease obligation (note 11).......................... 821,548 1,401,426
Stockholders' deficit (note 9):
Common Stock, $.01 par value. Authorized 100,000,000
shares;
issued 59,672,224 shares in 1997 and 1996............... 596,722 596,722
Paid-in capital........................................... 136,895,686 136,758,259
Accumulated deficit....................................... (152,786,657) (138,078,913)
Foreign currency translation reserve...................... (429,973) (52,315)
Treasury stock, 85,630 shares, at cost.................... (578,003) (578,003)
------------- -------------
Net stockholders' deficit.......................... (16,302,225) (1,354,250)
Commitments and contingencies (note 11)..................... -- --
------------- -------------
Total Liabilities and Stockholders' Deficit........ $ 10,985,895 $ 18,752,019
============= =============
</TABLE>
See accompanying notes to consolidated financial statements
F-3
<PAGE> 47
DMX INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
NINE MONTHS ENDED JUNE 30, 1997 AND 1996 AND YEARS ENDED SEPTEMBER 30, 1996 AND
1995
<TABLE>
<CAPTION>
JUNE 30, SEPTEMBER 30,
--------------------------- ---------------------------
1997 1996 1996 1995
------------ ------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Subscriber fee revenues -- related party (note
2)........................................... $ 6,907,044 $ 6,648,371 $ 9,086,434 $ 7,695,978
Subscriber fee revenues -- other............... 6,902,393 5,033,936 6,972,671 4,920,380
Other revenue, net............................. 564,990 270,669 431,060 157,026
Revenue -- DMX-Europe N.V. (note 5)............ 2,219,851 238,305 836,438 --
------------ ------------ ------------ ------------
16,594,278 12,191,281 17,326,603 12,773,384
Operating expenses:
General and administrative................... 5,312,343 3,945,166 5,803,043 5,511,615
Sales and marketing.......................... 5,320,841 6,672,658 8,570,141 7,438,023
Studio and programming....................... 7,548,413 6,616,162 9,016,760 7,773,759
International development.................... -- 868 1,598 168,629
Research and development..................... 630,263 588,506 778,047 725,164
Stock bonus and option compensation.......... 137,427 412,281 549,708 549,708
Depreciation and amortization................ 1,789,024 1,301,937 1,883,415 1,341,775
Operating expenses -- DMX-Europe N.V.
(note 5)................................... 8,489,238 2,110,020 5,740,289 --
Loss on disposal of DMX-Europe N.V. (note
5)......................................... 1,737,554 -- 7,153,278 --
------------ ------------ ------------ ------------
30,965,103 21,647,598 39,496,279 23,508,673
Net operating loss.................... (14,370,825) (9,456,317) (22,169,676) (10,735,289)
Other income (expense):
Equity in earnings of Galactic/TEMPO Sound
(note 4)................................... 203,436 107,571 197,227 306,640
Equity in loss of DMX-Europe N.V. (note 5)... -- (11,853,686) (11,853,686) (13,271,599)
Interest income.............................. 23,918 95,720 111,610 282,234
Interest expense............................. (247,680) (190,742) (246,181) (208,694)
Interest expense DMX-Europe N.V. (note 5).... (173,647) (297,222) (53,936) --
Other income................................. 1,519 451,976 172,270 779,866
Other expense................................ (144,465) -- (12,405) (232,687)
------------ ------------ ------------ ------------
(336,919) (11,686,383) (11,685,101) (12,344,240)
Net loss.............................. $(14,707,744) $(21,142,700) $(33,854,777) $(23,079,529)
============ ============ ============ ============
Loss per common share.......................... $ (0.25) $ (0.46) $ (0.68) $ (0.60)
============ ============ ============ ============
Weighted average number of common shares....... 59,586,594 46,308,220 49,675,569 38,505,107
============ ============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements
F-4
<PAGE> 48
DMX INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
NINE MONTHS ENDED JUNE 30, 1997 AND YEARS ENDED SEPTEMBER 30, 1996 AND 1995
<TABLE>
<CAPTION>
COMMON STOCK FOREIGN
--------------------- CURRENCY
NUMBER OF PAID IN ACCUMULATED TREASURY TRANSLATION
SHARES AMOUNT CAPITAL DEFICIT STOCK RESERVE TOTAL
---------- -------- ------------ ------------- --------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT SEPTEMBER 30, 1994..... 36,280,600 $362,806 $ 81,543,456 $ (81,144,607) $(578,003) $ -- $ 183,652
Issuance of common stock.......... 7,400,000 74,000 17,188,500 -- -- -- 17,262,500
Cost of issuance.................. -- -- (70,958) -- -- -- (70,958)
Accrued compensation (note 9)..... -- -- 549,708 -- -- -- 549,708
Foreign currency translation
reserve......................... -- -- -- -- -- 26,390 26,390
Net loss.......................... -- -- -- (23,079,529) -- -- (23,079,529)
---------- -------- ------------ ------------- --------- --------- ------------
BALANCE AT SEPTEMBER 30, 1995..... 43,680,600 436,806 99,210,706 (104,224,136) (578,003) 26,390 (5,128,237)
Issuance of common stock.......... 15,991,624 159,916 37,237,643 -- -- -- 37,397,559
Cost of issuance.................. -- -- (239,798) -- -- -- (239,798)
Accrued compensation (note 9)..... -- -- 549,708 -- -- -- 549,708
Foreign currency translation
reserve......................... -- -- -- -- -- (78,705) (78,705)
Net loss.......................... -- -- -- (33,854,777) -- -- (33,854,777)
---------- -------- ------------ ------------- --------- --------- ------------
BALANCE AT SEPTEMBER 30, 1996..... 59,672,224 596,722 136,758,259 (138,078,913) (578,003) (52,315) (1,354,250)
Accrued compensation (note 9)..... -- -- 137,427 -- -- -- 137,427
Foreign currency translation
reserve......................... -- -- -- -- -- (377,658) (377,658)
Net loss.......................... -- -- -- (14,707,744) -- -- (14,707,744)
---------- -------- ------------ ------------- --------- --------- ------------
BALANCE AT JUNE 30, 1997.......... 59,672,224 $596,722 $136,895,686 $(152,786,657) $(578,003) $(429,973) $(16,302,225)
========== ======== ============ ============= ========= ========= ============
</TABLE>
See accompanying notes to consolidated financial statements
F-5
<PAGE> 49
DMX INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED JUNE 30, 1997 AND 1996 AND YEARS ENDED SEPTEMBER 30, 1996 AND
1995
<TABLE>
<CAPTION>
JUNE 30, SEPTEMBER 30,
--------------------------- --------------------------
1997 1996 1996 1995
------------ ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss...................................... $(14,707,744) (21,142,700) (33,854,777) (23,079,529)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization............... 2,462,259 1,413,479 2,229,646 1,341,775
Dividend from Galactic/TEMPO Sound.......... 150,000 150,000 150,000 300,000
Equity in earnings of Galactic/TEMPO
Sound..................................... (203,436) (107,571) (197,227) (306,640)
Equity in loss of DMX-Europe N.V............ -- 11,853,686 11,853,686 13,271,599
Loss on disposal of DMX-Europe N.V.......... 1,737,554 -- 7,153,278 --
Loss on disposal of property and
equipment................................. 46,056 -- -- --
Compensation expense for stock bonus and
options................................... 137,427 412,281 549,708 549,708
Provision for doubtful accounts............. 810,219 -- 643,148 700,000
(Increase) decrease in prepaid and other
current assets............................ 30,100 (827,469) (947,596) 76,315
Decrease in advances to DMX-Europe N.V...... -- -- -- 490,296
(Increase) in receivables................... (777,726) (1,995,712) (1,077,525) (715,015)
(Increase) decrease in other assets......... (42,810) 64,801 93,157 (111,250)
Increase (decrease) in deferred revenue..... 13,434 (87,110) (80,934) (42,145)
Increase in royalty payable................. -- 434,485 521,292 538,562
Increase (decrease) in accounts payable and
accrued liabilities....................... 8,823,660 2,369,520 4,035,653 (33,365)
------------ ----------- ----------- -----------
Net cash used in operating
activities........................... (1,521,007) (7,462,310) (8,928,491) (7,019,689)
------------ ----------- ----------- -----------
Cash flows from investing activities:
Purchase of property and equipment, net....... (1,055,213) (1,050,754) (1,519,444) (954,101)
Advances to DMX-Europe N.V., net.............. -- (681,846) (681,846) (2,044,311)
Investment in preferred stock of DMX-Europe
(UK) Limited................................ -- (6,440,000) (6,440,000) (3,500,000)
Purchase of securities held to maturity....... -- -- (165,000)
Proceeds from matured securities held to
maturity.................................... -- 165,000 165,000 2,279,738
------------ ----------- ----------- -----------
Net cash used in investing
activities........................... (1,055,213) (8,007,600) (8,476,290) (4,383,674)
------------ ----------- ----------- -----------
Cash flows from financing activities:
Issuance of common stock, net................. -- 10,346,094 10,346,094 17,191,542
Issuance of note payable due to related
party....................................... 2,516,500 -- -- --
Repayment of note payable to bank............. -- (45,000) (45,000) (240,000)
Repayment of note payable..................... -- -- -- (181,455)
Repayment of principal portion of capital
lease obligation............................ (228,547) (295,210) (397,398) (228,225)
------------ ----------- ----------- -----------
Net cash provided by financing
activities........................... 2,287,953 10,005,884 9,903,696 16,541,862
------------ ----------- ----------- -----------
Net (decrease) increase in cash and
cash equivalents..................... (288,267) (5,464,026) (7,501,085) 5,138,499
Cash and cash equivalents, beginning of
period........................................ 1,121,034 8,622,119 8,622,119 3,483,620
------------ ----------- ----------- -----------
Cash and cash equivalents, end of period........ $ 832,767 3,158,093 1,121,034 8,622,119
============ =========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements
F-6
<PAGE> 50
DMX INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED JUNE 30, 1997 AND YEARS ENDED SEPTEMBER 30, 1996 AND 1995
(1) INCORPORATION AND NATURE OF BUSINESS.
DMX Inc., formerly International Cablecasting Technologies Inc. ("ICT"),
was incorporated under the laws of the state of Delaware in May 1990, to
accomplish a corporate reorganization which effected a change of situs of its
predecessor company of the same name (ICT-Canada). ICT-Canada was incorporated
pursuant to the Company Act (British Columbia) on April 26, 1979, by
registration of its Memorandum and Articles under the name Can-Am Entertainment
Corporation. On November 14, 1986, its name was changed to International
Cablecasting Technologies Inc. On April 27, 1995, ICT changed its name to DMX
Inc.
DMX Inc. is primarily engaged in programming, distributing and marketing a
digital music service; Digital Music Express(R) (DMX(R)), which provides
continuous 24-hours-per-day commercial free, CD quality music programming.
On July 11, 1997, DMX Inc. and TCI Music, Inc. ("TCI Music"), a wholly
owned subsidiary of Tele-Communications, Inc. ("TCI"), consummated a merger
pursuant to an Agreement and Plan of Merger, dated February 6, 1997, as amended
by Amendment One to Merger Agreement dated May 29, 1997 (the "Merger
Agreement"), among DMX Inc., TCI, TCI Music and TCI Merger Sub, Inc. ("Merger
Sub"), a wholly owned subsidiary of TCI Music, whereby Merger Sub was merged
with and into DMX Inc. (the "Merger") with DMX Inc. as the surviving corporation
and TCI Music became the successor Registrant to DMX Inc. Such Merger was deemed
effective July 1, 1997 for accounting purposes.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES.
ACCOUNTING PRINCIPLES AND CONSOLIDATION.
The consolidated financial statements include the accounts of DMX Inc. and
its wholly owned subsidiaries, TEMPO Sound, 450714 B.C. Ltd. and DMX-Europe N.V.
and subsidiary ("DMX-E"). DMX-Europe (UK) Limited was deconsolidated as of June
30, 1997 as discussed in note 5. All material intercompany balances and
transactions have been eliminated.
GOODWILL.
Goodwill was calculated as the purchase price of DMX-E less the fair value
of net assets acquired and is being amortized over 20 years. Goodwill will be
eliminated upon the ultimate disposition of DMX-E pursuant to DMX Inc.'s plan to
dispose of its operations as described in note 5. In connection with the
anticipated disposal of operations and considering the terms of such agreements
goodwill was reduced by $5,685,000 due the impairment of its value during the
fiscal year ended September 30, 1996. Due to the deconsolidation of DMX-Europe
(UK) Limited as discussed in note 5, goodwill was incorporated with the
investment in and advance to DMX-Europe (UK) in the accompanying balance sheet
as of June 30, 1997.
REVENUE RECOGNITION AND ALLOWANCE FOR DOUBTFUL ACCOUNTS.
DMX Inc. recognizes revenue based upon subscriber levels for affiliate
sales and the contract terms for its direct sales. The calculation of subscriber
levels for affiliate sales is based on billing and sales information provided by
its affiliates. Direct sales revenue is recognized beginning at inception of
service ratably over the contract terms. DMX Inc. analyzes subsequent cash
receipts and other data to determine the adequacy of its allowance for doubtful
accounts.
Accounts receivable and subscriber fee revenue from related party consists
of receivables and revenues due from TCI and its affiliates. At June 30, 1997,
TCI held 45.7% of the outstanding common stock of DMX Inc. (see note 12 "Recent
Developments"). Total subscriber fee revenue from TCI for the nine months ended
June 30, 1997 and 1996 and the fiscal years ended September 30, 1996 and 1995
represented approximately 50%, 57%, 56%, and 61%, respectively, of total
subscriber fee revenue.
F-7
<PAGE> 51
DMX INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
INVENTORY.
Inventory consisted of receivers, amplifiers, compact disc players, compact
discs and packaging material and is valued at the lower of cost (determined on a
first-in, first-out method) or estimated net realizable value.
INVESTMENT IN GALACTIC/TEMPO SOUND PARTNERSHIP.
DMX Inc.'s 50% investment in Galactic/TEMPO Sound, a partnership with
Galactic Radio Partners, Inc., is accounted for using the equity method. The
50-50 joint venture commenced July 16, 1990, providing basic cable audio
programming to cable television system operators.
PROPERTY AND EQUIPMENT.
Property and equipment is carried at cost and is depreciated over the
estimated useful lives of three to six years using the straight-line method.
Leasehold improvements are carried at cost and are depreciated over the shorter
of the estimated five-year useful life of the related asset or the term of the
lease.
INCOME TAXES.
DMX Inc. accounts for income taxes under Statement of Financial Accounting
Standard No. 109, Accounting for Income Taxes ("SFAS No. 109"), whereby deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amount of
existing assets and liabilities and their respective tax bases. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to
be recovered or settled. Under SFAS No. 109, 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.
FOREIGN CURRENCY TRANSLATION RESERVE.
Unrealized gains and losses resulting from the translation of financial
statements are reflected as a separate component of stockholders' equity.
LOSS PER SHARE.
The loss per share has been calculated by dividing the loss for the period
by the weighted average number of common shares issued and outstanding during
the period. Outstanding share options, awards and shares contingently issuable
under equity participation agreements have not been considered in the
computation as their impact on the net loss per common share would be
antidilutive.
CASH EQUIVALENTS.
Cash equivalents include highly liquid investments with an original
maturity of three months or less.
CASH FLOW INFORMATION.
Cash payments for interest in the nine months ended June 30, 1997 and
fiscal years ended September 30, 1996 and 1995 were $247,700, $246,200 and
$236,500, respectively. Foreign currency translation was $377,658 for the nine
months ended June 30, 1997, $78,705 and $26,390 for the fiscal years ended
September 30, 1996 and 1995, respectively.
F-8
<PAGE> 52
DMX INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
USE OF ESTIMATES.
In preparing financial statements in conformity with generally accepted
accounting principles, management is required to make estimates and assumptions
that affect the reported amounts of assets and liabilities, including the
accrual of music rights and royalties, and the disclosures of contingent assets
and liabilities at the date of the financial statements and revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
CONCENTRATION OF CREDIT RISK.
DMX Inc.'s accounts receivable balance is comprised primarily of amounts
due from cable system operators, with the majority due from its largest
customer, TCI.
STOCK OPTIONS.
Prior to January 1, 1996, DMX Inc. accounted for its stock option plan in
accordance with the provisions of Accounting Principles Board ("APB") Opinion
No. 25, "Accounting for Stock Issued to Employees", and related interpretations.
As such, compensation expense would be recorded on the date of grant only if the
current market price of the underlying stock exceeded the exercise price. On
January 1, 1996, DMX Inc. adopted Statement of Financial Accounting Standard No.
109, "Accounting for Stock-Based Compensation" (SFAS No. 123), which permits
entities to recognize as expense over the vesting period the fair value of all
stock-based awards on the date of grant. Alternatively, SFAS No. 123 allows
entities to continue to apply the provision of APB Opinion No. 25 and provide
pro forma net income and pro forma earnings per share disclosures for employee
stock option grants made in 1995 and future years as if the fair-value-based
method defined in SFAS No. 123 had been applied. DMX Inc. has elected to
continue to apply the provisions of APB Opinion No. 25 and provide the pro forma
disclosure provisions of SFAS No. 123.
RECLASSIFICATIONS.
Certain reclassifications of prior period amounts have been made to conform
to the current year's reporting format.
(3) ALLOWANCE FOR DOUBTFUL ACCOUNTS.
A summary of the activity of the allowance for doubtful accounts for the
nine months ended June 30, 1997 and fiscal years ended September 30, 1996 and
1995 follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
NINE MONTHS SEPTEMBER 30,
ENDED JUNE 30, -----------------------
1997 1996 1995
-------------- ----------- --------
<S> <C> <C> <C>
Balance, beginning of period.................. $ 251,247 $ 856,802 $156,802
Provision for doubtful accounts............... 810,219 643,148 700,000
Accounts charged-off.......................... (611,011) (1,248,703) --
--------- ----------- --------
Balance, end of period........................ $ 450,455 $ 251,247 $856,802
========= =========== ========
</TABLE>
F-9
<PAGE> 53
DMX INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(4) INVESTMENT IN GALACTIC/TEMPO SOUND PARTNERSHIP.
The summarized balance sheet and operating data as of and for the nine
months ended June 30, 1997, and the twelve months ended September 30, 1996, of
the Galactic/TEMPO Sound partnership follows:
<TABLE>
<CAPTION>
NINE MONTHS ENDED TWELVE MONTHS ENDED TWELVE MONTHS ENDED
JUNE 30, 1997 SEPTEMBER 30, 1996 SEPTEMBER 30, 1995
(UNAUDITED) (UNAUDITED) (UNAUDITED)
----------------- ------------------- -------------------
<S> <C> <C> <C>
Current assets............... $ 945,000 $ 890,000 $ 828,804
Non-current assets........... 225,000 144,000 186,747
Current liabilities.......... 55,000 26,000 101,694
Partners' capital............ 1,115,000 1,008,000 913,857
Partners' draws for the
period..................... (300,000) (300,000) (600,000)
Revenues..................... 1,769,000 2,227,000 1,903,000
Operating expenses........... (1,362,000) (1,833,000) (1,290,000)
Net income................... $ 407,000 $ 394,000 $ 613,000
=========== =========== ===========
</TABLE>
(5) INVESTMENT AND DISPOSITION OF DMX-EUROPE N.V. AND SUBSIDIARY.
The summarized operating data for the nine months ended June 30, 1997 and
the years ended September 30, 1996 and 1995, of DMX-Europe N.V. and subsidiary
follows:
<TABLE>
<CAPTION>
NINE MONTHS FOR THE YEAR ENDED
ENDED SEPTEMBER 30,
JUNE 30, ----------------------------
1997 1996 1995
----------- ------------ ------------
<S> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Revenue................................. $ 2,219,851 $ 1,559,262 $ 151,176
Operating, selling, general and
administrative expenses (including
intercompany expenses of $867,763 for
the nine months ended June 30, 1997
and $351,786 for the year ended
September 30, 1996)................... 8,706,261 15,594,979 16,500,784
Depreciation and amortization......... 673,234 909,022 541,678
----------- ------------ ------------
Operating loss.......................... (7,159,644) (14,944,739) (16,891,286)
Interest expense (including intercompany
expenses of $1,362,804 for the nine
months ended June 30, 1997 and
$874,250 for the year ended September
30, 1996)............................. (1,536,451) (3,115,621) (2,876,252)
Other................................. 22,494 22,851 54,519
----------- ------------ ------------
Net loss...................... $(8,673,601) $(18,037,509) $(19,713,019)
=========== ============ ============
</TABLE>
DISPOSITION OF DMX-EUROPE N.V. AND SUBSIDIARY.
DMX-Europe N.V. ("DMX-E NV") and its subsidiary DMX-Europe (UK) Limited
("DMX-E UK"), collectively ("DMX-E"), ceased operation on July 1, 1997. Due to
the fact that DMX-E UK was placed into receivership and liquidation, DMX Inc. no
longer has control over operations and activities, accordingly the accompanying
balance sheet as of June 30, 1997 gives the effect of the deconsolidation of
DMX-E UK. DMX-E UK was placed into receivership on July 1, 1997 and into
liquidation proceedings on July 18, 1997. DMX-E NV, although inactive since July
1, 1997, is scheduled for liquidation proceedings to commence during the fourth
calendar quarter of 1997.
F-10
<PAGE> 54
DMX INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
As a result of the DMX-E cessation of operations, the Subscription and
Shareholder Agreement dated December 18, 1996 ("Definitive Agreements") between
DMX Inc.; Mr. Jerold H. Rubinstein, an individual; and XTRA Music Limited, a
corporation under laws of England ("XTRA") was put into place whereby the
termination certificate was executed in July 1997, which terminated the Stock
Purchase Agreement dated December 18, 1996 that provided the disposition of
DMX-E to Mr. Jerold H. Rubinstein. Pursuant to the Definitive Agreement, DMX
Inc. obtained a 10% interest in XTRA and a Channel Distribution Agreement was
executed between XTRA and DMX Inc. The Channel Distribution Agreement provided
XTRA an exclusive, five-year, royalty-free license to distribute the DMX Music
service in Europe, the former Soviet Union and in the Middle East and the right
to use DMX Inc.'s trade marks for two years. The music service is currently not
being distributed by XTRA as Mr. Jerold H. Rubinstein is seeking financial
partners.
DMX Inc. has accounted for the effects of the disposal of DMX-E and
accordingly has estimated the loss on the disposal of DMX-E of $1,737,554 and
$7,153,278 in the consolidated statements of operations for the nine months
ended June 30, 1997 and the year ended September 30, 1996, respectively. The
loss on disposal of DMX-Europe NV reflected a write down of the assets to their
estimated net realizable value at June 30, 1997. The loss on disposal for 1996
was estimated as the net investment of $5,720,000 and the incurrence of certain
potential liabilities of $1,469,000 in conjunction with such disposal
activities.
DMX-E was formed by DMX Inc. to provide the necessary management, marketing
services and operating structure for the distribution of Digital Music
Express(R) ("DMX(R)"), throughout Europe. In 1993, TCI-Euromusic, Inc.
("TCI-E"), an indirect affiliate of TCI, acquired a 49% equity interest in DMX-E
through the purchase of 49% of the outstanding common stock of DMX-E for
$120,100, in addition to providing a $24.4 million credit facility which was
used for the start-up costs and initial operations of DMX-E. DMX Inc. partially
guaranteed the credit facility, and would be liable for one-half of the TCI-E's
"loss" as defined, which was payable at the option of DMX Inc., in DMX Inc.'s
Common Stock.
On May 17, 1996, DMX Inc. consummated the merger of TCI-E (the "TCI-E
Merger"), pursuant to the terms of the Agreement and Plan of Merger ("the
Agreement"), dated August 28, 1995, as amended as of November 1, 1995 and
January 17, 1996 among DMX Inc., TCI-E and United Artists Programming
International, Inc. ("UAPI"), an indirect affiliate of TCI and owner of the
outstanding shares of TCI-E. As a result of the TCI-E Merger, DMX Inc.acquired
the remaining 49% interest in DMX-E.
The TCI-E Merger was accounted for as a purchase and DMX Inc. issued
10,841,624 shares of its Common Stock to UAPI at a purchase price totaling
$27,104,060. The purchase price less the fair value of TCI-E net assets
acquired, resulted in goodwill of $10,415,701 which is being amortized over 20
years and was calculated as follows:
<TABLE>
<S> <C>
Purchase price.............................................. $27,104,060
Less book value of TCI-E net assets acquired................ (3,479,694)
-----------
23,624,366
Purchase price adjustments:
To adjust the investment in DMX-E for losses recorded by
TCI-E, which were also recognized by DMX Inc. based on
the modified equity method of accounting............... (9,026,263)
To reverse allowance for uncollectible interest recorded
by TCI-E at 49% of the interest accrued on the notes
receivable............................................. (4,213,793)
Other....................................................... 31,391
-----------
Goodwill.................................................... $10,415,701
===========
</TABLE>
F-11
<PAGE> 55
DMX INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The accompanying consolidated balance sheets of DMX Inc. at June 30, 1997
and September 30, 1996 is consolidated with the accounts of DMX-E and the
accompanying consolidated statements of operations and cash flows of DMX Inc.
were consolidated with the accounts of DMX-E for the nine months ended June 30,
1997 and for the period from May 18, 1996 through September 30, 1996. Prior to
May 18, 1996, DMX Inc. accounted for its investment in DMX-E using the modified
equity method of accounting.
(6) PROPERTY AND EQUIPMENT.
Property and equipment as of June 30, 1997 and September 30, 1996 consist
of the following:
<TABLE>
<CAPTION>
JUNE 30, SEPTEMBER 30,
1997 1996
----------- -------------
<S> <C> <C>
DMX INC.
Furniture and equipment..................................... $ 4,398,935 $ 3,613,145
Leasehold improvements...................................... 213,205 181,348
Studio equipment............................................ 3,432,489 4,103,686
Music library............................................... 1,046,944 918,126
Computer system............................................. 571,410 556,411
----------- -----------
9,662,983 9,372,716
Less accumulated depreciation and amortization.............. (5,694,930) (4,953,917)
----------- -----------
$ 3,968,053 $ 4,418,799
=========== ===========
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, SEPTEMBER 30,
1997 1996
----------- -------------
<S> <C> <C>
DMX-EUROPE
Furniture and equipment..................................... $ -- $ 344,224
Studio equipment............................................ 164,120 2,041,021
Computer system............................................. -- 695,049
----------- -----------
164,120 3,080,294
Less accumulated depreciation and amortization.............. -- (1,605,105)
----------- -----------
$ 164,120 $ 1,475,189
=========== ===========
</TABLE>
Studio equipment with a net book value of $137,000, net of accumulated
depreciation of $583,000 was leased to DMX-E for a monthly fee of approximately
$23,000, and was written off at June 30, 1997. Lease income related to leased
equipment to DMX-E for the period from October 1, 1995 through May 17, 1996, and
the fiscal year ended September 30, 1995 was approximately $172,000 and
$245,000, respectively, and was included in other income. For the nine months
ended June 30, 1997 and the period from May 18, 1996 through September 30, 1996,
the lease income of approximately $160,000 and $103,000, respectively, was
eliminated in consolidation.
Studio equipment of $948,000, net of accumulated depreciation of
$1,248,000, at June 30, 1997 was financed under the capital lease obligation.
F-12
<PAGE> 56
DMX INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(7) ACCRUED LIABILITIES.
Accrued liabilities as of June 30, 1997 and September 30, 1996 were
comprised of the following:
<TABLE>
<CAPTION>
JUNE 30, SEPTEMBER 30,
1997 1996
---------- -------------
<S> <C> <C>
Accrued music right royalties.............................. $2,920,285 1,574,449
Accrued marketing credits.................................. 2,305,240 2,575,408
Accrued legal fees......................................... 496,750 102,338
Accrued payroll............................................ 564,532 75,831
Accrued employee benefits.................................. 319,076 205,347
Deferred rent.............................................. 231,020 83,784
Other accrued expenses..................................... 686,899 269,680
---------- ----------
$7,523,802 4,886,837
========== ==========
</TABLE>
ACCRUED MUSIC RIGHT ROYALTIES.
DMX Inc. licenses rights to re-record and distribute music from a variety
of sources and pays royalties to songwriters and publishers through contracts
negotiated with performing rights societies such as the American Society of
Composers, Authors and Publishers ("ASCAP"), Broadcast Music, Inc. ("BMI") and
the Society of European Stage Authors and Composers ("SESAC"). DMX Inc. has
separate agreements with ASCAP, BMI and SESAC for residential and commercial
distribution. Certain of the agreements are being negotiated on an industrywide
basis mainly over new rate structures that may require retroactive rate
increases. DMX Inc. has continued to accrue royalties that are under
negotiations based on its best estimate, after consultation with counsel and
consideration of the terms and rates of the expired contracts.
The Digital Performance Right in Sound Recordings Act of 1995 ("1995 Act")
was signed into law on November 1, 1995. The 1995 Act establishes the right of
owners of the performance rights, such as the performers and record companies,
to control digital transmission of sound recordings by means of subscription
service digital transmissions. The 1995 Act provides a compulsory license for
noninteractive subscription services. An arbitration proceeding relating to
residential digital music distribution is pending before the United States
Copyright Office. The purpose of the proceeding is to determine the statutory
license royalty rate to be paid under the 1995 Act by DMX Inc. and other digital
music residential subscription services on services transmitted on non-business
subscribers. The rate charged is retroactive to February 1996 and is contingent
on the negotiated rate agreed to as result of the arbitration proceeding. DMX
Inc. has been accruing royalties at an estimated rate of 3% of residential
subscriber fee revenue since such date after consultation with counsel.
ACCRUED MARKETING CREDITS.
Accrued marketing credits at June 30, 1997 and September 30, 1996 of
$2,305,240 and $2,575,408, respectively, related to a certain license fee
arrangement. In July 1997, the total marketing credits were satisfied in full
through a cash payment of $855,436 and offset of certain license fees due to DMX
Inc.
(8) NOTE PAYABLE RELATED PARTY.
On February 6, 1997 DMX Inc. entered into a loan and security agreement
with TCI which provides DMX Inc. up to $3.5 million. The loan proceeds were used
to purchase and/or reimburse DMX Inc. for equipment and certain costs related to
obtaining commercial customers. The loan, as amended on May 29, 1997, bears
interest at a rate of 12.5% per annum and is to be paid in 34 equal monthly
installments
F-13
<PAGE> 57
DMX INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
commencing September 1, 1997. At June 30, 1997 the principal balance outstanding
was approximately $2,420,000 and accrued interest was approximately $97,000.
(9) STOCKHOLDERS' DEFICIT.
STOCK OPTIONS AND COMMITMENTS.
DMX Inc. has issued options to purchase Common Stock to certain directors,
officers and employees under various stock option plans. The option prices
represent fair market values at the date of grant. Transactions in stock options
under these plans are summarized as follows:
<TABLE>
<CAPTION>
SHARES OPTION PRICE
--------- ------------
<S> <C> <C>
Outstanding options at September
30, 1994...................... 3,095,833 $1.95 - $6.25 per share, expiring on
various dates, December 31, 1996 to July
1, 2006.
Options issued.................. 1,631,250 $2.00 - $3.25 per share
Options expired and
terminated.................... (331,250) $3.25 - $5.625 per share
---------
Outstanding options at September
30, 1995...................... 4,395,833 $1.95 - $6.25 per share, expiring on
various dates, December 31, 1996 to July
1, 2006.
Options issued.................. 100,000 $2.563 per share
Options expired and canceled.... (230,000) $2.563 - $4.180 per share
Options exercised............... (150,000) $1.95 per share
---------
Outstanding options at September
30, 1996...................... 4,115,833 $1.95 -- $6.25 per share, expiring on
various dates, December 31, 1996 to July
1, 2006.
Options expired................. (531,250) $1.95 - $5.75 per share
---------
Outstanding options at June
30,1997....................... 3,584,583
========= $2.063 - $6.25 per share, expiring on
various dates, June 30, 1998 to July 1,
2006.
</TABLE>
At June 30, 1997, options to purchase 3,584,583 shares were exercisable at
prices ranging from $2.063 to $6.25 per share and include options to purchase
400,000 shares that were exercisable prior to July 11, 1997 due to the
acceleration of options. By terms of the DMX Inc. 1993 Stock Option Plan,
options issued, outstanding and unexercised were terminated upon consummation of
the Merger. (See note 12 "Recent Developments".) Exercisable options held by
officers and directors of DMX Inc. at June 30, 1997 totaled 3,373,333.
ACCOUNTING FOR STOCK BASED COMPENSATION.
The per share fair value of stock options granted during the years ended
September 30, 1996 and 1995 ranged from $1.69 to $2.69 on the date of grant
using the Black Scholes option-pricing model. There were no options granted
during the nine months ended September 30, 1997. DMX Inc. applies APB Opinion
No. 25 in accounting for its Plans and accordingly, no compensation cost was
recognized to the extent the exercise price of the stock options equaled the
fair value. Had DMX Inc. determined compensation cost based on the fair
F-14
<PAGE> 58
DMX INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
value at the grant date for its stock options under SFAS No. 123, DMX Inc.'s net
loss and loss per share would have been increased to the pro forma amounts
indicated below:
<TABLE>
<CAPTION>
YEAR ENDED
NINE MONTHS SEPTEMBER 30,
ENDED ----------------------------
JUNE 30, 1997 1996 1995
------------- ------------ ------------
<S> <C> <C> <C>
Net loss
As reported............................ $(14,707,744) (33,854,777) (23,079,529)
Pro forma.............................. (15,216,002) (34,363,035) (23,574,673)
Net loss per share
As reported............................ (0.25) (0.68) (0.60)
Pro forma.............................. (0.26) (0.69) (0.61)
Weighted average common stock and common
stock equivalents outstanding.......... 59,586,594 49,675,569 38,505,107
</TABLE>
Pro forma net income reflects only options granted during the years ended
September 30, 1996 and 1995. Therefore, the full impact of calculating
compensation cost for stock options under SFAS No. 123 is not reflected in the
pro forma net income amounts presented above because compensation cost is
reflected over the options vesting period and compensation cost for options
granted prior to January 1, 1995 is not considered.
STOCK BONUS AND OPTION COMPENSATION.
Stock bonus expense included $137,427 and $412,281 for the nine months
ended June 30, 1997 and 1996, respectively, and $549,708 of compensation for
each of the years ended September 30, 1996 and 1995, related to the 1992
extension of the exercise date of an option issued in October 1990. The exercise
date was extended from 1993 to December 31, 1996 and represented an option to
purchase 350,000 shares of common stock granted to Jerold H. Rubinstein,
Chairman and Chief Executive Officer ("Chairman and CEO"). During the fiscal
year ended September 30, 1996, options to purchase 150,000 shares were exercised
and at December 31, 1996 the remaining options to purchase 200,000 shares
expired.
COMMON STOCK.
During 1996, DMX Inc. completed private placements with certain related
parties. Stephen A. Wynn, a director of DMX Inc., acquired 500,000 shares at
2.00 per share on March 15, 1996. TCI acquired 4,500,000 shares at 2.00 per
share on May 17, 1996 and was issued 10,841,624 shares valued at $2.50 per share
in DMX Inc. merger with TCI-E. In addition, TCI bought Stephen A. Wynn's
5,200,000 shares in DMX Inc. for 2.00 per share.
(10) INCOME TAXES.
At June 30, 1997, DMX Inc. had approximately $86,000,000 of net operating
loss carryforwards for U.S. Federal income tax reporting purposes, expiring in
years 2001 through 2012. The net operating loss carryforward for U.S. Federal
income tax purposes does not include deductions for the following: equity in
loss of DMX-E and option compensation, offset partially by a deduction of
executive compensation resulting from the exercise of stock options for U.S.
Federal income tax purposes. The amount of U.S. income tax loss carryforwards
available to offset U.S. taxable income in any year may be limited under Section
382 of the Internal Revenue Code of 1986 ("Code"), as amended, which limits the
amount of loss carryforwards that may be utilized in any particular tax period
when a "change of control" of DMX Inc. has occurred for U.S. tax purposes.
F-15
<PAGE> 59
DMX INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Any deferred tax amount relating to the net operating loss carryforwards,
or any other deferred tax asset, has been fully offset by a valuation allowance.
Accordingly, no income tax benefit has been recorded.
(11) COMMITMENTS AND CONTINGENCIES.
CAPITAL LEASE WITH RELATED PARTY.
DMX Inc. has an equipment lease with the National Digital Television
Center, Inc., a subsidiary of TCI ("NDTC"), for the equipment at the studio and
uplinking facility in Littleton, Colorado. The outstanding balance of the
capital lease obligation at June 30, 1997 was $1,386,000 with terms that extends
through the year 2000, at an interest rate of 9.5%. The related studio equipment
had a net book value of $948,000 at June 30, 1997 and is included in Property
and Equipment in the accompanying consolidated balance sheets.
OPERATING LEASE COMMITMENTS.
DMX Inc. is obligated under various operating leases for office space,
uplinking and satellite services. Certain leases are cancelable subject to
penalties. Total expenses under these leases were approximately $4,023,000 for
the nine months ended June 30, 1997 and $5,324,000 and $5,097,000 for the fiscal
years ended September 30, 1996 and 1995, respectively and are included in
general and administrative, sales and marketing and studio expenses in the
accompanying consolidated statements of operations.
Minimum lease payments under the capital and operating leases at June 30,
1997 follows:
<TABLE>
<CAPTION>
OPERATING LEASES
CAPITAL WITH RELATED OPERATING LEASES
LEASE PARTIES WITH OTHERS
---------- ---------------- ----------------
<S> <C> <C> <C>
1998....................................... $ 569,600 4,535,800 770,900
1999....................................... 564,000 4,519,000 704,400
2000....................................... 552,600 3,913,300 681,600
2001....................................... -- 2,258,400 670,100
Thereafter................................. -- 7,904,400 --
---------- ----------- ----------
Total minimum lease payments............... $1,686,200 23,130,900 2,827,000
========== =========== ==========
Less amounts representing interest......... (293,100)
==========
Present value of net minimum lease
payments................................. $1,393,100
==========
</TABLE>
The operating leases with related parties include the lease of studio
facilities in Colorado and uplinking and satellite services from WTCI. Total
expenses under leases with related party were $3,392,000 for the nine months
ended June 30, 1997 and $4,831,000 and $4,489,000 for the fiscal years ended
September 30, 1996 and in 1995.
MANUFACTURING COMMITMENTS AND ROYALTY PAYABLE.
DMX Inc. and Scientific-Atlanta, Inc. ("S-A"), had an agreement with
respect to the manufacture, distribution and servicing of the DM-2000 tuners and
DMX-DJ's. DMX Inc. was not obligated to purchase or guarantee the purchase of
any minimum number of tuners or DMX-DJ's, but S-A was the exclusive tuner
manufacturer in the U.S. and Canada and earned a royalty of approximately five
percent (5%) of DMX Inc.'s premium audio service revenues until August 1996. No
payments are required until DMX Inc. achieves "operating breakeven", as defined
in the agreement.
DMX Inc. and Comstream Corporation ("Comstream"), have an agreement with
respect to the manufacture, distribution and servicing of the DR-200 Digital
Satellite Receiver. DMX Inc. has guaranteed
F-16
<PAGE> 60
DMX INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
the purchase of 50,000 digital satellite receivers by DMX Inc., its approved
customers and/or affiliates within 42 months after commencement of the
agreement.
401(k) SAVINGS PLAN.
DMX Inc. maintains a qualified defined contribution 401(k) savings plan.
Prior to January 1, 1995 eligible participants vested 100% in employer matching
contributions of 10% of the participants pretax deferrals invested in DMX Inc.'s
common stock. Subsequent to January 1, 1995, eligible participants vest in
employer matching contributions of 10% of the participants pretax deferrals
invested in DMX Inc.'s common stock in accordance with the vesting schedule as
defined in the agreement. The discretionary employer matching contribution was
10 percent of the participants pretax deferrals invested in DMX Inc.'s common
stock. For the nine months ended June 30, 1997, DMX Inc.'s employee benefit
expense for matching contributions totaled $3,550.
PARENT GUARANTEES.
DMX Inc. has guaranteed certain contracts of DMX-E related to their uplink
services agreement and subscriber management services agreement. To the extent
DMX-E is unable to perform under the agreements, certain creditors of DMX-E may
pursue claims against DMX Inc. under the guarantees. A claim under the guaranty
of DMX-E's obligation to indemnify British Sky Broadcasting under the uplink
services agreement could potentially approximate $1.3 million which is included
in the loss on disposal of DMX-E in the accompanying consolidated statement of
operations. DMX Inc. has also guaranteed certain other obligations of DMX-E
under the Subscriber Management Services Agreement between DMX-E and Selco
Servicegesellschaft Fur Elektronische Kommunikation mbH and the related side
letter agreement. DMX Inc. cannot estimate the amount of any potential claims at
this time under such guarantee; however, such liabilities could have a material
adverse effect upon the financial position and results of operation of DMX Inc.
As described in note 5, "Investment in and Disposition of DMX-Europe N.V.
and Subsidiary", DMX-E ceased operations and DMX-Europe (U.K.) Limited was put
into receivership on July 1, 1997 and into liquidation proceedings on July 18,
1997. DMX- Europe NV, although inactive since July 1, 1997, has not yet been put
into liquidation; however, these proceedings are scheduled to commence during
the fourth calendar quarter of 1997. In such circumstances, claims may be filed
under the guarantees discussed above or other claims may be asserted.
LEGAL ACTIONS.
From time to time DMX Inc. may be a party to legal actions arising in the
ordinary course of business, including claims by former employees. In the
opinion of DMX Inc.'s management, after consultation with counsel, except as set
forth in the next paragraph, disposition of such matters are not expected to
have a material adverse effect upon the financial position, results of
operations or liquidity of DMX Inc.
On September 8, 1996, a purported class action lawsuit entitled Brickell
Partners v. Jerold H. Rubinstein, Donne F. Fisher, Leo J. Hindery, Jr., James R.
Shaw, Sr., Kent Burkhart, J.C. Sparkman, Menon Bhaskar, DMX Inc., and
Tele-Communications, Inc. (Civil Action No. 15206) was filed in the Delaware
Chancery Court alleging, among other things, that the proposed acquisition of
DMX Inc. by TCI is wrongful, unfair and harmful to DMX Inc.'s public
stockholders and seeking to enjoin the consummation of the Merger. DMX Inc.
believes that this action is without merit and intends to defend it vigorously.
On July 23, 1997, Jeri L. Amstutz, a former employee of DMX Inc., filed a
complaint in Superior Court of California, County of Los Angeles, Jeri L.
Amstutz v. DMX Inc., Otis Smith, Jerold Rubinstein and Does 1 to 100. The
plaintiff alleges certain wrongful employment practices. The plaintiff seeks
compensatory damages
F-17
<PAGE> 61
DMX INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
for lost wages and benefits, foreseeable consequential and incidental damages in
an unspecified amount, as well a attorneys' fees, costs and prejudgment
interest. The plaintiff also seeks punitive damages and damages for emotional
distress (and similar harm) in unspecified amounts which the plaintiff claims to
believe will exceed $2,000,000.
On July 23, 1997, Marnie Tenden, a former employee of DMX Inc., filed a
complaint in Superior Court of California, County of Los Angeles, Marnie Tenden
v. DMX Inc., Otis Smith, Jerold Rubinstein and Does 1 to 100, which alleges sex
discrimination and retaliatory harassment. The plaintiff seeks compensatory
damages for lost wages and benefits, foreseeable consequential and incidental
damages, as well as attorneys' fees, costs and prejudgment interest. The
plaintiff also seeks punitive damages and damages for emotional distress (and
similar harm) in unspecified amounts which the plaintiff claims to believe will
exceed $500,000.
(12) RECENT DEVELOPMENTS.
On July 11, 1997, DMX Inc. and TCI Music consummated a merger pursuant to
the Merger Agreement, among DMX Inc., TCI, TCI Music and Merger Sub, whereby
Merger Sub was merged with and into DMX Inc. with DMX Inc. as the surviving
corporation.
In connection with the Merger, TCI and TCI Music entered into a
Contribution Agreement dated July 11, 1997 (the "Contribution Agreement").
Pursuant to the Contribution Agreement: (i) TCI Music issued to TCI (as designee
of certain of its indirect subsidiaries), 62,500,000 shares of Series B Common
Stock, par value $0.01 per share, of TCI Music and a promissory note in the
amount of $40 million; (ii) until December 31, 2006 certain subsidiaries of TCI
will transfer to TCI Music the right to receive all revenue from sales of DMX
music services to their residential and commercial subscribers, net of an amount
equal to 10% of the revenue from such sales to residential subscribers and net
of the revenue otherwise payable to DMX as license fees for DMX music services
under affiliation agreements currently in effect; (iii) TCI contributed to TCI
Music certain digital commercial tuners that are not in service; and (iv) TCI
granted to each stockholder of DMX Inc. who became a stockholder of TCI Music
pursuant to the Merger, one right (a "Right") with respect to each whole share
of Series A Common Stock, $.01 par value per share, of TCI Music ("TCI Music
Series A Common Stock") acquired by such stockholder in the Merger pursuant to
the terms of the Rights Agreement among TCI, TCI Music and the Bank of New York,
as Rights Agent. Each Right entitles the holder to require TCI to purchase from
such holder one share of TCI Music Series A Common Stock at a purchase price of
$8.00 per share, payable at the election of TCI, in cash, a number of shares of
Tele-Communications, Inc. Series A TCI Group Common Stock ("Series A TCI Group
Common Stock") having an equivalent value or a combination thereof, if during
the one-year period beginning on July 11, 1997, the effective date of the
Merger, the price of TCI Music Series A Common Stock does not equal or exceed
$8.00 per share for a period of at least 20 consecutive trading days.
Upon consummation of the Merger, each outstanding share of common stock,
$.01 par value per share, of DMX Inc.was converted into the right to receive (i)
one-quarter share of TCI Music Series A Common Stock, (ii) one Right with
respect to each whole share of TCI Music Series A Common Stock and (iii) cash in
lieu of fractional shares of TCI Music Series A Common Stock and Rights. Until
the Rights expire or are exercised, the Rights will be evidenced by a legend on
the certificates for shares of TCI Music Series A Common Stock issued in the
Merger. Accordingly, the Rights associated with the shares of TCI Music Series A
Common Stock will be represented solely by, and will not be separable from, such
shares of TCI Music Series A Common Stock, and the surrender or transfer of any
such certificate for shares of TCI Music Series A Common Stock will also
constitute the surrender or transfer of the Rights associated with the TCI Music
Series A Common Stock represented by such certificate.
The outstanding shares of TCI Music Series A Common Stock represent
approximately 19.25% of, and 2.3% of the voting power related to, the total
outstanding shares of TCI Music Series A Common Stock and
F-18
<PAGE> 62
DMX INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
TCI Music Series B Common Stock (together, the "TCI Music Common Stock"); and
the outstanding shares of TCI Music Series B Common Stock represent
approximately 80.75% of, and 97.7% of the voting power related to the total
outstanding shares of TCI Music Common Stock. TCI beneficially owns
approximately 45.7% of the outstanding shares of TCI Music Series A Common Stock
and 100% of the outstanding shares of TCI Music Series B Common Stock, which TCI
ownership collectively represents approximately 89.6% of the outstanding shares
of TCI Music Common Stock and 98.7% of the voting power of the outstanding
shares of TCI Music Common Stock.
Effective July 11, 1997, TCI Music, as the successor registrant to DMX Inc.
determined to change its fiscal year end from September 30 to December 31, and
reports the nine month transition period ended June 30, 1997 on Form 10-K.
TCI Music, TCI Music Acquisition Sub, Inc., a Florida corporation and a
wholly-owned subsidiary of TCI Music ("Acquisition Sub"), and The Box Worldwide,
Inc., a Florida corporation ("The Box"), have entered into an Agreement and Plan
of Merger dated as of August 12, 1997 (the "Box Merger Agreement"). Pursuant to
the Box Merger Agreement, Acquisition Sub will be merged with and into The Box
with The Box as the surviving corporation (the "Box Merger"). Outstanding shares
of common stock of The Box will be converted into a number of shares of TCI
Music Series A Convertible Preferred Stock ("Music Preferred Stock") based on
the formula described below, and all common stock of The Box outstanding
immediately after the Box Merger (the number of which will be equal to the
number of outstanding shares of common stock of The Box outstanding immediately
before the Box Merger) will be owned by TCI Music. Unless converted into shares
of common stock of The Box or unless the holder thereof exercises dissenters'
rights under the Florida Business Corporation Act (the "FBCA"), the 1,666,667
shares of 6% Convertible Redeemable Preferred Stock of The Box will remain
outstanding after the Box Merger.
Consummation of the Box Merger will be subject to the satisfaction or
waiver of various conditions, including, among others, the approval of the Box
Merger by shareholders of The Box holding more than 75% of its voting shares and
receipt of governmental and other third-party approvals and consents. There are
no assurances that the Box Merger will be consummated.
Common stock of The Box will be valued at $1.50 per share for purposes of
the Box Merger, and each share of common stock of The Box will be convertible
into the number of shares of Music Preferred Stock equal to the product of (i)
$1.50 divided by the average trading price of the TCI Music Series A Common
Stock over a period of 20 consecutive trading days ending on the third trading
day prior to the closing of the Box Merger and (ii) one-third. Assuming that
none of the holders of common stock of The Box exercise dissenters' rights under
the FBCA, and that no outstanding options, warrants or other rights to acquire
common stock of The Box are exercised prior to the Box Merger, the aggregate
value of the consideration to be paid to the holders of common stock of The Box
would be approximately $36 million. Each share of Music Preferred Stock will
initially be convertible at the option of the holder into three shares of TCI
Music Series A Common Stock subject to certain antidilution adjustments, and
will be entitled to the number of votes equal to the number of votes equal to
the number of shares of TCI Music Series A Common Stock into which the Music
Preferred Stock is convertible on all matters submitted to TCI Music
stockholders for a vote, voting together with the TCI Music Series A Common
Stock and Series B Common Stock of TCI Music. Unlike the shares of TCI Music
Series A Common Stock issued to former stockholders of DMX Inc., the shares of
TCI Music Series A Common Stock into which the Music Preferred Stock is
convertible will not have any rights associated therewith pursuant to which the
holders thereof will have the right to require TCI to purchase their shares of
Series A Common Stock.
Three of The Box's shareholders, H.F. Lenfest, J. Patrick Michaels, Jr. and
StarNet/CEA II Partners (the "Voting Shareholders") have entered into a Voting
Agreement with TCI Music dated as of August 12, 1997 (the "Voting Agreement").
Pursuant to the Voting Agreement, the Voting Shareholders, who
F-19
<PAGE> 63
DMX INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
collectively beneficially own 60.5% of the outstanding shares of common stock of
The Box, have agreed to vote such shares, which represent 56.7% of the voting
stock of The Box, in favor of the adoption and approval of the Box Merger and to
vote against any proposal that would compete or interfere with the Box Merger.
On September 18, 1997, TCI Music and Paradigm Music Entertainment Company,
a Delaware corporation ("Paradigm"), entered into a binding letter of intent
(the "LOI"). Pursuant to the LOI, a wholly-owned subsidiary of TCI Music will be
merged with and into Paradigm with Paradigm as the surviving corporation (the
"Paradigm Merger"). Outstanding shares of common stock of Paradigm (other than
shares with respect to which dissenters' rights have been demanded) will be
converted into shares of TCI Music Series A Common Stock, and all common stock
of Paradigm outstanding immediately after the Paradigm Merger will be owned by
TCI Music.
Consummation of the Paradigm Merger will be subject to the satisfaction or
waiver of various conditions, including, among others, the approval of the
Paradigm Merger by stockholders of Paradigm holding more than a majority of its
voting shares and receipt of governmental and other third-party approvals and
consents. There are no assurances that the Paradigm Merger will be consummated.
The TCI Music Series A Common Stock to be issued to existing stockholders
of Paradigm in connection with the Paradigm Merger will have an aggregate market
value of approximately $24 million (determined by the average of the mean daily
closing bid and asked prices of TCI Music Series A Common Stock during the 20
consecutive trading days ending on the third trading day prior to the closing of
the Paradigm Merger). TCI Music will also either assume debt of, or contribute
cash to, Paradigm in connection with the Paradigm Merger, in either case in the
amount of approximately $5,000,000.
Pursuant to the LOI, TCI Music loaned approximately $2.2 million, and is
obligated to advance additional amounts of up to $550,000 per month for the
months of October, November and December 1997 (collectively the "Advances"), to
Paradigm to fund operations pending closing of the Paradigm Merger. The Advances
bear interest at 10% per annum, are secured by all of Paradigm's assets, and are
due and payable no later than June 30, 1998.
At the effective time of the Paradigm Merger, Thomas McPartland, President
and Chief Executive Officer of Paradigm, will be appointed President and Chief
Executive Officer of, and will become a director of, TCI Music.
Three of Paradigm's principal stockholders (the "Paradigm Voting
Stockholders") have entered into a Voting Agreement with Paradigm and TCI Music
dated as of September 18, 1997 (the "Paradigm Voting Agreement"). Pursuant to
the Paradigm Voting Agreement, the Paradigm Voting Stockholders, who
collectively beneficially own 39.2% of the outstanding shares of common stock of
Paradigm have agreed to vote such shares, which represent 70.3% of the voting
stock of Paradigm, in favor of the adoption and approval of the Paradigm Merger
and to vote against any proposal that would compete or interfere with the
Paradigm Merger.
The Paradigm Merger is intended to qualify as a tax-free reorganization
under the Internal Revenue Code of 1986, as amended.
F-20
<PAGE> 64
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, DMX Inc. has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
TCI MUSIC, INC.
(Registrant)
By: /s/ DAVID B. KOFF
----------------------------------
David B. Koff
President and Chief Executive
Officer
October 9, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of DMX Inc. and
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ LEO J. HINDERY Chairman of the Board October 9, 1997
- - -----------------------------------------------------
Leo J. Hindery
/s/ ROBERT R. BENNETT Director October 9, 1997
- - -----------------------------------------------------
Robert R. Bennett
/s/ DONNE F. FISHER Director October 9, 1997
- - -----------------------------------------------------
Donne F. Fisher
/s/ PETER M. KERN Director October 9, 1997
- - -----------------------------------------------------
Peter M. Kern
/s/ DAVID B. KOFF Director, President and Chief October 9, 1997
- - ----------------------------------------------------- Executive Officer
David B. Koff
/s/ J.C. SPARKMAN Director October 9, 1997
- - -----------------------------------------------------
J.C. Sparkman
/s/ LON A. TROXEL Director October 9, 1997
- - -----------------------------------------------------
Lon A. Troxel
/s/ STEPHEN M. BRETT Secretary, Vice President & October 9, 1997
- - ----------------------------------------------------- General Counsel
Stephen M. Brett
/s/ JOANNE WENDY KIM Vice President-Finance October 9, 1997
- - ----------------------------------------------------- Principal Financial Officer and
Joanne Wendy Kim Principal Accounting Officer
</TABLE>
<PAGE> 65
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
2.1(1) -- Form of Arrangement Agreement [2.1]*
2.2(2) -- Certificate of Discontinuance issued by Department of
Consumer and Corporate Affairs, Canada [2.2]*
2.3(2) -- Certificates of Domestication, Merger, Name Change and
Correction filed in Delaware by ICT-Canada and
ICT-Delaware to implement the Reorganization as of
September 28, 1990 [2.3]*
3.1(12) -- Amended and Restated Certificate of Incorporation of DMX
Inc.
3.2(1) -- Bylaws of the DMX Inc. [3.2]*
4.1(3) -- Articles IV, VI, VII, VIII, XI, XII of the Certificate of
Incorporation of the DMX Inc. (filed as part of Exhibit
3.1)
4.2(1) -- Articles II, III, VII and XI of the Bylaws of DMX Inc.
(filed as part of Exhibit 3.2)
4.3(4) -- Form of Agent's Warrant to Cruttenden & Company and
Robert S. London [4.3]*
4.4(1) -- Broker's Warrant to Merit Investment Corporation [4.4]*
4.5(1) -- Form of Option Agreement for Director, Officer and
Employee Options [4.5]*
4.6(5) -- TCI Equity Participation Agreement [4.6]*
4.7(1) -- Viacom Equity Participation Agreement [4.7]*
4.8(1) -- KBL Services Equity Participation Agreement [4.8]*
4.9**(11) -- Loan Agreement between ICT-Europe and TCI-Euromusic
("TCI-E"), (without exhibits) dated May 19, 1993
4.10(11) -- Contribution Agreement between TCI-Euromusic and DMX Inc.
dated May 19, 1993
10.1(5) -- TCI Equity Participation Agreement (filed as Exhibit 4.6)
10.2(1) -- Viacom Equity Participation Agreement (filed as Exhibit
4.7)
10.3(1) -- KBL Services Equity Participation Agreement (filed as
Exhibit 4.8)
10.4**(11) -- Affiliation Agreement between DMX Inc. and Colony
Communications dated May 1, 1992 [10.4]*
10.5**(11) -- Affiliation Agreement between DMX Inc. and Crown Media,
Inc., dated July 1, 1992 [10.5]*
10.6**(11) -- Affiliation Agreement between DMX Inc. and Prime II
Management, L.P. [10.6]*
10.7(11) -- Stock Purchase Agreement between DMX Inc. and various
private parties, dated August 2, 1991 [10.7]*
10.8(11) -- Stock Purchase Agreement between DMX Inc. and Scudder
Development Fund, dated August 23, 1993 [10.8]*
10.9(11) -- Stock Purchase Agreement between DMX Inc. and Crown
Media, Inc. dated July 22, 1992 [10.9]*
10.10(11) -- Stock Purchase Agreement between DMX Inc. and Crown
Media, Inc. dated August 30, 1993 [10.10]*
10.11(11) -- Stock Purchase Agreement between DMX Inc. and Brahman
Partners, II, L.P. dated September 15, 1993 [10.11]*
10.12(11) -- Stock Purchase Agreement between DMX Inc. and Quota Fund,
N.V.-Brahman, dated September 15, 1993 [10.12]*
</TABLE>
<PAGE> 66
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.13(11) -- Stock Purchase Agreement between DMX Inc. and Genesis
Capital Fund, dated September 15, 1993 [10.13]*
10.14(11) -- Stock Purchase Agreement between DMX Inc. and Shaw
Cablesystems, dated March 9, 1992 [10.14]*
10.15(11) -- Stock Purchase Agreement between DMX Inc. and Shaw
Communications, Inc., dated September 30, 1993 [10.15]*
10.16(6) -- Stock Bonus Agreement with Jerold H. Rubinstein****
[10.15]*
10.17(11) -- Amendment to Stock Bonus Agreement****
10.18(6) -- Deferred Compensation Agreement with Jerold H.
Rubinstein**** [10.16]*
10.19(1) -- Employment Agreement with W. Thomas Oliver*** [10.11]*
10.20(11) -- Employment Agreement with Robert M. Manning***
10.21(5) -- SSI Affiliation Agreement [10.2]*
10.22(5) -- Viacom Affiliation Agreement [10.3]*
10.23(5) -- KBLCOM Residential Affiliation Agreement [10.4]*
10.24(2) -- Western Tele-Communications ("WTCI") Security Agreement
and Promissory Note [10.14]*
10.25(7) -- Studio Facility and Uplinking Agreement between Western
Tele-Communications, Inc. and DMX Inc.
10.26**(11) -- [10.15]* Agreement for Acquisition of Capital Stock and
for the Governance of ICT-Europe N.V. ("ICT-E") (without
exhibits), dated May 19, 1993
10.27**(11) -- ICT-Europe Technology License and Services Agreement
(without exhibits), dated May 19, 1993
10.28**(11) -- ICT-Europe Trademark Agreement (without exhibits), dated
May 19, 1993
10.29**(11) -- ICT-Europe Loan Agreement, dated May 19, 1993 (filed as
Exhibit 4.9)
10.30(11) -- Contribution Agreement between TCI-Euromusic and ICT,
dated May 19, 1993 (filed as Exhibit 4.10)
10.31(11) -- ICT-Europe Equipment Lease, dated May 18, 1993 (without
exhibits)
10.32(11) -- DMX Inc. Promissory Note in favor of TCI-E, dated May 19,
1993
10.33(11) -- DMX Inc. Security Agreement in favor of TCI-E, (without
exhibits) dated May 19, 1993
10.34**(11) -- License and Distribution Agreement between ICT-Europe and
Broadcom International Holdings, as amended,
10.35**(11) -- dated March 31, 1992 License and Distribution Agreement
between DMX Inc. and DMX-Canada, dated March 9, 1992
10.36(4) -- NACR License and Marketing Agreement [10.10]*
10.37(2) -- Manufacturing and Sales Agreement between DMX Inc. and
Scientific-Atlanta, Inc. [10.12]*
10.38(2) -- License and Technical Assistance Agreement between DMX
Inc. and Scientific-Atlanta [10.13]*
10.39(1) -- FSL Development and Licensing Agreement, as amended
[10.8]*
10.40(1) -- GE American Communication, Inc. Agreement Regarding
Satellite Carriage [10.9]*
</TABLE>
<PAGE> 67
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.41**(11) -- COMSTREAM Agreement between DMX Inc. and COMSTREAM
Corporation, dated July 22, 1993
10.42**(11) -- COMSTREAM Option Agreement between DMX Inc. and COMSTREAM
Corporation, dated July 22, 1993
10.43(1) -- Joint Venture Agreement with Galactic Radio, Partners,
Inc. [10.7]*
10.44**(11) -- Sky Subscribers Management and Access Agreement between
ICT-Europe and Sky Subscribers Services Limited, 1993
10.45**(11) -- NDC Technology License Agreement between News Datacom
Limited, ICT-Europe and ICT-Europe UK, dated July 26,
1993
10.46(6) -- Employee Stock Purchase Plan**** [10.17]*
10.47(6) -- 1991 Incentive Stock Option Plan**** [10.18]*
10.48(8) -- 1991 Non-Qualified Stock Option Plan**** [4.10]*
10.49(8) -- 1991 Non-Qualified Stock Option Plan for Non-Employee
Directors**** [4.11]
10.50(9) -- 1993 Stock Option Plan**** [28.1]*
10.51(9) -- Form of ICT Non-Qualified Stock Option Agreement****
(Non-Employee Director) [28.2]*
10.52(9) -- Form of ICT Non-Qualified Stock Option Agreement****
(Employee and Employee-Director) [28.3]*
10.53(9) -- Form of ICT Incentive Stock Option Agreement**** [28.4]*
10.54(11) -- Principal Executive Office Lease, California
10.55(11) -- C-3 Satellite Transponder Sub-Lease Agreement between
WTCI and DMX Inc.
10.56(10) -- Satellite Transponder Management Agreement between WTCI
and DMX Inc., dated December 2, 1992
10.57(10) -- Satellite Transponder Management Agreement between WTCI
and DMX Inc., dated January 27, 1993
10.58(10) -- Assignment and Assumption Agreement between WTCI and
ICT-Europe (without exhibits)
10.59**(10) -- Assignment Agreement between IDB and WTCI, dated January
21, 1993
10.60(10) -- Agreement between DMX Inc. and the American Society of
Composers, Authors & Publishers, dated December 20, 1991
10.61**(10) -- Agreement between DMX Inc. and Broadcast Music Inc.,
dated October 11, 1991, as supplemented and amended
10.62**(10) -- Agreement between DMX Inc. and SESAC, dated December 26,
1991
10.63**(11) -- Affiliation Agreement between DMX Inc. and Scripps
Howard, Inc. dated April 30, 1994
10.64***(11) -- Employment Agreement between DMX Inc. and Lon Troxel,
dated October 1, 1991, as amended.
10.65***(11) -- Employment Agreement between DMX Inc. and Keno Thomas,
dated January 24, 1994
10.66(11) -- International Cablecasting Technologies Inc. Savings
Plan, as amended
10.67(11) -- Addendum to KBLCOM Affiliation Agreement
</TABLE>
<PAGE> 68
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.68***(12) -- Employment Agreement between DMX Inc. and DigiTempo,
Inc., dated October 17, 1994
10.69***(12) -- Employment Agreement between DMX Inc. and Doug Talley,
dated January 1, 1995
10.70***(13) -- Employment Agreement between DMX Inc. and Lon Troxel,
dated October 1, 1991, as amended September 16, 1996
10.71*****(13) -- Affiliation Agreement between DMX Inc. and PRIMESTAR
Partners, dated January 25, 1995
10.72*****(13) -- Affiliation Agreement between DMX Inc. and AlphaStar
Television Network, Inc., dated November 29, 1995
10.73*****(13) -- Stock Purchase and Shareholders Agreement between DMX
Inc., DMX-Europe (UK) Limited, DMX-Europe N.V. and Jerold
H. Rubinstein
10.74(13) -- Subscription and Shareholders Agreement between DMX Inc.,
Jerold H. Rubinstein and XTRA Music Limited
10.75***** -- Commercial License and Distribution Agreement between DMX
Inc. and DMX Canada Partnership, dated November 1, 1994
10.76***** -- Residential License and Distribution Agreement between
DMX Inc. and DMX-Canada (1995) Ltd., dated March 9, 1992,
as amended April 18, 1997
10.77 -- Channel Distribution Agreement between DMX Inc. and XTRA
Music Limited, dated July 3, 1997
10.78 -- Termination Certificate between DMX Inc. and Jerold H.
Rubinstein (Stock Purchase Agreement, dated December 18,
1996), dated July 3, 1997
10.79 -- Termination Agreement between DMX Inc. and DMX-Europe
N.V., a Netherlands corporation (Technology License and
Services Agreement, Dated May 19, 1993), dated July 3,
1997
10.80 -- Termination Agreement between DMX Inc. and DMX-Europe
N.V., a Netherlands corporation (Trademark Agreement,
dated May 19, 1993), dated July 3, 1997
10.81 -- Assignment Agreement between DMX Inc. and Jerold H.
Rubinstein, dated July 8, 1997
10.82*** -- Employment Agreement between DMX Inc. and Lon Troxel,
dated October 1, 1991, as amended August 22, 1997
10.83 -- TCI Music, Inc. 1997 Stock Incentive Plan
11.1 -- Statement Regarding Computation of Per Share Earnings
(included in DMX Inc.'s Financial Statements)
21.1 -- Listing of All Subsidiaries of DMX Inc.
27. -- Financial Data Schedule
</TABLE>
- - ---------------
(1) Incorporated by Reference to DMX Inc.'s Registration Statement on Form
S-1, July 10, 1990, file #33-35690
(2) Incorporated by Reference to DMX Inc.'s Post-Effective Amendment No. 2 to
Registration Statement on Form S-1, May 24, 1991, file #33-35690
(3) Incorporated by Reference to DMX Inc.'s Post-Effective Amendment No. 1 to
Registration Statement on Form S-1, filed on October 15, 1990, file
#33-35690
<PAGE> 69
(4) Incorporated by Reference to DMX Inc.'s Amendment No. 2 to Registration
Statement on Form S-1, September 28, 1990, file #33-35690
(5) Incorporated by Reference to DMX Inc.'s Amendment No. 1 to Registration
Statement on Form S-1, August 31, 1990, file #33-35690
(6) Incorporated by Reference to DMX Inc.'s Registration Statement on Form
S-1, February 24, 1992, file #33-35690
(7) Incorporated by Reference to DMX Inc.'s Post-Effective Amendment No. 3 to
Registration Statement on Form S-1, August 15, 1991, file #33-35690
(8) Incorporated by Reference to DMX Inc.'s 1992 10-K, December 13, 1992
(9) Incorporated by Reference to DMX Inc.'s 1993 Registration Statement on
Form S-8, May 3, 1993
(10) Incorporated by Reference to DMX Inc.'s 1993 10-K, December 23, 1993
(11) Incorporated by Reference to DMX Inc.'s 1994 10-K, December 29, 1994
(12) Incorporated by Reference to DMX Inc.'s 1995 10-K, January 9, 1996
(13) Incorporated by Reference to DMX Inc.'s 1996 10-K, January 14, 1997
* Indicates exhibit number of document in original filing
** DMX Inc. has received confidential treatment for a portion of the
referenced exhibit
*** Indicates Management Contract
**** Indicates Compensatory Plan
***** DMX Inc. has requested confidential treatment for a portion of the
referenced exhibit
<PAGE> 1
EXHIBIT 10.75
TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
1. DEFINITIONS........................................................... 2
2. TERM.................................................................. 8
a) Initial and Renewal Term........................................ 9
b) Continuation of Service......................................... 9
c) Right of First Refusal.......................................... 10
3. GRANT OF RIGHT........................................................ 11
a) Exclusive Right................................................. 11
b) Right to Sublicense............................................. 12
4. RESTRICTIONS AND LIMITATIONS.......................................... 12
a) Limitation on Rights............................................ 12
b) Competitive Services............................................ 13
c) Reservation of Rights........................................... 14
d) Requirement for Commercial Service Agreements................... 14
5. MULTI-LOCATION ACCOUNTS............................................... 15
6. CONTENT OF SERVICE.................................................... 16
7. ADJUNCT SERVICES...................................................... 17
8. TRANSMISSION OF SERVICE............................................... 18
a) Costs of Transmission........................................... 18
b) Technical Information to be provided............................ 19
c) Alternative distribution of the Service......................... 20
d) Changes in reception system..................................... 20
e) Interruption in Transmission of Service......................... 21
(i) Involuntary Minor Interruption........................... 21
(ii) Involuntary Major Interruption........................... 22
(iii) Voluntary Minor Interruption............................. 24
(iv) Voluntary Major Interruption............................. 25
f) Satellite Transition............................................ 27
9. DELIVERY AND DISTRIBUTION OF THE SERVICE.............................. 28
a) Reception Equipment............................................. 28
b) No Additions, Deletions, etc.................................... 29
c) Pavment Required................................................ 29
d) Private Use or Recording........................................ 29
</TABLE>
*** Confidential portions of this document have been omitted and filed
separately with the Securities and Exchange Commission pursuant to a
request for confidential treatment.
i
<PAGE> 2
<TABLE>
<S> <C> <C>
10. SERVICE FEES.......................................................... 29
(i) Basic Fees............................................... 29
(ii) Affiliate Fees........................................... 29
b) Time for payment................................................ 30
c) Payment in American Dollars..................................... 31
d) Service Fee Adjustment Dates.................................... 31
e) Best Rate....................................................... 31
f) Service fee exemption........................................... 32
11. REPORTS AND RECORDS................................................... 33
a) Books, records and audits....................................... 33
b) Monthly accounting statements................................... 33
c) Dispute......................................................... 33
12. COLLECTIONS........................................................... 34
13. PAYMENT OF TAXES...................................................... 34
14. MUSIC PERFORMANCE AND OTHER MUSIC RIGHTS.............................. 35
15. RESEARCH.............................................................. 36
a) Each Party to Provide Information............................... 35
b) Other Research.................................................. 36
16. PROPRIETARY MARKS..................................................... 36
a) Rights in Proprietary Marks..................................... 36
b) Acknowledgement of Rights....................................... 37
c) Quality Standards and Samples................................... 37
d) Protection of Proprietary Marks................................. 38
e) Form of Use..................................................... 38
f) Infringement Proceedings........................................ 39
17. MARKETING AND PROMOTION............................................... 39
18. TERMINATION, OBLIGATIONS UPON TERMINATION OR EXPIRATION............... 40
a) Right to Terminate.............................................. 40
b) Obligations Upon Termination or Expiration...................... 40
c) Effect of Expiration or Termination............................. 41
19. WARRANTIES AND INDEMNITIES............................................ 41
</TABLE>
ii
<PAGE> 3
<TABLE>
<S> <C> <C>
a) DMX US's Warranties............................................. 41
b) DMX CANADA's Warranties......................................... 43
c) DMX CANADA's Indemnification.................................... 43
d) DMX US's Indemnification........................................ 44
e) Notice of Claims................................................ 45
f) Limitation of Liability......................................... 45
20. FORCE MAJEURE......................................................... 45
21. NOTICES............................................................... 46
22. CONFIDENTIALITY....................................................... 47
23. ASSIGNMENT............................................................ 48
a) Assigment: Binding Effect; Reorganization....................... 48
b) Insolvency...................................................... 49
24. MISCELLANEOUS......................................................... 49
a) Entire Agreement; Amendments; Waivers........................... 49
b) Governing Law................................................... 50
c) No Agency....................................................... 50
d) Jurisdiction for Disputes....................................... 50
e) Injunctive Relief............................................... 50
f) No Partnership.................................................. 50
g) Severability.................................................... 51
h) Headings and Captions........................................... 51
i) Counterparts.................................................... 51
J) No Inference Against Author..................................... 51
k) No Third Party Beneficiaries.................................... 51
1) Arbitration..................................................... 51
</TABLE>
iii
<PAGE> 4
COMMERCIAL LICENSE AND DISTRIBUTION AGREEMENT
This Agreement made as of the 1st day November, 1994, by and between:
DMX Inc., a Delaware Corporation, with offices at 11400 W. Olympic Boulevard,
Suite 1100, Los Angeles, California 90064-1507 ("DMX US")
and
The DMX Canada Partnership, a partnership with offices at Suite 900, 630 - 3rd
Avenue S.W. Calgary, Alberta T2P 4L4, Canada ("DMX CANADA")
RECITALS:
1. WHEREAS, International Cablecasting Technologies Inc., the predecessor
of DMX US, and DMX-Canada Ltd. entered into a license and distribution
agreement dated March 9, 1992, (the "Original License") under which DMX US
granted to DMX-Canada Ltd. the exclusive license and right to distribute the
Service, as hereinafter defined, in Canada;
2. AND WHEREAS, The DMX Canada Partnership has acquired or will acquire
all the rights and interests of DMX-Canada Ltd. under the Original License and
shall continue offering the Service under the name DMX CANADA;
3. AND WHEREAS, DMX CANADA wishes to acquire from DMX US and DMX US wishes
to grant to DMX CANADA the exclusive right to distribute the Service directly or
indirectly, through Agents or Affiliates, to commercial Service Subscribers in
Canada, as such capitalized terms are hereinafter defined;
<PAGE> 5
2
4. AND WHEREAS, the parties hereto wish to replace the 1992 Agreement as
it relates to the distribution of the Service to Commercial Establishments by
way of this license and distribution agreement;
NOW THEREFORE, in consideration of the representations, warranties and
covenants contained herein, and for other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereby
agree as follows:
1. DEFINITIONS:
All capitalized terms used in this Agreement shall have the meanings
set out in this Section or as otherwise defined in the Agreement.
a) Adjunct Services means additional services or options, which are not
simply additional music formats and which, subsequent to the date of
this Agreement, are developed by DMX US for which DMX US expects
subscribers will be charged separately or in addition to the Service;
b) Affiliate(s) means any operators of Canadian cable systems or any third
parties, all as determined by DMX CANADA, in its absolute and sole
discretion, who: (i) are licensed to operate in Canada by the CRTC;
(ii) market the Service and/or the Adjunct Service through a sales
force separate from that of DMX CANADA; (iii) enter into Commercial
Service Agreements, as hereinafter defined, directly with Service
Subscribers and not on behalf of DMX CANADA, and as a result have
direct contractual relationships with the Service Subscribers for the
distribution of the Service and/or the Adjunct Service, if any; and
(iv) execute an Affiliate Agreement with DMX CANADA, as defined in
Section 3 below, whereby the Affiliate is to pay a fee to DMX CANADA
for each Commercial
<PAGE> 6
3
Establishment, as defined below, to which it distributes the Service
and/or Adjunct Service;
c) Affiliate Agreement has the meaning set out in Section 3(b) hereof.
d) Affiliate Fee has the meaning set out in Section 10(a)(ii) hereof.
e) Agency Agreement has the meaning set out in Section 3(b) hereof.
f) Agent(s) means any agents of DMX CANADA or any third parties, all as
determined by DMX CANADA, in its absolute and sole discretion, who are
retained by DMX CANADA on contract or otherwise and paid a commission
or other performance-related fee for representing DMX CANADA in
selling, marketing or promoting the Service and/or the Adjunct Service
to subscribers and have executed an Agency Agreement;
g) Alternative Technologies means the transmission or distribution of the
Service by means of: (i) satellite master antenna television systems,
multi point distribution services, multichannel multipoint distribution
services, (ii) other equipment, system or technology capable of
receiving the Service, directly from a satellite including, but not
limited to C-Band or KU-Band Satellites; or (iii) any facility,
apparatus or other thing, equipment, wire, cable, radio, optical,
electromagnetic system or any other system or technology that is used
or capable of being used for or in any operation directly connected
with the emission, transmission, or reception of the Service, and with
respect to all of (i), (ii) and (iii) above, whether existing at the
date of this Agreement or developed in the future.
h) Approved Purposes means the distribution of the Service by DMX CANADA,
its Agents or Affiliates for: (i) promotional purposes to: (A) certain
directors, officers or employees of Shaw or other individuals as
determined by DMX CANADA in its absolute and sole
<PAGE> 7
4
discretion; (B) the corporate head office of Shaw wherever situated; (C)
the branch offices of Shaw, wherever situated, if used for promotional
purposes and not for background music; and (D) certain industry trade
shows, conferences, or meetings of a promotional nature or related to
marketing of the Service attended by directors, officers, employees or
representatives of DMX CANADA or the Agents or Affiliates (all of such
recipients of the Service identified in (A) through (D) above collectively
referred to as the "Promotional Receivers"); and (ii) purposes of
demonstrating the Service to potential Service Subscribers, as hereinafter
defined, whether on-site at their respective Commercial Establishments or
at some other location or locations, all as determined by DMX CANADA in its
absolute and sole discretion (which recipients of the Service are referred
to as the "Demonstration Receivers").
i) Canadian Rights Payment means all music performance license fees,
copyright fees, mechanical reproduction rights, if applicable, and other
payments required to be paid under Canadian law, and performing rights
fees, arising out of the distribution of the Services in the Territory, as
hereinafter defined, including, without limitation, the Society of
Composers, Authors and Music Publishers of Canada (SOCAN).
j) Claims has the meaning set out in Section 19(c) hereof.
k) Commercial Establishment means each and every premise, including, without
limitation, any restaurant, bar, office, work place, place of business,
school, park, place frequented by the public, hotel, motel, club, nursing
or rest home, or showroom, whether or not business is conducted at such
premise, excepting only a Private Residence, as hereinafter defined, which
a Service Subscriber designates as a location for receipt of the Service,
it being understood that in the case of a shopping centre, industrial park
or other multiple-business facility, each separate business occupying a
distinct space within such facility shall be deemed to constitute a
separate commercial establishment.
<PAGE> 8
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l) Commercial Service Agreement means the standard commercial service
agreement and multiple location commercial service agreement prepared and
used by DMX CANADA from time to time for the provision of the Service to a
Service Subscriber.
m) Competitive Service has the meaning set out in Section 4(b) hereof.
n) Competitor has the meaning set out in Section 2(c) hereof.
o) Demonstration Receivers has the meaning set out in the definition of
"Approved Purposes" hereof.
p) Footprint has the meaning set out in Section 8(a)(i) hereof.
q) Inspection has the meaning set out in Section 11(a) hereof.
r) Involuntary Major Interruption: means any act, event or omission outside
the direct or indirect control of, or not initiated, either directly or
indirectly, by DMX US, including any exercise of a contractual preemption
right by a third party satellite provider, or an act of God or nature,
including, without limitation, any non-planned event or failure of the 402R
Satellite, or any successor thereof, (but excluding the expiration of the
scheduled operating life of the 402R Satellite or any successor thereof)
that interferes with, interrupts or obstructs the transmission of the
digital audio signal to the Territory: (A) which interference lasts for a
period of Fourteen (14) or more consecutive calendar days; (B) which would
require a realignment or replacement of, or modification to the reception
equipment, technology or system utilized by DMX CANADA at the time of such
interference, interruption or obstruction in order to receive the digital
audio signal to the same standard and quality as is required pursuant to
this Agreement; or (C) which changes in any material manner whatsoever the
geographic area of the Footprint.
<PAGE> 9
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s) Involuntary Minor Interruption: means any act, event or omission outside
the direct or indirect control of, or not initiated, either directly or
indirectly, by DMX US including any exercise of a contractual preemption
right by a third party satellite provider, or an act of God or nature that
interferes with, interrupts or obstructs the transmission of the digital
audio signal to the Territory for a period equal to or greater than
Twenty-four (24) consecutive hours but less than Fourteen (14) consecutive
calendar days.
t) Lower Service Fee has the meaning set out in Section 10(e) hereof.
u) Multi-Location Account means (i) a Service Subscriber that owns, operates,
leases or licenses by way of a franchise or other license agreement, more
than one (1) location that subscribes to and receives the Service, and (ii)
that requires centralized decision making at its headquarters with respect
to its subscription of the Service for all its locations.
v) On-Premise Service has the meaning set out in the definition of "Service"
hereof.
w) Private Residence means any single or multiple dwelling unit or premise
where any person is domiciled, except on a transient or temporary basis
(such as a motel, hotel, nursing or rest home).
x) Promotional Receivers has the meaning set out in the definition of
"Approved Purposes" hereof.
y) Proprietary Marks has the meaning set out in Section 16(a) hereof.
z) Purchaser has the meaning set out in Section 2(c) hereof.
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aa) Sale Notice has the meaning set out in Section 2(c) hereof.
bb) Selling Party has the meaning set out in Section 5 hereof.
cc) Service means: (i) the premium audio programming service offered by DMX
US twenty-four (24) hours per day, seven (7) days per week consisting of
a minimum of 70 channels (formats) of uninterrupted music, without any
commercials or other announcements, transmitted in a digital signal; and
(ii) the premium audio programming service offered by DMX US of
uninterrupted music, without any commercials or other announcements,
delivered by means of stand-alone hardware and related equipment and
accessories, including, without limitation, tapes and compact discs (the
latter stand-alone service hereinafter separately referred to as the
"On-Premise Service");
dd) Service Subscribers means those individuals, persons, associations,
partnerships, corporations or legal representatives which subscribe to
the Service and enter into and execute a Commercial Service Agreement.
ee) Servicing Party has the meaning set out in Section 5 hereof.
ff) Servicing Party Fees has the meaning set out in Section 5 hereof.
gg) Shaw means Shaw Cablesystems Ltd. and its affiliates as the term
"affiliates" is defined in the Companies Act, British Columbia.
hh) Term has the meaning set out in Section 2(a) hereof.
ii) Territory means all of the country of Canada and its territories.
<PAGE> 11
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jj) Third Party Distributor has the meaning set out in Section 10(e)
hereof.
kk) Voluntary Major Interruption: means any act or omission within the
direct or indirect control of or initiated, either directly or
indirectly, by DMX US including, without limitation, a modification to
the method of transmission of the Service to the Territory or the
entering into a license or other agreement for a replacement of the
services of the 402R Satellite, or any successor thereof, that
interferes with, interrupts or obstructs the transmission of the digital
audio signal to the Territory: (A) for a period of Fourteen (14) or more
consecutive calendar days; (B) which would require a realignment or
replacement of, or modification to the reception equipment, technology
or system utilized by DMX CANADA at the time of such interference,
interruption or obstruction in order to receive the digital audio signal
to the same standard and quality as is required pursuant to this
Agreement; or (C) which changes in any material manner whatsoever the
geographic area of the Footprint.
ll) Voluntary Minor Interruption: means any act or omission within the
direct or indirect control of or initiated, either directly or
indirectly, by DMX US including, without limitation, a modification to
the method of transmission of the Service to the Territory or the
entering into a license or other agreement for the replacement of the
services of the 402R Satellite, or any successor thereof, that
interferes with, interrupts or obstructs the transmission of the digital
audio signal to the Territory for a period equal to or greater than
Twenty-four (24) consecutive hours but less than Fourteen (14)
consecutive calendar days.
mm) 402R Satellite has the meaning set out in Section 4(b) hereof.
2. TERM
<PAGE> 12
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a) Initial and Renewal Term: Subject to the earlier termination of
this Agreement as set forth in Section 18 hereof, the term of this
Agreement shall commence on November 1, 1994 and shall terminate on
March 31, 2012 (the "Term"). Provided that neither party hereof is in
default in the observance and performance of its obligations hereunder
at the end of the Term, unless such default has been waived by the other
party, the parties hereto shall negotiate exclusively with each other
for a renewal term of this Agreement for a period of Twelve (12) months
(the "Negotiation Period") prior to the expiry of the Term. For greater
certainty, the parties acknowledge and agree that DMX CANADA shall not
negotiate with a third party music service provider and DMX US shall not
negotiate with a third party music service distributor regarding
distribution of a music service in the Territory during the Negotiation
Period. The parties hereto shall undertake such negotiations at the
commencement of the Negotiation Period and shall negotiate diligently
and in good faith during the Negotiation Period for the renewal of the
Agreement. The Negotiation Period shall expire at the end of the Term,
unless the parties hereto have agreed in principle to the renewal of
the Agreement and the material provisions thereof have been completed
subject only to finalization of the document related thereto.
b) Continuation of Service: Notwithstanding the expiration or
earlier termination of the Term, DMX CANADA shall have the right and the
obligation to continue providing the Service to all Service Subscribers
pursuant to the terms and conditions of the Commercial Service
Agreements which were in effect as of such expiration or termination;
provided that such right and obligation with respect to each such
Service Subscriber shall expire upon the termination or expiry of such
Service Subscriber's Commercial Service Agreement which may not be
renewed or extended in any way. It is understood and agreed that DMX US
shall continue to transmit the Service after the Term pursuant to this
Section 2 b) and in accordance with its obligations set out in Sections
8 and 19. DMX CANADA shall be obligated to pay to DMX US the service
fees in accordance with
<PAGE> 13
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Section 10 below, for so long as DMX US continues to provide the
Service pursuant to this Section 2(b).
Notwithstanding the expiration or earlier termination of the Term, the
parties hereto further agree that DMX CANADA shall have the right to
enter into any new Commercial Service Agreements with Service
Subscribers provided that: (i) the terms of such new Commercial Service
Agreements do not exceed the longest term of any unexpired Commercial
Service Agreement existing at the date of the expiration or earlier
termination of the Term of this Agreement; and (ii) DMX CANADA obtains
the prior written approval of DMX US to any such new Commercial Service
Agreement, which approval may be granted or withheld in its sole
discretion. The provisions of this Section 2(b) shall apply mutatis
mutandis to such new Commercial Service Agreements.
c) Right of First Refusal: If during the Term, DMX CANADA desires to offer
for sale its interest in the rights to distribute the Service or
Adjunct Service to commercial Service Subscribers in the Territory or
if a third party submits an offer in writing to purchase the same
which DMX CANADA in its absolute and sole discretion considers
reasonable, DMX CANADA shall give notice (the "Sale Notice") in
writing to DMX US of its intention to do so and set out therein the
terms and conditions upon which it is prepared to sell the same. DMX
US shall have Forty-five (45) days following the date of receipt of
the Sale Notice to accept in writing the right of first refusal with
respect to the sale of the business including the exclusive right to
distribute the Service and/or the Adjunct Services, if any, in the
Territory upon the terms and conditions set out in the Sale Notice. If
DMX US accepts the terms and conditions of the Sale Notice, the
parties hereto shall enter into an agreement of purchase and sale in
accordance with the terms and conditions of the Sale Notice. If DMX US
had not accepted the terms and conditions set out in the Sale Notice,
DMX CANADA may, at its option, sell the business to any other person
(the "Purchaser") including, without limitation, a person that offers
an audio music service to
<PAGE> 14
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Commercial Establishments in the Territory (the "Competitor") at such
terms and conditions which are no more favourable to the Purchaser than
those set out in the Sale Notice. The terms of any such sale shall
require the Purchaser to assume and fulfill all of DMX CANADA's
obligations under this Agreement. If the Purchaser is a Competitor then
all of the Purchaser's rights under this Agreement shall be
non-exclusive.
3. GRANT OF RIGHT
a) Exclusive Right: Subject to the terms and conditions contained herein,
DMX US hereby grants to DMX CANADA, and DMX CANADA hereby accepts, the
exclusive right within the Territory to distribute the Service,
directly or through any Agents or Affiliates by means of any equipment,
technology or system including, without limitation, the Alternative
Technologies, to Commercial Establishments during the Term in
accordance with the provisions of this Agreement. The parties hereto
acknowledge and agree that in the event DMX US enters into an
agreement for distribution of the Service or any Adjunct Service by
means of the "Internet" (i.e., a so-called "on-line" service) which
would materially affect DMX CANADA's exclusive rights hereunder, DMX US
shall immediately notify DMX CANADA of such agreement in writing
together with a description of the agreement. The parties hereto shall
thereafter negotiate in good faith with respect to an appropriate
sharing of revenues related to the distribution of the Service or the
Adjunct Service, as the case may be, by DMX US by means of the Internet.
Further, in the event any technology is developed in the future for
distribution of the Service or any Adjunct Service for which there
would be no means of restricting the territory or geographic area of
distribution or identifying the end user of the Service or Adjunct
Service (an "Uncontrolled Distribution"), and in the event DMX US
enters into an agreement for Uncontrolled Distribution of the Service
or the Adjunct Service which would materially affect DMX CANADA's
exclusive rights hereunder, the parties agree to
<PAGE> 15
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negotiate in good faith with respect to revenue sharing in connection
therewith. Neither DMX CANADA nor its Affiliates shall distribute the
Service or any Adjunct Service by means of an Uncontrolled Distribution
(including any distribution by means of Internet distribution which
could fall within the definition of Uncontrolled Distribution) without
the written consent of DMX US.
b) Right to Sublicense: Subject to the terms and conditions herein, DMX US
hereby grants to DMX CANADA the right within the Territory to
sublicense the distribution rights related to the Service granted
herein to the Agents and the Affiliates. DMX CANADA shall enter into an
agency agreement (the "Agency Agreement") with each Agent, and an
affiliate agreement (the "Affiliate Agreement") with each Affiliate,
the form and content of which shall be determined by DMX CANADA and
approved by DMX US both as to its original form and from time to time
throughout the Term when such form is materially amended, such approval
not to be unreasonably withheld. The Agency Agreement and the Affiliate
Agreement shall include, without limitation, a requirement that the
Agent, or the Affiliate, as the case may be, honour certain prescribed
installation and performance standards set out therein.
4. RESTRICTIONS AND LIMITATIONS
a) Limitation on Rights: The rights granted herein do not include any
rights of DMX CANADA or any other person to:
i) record, make or manufacture any recording or other
reproductions of any of the Service or any part thereof; or
ii) transmit, re-transmit, distribute, deliver or authorize the
transmission, re-transmission, distribution or delivery of any
of the Service, in any manner, outside
<PAGE> 16
13
the Territory or within the Territory to any person which is not
a Service Subscriber, except for the Approved Purposes pursuant
to Subsection 10(f) hereof.
B) Competitive Services: During the Term neither DMX CANADA, its
Affiliates, nor Shaw shall transmit, re-transmit, distribute or deliver
any multi-channel digital audio music service (the "Competitive
Service") other than the Service (or any other DMX US music service
which DMX CANADA may be authorized to distribute to Private Residences
by separate agreement with DMX US) in the Territory, subject to the
provisions set out in this paragraph. Nothing herein, however, shall
be deemed to prohibit Shaw, other than DMX CANADA, or the Affiliates or
Shaw's successors from transmitting, re-transmitting, distributing or
delivering or delivering any Competitive Service to any Private
Residence. Notwithstanding the foregoing, DMX CANADA and its
Affiliates may, at their option, transmit, retransmit, distribute or
deliver a Competitive Service to any Commercial Establishment located
in the Territory, if, and only if: (A)(i) such Commercial Establishment
falls outside the footprint or reception area of the Telstar 402R
Transponder 15B, the direct broadcast satellite used by DMX US at the
date of this Agreement (the "402R Satellite") or the footprint of any
other direct broadcast satellite used by DMX US to transmit the
Service, but only if and when such other direct broadcast satellite
becomes operational; and (ii) DMX CANADA is not otherwise capable of
distributing or delivering the On-Premise Service or distributing the
Service by other Alternative Technologies to such Commercial
Establishment on a basis which is economically profitable to DMX
CANADA, as determined by it, in its reasonable business judgment; or
(B) for any reason there is an Involuntary Major Interruption or a
Voluntary Major Interruption as set out in Section 8(e) hereof.
Notwithstanding anything else contained herein to the contrary, neither
DMX CANADA nor the Affiliates shall be required to distribute the
Service to any subscriber of the Competitive service at any time during
the Term even if such subscriber were originally a Service Subscriber.
DMX US
<PAGE> 17
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covenants and agrees that it shall not offer, provide, license, transmit,
re-transmit, distribute or deliver, directly or indirectly through any of
its agents, affiliates or subsidiaries, the Service or any multi-channel
digital audio music service of any nature, whatsoever, or the Adjunct
Services to an Commercial Establishment in the Territory during the Term,
subject only to the provisions of the right of first negotiation related to
the Adjunct Services set out in Section 7 hereof and the provisions related
to distribution of the Service via the Uncontrolled Distribution set out in
Section 3(a) hereof. DMX US acknowledges and agrees that it shall include
provisions in its license agreements related to the distribution of the
Service or any Adjunct Services to be entered into with its agents,
affiliates and licensees, from and after the date of this Agreement, which
restrict such agents, affiliates and licensees from transmitting,
retransmitting, distributing, delivering, or selling the Service or any
Adjunct Service to or in the Territory, or any portion thereof, subject to
the provisions of Section 7 hereof. DMX US further agrees that it shall
assist DMX CANADA in locating any agent, affiliate or licensee of DMX US
that distributes, delivers, transmits, retransmits or sells the Service or
the Adjunct Service in the Territory at any time during the Term, and it
shall assist, to the best of its ability, DMX CANADA in conducting such
investigations and prosecutions of such agents, affiliates and licensees,
subject to the provisions of Section 7.
c) Reservation of Rights: Except as expressly set forth in this Agreement,
DMX CANADA shall have no proprietary interest in the Service, including the
accompanying program data, the Proprietary Marks, as hereinafter defined,
or any other rights or property of DMX US, all of which are reserved and
shall remain the rights and property of DMX US.
d) Requirement for Commercial Service Agreements: DMX CANADA shall only
provide the Service to a Service Subscriber which has executed a Commercial
Service Agreement in the form prepared and adopted by DMX CANADA, in its
absolute and sole discretion, from time to time, subject to the provisions
related to the Approved Purposes
<PAGE> 18
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set out in Section 10 hereof. DMX CANADA agrees that it shall provide
DMX US with a copy of its standard form Commercial Service Agreement
currently in use and with the amended form of the same whenever it is
materially amended from time to time during the Term. The Commercial
Service Agreement shall contain appropriate terms for the protection of
the Propriety Marks, referred to in Section 16 below. DMX CANADA
shall, in good faith, fulfill its obligations under and take such steps
as may be practical and reasonable to enforce each Commercial Service
Agreement in accordance with its terms.
5. MULTI-LOCATION ACCOUNTS
The parties hereto acknowledge that several Multi-Location Accounts may
have Commercial Establishments located both within and outside the Territory.
Accordingly, DMX CANADA and DMX US mutually agree that either party may enter
into Multi-Location Account agreements which provide for distribution of the
Service to Commercial Establishments located in each other's respective
territories or geographic areas (or those territories of their respective
agents, affiliates, or licensees as the case may be) provided that a decision
making headquarters for the Multi-Location Account is located in the territory
of the party entering into the Multi-Location Account agreement, and otherwise
subject to the provisions hereof. The party which enters into such a
Multi-Location Account agreement (the "Selling Party") shall deliver notice to
the other party (the "Servicing Party") of such Multi-Location Account within
ten (10) days after execution of the Multi-Location Account agreement or when
notified by the Customer. Such notice shall identify those Commercial
Establishments located in the Servicing Party's territory and the terms,
conditions and amounts payable under the Multi-Location Account agreement, and
sales commissions payable with respect to the Commercial Establishments located
in the Servicing Party's territory. Within ten (10) days after its receipt of
the Selling Party's notice the Servicing Party shall give notice to the Selling
Party indicating whether the Servicing Party will accept the terms and
conditions of the Multi-Location Account agreement and sales commissions
<PAGE> 19
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set forth in the Selling Party's notice. If the Servicing Party so accepts, the
Servicing Party shall have responsibility for the installation and servicing of
the Commercial Establishments of the Multi-Location Account located in its
territory and shall observe and perform the obligations of the supplier of the
Service under the Multi-Location Account agreement. The Servicing party will
invoice the Selling Party for all fees ("Servicing Party Fees") as provided in
the Multi-Location Account agreement in connection with the Commercial
Establishments of the Multi-Location Account in the Servicing Party's territory
and the Selling Party shall include such amounts (including any applicable
taxes) in each billing sent by the Selling Party to the Multi-Location Account.
Within thirty (30) days after the Selling Party's receipt of payment from the
Multi-Location Account for each applicable billing, the Selling Party shall pay
to the Servicing Party the Servicing Party Fees related to such billing. In
each instance in which DMX CANADA receives Servicing Party Fees, [***] subject
to such Multi-Location Account, and otherwise in accordance with Section 10(a)
below. The Servicing Party shall be directly responsible for paying the
applicable sales commissions. In the event that the Servicing Party declines to
accept the terms of the Selling Party's notice, the Selling Party shall then
have the right to retain a third party to perform the required services and to
receive the fees applicable thereto.
6. CONTENT OF SERVICE
DMX US acknowledges and agrees that the Service shall not contain any
obscenity or any other matter in violation of any law of any jurisdiction in
which the Service is distributed whether in the Territory or the United
States, but shall include programming, format and other content as may be, in
the sole discretion of DMX US, necessary or appropriate for the transmission,
reception and processing of the digital signals, including, without limitation,
transmission necessary for the display on the panel of the DMX hand held remote
control of the song, title, artist and other descriptive information relating
to the music segment.
*** Confidential portions omitted and filed separately with the Securities and
Exchange Commission pursuant to a request for confidential treatment.
<PAGE> 20
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7. ADJUNCT SERVICES
If DMX US wishes to offer, provide, license, distribute, transmit, deliver
or re-transmit any Adjunct Service to Commercial Establishments within the
Territory, it shall give notice (the "Adjunct Service Notice") in writing to
DMX CANADA of its intention to do so and set out therein a description of the
Adjunct Service. DMX CANADA shall have Forty-five (45) days following the date
of receipt of the Adjunct service Notice to deliver written notice to DMX US
(the "Adjunct service Reply") that DMX CANADA wishes to obtain the exclusive
right to distribute the Adjunct Service to Commercial Establishments in the
Territory. If DMX CANADA delivers the Adjunct Service Reply within such time
period set out above, the parties hereto shall negotiate in good faith, for a
period of sixty (60) days following receipt by DMX US of the Adjunct Service
Reply (the "Negotiating Period") with respect to all material terms and
conditions for a proposed exclusive license agreement (the "Adjunct Service
Agreement") granting to DMX CANADA the exclusive license to distribute the
Adjunct Service to Commerical Establishments in the Territory to any
subscribers, including, without limitation, the Service Subscribers in
conjunction with and in addition to the Service and the Adjunct Service
Agreement shall include a reasonable time period for DMX CANADA to file an
application with and obtain the approval of the Canadian Radio-television and
Telecommunications Commission, if required. If DMX CANADA has not delivered the
Adjunct Service Reply on a timely basis, or if the parties have not agreed in
principle to the material terms and conditions of the Adjunct Service Agreement
within the Negotiating Period, subject only to the finalization of the document
related thereto, DMX US may, at its option: (i) grant the license for the
distribution of the Adjunct Service, but without right to distribute the same in
conjunction with the service, to Commerical Establishments in the Territory, to
any other person at such material terms and conditions which are no more
favourable to any other person than those offered to DMX CANADA; or (ii)
distribute the Adjunct Service to Commercial Establishments in the Territory
itself, but it is expressly agrees that it shall not distribute the Service in
the Territory whether in conjunction with the distribution of the Adjunct
Service or in any manner otherwise. DMX
<PAGE> 21
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CANADA acknowledges and agrees that if for any reason it discontinues its
distribution of the Service to Commercial Establishments in the Territory it
shall not continue to have a right of first refusal, as set forth in this
Section 7, with respect to the distribution of the Adjunct Service to
Commercial Establishments in the Territory nor the exclusive license to
distribute the Adjunct Service to Commercial Establishments in the Territory.
This right of first refusal granted herein shall apply to each and every
Adjunct Service offered, developed or licensed by DMX US for transmission,
distribution, delivery or retransmission to Commercial Establishments in the
Territory and is not limited in any manner whatsoever to any one Adjunct
Service, nor is it conditional upon the acceptance by DMX CANADA to distribute
any other Adjunct Service to Commercial Establishments in the Territory.
8. TRANSMISSION OF SERVICE
a) Costs of Transmission:
i) DMX US acknowledges and agrees that it shall transmit the
Service without interruption Twenty-four (24) hours a day, Seven
(7) days a week on the 402R Satellite, the footprint or
reception area of which shall include the cities of Whitehorse,
Yukon, Victoria, British Columbia and Halifax, Nova Scotia (the
"Footprint"). For greater certainty, the Footprint of such
satellite shall include all that area outlined in colour on the
attached contour map. DMX US shall maintain the quality and
integrity of the transmission of the digital audio signal
throughout all the geographic region included in the Footprint
such that there is no material variance in the quality of the
Service in the Territory. DMX US acknowledges and agrees that it
shall be solely responsible for all costs of whatsoever nature
incurred in transmitting the Service from the DMX US studio in
the United States to the point of reception at the land based
equipment located at the Commercial Establishment in the
Territory and that such costs shall include, without
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limitation, the costs of uplinking the Service to a satellite
transponder, the rental of the satellite transponder and all
other costs incurred in connection with the use of the satellite
transponder. DMX US may, from time to time, transmit the Service
on such other transponder devices as provided in Section 8(f)
below subject to the provisions of this Section 8.
ii) DMX CANADA acknowledges and agrees that it shall be solely
responsible for any and all costs whatsoever incurred in
connection with: (A) the installation of the land based
reception equipment including the satellite dish and cable
hook-up, at the Commercial Establishment located in the
Territory; and (B) reception, distribution or retransmission of
the Service from the point of reception at the land based
equipment located in the Territory to any other location or site
in the Territory. DMX CANADA agrees that it shall maintain the
quality and integrity of the digital audio signal that it
receives from DMX US if it retransmits the Service for purposes
of distribution within the Territory.
b) Technical Information to be provided; DMX US shall provide to DMX
Canada in a timely manner, all information as may be necessary or
appropriate concerning the following matters:
i) A description, complete with all necessary or appropriate
technical specifications, of the manner in which the Service
will be provided to DMX Canada, including the identification of
the satellite and transponder number which shall be used for
transmitting the Service;
ii) All the technical specifications and information relating to the
land-based equipment, technology and systems which DMX CANADA
and/or its Service Subscribers will be required to use for
reception, distribution or retransmission of
<PAGE> 23
20
the Service in the Territory in accordance with the provisions
of this Agreement; and
iii) All pertinent technical and other information necessary,
appropriate or helpful for the deciphering or unscrambling of
DMX US's encrypted code, it being specifically understood,
however, that nothing in the foregoing provisions shall be
deemed either to give DMX CANADA any right in DMX US's
proprietary technology or to require DMX US to provide any
information with respect thereto not required by DMX CANADA in
order to fulfill its obligations under this Agreement, or those
agreements made between DMX CANADA, its Agents, Affiliates and
its Service Subscribers.
c) Alternative distribution of the Service: DMX CANADA may, in its sole
discretion, distribute the Service to Commercial Establishments within
the Territory by means of Alternative Technologies at its sole cost and
expense, subject to the provisions of Section 8(d) hereof, DMX US agrees
that it shall provide DMX CANADA with such technical information as DMX
US may have in order to assist DMX CANADA with such distribution by
means of Alternative Technologies.
d) Changes in reception system: Notwithstanding the provisions of Section 8
(c) above, DMX US acknowledges and agrees that it shall be solely
responsible for all costs incurred by DMX CANADA if, during the Term,
DMX CANADA is required to make any changes or modifications to or
replacements of, in any manner whatsoever, its reception and decoding
equipment, technology or systems in order to make such equipment,
technology or systems capable of receiving the Service from any
Alternative Technology employed by DMX US to transmit the Service to the
Territory other than the method or format of transmission from the 402R
Satellite utilized by DMX US at the date of this Agreement. If there is
any such requirement to modify or replace the reception and
<PAGE> 24
21
decoding equipment, technology or system, DMX US shall immediately
deliver to DMX CANADA written notice thereof in reasonable detail
explaining what modifications or replacements must be made, together
with a written proposal outlining a reasonable time period within which
it shall make such payments arising hereunder to DMX CANADA. DMX US
shall ensure at its own cost and expense that the transmission format
utilized by it will be compatible at all times during the Term with the
reception and decoding equipment, technology or systems purchased and
utilized by DMX CANADA, the Agents and Affiliates, in accordance with
subsection b) (ii) and that regardless of what technology, system or
method DMX US employs to transmit the Service in the Territory, DMX US
shall maintain the quality and integrity of the transmission of the
digital audio signal throughout a geographic region containing all of
the capital cities of each of the Provinces of Canada or a geographic
region representing a minimum of Ninety-five (95%) per cent of DMX
CANADA's entire base of Service Subscribers existing at the date of such
modification or replacement such that there is no variance in the
quality of the Service perceptible to the Service Subscribers.
e) Interruption in Transmission of Service: With respect to the
interruption or interference in the transmission of the Service in the
Territory, DMX US and DMX CANADA agree as follows:
(i) Involuntary Minor Interruption: If there is an Involuntary Minor
Interruption in the transmission of the Service in the Territory
during the Term, DMX CANADA may, at its option and without
notice, withhold billing, collecting and paying all the service
fees which would otherwise be accruing and payable to DMX US for
the period of the Involuntary Minor Interruption until the end
of the Involuntary Minor Interruption (provided DMX CANADA
credits the Service Subscribers effected by the Involuntary
Minor Interruption for such service fees) notwithstanding any
provision in this Agreement to the contrary. DMX CANADA
<PAGE> 25
22
shall not have any other rights or remedies available at law or
equity against DMX US as a result of such Involuntary Minor
Interruption in the transmission of the Service in the
Territory.
(ii) Involuntary Major Interruption: If there is an Involuntary Major
Interruption in the transmission of the Service in the Territory
during the Term, the provisions of Section 20 hereof shall apply
subject to the obligations of the parties hereto set out in this
subsection (e)(ii), and DMX CANADA may, at its option and
without notice: (A) withhold billing, collecting, and paying all
the service fees which would otherwise be accruing and payable
to DMX US for the period of the Involuntary Major Interruption
until the end of the Involuntary Major Interruption, if
applicable, (provided DMX CANADA credits the Service
Subscribers effected by the Involuntary Major Interruption for
such service fees) notwithstanding any provision contained in
the Agreement to the contrary; and (B) offer a Competitive
Service to any Commercial Establishment located in the Territory
in accordance with the provisions set out in Section 4 hereof
except that the requirements set out in (A)(i) and (ii) of
Section 4(b) shall not apply.
Notwithstanding such Involuntary Major Interruption, if an
alternate satellite with a comparable footprint or reception
area to the Footprint exists such that DMX US is technically
able to retransmit the Service to the Territory, DMX US shall
engage in good faith prior consultations with DMX CANADA
regarding utilizing such alternate satellite and shall make
commercially reasonable efforts to utilize such alternate
satellite within a reasonable time period following the
commencement of the Involuntary Major Interruption. If such an
alternate satellite is not available and there exists an
alternate satellite without a comparable footprint or reception
area to the Footprint but which would offer a reception area or
footprint acceptable to DMX CANADA such that DMX US is
technically able
<PAGE> 26
23
to retransmit the Service to the Territory, DMX US shall engage
in good faith prior consultations with DMX CANADA regarding
utilizing such alternate satellite and shall make commercially
reasonable efforts to utilize such satellite within a reasonable
time period following the commencement of the Involuntary Major
Interruption. If such an alternate satellite is not available
and there exists an Alternative Technology to retransmit the
Service to the Territory, other than the On-Premise Service,
with a reception area comparable in geographic area to the
Footprint containing all of the capital cities of each of the
Provinces of Canada or representing a minimum of Ninety-five
(95%) per cent of DMX CANADA's entire base of Service
Subscribers existing at the date of such Involuntary Major
Interruption and which would not reduce the quality and
integrity of the transmission of the digital audio signal from
that maintained prior to such Involuntary Major Interruption,
DMX US shall engage in good faith prior consultations with DMX
CANADA regarding using such Alternative Technology and shall
make commercially reasonable efforts to use such Alternative
Technology to retransmit the Service to the Territory. If the
Involuntary Major Interruption continues for a period greater
than or equal to Thirty (30) consecutive calendar days, then the
rights and obligations set out in this Agreement shall be
suspended for a maximum period of Three Hundred and Sixty-Five
(365) days from the first date of such Involuntary Major
Interruption (the "Suspension Period") such that the provisions
of Section 20 hereof shall apply without qualification and the
parties hereto shall be relieved of observing and performing
their respective obligations hereunder without liability
therefor, excepting only the obligation of DMX CANADA to pay to
DMX US any service fees outstanding for periods prior to the
Suspension Period and any obligations of either party hereto
arising under this section. DMX CANADA shall have the right, in
its absolute and sole discretion, to terminate the Agreement at
any time during the Suspension Period without any liability
therefor. If after the expiry of the Suspension Period
<PAGE> 27
24
DMX US fails to retransmit the Service to the Territory using
any manner of technology or systems whatsoever, then this
Agreement shall be terminated without liability of either party
therefor. Notwithstanding such termination, the parties hereto
agree that DMX CANADA shall maintain the right of first
negotiation during the remainder of the unexpired portion of the
Term for the exclusive right to distribute the Service to
Commercial Establishments in the Territory such that if DMX US
is able to retransmit the Service to the Territory using any
manner of technology or systems whatsoever after the expiry of
the Suspension Period, it shall so notify DMX CANADA in writing
and the parties shall engage in diligent and good faith
negotiations for the commencement of the transmission of the
Service in the Territory. The provisions of this Section shall
survive the expiration of the Term or early termination of this
Agreement.
(iii) Voluntary Minor Interruption: If there is a Voluntary Minor
Interruption in the transmission of the Service in the Territory
during the Term, then: (A) DMX US shall give notice to DMX
CANADA in writing of the same Forty-five (45) days prior to the
commencement of such interruption, unless such interruption is
unavoidably imminent in which case DMX US shall give written
notice to DMX CANADA as soon as reasonably possible; and (B) DMX
CANADA may, at its option and without notice, withhold billing,
collecting, and paying all the service fees which would
otherwise be accruing and payable to DMX US for the period of
the Voluntary Minor Interruption until the end of the Voluntary
Minor Interruption (provided DMX CANADA credits the Service
Subscribers effected by the Voluntary Minor Interruption for
such service fees) notwithstanding any provision in this
Agreement to the contrary. Following completion of the Voluntary
Minor Interruption, DMX US shall continue to transmit the
Service to the Territory with a footprint or reception area
comparable to the Footprint, all at its sole cost and expense.
DMX CANADA shall not have any other rights or
<PAGE> 28
25
remedies available at law or equity against DMX US as a result
of such Voluntary Minor Interruption except that the indemnity
granted by DMX US in favour of DMX CANADA as set out in Section
19(d) hereof shall apply hereto.
(iv) Voluntary Major Interruption: If there is a Voluntary Major
Interruption in the transmission of the Service to the Territory
during the Term, then: (A) DMX US shall give notice to DMX
CANADA in writing of the same Forty-five (45) days prior to the
commencement of such interruption, unless such interruption is
unavoidably imminent in which case DMX US shall give written
notice to DMX CANADA as soon as reasonably possible; and (B) DMX
CANADA may, at its option and without notice; (1) withhold
billing, collecting and paying all the service fees which would
otherwise be accruing and payable to DMX US for the period of
the Voluntary Major Interruption (provided DMX CANADA credits
the Service Subscribers effected by the Voluntary Major
Interruption for such service fees) until: (a) the end of the
Voluntary Major Interruption, if applicable; or (b) such time as
DMX CANADA has recovered the direct costs it has incurred as a
result of: (i) not being able to provide the Service in the
Territory for the period of the Voluntary Major Interruption;
and (ii) reestablishing the distribution of the Service in the
Territory following such Voluntary Major Interruption, as
reasonably determined by DMX CANADA, in tis sole discretion,
including, without limitation, the costs incurred by DMX CANADA
to realign its receiving equipment, if any, notwithstanding any
provision in this Agreement to the contrary excepting only the
provisions of Section 8(f) hereof; and (2) DMX CANADA may offer
a Competitive Service to any Commercial Establishment located in
the Territory in accordance with the provisions set out in
Section 4 hereof except that the requirements set out in (A)(i)
and (ii) of Section 4(b) shall not apply. DMX CANADA shall not
have any other rights or remedies available at law or equity
against DMX US as a result of such Voluntary Major Interruption
<PAGE> 29
26
except that the indemnity granted by DMX US in favour of DMX
CANADA as set out in Section 19(d) shall apply hereto.
Notwithstanding such Voluntary Major Interruption, if an
alternate satellite with a comparable footprint or reception
area to the Footprint exists such that DMX US is technically
able to retransmit the Service to the Territory, DMX US shall
engage in good faith prior consultations with DMX CANADA
regarding utilizing such alternate satellite and shall make
commercially reasonable efforts to utilize such alternate
satellite within a reasonable time period following the
commencement of the Voluntary Major Interruption. If such an
alternate satellite is not available and there exists an
alternate satellite without a comparable footprint or reception
area to the Footprint but which would offer a reception area or
footprint acceptable to DMX CANADA such that DMX US is
technically able to transmit the Service to the Territory, DMX
US shall engage in good faith prior consultations with DMX
CANADA regarding utilizing such alternate satellite and shall
make commercially reasonable efforts to utilize such satellite
within a reasonable time period following the commencement of
the Voluntary Major Interruption. If such alternate satellite is
not available and there exists an Alternative Technology to
transmit the Service to the Territory, other than the On-Premise
Service, with a reception area comparable in geographic area to
the Footprint containing all of the capital cities of each of
the Provinces of Canada or representing a minimum of Ninety-five
(95%) per cent of DMX CANADA's entire base of Service
Subscribers existing at the date of such Voluntary Major
Interruption, and which would not reduce the quality and
integrity of the transmission of the digital audio signal from
that maintained prior to such Voluntary Major Interruption, DMX
US shall engage in prior consultations with DMX CANADA regarding
using such Alternative Technology and shall make commercially
reasonable efforts to use such Alternative Technology to
transmit
<PAGE> 30
27
the Service to the Territory. If the Voluntary Major
Interruption continues for a period greater than or equal to
Thirty (30) consecutive calendar days, then the obligations of
the parties set out in this Agreement shall be suspended for a
maximum period of Three Hundred and Sixty-Five (365) days from
the first date of such Voluntary Major Interruption (the
"Suspension Period") excepting only the obligation of DMX CANADA
to pay to DMX US any service fees outstanding for periods prior
to the Suspension Period and any obligations of either party
arising under this Section and Section 19. DMX CANADA shall have
the right, in its absolute and sole discretion, to terminate
this Agreement at any time during the Suspension Period without
any liability therefor. If after the expiry of the Suspension
Period DMX US fails to transmit the Service to the Territory
using any manner of technology or systems whatsoever, then this
Agreement shall be terminated. Notwithstanding such termination,
the parties hereto agree that DMX CANADA shall maintain the
right of first negotiation during the remainder of the unexpired
portion of the Term for the exclusive right to distribute the
Service in the Territory such that if DMX US is able to transmit
the Service to the Territory using any manner of technology or
systems whatsoever after the expiry of the Suspension Period, it
shall so notify DMX CANADA in writing and the parties shall
engage in diligent and good faith negotiations for the
commencement of the transmission of the Service in the
Territory. The provisions of this section shall survive the
expiration of the Term or the early termination of this
Agreement.
(f) Satellite Transition: Notwithstanding any provision in Section 8(e)
above to the contrary, DMX US may transmit the Service to the Territory
using another satellite subject to the provisions hereof. It is the
intention of the parties hereto that in the event of a change of a
satellite by DMX US other than as set out in this Section 8(f), DMX US
shall be responsible, at its sole cost and expense, for the direct
costs incurred by DMX CANADA
<PAGE> 31
28
in connection with the realignment of DMX CANADA's receiving equipment
in order that it may receive the modified digital audio signal
transmitted from such alternate satellite. DMX CANADA shall be
responsible, at its sole cost and expense, for the realignment of its
receiving equipment if, and only if: (i) DMX US transmits the Service on
an alternate satellite as a result of the expiration of the scheduled
operating life of the 402R Satellite or its successor; and (ii) on one
occasion only during the scheduled operating life of the 402R Satellite
DMX US elects to change the satellite used to transmit the Service for
any reason whatsoever. DMX US shall ensure, at its sole cost and
expense, that the footprint or geographic area of the alternate
satellite shall be comparable to the Footprint. DMX US shall deliver
written notice to DMX CANADA, if possible, of such satellite transition
as contemplated in this Section 8(f) at least Forty-five (45) days in
advance, and shall provide DMX CANADA with Sixty (60) consecutive
calendar days of overlap of transmission using both the 402R Satellite
and its successor satellite, and subsequently with such other alternate
satellites, in order that DMX CANADA may coordinate and complete the
realignment of its receiving equipment necessary to receive the digital
audio signal transmitted from such successor satellite(s).
9. DELIVERY AND DISTRIBUTION OF THE SERVICE
a) Reception Equipment: DMX CANADA shall provide by way of lease or sale to
each Service Subscriber any and all land-based equipment or other
equipment, which incorporates DMX proprietary technology and is
manufactured by DMX US authorized and approved parties, as required for
reception of the Service at the Commercial Establishment pursuant to the
terms and conditions of the Commercial Service Agreement.
<PAGE> 32
29
b) No Additions, Deletions, etc.: DMX CANADA, its Agents and Affiliates shall
distribute the Service together with the accompanying program data
throughout the Territory without addition, deletion, alteration, editing
or amendment, unless specifically permitted to do so by DMX US in writing,
in its sole discretion, or unless required to do so to comply with any
applicable law or regulation of any authority having jurisdiction.
c) Payment Required: Except with respect to any Approved Purpose, as
hereinafter set out, DMX CANADA shall distribute or deliver the Service
only to Service Subscribers who pay a fee therefor.
d) Private Use or Recording: Nothing in this Agreement shall be deemed to
authorize DMX CANADA, or its Service Subscribers to record the Service for
their private use or to install recording devices for the purposes of so
doing. DMX CANADA shall not have any liability to DMX US for the
unauthorized recording of the Service by the Service Subscribers, the
Agents or the Affiliates.
10 SERVICE FEES
a) (i) Basic Fees: DMX CANADA shall pay to DMX US each month during the
Term commencing November 1, 1994 to and including October 31, 1999,
[***] multiplied by the number of Commercial Establishments in the
Territory to which DMX CANADA or the Agents distribute the Service,
subject to the provisions of Section 10(f) hereof.
(ii) Affiliate Fees: In addition to the above, DMX CANADA shall pay to
DMX US each month during the Term commencing November 1, 1994 a
service fee (the "Affiliate Fee") [***] multiplied by the number
of Commercial Establishments in the Territory to which an Affiliate
*** Confidential portions omitted and filed separately with the Securities and
and Exchange Commission pursuant to a request for confidential treatment.
<PAGE> 33
30
distributes the Service pursuant to executed Commercial Service
Agreements; or [***] the fee charged by DMX CANADA to an
Affiliate for each Commercial Establishment to which the
Affiliate distributes the Service multiplied by the number of
Commercial Establishments in the Territory to which the
Affiliate distributes the Service. If DMX CANADA charges any
Affiliates differing fees with respect to its Commercial
Establishments, then the calculation for this subsection (B)
shall be [***] of each of the differing fees charged by DMX
CANADA to such Affiliate multiplied by the number of Commercial
Establishments in each differing fee category. For example, if
DMX CANADA charges a given Affiliate a monthly fee of [***] Can.
for some Commercial Establishments, and [***] Can. for other
Commercial Establishments, then the calculation of this
subsection (B) for that Affiliate would be as follows: [***]
(the number of Commercial Establishments for which DMX CANADA
charges the Affiliate the [***] (the number of Commercial
Establishments for which DMX CANADA charges the Affiliate the
[***].
The amount of the service fees payable under this Section 10(a) and
otherwise in this Section shall be determined by DMX CANADA and a
statement including reasonable detail as to the calculation thereof
shall be delivered to DMX US in accordance with Section 11 hereof.
b) Time for payment. The service fees payable by DMX CANADA to DMX US
hereunder shall be paid not later than Forty-five (45) days after the
end of the respective calendar month for which they are payable. If any
fees described in this section remain unpaid Five (5) business days
after the due date, the delinquent amount shall accrue interest at the
rate of 1-1/2% per month, being 18% per annum, or the highest lawful
rate, whichever
*** Confidential portions omitted and filed separately with the Securities
and Exchange Commission pursuant to a request for confidential
statement.
<PAGE> 34
31
is less, from the due date until payment is received by DMX US, as the case
may be. DMX CANADA shall be liable for all reasonable costs and expenses
(including, without limitation, reasonable counsel fees and arbitration or
Court costs) in connection with the collection of any overdue amount.
c) Payment in American Dollars: All payments made by DMX CANADA hereunder to
DMX US shall be made in American Dollars with the exception of the
Affiliate Fee which shall be paid in Canadian Dollars.
d) Service Fee Adjustment Dates: Subject to the provisions of Section 10(e),
the rates for the service fees payable by DMX CANADA to DMX US, excluding
the Affiliate Fees, shall be increased on an annual basis during the Term
commencing on November 1, 1999 and each anniversary date thereof by [***]
of the then current rate but only with respect to those Commercial Service
Agreements executed, renewed or extended on or after November 1, 1999
subject to the limitations set out in this Section. The service fee payable
with respect to a Commercial Service Agreement shall be determined in the
year of its execution, renewal or extension and shall be fixed for the
duration of the term of the Commercial Service Agreement notwithstanding
the increase of the rate of the service fee payable by DMX CANADA to DMX
US on an annual basis as set out hereunder. If the Commercial Service
Agreement is subsequently renewed or extended, then the service fee payable
by DMX CANADA to DMX US with respect to such Commercial Service Agreement
shall be at the rate determined in the year of renewal or extension and
shall be fixed for the balance of the renewal or extension of the term of
such Commercial Service Agreement.
e) Best Rate: DMX US agrees that if at any time during the Term it enters into
an agreement with another party ("Third Party Distributor") which has the
same number or a lesser number of Commercial Establishments in its
distribution territory than are in the
*** Confidential portions omitted and filed separately with the Securities and
Exchange Commission pursuant to a request for confidential treatment.
<PAGE> 35
32
Territory and for which DMX US grants a license to distribute the Service
for a service fee that is less than that payable by DMX CANADA hereunder,
whether by rebate, lower base service fee or any other means, (the "Lower
Service Fee") regardless of where the Third Party Distributor's territory
or geographic area of distribution may be located, DMX US shall
immediately notify DMX CANADA in writing of the Lower Service Fee.
Notwithstanding any other provision of this Agreement, the parties hereto
agree that following the date of such notification until the earlier of
the expiry of the Term or the date the Lower Service Fee charged to the
Third Party Distributor is changed, the service fee payable by DMX
CANADA to DMX US under this Agreement shall be fixed and equal to the
Lower Service Fee commencing with the payment subsequent to the date of
notification.
f) Service fee exemption: Notwithstanding anything to the contrary
contained in this Agreement, DMX CANADA may transmit, distribute,
retransmit or deliver the Service [***] DMX CANADA shall report on a
monthly basis to DMX US the names and locations of the Demonstration
Receivers and Promotional Receivers and the durations for which they
were offered. If DMX US is not satisfied, acting reasonably, with the
numbers of Promotional Receivers and Demonstration Receivers it may
request that DMX CANADA review its practices relating to the Promotional
Receivers and Demonstration Receivers and question such terms if they
appear to it to be unreasonable.
*** Confidential portions omitted and filed separately with the Securities
and Exchange Commission pursuant to a request for confidential treatment.
<PAGE> 36
33
11. REPORTS AND RECORDS
a) Books, records and audits: DMX CANADA shall keep accurate and complete
books and records of billings, Service Subscribers, numbers of
Commercial Establishments, retired accounts, monthly service fee
charges, interruptions or other failure in the delivery of the Service
and all other records for each Service Subscriber necessary to
substantiate the number of Commercial Establishments served on the first
and last days of each month and the calculation of the monthly service
fee. All such records relating to the foregoing shall be kept in
accordance with generally accepted accounting principles and the most
recent Three (3) calendar years of such records shall be available for
inspection, copy and audit (collectively, the "Inspection") by DMX US
or its representatives, at its own expense, on at least two weeks
notice to DMX Canada during normal business hours throughout the Term,
and for three (3) years thereafter. The right of DMX US to conduct any
Inspection shall be limited to only one opportunity during any 365 day
period, and shall be conducted as to any statement delivered in
accordance with Section 11(b) below within 3 years from the date of
such statement.
b) Monthly accounting statements; DMX CANADA shall, within Forty-five (45)
days following the calendar month end provide DMX US with a statement
containing the calculation of the service fees payable by DMX CANADA
for such earlier month pursuant to this Agreement and such additional
account and statistical information as may be reasonably required by
DMX US to monitor the number of Commercial Establishments served by DMX
CANADA and the service fees payable to DMX US pursuant to Section 10(a).
c) Dispute: If any Inspection of DMX CANADA's records reveals that DMX
CANADA has underpaid any monthly service fee or other amount payable
hereunder, DMX US shall
<PAGE> 37
34
provide DMX CANADA with written notice thereof setting out in
reasonable detail an invoice for any balance owing to DMX US and the
reasons therefor. DMX CANADA shall have the right to review the report
of the Inspection and satisfy itself, in its absolute and sole
discretion, as to the findings thereof. If DMX CANADA concurs with the
findings of the Inspection it shall pay DMX US the amount of such
underpayment within Ten (10) days of the date of the invoice therefor,
plus all applicable interest. If DMX CANADA shall dispute the findings
of the Inspection it shall provide DMX US with a written notice thereof
within Ten (10) days of the date of the invoice therefor explaining in
reasonable detail the reasons for such dispute. The parties hereto
agree that they shall negotiate in good faith the amount of the
underpayment, if any, failing which the matter shall be resolved by
arbitration pursuant to Section 24(1) hereof. The remedies set forth
in this paragraph shall be limited to a period of three (3) years from
the date of such underpayment.
12. COLLECTIONS
DMX CANADA shall be responsible for billing and using commercially
reasonable efforts to collect all amounts due from the Service Subscribers.
13. PAYMENT OF TAXES
DMX CANADA shall be responsible for collecting and paying any income,
franchise, sales, use, occupational, general service, value added, or other
taxes, assessments, licenses or other charges assessed, levied, or imposed by
any government, agency or regulatory body having jurisdiction within the
Territory with respect to DMX CANADA's distribution of the Service in the
Territory.
<PAGE> 38
35
14. MUSIC PERFORMANCE AND OTHER MUSIC RIGHTS
DMX CANADA shall be responsible for and shall pay all Canadian Rights
Payment arising out of the delivery and distribution of the Service in the
Territory.
15. RESEARCH
a) Each Party to Provide Information: DMX US shall provide DMX CANADA with
free access to and the right to use, pursuant to the terms hereof, all
research and marketing information pertaining to the operation of the
Service internationally, except where providing such information would
violate any agreement DMX US may have with any third party. Any and all
such information shall be provided by DMX US subject to DMX CANADA
paying DMX US for the costs of reproducing and shipping materials, or
any other out-of-pocket costs which DMX US may incur in making such
information available to DMX CANADA. DMX CANADA shall provide DMX US
with free access to and the right to use, pursuant to the terms hereof,
all research and marketing information pertaining to the provision of
the Service in the Territory except where providing such information
would violate any agreement DMX CANADA may have with any third party.
Any and all such information shall be provided by DMX CANADA to DMX US
upon receipt of a written request therefor, subject to DMX US paying DMX
CANADA for the costs of reproducing and shipping materials, or any other
out-of-pocket costs which DMX CANADA may incur in making such
information available to DMX US. Notwithstanding the foregoing, neither
party hereto shall be obligated to provide the other with any materials
which are considered by it to be confidential in nature or relate to its
particular business plan.
<PAGE> 39
36
b) Other research: DMX US may from time to time, wish to undertake
marketing tests and surveys, ratings polls and other research
in connection with the distribution of the Service or the Adjunct
Services. With respect to any tests, surveys or research which applies
to the Territory or a portion thereof, DMX US shall provide DMX CANADA
with written notice Two (2) weeks in advance, setting out the nature and
scope of each such project and DMX CANADA shall, to the extent permitted
by applicable law, cooperate in such project by rendering such
assistance as DMX US may reasonably request and which DMX CANADA can
reasonably provide, it being understood that the cost of which
assistance shall be borne solely by DMX US. DMX US shall treat the
Service Subscriber lists received from DMX CANADA or any of the Agents
or Affiliates in connection with such research as confidential and the
sole and exclusive property of DMX CANADA and shall use such information
solely for the purpose of conducting such marketing research. DMX US
shall provide DMX CANADA with the results of such research immediately
upon the completion thereof.
16. PROPRIETARY MARKS
a) Rights in Proprietary Marks: DMX US hereby grants to DMX CANADA the
exclusive royalty-free license (and right to sublicense in accordance
with the terms of this Agreement) to use and display in connection with
and only in connection with, DMX CANADA's offering of the Service and
any Adjunct Service offered according to the terms of this Agreement,
the trademarks, trade names, logo types, insignia, designs and service
marks (collectively, the "Proprietary Marks") designated, from time to
time, by DMX US as the Proprietary Marks, including, as of the date
hereof, the marks"Digital Music Express", "DMX" and all marks or trade
names containing the term "DMX" including "DMX Canada" and the DMX
logo. Notwithstanding anything in this Section 16 to the contrary, DMX
US agrees that it shall not grant during the Term the right or license
to use or display the Proprietary Marks in the Territory to any party
other than
<PAGE> 40
37
DMX CANADA, its Agents or Affiliates excepting only to a third party who
may distribute an Adjunct Service pursuant to Section 7 hereof, and then
only if: i) such Proprietary Mark is used strictly in connection with the
Adjunct Service and not the Service; and ii) the Proprietary Marks used to
identify the Adjunct Service are separately identifiable from the
Proprietary Marks used to identify the Service. DMX US further grants to
DMX CANADA the exclusive right to use, solely in accordance with the terms
hereof, the "DMX" mark as part of DMX CANADA's tradename, or corporate name
in connection with, and only in connection with, DMX CANADA's offering of
the Services and any Adjunct Services offered according to the terms of
this Agreement. DMX CANADA acknowledges the ownership of the Proprietary
Marks by DMX US, and the ownership by DMX US of the goodwill associated
therewith and agrees that it will do nothing inconsistent with such
ownership and that all use of the Proprietary Marks by DMX CANADA shall
enure to the benefit of and be on behalf of DMX US with the exception of
the rights and benefits to which DMX CANADA is entitled pursuant to this
Agreement. DMX CANADA agrees further that nothing in this Agreement shall
give DMX CANADA any right, title or interest in the Proprietary Marks other
than in accordance with this Agreement and DMX CANADA agrees that it will
not attack the title of DMX US to the Proprietary Marks or attack the
validity of this Agreement.
b) Acknowledgement of Rights: DMX CANADA covenants to execute such agreements
and other documents which DMX US reasonably deems necessary to maintain or
preserve DMX US's interest in the Proprietary Marks, provided that the form
of any such document shall be agreed upon by DMX CANADA and DMX US.
c) Quality Standards and Samples: DMX Canada may use the Proprietary Marks in
such manner as it may determine provided that any such use shall not, in
the opinion of DMX US, acting reasonably, detract from the goodwill
associated with such Proprietary Marks in the United States and in the
Territory. DMX CANADA agrees to review a copy of the
<PAGE> 41
38
policies and procedures manual established by DMX US with respect to the
use of the Proprietary Marks and it shall report to DMX US within a
reasonable time regarding exceptions by it in its use of the Proprietary
Marks arising by virtue of Canadian customs, usage and law.
d) Protection of Proprietary Marks: The parties shall cooperate in
developing procedures necessary and appropriate for the protection of
the Proprietary Marks in the Territory, including, without limitation,
in connection with the use or display of the Proprietary Marks by the
Agents or Affiliates.
e) Form of Use:
i) DMX CANADA, its Agents and Affiliates shall use the Proprietary
Marks only in the form and manner and with appropriate legends as
prescribed herein or additionally from time to time by DMX US and
not to use any other trademark, trade name, logo type, insignia,
copyright, design, service mark or tradename in combination with
any Proprietary Mark without prior written approval of DMX US.
Notwithstanding the foregoing, DMX CANADA, its Agents and
Affiliates may use the Proprietary Marks in association with
their own positioning statements, tradenames, logo types,
insignia, copyright, design or trade marks without the prior
written approval of DMX US, provided that such use does not
detract from the goodwill associated with the Proprietary Marks
in the United States or the Territory.
ii) DMX CANADA, its Agents and Affiliates shall not at any time
apply for any registration of any trademark or other designation
which would affect the ownership of any Proprietary Mark nor file
any document with any governmental
<PAGE> 42
39
authority to take any action which would affect the ownership
of any Proprietary Mark.
iii) DMX CANADA, its Agents and Affiliates shall at no time use or
authorize the use of any trademark, tradename or other
designation identical to or reasonably similar to any of the
Proprietary Marks.
iv) DMX CANADA, its Agents and Affiliates shall not use or permit
the use of the Proprietary Marks in any unlawful or deceptive
manner or in any way that shall directly or indirectly tend to
impair or lessen the value of the Proprietary Marks.
f) Infringement Proceedings: If DMX CANADA becomes aware of any
unauthorized use of any of the Proprietary Marks by third parties, it
shall immediately notify DMX US of such unauthorized use. DMX US shall
have the sole right and discretion to take whatever action it deems
necessary, at its sole cost, to deal with such unauthorized use.
17. MARKETING AND PROMOTION
DMX CANADA shall use its best reasonable efforts to market and promote
the Service and if applicable, the Adjunct Services, to Commercial
Establishments within the Territory, including, without limitation, retaining
direct and indirect sales agents in keeping with the size of and concentration
of the population of the Territory at all times during the Term, as determined
by DMX CANADA, acting reasonably, and it shall not cease distribution,
marketing or promotional efforts of the Service in the Territory during the
Term unless required by law, regulation or by any authority having jurisdiction.
Each party shall provide to the other party upon request thereof, at no cost,
copies of all materials relating to the marketing or promotion of the Service,
including, without limitation, print ads, radio and television commercials,
brochures, literature, training programs and sales kits, and the party receiving
such materials shall have the
<PAGE> 43
40
right to reproduce, and alter (except that the Proprietary Marks shall not be
altered) such materials for its own use in the marketing or promotion of the
Service.
18. TERMINATION, OBLIGATIONS UPON TERMINATION OR EXPIRATION
-------------------------------------------------------
a) Right to Terminate: If either DMX US or DMX CANADA commits a
substantial breach of any covenant or condition contained herein
(substantial being understood to include but not limited to all matters
related to payments, minimum obligations and covenants, inability of DMX
US to transmit the Service for any reason whatsoever, time and
warranties) on its part to be performed, and such breach shall not be
remedied within Thirty (30) days after receipt of written notice
thereof, then this Agreement shall, at the option of the party claiming
breach, be deemed terminated on the effective date set out in such
written notice, subject to: (i) the rights of the parties hereto set out
in Section 8 of this Agreement; (ii) DMX CANADA shall have a period of
Six (6) months after the effective date of termination as set out in
such notice to report the terms and conditions of any recent Commercial
Service Agreements executed by a Service Subscriber and to distribute
the Service thereto pursuant to Section 2(b); and (iii) the provisions
contained in Section 2 hereof related to the continuation of the Service
following termination.
b) Obligations Upon Termination or Expiration: Upon expiration, or in the
event of termination for any cause, including but not limited to those
specified above, DMX CANADA shall, subject only to the provisions of
Section 2 hereof: (i) permanently cease using the Proprietary Marks as
defined in Section 16; (ii) permanently cease using any trademark,
tradename, service mark or other designation similar to the Proprietary
Marks; (iii) make all alterations necessary to distinguish its business
from any identity with DMX US; (iv) immediately return to DMX US all
technical research and marketing materials, files and all other
information or materials provided by DMX US or developed from materials
provided by DMX US and related to the Service or any Adjunct Services;
(v)
<PAGE> 44
41
render up or destroy, at the sole option of DMX US, any material and
means for producing material bearing the Proprietary Marks; (vi)
immediately cancel any registrations for its corporate name, or
tradename which may include the Proprietary Marks or any component
thereof; and (vii) cease using any tradename which may include the
Proprietary Marks or any component thereof.
c) Effect of Expiration or Termination: Upon the expiration or earlier
termination of this Agreement, all rights granted to DMX CANADA
hereunder, except any rights surviving termination pursuant to Section
2 hereof, shall immediately terminate and revert to DMX US, and DMX
CANADA shall undertake such further action as required to effect such
revision.
19. WARRANTIES AND INDEMNITIES
a) DMX US's Warranties: DMX US represents and warrants to DMX CANADA
effective as of the date of this Agreement and throughout the Term as
follows: (i) DMX Inc. is a corporation duly organized and validly
existing under the laws of the State of Delaware; (ii) DMX US has the
right to grant the rights granted hereunder to DMX CANADA, and DMX US
shall not grant such rights in the Territory to any other person or
entity during the Term, subject to the provisions of Section 7 hereof;
(iii) DMX US has the power and authority to enter into this Agreement
and has taken all necessary action to authorize the execution and
delivery of the same and the consummation of the transactions
contemplated herein; (iv) DMX US is under no contractual or other legal
obligation which shall in any way interfere with its full, prompt and
complete performance hereunder (or to the extent that there are such
obligations, DMX US shall promptly obtain any and all consents
necessary to permit DMX US to fully, promptly and completely perform
hereunder); (v) the individual executing this Agreement on behalf of
DMX US has the authority to do so; (vi) DMX US is in full compliance
with all laws, including all
<PAGE> 45
42
rules and regulations to which it is subject; (vii) neither the Service, any
program related thereto, or any component thereof is subject to, or the subject
of, any lien, encumbrance, charge, lis pendens, or litigation pending or
threatened which would affect, in any way, the ability of DMX US to observe and
perform its obligations under this Agreement; (viii) the obligations created by
this Agreement, insofar as they purport to be binding on DMX US, constitute
valid and binding obligations of DMX US enforceable against it in accordance
with their terms; (ix) the methods utilized by DMX US for recording and
transmitting the Service do not violate any applicable law, regulation or
ordinance or the rights of any third party; (x) neither the performance nor
observance of any obligations of DMX US under this Agreement, nor the
programming or transmission of the Service by DMX US, to the Territory, nor any
other rights or materials provided by DMX US to DMX CANADA hereunder, shall
violate any third party rights, including, without limitation, any
confidentiality, intellectual property, copyright, trademark, tradename,
service mark, patent, statutory or equitable right of any person whatsoever or
otherwise give rise to civil or criminal liability or to any additional payment
of fees by DMX CANADA to any copyright owner or collective, association or other
body, other than as expressly provided in this Agreement, licensed to collect
such payments on behalf of the copyright owner on account of the use of the
copyrighted materials whether related in any way whatsoever to the Service, the
Proprietary Marks, the Adjunct Services, if applicable, or any other rights or
privileges granted herein; (xi) the transmission of the Service is, and shall
be during the Term, fully compatible and functional with the reception and
decoding equipment or technology provided to DMX CANADA pursuant to this
Agreement, subject to the condition that such equipment and technology is
manufactured, used and maintained in accordance with each of their respective
operational, functional and technical specifications that have been agreed to
between DMX US and such manufacturers thereof; and (xii) DMX US has the
exclusive right, title and interest in and to the Proprietary Marks and the
goodwill associated therewith. The foregoing
<PAGE> 46
43
representations and warranties shall survive the expiration or earlier
termination of this Agreement.
b) DMX CANADA's Warranties: DMX CANADA represents and warrants to DMX US
effective as of the date of this Agreement and throughout the Term as
follows: (i) DMX CANADA is a partnership formed under the laws of the
Province of Alberta; (ii) DMX CANADA has the authority to enter into
this Agreement and has taken all necessary action to authorize the
execution and delivery of the same and the consummation of the
transactions contemplated herein; (iii) DMX CANADA is under no
contractual or other legal obligation which shall in any way interfere
with its full, prompt and complete performance hereunder (or to the
extent that there are such obligations, DMX CANADA, shall promptly
obtain any and all consents necessary to permit DMX CANADA, operating
as DMX CANADA to fully, promptly and completely perform hereunder);
(iv) the partners executing this Agreement on behalf of DMX CANADA has
the authority to do so; (v) DMX CANADA is in material compliance with
all laws to which it is subject; (vi) the obligations created by this
Agreement, insofar as they purport to be binding on DMX CANADA,
constitute valid and binding obligations of DMX CANADA enforceable
against it in accordance with their terms. The foregoing
representations and warranties shall survive the expiration or earlier
termination of this Agreement.
c) DMX CANADA's Indemnification: DMX CANADA shall indemnify and forever
hold harmless DMX US, DMX US's affiliates, subsidiaries, successors
and assigns and their respective officers, directors, employees and
agents (the "DMX US Parties") from any and all liabilities, losses,
damages, claims, actions, suits, costs, expenses and disbursements
including reasonable legal fees and expenses on a solicitor and his
client basis of whatsoever kind and nature which shall result from:
(i) the incorrectness of any representation or breach of any warranty
of DMX CANADA contained in this Agreement; (ii) the breach by DMX
CANADA of any of its covenants or agreement
<PAGE> 47
44
contained in this Agreement; and (iii) the distribution, promotion or
marketing of the Service by DMX CANADA, pursuant to (and as permitted
by) this Agreement. The foregoing indemnification shall survive the
expiration or earlier termination of this Agreement.
d) DMX US's Indemnification: DMX US shall indemnify and forever hold
harmless DMX CANADA, Shaw, its affiliates, as that term is defined in
the Companies Act, British Columbia, the Agents and the Affiliates and
all of their respective successors, assigns, officers, directors,
employees and agents (collectively, the "DMX Canada Parties") from any
and all liabilities, losses, damages, claims, actions, suits, costs,
expenses and disbursements including reasonable legal fees and
expenses on a solicitor and his client basis of whatsoever kind and
nature which arise in connection with or result from: (i) the
incorrectness of any representation or breach of any warranty of DMX US
contained in this Agreement; (ii) the breach by DMX US of any of its
covenants or agreements contained in this Agreement or its failure to
observe and perform any of its obligations or covenants hereunder;
(iii) a Voluntary Major Interruption in the transmission of the Service
to the Territory, including, without limitation, all direct losses and
identifiable costs arising in connection with the realignment,
modification, alteration or change made to the reception equipment,
technology or system used by DMX CANADA to distribute the Service in
the Territory or to receive the digital audio signal transmitted by DMX
US; and (iv) a Voluntary Minor Interruption in the transmission of the
Service to the Territory, including, without limitation, all direct
losses and identifiable costs arising in connection with the
realignment, modification, alteration or change made to the reception
equipment, technology or system used by DMX CANADA to distribute the
Service in the Territory or to receive the digital audio signal
transmitted by DMX US. The foregoing indemnification shall survive
the expiration or earlier termination of this Agreement.
<PAGE> 48
45
e) Notice of Claims: In connection with any indemnification provided in
this Agreement, each party shall so indemnify the other only if such
other party claiming indemnity shall give the indemnifying party prompt
notice of any claim or litigation to which its indemnity applies; it
being agreed that the indemnifying party shall have the right to assume
the defence of any or all claims or litigation to which its indemnity
applies and that the indemnified party will cooperate fully (at the cost
of the indemnifying party) with the indemnifying party in such defence
and in the settlement of such claim or litigation.
f) Limitation of Liability: Each party's entire liability and the
exclusive remedies of either party against the other for any damages
caused by any defect or failure in the Service or arising from the
performance and nonperformance of any obligation under this Agreement,
regardless of the form of action, whether in contract, tort, including
negligence, strict liability or otherwise, except as specifically
provided for otherwise in this Agreement, shall be the actual direct
damages which are proven. Neither party shall be liable for any costs
of the procurement of substitute services, incidental, indirect, special
or consequential damages, or for lost profits or revenues of any kind,
however caused, whether for breach of contract, or otherwise, and
whether or not such party was previously advised of the possibility of
such damages.
20. FORCE MAJEURE
-------------
Except as herein otherwise expressly provided, if and whenever and to
the extent that the parties hereto shall be prevented, delayed or restricted in
the fulfillment of any obligation hereunder in respect of the supply or
provision of any service or the observance or performance of any of the terms
and conditions hereunder by reason of strikes or work stoppages or being unable
to obtain any material, service, utility or labour required to fulfil such
obligation or by reason of any statute, law or regulation of, or inability to
obtain any permission from, any governmental authority having lawful
jurisdiction including, without limitation, any order,
<PAGE> 49
46
decision, or declaration by the Government of Canada or its agencies or
tribunals having jurisdiction, regarding maintaining or regulating the Canadian
content of the Service which prevents, delays or restricts such fulfillment, or
by reason of any other cause beyond the control of such party, the time for
fulfillment of such obligation shall be extended during the period in which such
circumstances operates to prevent, delay or restrict the fulfillment thereof,
and the other party to this Agreement shall not be entitled to compensation for
any inconvenience, nuisance or discomfort thereby occasioned.
21. NOTICES
-------
Any notice or other communication required or permitted to be given
hereunder shall be in writing and shall be delivered in person, transmitted by
telecopy or similar means of recorded electronic communication or sent by
registered mail, charges prepaid, addressed as follows:
If to DMX CANADA:
DMX CANADA
Suite 900
630 - 3rd Avenue S.W.
Calgary, Alberta
T2P 4L4
Attention: The President
With a courtesy copy to:
Shaw Communications Inc.
Suite 900
630 - 3rd Avenue S.W.
Calgary, Alberta
T2P 4L4
Attention: Corporate Counsel
<PAGE> 50
47
If to DMX US:
DMX Inc.
11400 W. Olympic Boulevard, Suite 1100
Los Angeles, California
90064-1S07
Attention: President
With a courtesy copy to:
Peter Laird, Esq.
Edelstein, Laird & Sobel, LLP
9255 Sunset Boulevard, Suite 800
Los Angeles, California
90069
Any such notice or other communication shall be deemed to have been
given and received on the day in which it was delivered or transmitted (or, if
transmitted and such day is not a business day, on the next following business
day) or, if mailed, on the fifth business day following the date of mailing;
provided, however, that if at the time of mailing or within five business days
thereafter there is or occurs a labour dispute or other event that might
reasonably be expected to disrupt the delivery of documents by mail, any notice
or the communication hereunder shall be delivered or transmitted by means of
recorded electronic communication as aforesaid. Any party may at any time
change its address for service from time to time by giving notice to the other
parties in accordance with this Section.
22. CONFIDENTIALITY
---------------
Without the prior consent of the other party, neither DMX US nor DMX
CANADA shall disclose to any third party (other than the Agents and Affiliates,
as the case may be, and each party's respective employees, agents, and
professional advisors, in their capacity as such, with a need to know in the
performance of their ordinary employee functions, or parties with which
<PAGE> 51
48
such party is participating in a joint venture, which need to know as part of
such joint venture, provided in either case, such employees and parties agree
to be bound by the provisions of this paragraph), including, without limitation,
any municipality or other governmental entity, any information with respect to
DMX US's proprietary technology, any research or other information provided by
either party hereunder (including information with respect to the Agents,
Affiliates and DMX US's agents and affiliates) or any other term, provision or
covenant hereof except: (i) to the extent required by the other party to
perform its obligations under this Agreement or approved in writing by the
other party; (ii) to the extent necessary to comply with law, administrative
rules, regulations or requirements, or the valid order of a court of competent
jurisdiction, in which event the party making such disclosure shall so notify
the other as promptly as practicable (and, if possible, prior to making such
disclosure) and shall seek confidential treatment of such information and of
this Agreement; (iii) as part of its normal reporting or review procedure to
its auditors, its attorneys or to performing rights societies; (iv) in order to
enforce its rights pursuant to this Agreement; or (v) to the extent the
information has already been publicly released by the other party.
23. ASSIGNMENT
a) Assignment; Binding Effect; Reorganization: This Agreement, including
both its obligations and benefits, shall enure to the benefit of, and be binding
on, the respective assignees, transferees and successors of the parties, except
that neither this Agreement nor either party's rights or obligations hereunder
shall be assigned or transferred by either party without the prior written
consent of the other party provided, however, no consent shall be necessary in
the event of any assignment to a successor entity resulting from a merger,
acquisition or consolidation by either party or assignment to any affiliate of
either party hereto as the term "affiliate" is defined in the Companies Act,
British Columbia. DMX US acknowledges and agrees that any sale by DMX CANADA
to a third person
<PAGE> 52
49
pursuant to section 2(c) hereof shall not constitute an assignment for
the purposes of this section 23(a).
b) Insolvency: If either party makes an assignment for the benefit of its
creditors, or commences bankruptcy, receivership, insolvency,
reorganization, dissolution or liquidation proceedings, that party
shall be deemed to be in default of its obligations under this
Agreement, and the other party shall be entitled to exercise any and
all remedies provided at law or in equity or otherwise provided in this
Agreement.
24. MISCELLANEOUS
-------------
a) Entire Agreement; Amendments; Waivers: This Agreement contains the
entire understanding of the parties hereto relating to the subject
matter hereof and supersedes and replaces the Original License and the
various letter agreements amending the same (collectively, the "1992
Agreement") but only with respect to the distribution of the Service to
Commercial Establishments. DMX US acknowledges that DMX CANADA retains
the right to distribute the Service to Private Residences in the
Territory in accordance with the 1992 Agreement, and any successor
thereof and DMX US shall not distribute the Service to Private
Residences in the Territory until such time as DMX CANADA's rights have
expired under the 1992 Agreement or any successor thereof. This
Agreement shall be amended, modified or terminated only in writing
signed by both parties. Any waiver must be in writing and signed by
the party whose rights are being waived and no waiver by either DMX
CANADA or DMX US of any breach of any provision hereof shall be or be
deemed to be a waiver of any preceding or subsequent breach of the same
or any other provision of this Agreement.
<PAGE> 53
50
b) Governing Law: The obligations of DMX CANADA and DMX US under this
Agreement and all matters collateral thereto shall be governed by the
laws of the Province of British Columbia, Canada.
c) No Agency: Neither DMX CANADA nor DMX US shall be or hold itself out
as the agent of the other under this Agreement. No Service Subscriber
shall be deemed to have any privity of contract or direct contractual
or other relationship with DMX US by virtue of this Agreement or DMX
US's delivery of the Service to DMX CANADA hereunder.
d) Jurisdiction for Disputes: In the event of any controversy or claim
arising out of or relating to this Agreement or the making,
performance or interpretation thereof, the parties hereto shall
recognize and be subject to the laws in force in the Province of
British Columbia, Canada.
e) Injunctive Relief: If DMX CANADA breaches the non-competition
provisions of Section 4(b) hereof, or if DMX CANADA breaches Section
16 hereof, then DMX CANADA agrees that DMX US shall be entitled to
seek injunctive relief in connection with such breach. If DMX US
breaches the exclusivity provisions of Section 3 hereof, then DMX US
agrees that DMX CANADA shall be entitled to seek injunctive relief in
connection with such breach, and if DMX US breaches the provisions of
Sections 4, 6, 7, 16, and 17 hereof, then DMX US agrees that DMX
CANADA shall be entitled to seek specific performance in connection
with such breach.
f) No Partnership: Nothing contained herein shall be deemed to create,
and the parties do not intend to create, any partnership or joint
venture as and between DMX CANADA and DMX US and neither party is
authorized to or shall act toward third parties or the public in any
manner which would indicate any such relationship with the other.
<PAGE> 54
51
g) Severability: the invalidity under applicable law of any provision of
this Agreement shall not affect the validity of any other provision of
this Agreement, and in the event that any provision hereof is
determined to be invalid or otherwise illegal, this Agreement shall
remain effective and shall be construed in accordance with its terms;
provided however, that the provision of this Agreement which is
affected shall, to the extent possible, be curtailed and limited only
to the extent necessary to bring it within the requirements of the
law.
h) Headings and Captions: The titles and headings of the paragraphs in
this Agreement are for convenience only and shall not in any way
affect the interpretation of this Agreement.
i) Counterparts: This agreement may be executed in one or more
counterparts, each of which shall be deemed an original and all of
which shall constitute one and the same Agreement, and shall become
effective when each party has received an original counterpart which
has been executed by the other party. In proving this Agreement, it
shall not be necessary to produce or account for more than one such
counterpart.
j) No Inference Against Author: DMX US and DMX CANADA each acknowledge
that this Agreement was fully negotiated by the parties and,
therefore, no provision of this Agreement shall be interpreted against
any party because such party or its legal representative drafted such
provision.
k) No Third Party Beneficiaries: The provisions of this Agreement are for
the exclusive benefit of the parties hereto and their permitted
assigns, and no third party shall be a beneficiary of, or have any
rights by virtue of, this Agreement.
l) Arbitration: In the event that a dispute arises between the parties
hereto pursuant to this Agreement, differences or unresolved matters
shall be referred to arbitration which arbitration shall be conducted
in accordance with the following procedures and principles:
<PAGE> 55
52
(i) Upon the written demand of either party and within ten (10) days from
the date of such demand, each party shall appoint an arbitrator and the
two appointed arbitrators shall then promptly appoint a third. If either
party shall fail to appoint an arbitrator within ten (10) days from the
date of the demand, then the arbitrator shall, upon the application of
the other party, be appointed by a Justice of the Supreme Court of
British Columbia. If the two arbitrators shall fail, within ten (10)
days from the appointment of the second of them, to agree upon and
appoint the third arbitrator, then upon the application of either party,
the third arbitrator shall be appointed by a Justice of the Supreme
Court of British Columbia.
(ii) The arbitrators shall proceed promptly to hear and shall determine the
matter in dispute subject to any reasonable delay.
(iii) The award of the arbitrators shall be drawn up in writing and signed by
the arbitrators, or a majority of them, and shall be final and binding
on the parties, and the parties shall abide by the award and perform its
terms and conditions. Each party shall be responsible for the fees and
expenses of the arbitrator named by it and the fees and expenses of the
third arbitrator shall be paid in equal proportion by DMX US and DMX
CANADA.
(iv) Save as otherwise expressly provided, the provisions of the Commercial
Arbitration Act of British Columbia shall apply provided that when there
is a conflict between the provisions of this section and the Act, the
provisions of this section shall apply.
(v) When appointing arbitrators and in nominating persons for consideration
for appointment by the Supreme Court of British Columbia the parties
shall use their best efforts to appoint or nominate persons who by
experience or profession are qualified to hear and determine the dispute
or difference brought before them.
<PAGE> 56
53
(vi) Notwithstanding any dispute or difference or arbitration
proceeding arising from this Agreement, the parties shall
continue to perform their respective obligations under this
Agreement while any matter is the subject of negotiation,
discussion or arbitration and prior to the rendering of the
arbitral award.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first above written.
DMX INC.
Per: /s/ LON A. TROXEL
----------------------------------
Title: COO
THE DMX CANADA PARTNERSHIP
BY ITS PARTNER, SHAW CABLESYSTEMS LTD.
Per: /s/ HEATHER SHAW
----------------------------------
Title: Vice President, Televisual
Per: /s/ MICHAEL OSTOPOWICH
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Title: Senior V.P., Finance
BY ITS PARTNER, 450714 B.C.LTD.
Per: /s/ BRIAN IRWIN
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Title: President/Secretary
Per:
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Title:
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EXHIBIT 10.76
TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
1. DEFINITIONS ................................................... 2
2. TERM .......................................................... 5
Initial and Renewal Term ...................................... 5
3. GRANT OF RIGHT ................................................ 5
Exclusive Right ............................................... 5
Right to Sublicense ........................................... 6
4. RESTRICTIONS AND LIMITATIONS .................................. 6
Limitation on Rights .......................................... 6
Competitive Services .......................................... 7
Reservation of Rights ......................................... 7
5. CONTENT OF SERVICE ............................................ 8
US Channels ................................................... 8
Canadian Channels ............................................. 8
Compliance with CRTC Decision ................................. 8
Affiliate Distribution ........................................ 8
Distinction From Other Music Service .......................... 8
6. ADJUNCT SERVICES .............................................. 9
7. TRANSMISSION OF SERVICE ....................................... 9
Costs of Transmission ......................................... 9
Technical Information to be Provided .......................... 10
Alternative Distribution of the Service ....................... 11
Changes in Reception System ................................... 11
Interruption in Transmission of Service ....................... 12
Involuntary Minor Interruption ........................ 12
Involuntary Major Interruption ........................ 12
Voluntary Minor Interruption .......................... 13
Voluntary Major Interruption .......................... 13
Satellite Transition .......................................... 15
8. DELIVERY AND DISTRIBUTION OF THE SERVICE ...................... 15
Subscriber Equipment .......................................... 15
No Additions, Deletions, etc. ................................. 15
Payment Required .............................................. 16
Private Use or Recording ...................................... 16
</TABLE>
*** Confidential portions of this document have been omitted and filed
separately with the Securities and Exchange Commission pursuant to a
request for confidential treatment.
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<TABLE>
<S> <C> <C>
9. SERVICE FEES.................................................... 16
Basic Service Fees...................................... 16
Discretionary Service................................... 16
Premium Tier............................................ 17
Time For Payment................................................ 17
Payment in American Dollars..................................... 17
Service Fee Renegotiation....................................... 17
Service Fee Exemption........................................... 18
10. REPORTS AND RECORDS............................................. 18
Books, Records and Audits....................................... 18
Monthly accounting statements................................... 19
Dispute......................................................... 19
11. COLLECTIONS..................................................... 19
12. PAYMENT OF TAXES................................................ 19
13. MUSIC PERFORMANCE AND OTHER MUSIC RIGHTS........................ 20
14. RESEARCH........................................................ 20
Each Party to Provide Information............................... 20
Other Research.................................................. 20
15. PROPRIETARY MARKS............................................... 20
Rights in Proprietary Marks..................................... 20
Acknowledgment of Rights........................................ 21
Quality Standards and Samples................................... 21
Protection of Proprietary Marks................................. 21
Form of Use..................................................... 21
Infringement Proceedings........................................ 22
16. MARKETING AND PROMOTION......................................... 22
17. TERMINATION, OBLIGATIONS UPON TERMINATION OR EXPIRATION......... 22
Right to Terminate.............................................. 22
Obligations Upon Termination or Expiration...................... 23
Effect of Expiration or Termination............................. 23
18. WARRANTIES AND INDEMNITIES...................................... 23
DMX US's Warranties............................................. 23
</TABLE>
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<TABLE>
<S> <C> <C>
DMX '95's Warranties............................................24
DMX '95's Indemnification.......................................25
DMX US's Indemnification........................................25
Notice of Claims................................................26
Limitation of Liability.........................................26
19. FORCE MAJEURE...................................................26
20. NOTICES.........................................................26
21. CONFIDENTIALITY.................................................28
22. ASSIGNMENT......................................................28
Assignment; Binding Effect; Reorganization......................28
Insolvency......................................................28
23. MISCELLANEOUS...................................................29
Entire Agreement; Amendments; Waivers...........................29
Governing Law...................................................29
No Agency.......................................................29
Jurisdiction for Disputes.......................................29
Injunctive Relief...............................................29
No Partnership..................................................29
Severability....................................................29
Headings and Captions...........................................30
Counterparts....................................................30
No Inference Against Author.....................................30
No Third Party Beneficiaries....................................30
Arbitration.....................................................30
</TABLE>
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RESIDENTIAL LICENSE AND DISTRIBUTION AGREEMENT
This Agreement made as of April 18, 1997, by and between:
DMX INC., a Delaware Corporation with offices at 11400 W. Olympic Boulevard,
Suite 1100, Los Angeles, California 90064-1507 ("DMX US").
-AND-
DMX CANADA (1995) LTD., a body corporate with offices at Suite 900,
630 3rd Avenue S.W., Calgary, Alberta T2P 4L4, Canada ("DMX '95").
RECITALS
1. WHEREAS, International Cablecasting Technologies Inc. ("ICT"), the
predecessor of DMX US, and DMX-Canada Ltd. entered into a license and
distribution agreement dated March 9, 1992, (the "Original License") under
which DMX US granted to DMX-Canada Ltd. the exclusive license and right to
distribute ICT's premium music service in Canada;
2. AND WHEREAS, DMX '95 has acquired or will acquire all the rights and
interests DMX-Canada Ltd. under the Original License;
3. AND WHEREAS, DMX '95 wishes to acquire from DMX US and DMX US wishes to
grant to DMX '95 the exclusive right to distribute the US Channels which in
combination with the Canadian Channels constitute the Service directly or
indirectly, through Affiliates, to Service Subscribers at Private Residences in
Canada, as such capitalized terms are hereinafter defined;
4. AND WHEREAS, by a decision of the Canadian Radio-television and
Telecommunications Commission dated August 23, 1996, the CRTC confirmed the
CRTC Decision 95-911 dated December 20, 1995 approving the application by DMX
'95 for a broadcasting license to carry on a new pay audio programming
undertaking, subject to the conditions of license set out in the CRTC
Decision.
5. AND WHEREAS, the parties hereto wish to replace the Original License
with respect to the distribution of the Service to Private Residences by way of
this amended and restated license and distribution agreement;
NOW THEREFORE, in consideration of the representations, warranties and
covenants
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contained herein, and for other good and valuable consideration, the receipt
and sufficiency of which are hereby acknowledged, the parties hereby agree as
follows:
1. DEFINITIONS
All capitalized terms used in this Agreement shall have the meanings set
out in this Section or as otherwise defined in the Agreement.
a) Adjunct Services means additional services or options, which are not
simply additional music formats and which, subsequent to the date of
this Agreement, are developed by DMX US for which DMX US expects
subscribers will be charged separately or in addition to the Service;
b) Affiliate(s) means any operators of Canadian cable systems or any third
parties, all as determined by DMX '95, in its absolute and sole
discretion, who: (i) hold a broadcast distribution undertaking license
issued by the CRTC; (ii) market the Service and/or the Adjunct Service
through a sales force separate from that of DMX '95; (iii) have direct
billing relationships with the Service Subscribers for the distribution
of the Service and/or the Adjunct Service, if any; and (iv) who execute
an Affiliate Agreement with DMX '95, as defined in Section 3 below,
whereby the Affiliate is to pay a fee to DMX '95 for each Private
Residence to which it distributes the Service and/or Adjunct Service;
c) Affiliate Agreement has the meaning set out in Section 3(b) hereof.
d) Alternative Technologies means the transmission or distribution of the
Service by means of (i) satellite master antenna television systems,
multi point distribution services, multichannel multi point distribution
services; (ii) other equipment, system or technology capable of
receiving the Service, directly from a satellite including, but not
limited to, C-Band or KU-Band Satellites; or (iii) any facility,
apparatus or other thing, equipment, wire, cable, radio, optical,
electromagnetic system or any other system or technology that is used or
capable of being used for or in any operation directly connected with
the emission, transmission, or reception of the Service, and with
respect to all of (i), (ii) and (iii) above, whether existing at the
date of this Agreement or developed in the future.
e) Approved Purposes means the distribution of the Service by DMX '95, or
its Affiliates for (i) promotional purposes to: (A) certain directors,
officers or employees of Shaw and its Affiliates, wherever situated, if
used for promotional purposes and not for background music; and (B)
certain industry trade shows, conferences, or meetings of a promotional
nature or related to marketing of the service attended by directors,
officers, employees or representatives of DMX '95 or the Affiliates (all
of such recipients of the Service identified in (A) and (B) above
collectively referred to as the "Promotional Receivers"); and (ii)
purposes of demonstrating the Service to potential Service Subscribers,
as hereinafter defined, at locations determined by DMX '95 in its
absolute and sole discretion (which
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recipients of the Service are referred to as the "Demonstration Receivers").
f) Canadian Channels has the meaning set out in Section 5 hereof.
g) Canadian Regulatory Law means the Broadcasting Act (Canada), or any
successor thereof, the regulations under the Act, directions by the
Governor in Council to the CRTC and any decision or order of, or any
policy published or administered by the CRTC.
h) Canadian Rights Payment means all music performance license fees, copyright
fees, mechanical reproduction rights, if applicable, and other payments
required to be paid under Canadian law, and performing rights fees, arising
out of the distribution of the Service in the Territory, as hereinafter
defined, including, without limitation, the Society of Composers, Authors
and Music Publishers of Canada (SOCAN).
i) Competitive Service has the meaning set out in Section 4(b) hereof.
j) CRTC means the Canadian Radio-television and Telecommunications Commission
and any successor thereof.
k) CRTC Decision means decision 95-911 dated December 20, 1995 of the CRTC
relating to the distribution of the Service to Private Residences in the
Territory.
l) Demonstration Receivers has the meaning set out in the definition of
"Approved Purpose" hereof.
m) Footprint has the meaning set out in Section 7(a)(i) hereof.
n) FM Band Service has the same definition as "Service" except that it shall
consist of up to and not a minimum of thirty (30) channels (formats)
delivered in an analogue signal over the FM Band spectrum by the Affiliates.
o) Inspection has the meaning set out in Section 10(a) hereof.
p) Involuntary Major Interruption means any act, event or omission outside the
direct of indirect control of or not initiated, either directly or
indirectly, by DMX US, including any exercise of a contractual preemption
right by a third party satellite provider, or such as an act of God or
nature, including, without limitation, any non-planned event or failure of
the 402R Satellite or any successor thereof (but excluding the expiration of
the scheduled operative life of the 402R Satellite or any successor thereof)
that interferes with, interrupts or obstructs the transmission of the
digital audio signal to DMX '95's or the Affiliates' land based reception
equipment in the Territory: (A) which interference lasts for a period of
Fourteen (14) or more consecutive calendar days; (B) which would require a
replacement of, or modification to the reception equipment, technology or
system utilized by DMX '95 or the
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Affiliates at the time of such interference, interruption or
obstruction in order to receive the digital audio signal to the same
standard and quality as is required pursuant to this Agreement; or (C)
which changes in any material manner whatsoever the geographic area of
the Footprint.
q) Involuntary Minor Interruption: means any act, event or omission
outside the direct or indirect control of, or not initiated, either
directly or indirectly, by DMX US, including any exercise of a
contractual preemption right by a third party satellite provider, or
such as an act of God or nature that interferes with, interrupts or
obstructs the transmission of the digital audio signal to DMX '95's or
the Affiliates' land based reception equipment in the Territory for a
period equal to or greater than Twenty-four (24) consecutive hours but
less than Fourteen (14) consecutive calendar days.
r) Private Residence means any single or multiple dwelling unit or premise
where any person is domiciled, except on a transient or
temporary basis.
s) Promotional Receivers has the meaning set out in the definition of
"Approved Purposes" hereof.
t) Proprietary Marks has the meaning set out in Section 15(a) hereof.
u) Service means the premium audio programming service consisting of a
minimum of thirty (30) channels (formats) of uninterrupted
music, offered by DMX '95 and its Affiliates twenty-four (24) hours per
day, seven (7) days per week, without any commercials or other
announcements, transmitted in a digital signal comprised of Canadian
Channels and US Channels provided on a one-to-one ratio.
v) Service Subscribers means those individuals, persons, associations,
partnerships, corporations or legal representatives which
subscribe to the Service for delivery at a Private Residence.
w) Shaw means Shaw Cablesystems Ltd. and its "affiliates" as such term is
defined in the Companies Act, British Columbia.
x) Term has the meaning set out in Section 2(a) hereof.
y) Territory means all of the country of Canada and its territories.
z) US Channels has the meaning set out in Section 7 hereof.
aa) Voluntary Major Interruption: means any act or omission within the
direct or indirect control of or initiated, either directly or
indirectly, by DMX US including, without limitation, a modification to
the method of transmission of the US Channels to DMX '95's or the
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Affiliates' land based reception equipment in the Territory or the
entering into a license or other agreement for a replacement of the
services of the 402R Satellite, or any successor thereof, that
interferes with, interrupts or obstructs the transmission of the digital
audio signal to DMX '95's or the Affiliates' land based reception
equipment in the Territory: (A) for a period of Fourteen (14) or more
consecutive calendar days; (B) which would require a replacement of, or
modification to the reception equipment, technology or system utilized
by DMX '95 or the Affiliates at the time of such interference,
interruption or obstruction in order to receive the digital audio signal
to the same standard and quality as is required pursuant to this
Agreement; or (C) which changes in any material manner whatsoever the
geographic area of the Footprint.
bb) Voluntary Minor Interruption: means any act or omission within the
direct or indirect control of or initiated, either directly or
indirectly, by DMX US including, without limitation, a modification to
the method of transmission of the US Channels to DMX '95's or the
Affiliates' land based reception equipment in the Territory or the
entering into a license or other agreement for the replacement of the
services of the 402R Satellite, or any successor thereof, that
interferes with, interrupts or obstructs the transmission of the digital
audio signal to DMX '95's or the Affiliates' land based reception
equipment in the Territory for a period equal to or greater than
Twenty-four (24) consecutive hours but less than Fourteen (14)
consecutive calendar days.
cc) 402R Satellite has the meaning set out in Section 7(a)(i) hereof.
2. TERM
Initial and Renewal Term: Subject to the earlier termination of this
Agreement as set forth in Section 18 hereof, the term Agreement shall commence
on the date hereof and shall terminate on March 31, 2012 (the "Term"). Provided
that neither party is in default in the observance and performance of its
obligations hereunder at the end of the Term, unless such default has been
waived by the other party, the parties shall negotiate exclusively with each
other for a renewal term of this Agreement (i.e. DMX '95 shall not negotiate
with a third party music service provider, and DMX US shall not negotiate with
a third party music service distributor) for a period of Twelve (12) months
prior to the expiry of the Term. The parties hereto shall commence negotiations
diligently and in good faith at the commencement of the Twelve (12) month
period for the renewal of the Agreement. The exclusive negotiating period shall
expire at the end of the Term, unless the parties hereto have agreed in
principle to the renewal of the Agreement and the material provisions thereof
have been completed subject only to finalization of the document related
thereto.
3. GRANT OF RIGHT
a) Exclusive Right: Subject to the terms and conditions contained herein,
DMX US hereby grants to DMX '95, and DMX '95 hereby accepts, the
exclusive right within the Territory to distribute the US Channels,
which in combination with the Canadian Channels constitute
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the Service directly or through any Affiliates by means of any
equipment, technology or system including, without limitation, the
Alternative Technologies, to Private Residences during the Term,
subject to compliance with the CRTC Decision and any subsequent
decision of the CRTC relating to the Service, and in accordance with
the provisions of this Agreement. The parties hereto acknowledge and
agree that in the event DMX US enters into an agreement for
distribution of the US Channels or any Adjunct Service by means of the
"Internet", (i.e., a so-called "on-line" service) which would
materially affect DMX '95's exclusive rights hereunder, DMX US shall
immediately notify DMX '95 of such agreement in writing together with a
description of the agreement. The parties hereto shall thereafter
negotiate in good faith with respect to an appropriate sharing of
revenues related to the distribution of the US Channels or the Adjunct
Service, as the case may be, by DMX US by means of the Internet.
Further, in the event any technology is developed in the future for
distribution of the Service or any Adjunct Service for which there would
be no means of restricting the territory or geographic area of
distribution or identifying the end user of the Service or Adjunct
Service (an "Uncontrolled Distribution"), and in the event DMX US enters
into an agreement for Uncontrolled Distribution of the US Channels or
the Adjunct Service which would materially affect DMX '95's exclusive
rights hereunder, the parties agree to negotiate in good faith with
respect to revenue sharing in connection therewith. Neither DMX '95 nor
its Affiliates shall distribute the US Channels or any Adjunct Service
by means of an Uncontrolled Distribution (including any distribution by
means of Internet distribution which could fall within the definition of
Uncontrolled Distribution) without the written consent of DMX US.
b) Right to Sublicense: Subject to the terms and conditions contained
herein, DMX US hereby grants to DMX '95 the right within the Territory
to sublicense the distribution rights related to the Service granted
herein to the Affiliates. DMX '95 shall enter into an affiliate
agreement with each Affiliate (the "Affiliate Agreement"), the form and
content of which shall be determined by DMX '95 provided that it shall
not be inconsistent with this Agreement. The Affiliate Agreement shall
include, without limitation, from and after the date of this Agreement,
requirements that the Affiliate not compete directly with DMX US in
distributing the US Channels outside the Territory nor distribute the
US Channels on the Internet.
4. RESTRICTIONS AND LIMITATIONS
a) Limitation on Rights: The rights granted herein do not include any
rights of DMX '95, its Affiliates or any other person to:
i) record, make or manufacture any recordings or other
reproductions of any of the US Channels or any part thereof;
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ii) transmit, re-transmit, distribute, deliver or authorize the
transmission, retransmission, distribution or delivery of any of
the US Channels in any manner, outside the Territory; or
iii) transmit, re-transmit, distribute, deliver or authorize the
transmission, retransmission, distribution or delivery of any of
the Service within the Territory to any person which is not a
Service Subscriber, except for the Approved Purposes pursuant
to Subsection 9(e) hereof.
b) Competitive Services: Subject to the provisions of this Section 4(b),
during the Term neither DMX '95 nor Shaw shall offer, provide,
transmit, re-transmit, distribute or deliver, directly or indirectly
through any of its agents, affiliates or subsidiaries, to any location
in the world any audio music service of any nature whatsoever other
than the Service (the "Competitive Service"). Except in the case of DMX
'95, nothing herein shall be deemed to prohibit Shaw or Shaw's
successors, or DMX '95's Affiliates from offering, providing,
transmitting, retransmitting, distributing or delivering any
Competitive Service to any Private Residence located in the Territory.
Further, DMX '95 may, at its option, transmit, retransmit, distribute
or deliver a Competitive Service to any Private Residence located in
the Territory if, and only if there is an Involuntary Major
Interruption or a Voluntary Major Interruption as set out in Section
7(e) hereof. Notwithstanding anything else contained herein to the
contrary, neither DMX '95 nor the Affiliates shall be required to
distribute the Service to any subscriber of a Competitive Service if
such subscriber is a subscriber of a Competitive Service as a result of
an Involuntary Major Interruption or a Voluntary Major Interruption
pursuant to Section 7(e) hereof or is otherwise a subscriber of a
Competitive Service through an Affiliate. DMX US covenants and agrees
that, except as set forth in this Agreement, it shall not offer,
provide, license, transmit, re-transmit, distribute or deliver,
directly or indirectly through any of its agents, affiliates or
subsidiaries, the Service or any audio music service of any nature,
whatsoever, or the Adjunct Services to any Private Residence in the
Territory during the Term, subject only to the provisions of the right
of first refusal related to the Adjunct Services set out in Section 6
hereof and the provisions related to an Uncontrolled Distribution of
the US Channels set out in Section 3(a) hereof. DMX US acknowledges and
agrees that it shall include in its standard form of license agreement
related to the distribution of the US Channels to be entered into with
its agents, affiliates and licensees, from and after the date of this
Agreement, a provision whereby the agents, affiliates and licensees
covenant not to distribute, deliver, transmit, or re-transmit the
Service or the Adjunct Service in the Territory, or any portion
thereof. DMX US further agrees that it shall assist DMX '95 in locating
any agent, affiliate, or licensee of DMX US that distributes, delivers,
transmits or re-transmits the Service or the Adjunct Service in the
Territory at any time during the Term and it shall assist, to the best
of its ability, DMX '95 in conducting such investigations and
prosecutions of such agents, affiliates and licensees.
(c) Reservation of Rights: Except as expressly set forth in this Agreement,
DMX '95 shall have no proprietary interest in the US Channels including
the accompanying program data, the
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Proprietary Marks, as hereinafter defined, or any other rights or
property of DMX US, all of which are reserved and shall remain the rights and
property of DMX US.
5. CONTENT OF SERVICE
(a) US Channels: DMX US shall produce the US Channels at its sole
cost and expense. DMX '95 may select any of the US Channels offered by DMX US
and may change its selection from time to time at its sole discretion. DMX US
shall ensure that the US Channels shall not contain any obscenity or any other
matter in violation of laws, regulations, decisions or orders of any authority
having jurisdiction in the Territory. The US Channels shall include
programming, format and other content as may be necessary or appropriate for
the transmission, reception and processing of the digital signals, including,
without limitation, transmission necessary for the display on the panel of the
DMX hand held remote control of the song, title, artist and other descriptive
information relating to the music segment.
(b) Canadian Channels: DMX '95 shall produce the Canadian premium
audio music channels in digital format (collectively, the "Canadian Channels")
at its sole cost and expense. DMX '95 shall ensure that the Canadian Channels
shall not contain any obscenity or any other matter in violation of laws,
regulations, decisions or orders of any authority having jurisdiction in the
Territory. The Canadian Channels shall include programming, format and other
content as may be necessary or appropriate for the transmission, reception and
processing of the digital signals, including, without limitation, transmission
necessary for the display on the panel of the DMX hand held remote control of
the song, title, artist and other descriptive information relating to the music
segment. The parties hereto acknowledge and agree that DMX US shall have no
proprietary interest in the Canadian Channels which shall be reserved and
remain the rights and property of DMX '95.
(c) Compliance with CRTC Decision: DMX '95 and the Affiliates shall
comply with the conditions of the CRTC Decision, and any subsequent decision of
the CRTC or its successor, relating to the manner of distribution of the
Service in the Territory. DMX '95 may increase above thirty (30) the total
number of channels to be provided as the Service in the Territory and the
rights and obligations of the parties hereto as set out in this Agreement shall
not otherwise be affected by such increase in the number of channels provided
as the Service.
(d) Affiliate Distribution: DMX '95 acknowledges that it shall review
from time to time the package of channels offered by its Affiliates to their
Service Subscribers and DMX '95 shall use its best efforts to encourage the
Affiliates to offer a package of channels appropriate for the Affiliate's
particular market of Service Subscribers. In the event an Affiliate is unable
to carry thirty (30) channels or transmit the Service in digital format for
technological reasons, it may carry fewer channels or transmit the Service in
analogue format.
(e) Distinction From Other Music Service: In the event Shaw or the
Affiliates offer to subscribers a Competitive Service, such Competitive Service
shall not be offered, packaged, advertised, promoted or otherwise distributed
by Shaw or the Affiliates in such a manner as to
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identify the Competitive Service as being a part of the Service or in any way
associated with the DMX brand name.
6. ADJUNCT SERVICES
If DMX US wishes to offer, provide, license, distribute, transmit,
deliver or re-transmit any Adjunct Service to Private Residences within the
Territory, it shall give notice (the "Adjunct Service Notice") in writing to DMX
'95 of its intention to do so and set out therein a description of the Adjunct
Service Notice. DMX '95 shall have Forty-five (45) days following the date of
receipt of the Adjunct Service Notice to deliver written notice to DMX US (the
"Adjunct Service Reply") that DMX '95 wishes to obtain the exclusive right to
distribute the Adjunct Service to Private Residences in the Territory. If DMX
'95 delivers the Adjunct Service Reply within such time period set out above,
the parties hereto shall negotiate in good faith, for a period of Sixty (60)
days following receipt by DMX US of the Adjunct Service Reply (the "Negotiating
Period") with respect to all material terms and conditions for a proposed
exclusive license agreement (the "Adjunct Service Agreement") granting to DMX
'95 the exclusive license to distribute the Adjunct Service to Private
Residences in the Territory in conjunction with and in addition to the Service
and the Adjunct Service Agreement shall include a reasonable time period for DMX
'95 to file an application with and obtain the approval of the CRTC, if
required. If DMX '95 has not delivered the Adjunct Service Reply on a timely
basis, or if the parties have not agreed to the material terms and conditions of
the Adjunct Service Agreement within the Negotiating Period, DMX US may, at its
option subject to compliance with all Canadian Regulatory Law: (i) grant the
license for the distribution of the Adjunct Service, but without right to
distribute the same in conjunction with the Service to Private Residences, in
the Territory, to any other person at such material terms and conditions which
are no more favorable to any other person than those offered to DMX '95; or (ii)
distribute the Adjunct Service to Private Residences in the Territory, but it
expressly agrees that it shall not distribute the Service in the Territory
whether in conjunction with the distribution of the Adjunct Service or in any
manner otherwise. DMX '95 acknowledges and agrees that if for any reason it
discontinues its distribution of the Service to Private Residences in the
Territory it shall not continue to have a right of first refusal, as set forth
in this Section 6, with respect to the distribution of the Adjunct Service to
Private Residences in the Territory nor the exclusive license to distribute the
Adjunct Service to Private Residences in the Territory. This right of first
refusal granted herein shall apply to each and every Adjunct Service offered,
developed or licensed by DMX US for transmission, distribution, delivery or
re-transmission to Private Residences in the Territory and is not limited in any
manner whatsoever to any one Adjunct Service, nor is it conditional upon the
acceptance by DMX '95 to distribute any other Adjunct Service in the Territory.
7. TRANSMISSION OF SERVICE
a) Costs of Transmission:
i) DMX US acknowledges and agrees that it shall transmit a minimum
of 70 premium audio music channels in digital format (the "US
Channels") without interruption
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Twenty-four (24) hours a day, Seven (7) days a week on the
Telstar 402R Transponder 15B, the direct broadcast satellite
used by DMX US at the date of this Agreement to transmit the US
Channels (the "402R Satellite") or its successor, the footprint
or reception area of which shall include the cities of
Whitehorse, Yukon, Victoria, British Columbia and Halifax, Nova
Scotia (the "Footprint"). The Footprint shall include all that
area outlined in color on the attached contour map. DMX US shall
maintain the quality and integrity of the transmission of
digital audio signal throughout all the geographic region
included in the Footprint such that there is no material
variance in the quality of the US Channels in the Territory. DMX
US acknowledges and agrees that it shall be solely responsible
for all costs of whatsoever nature incurred in transmitting the
US Channels from the DMX US studio in the United States to the
point of reception at DMX '95's or its Affiliates' land based
reception equipment which shall be in the Footprint and that
such costs shall include, without limitation, the costs of up
linking the US Channels to a satellite transponder, the rental
of the satellite transponder and all other costs incurred in
connection with the use of the satellite transponder. DMX US
may, from time to time, transmit the US Channels on such other
transponder devices as provided in Section 7(f) below subject to
the provisions of this Section 7.
ii) DMX '95 acknowledges and agrees that it shall be solely
responsible for any and all costs whatsoever incurred in
connection with: (A) installing its land based reception
equipment in the Footprint; (B) selecting from the more than 70
US Channels (the "Repackaged US Channels") as determined by DMX
'95 in its sole discretion, and combining the same with the
Canadian Channels to constitute the Service; (C) transmitting
the Canadian Channels from the DMX '95 studio to the point of
reception at the Affiliates' land based reception equipment
located in the Territory including, without limitation, the
costs of up linking the Canadian Channels to a satellite
transponder, the rental of the satellite transponder and all
other costs incurred in connection with the use of the satellite
transponder; (D) transmitting the Repackaged US Channels to the
point of reception at its Affiliates' land based reception
equipment located in the Territory including, without
limitation, the costs of re-up linking the Repackaged US
Channels to a satellite transponder, the rental of the satellite
transponder and all other costs incurred in connection with the
use of the satellite transponder; and (E) whether directly or
through its Affiliates, distributing or re-transmitting the
Service from the point of reception at its and the Affiliates,
land based equipment to Service Subscribers in the Territory.
DMX '95 agrees that it shall maintain the quality and integrity
of the digital audio signal that it receives from DMX US as it
re-transmits the Service to its Affiliates or Service
Subscribers within the Territory.
b) Technical Information to be Provided: DMX US shall provide to DMX '95 in
a timely manner, all information as may be necessary or appropriate
concerning the following matters:
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<PAGE> 14
i) A description, complete with all necessary or appropriate
technical specifications, of the manner in which the US Channels
will be provided to DMX '95, including the identification of the
satellite and transponder number which shall be used for
transmitting the US Channels;
ii) All the technical specifications and information relating to the
land-based equipment, technology and systems which DMX '95
and/or its Affiliates will be required to use for reception,
distribution or re-transmission of the US Channels in the
Territory in accordance with the provisions of this Agreement;
and
iii) All pertinent technical and other information necessary,
appropriate or helpful for the deciphering or unscrambling of
DMX US's encrypted code, it being specifically understood,
however, that nothing in the foregoing provisions shall be
deemed either to give DMX '95 any right in DMX US's proprietary
technology or to require DMX US to provide any information with
respect thereto not required by DMX '95 in order to fulfil its
obligations under this Agreement, or those agreements made
between DMX '95 and its Affiliates.
c) Alternative Distribution of the Service: DMX '95 and its Affiliates may,
in their sole discretion, distribute the Service within the Territory by
means of Alternative Technologies at their sole cost and expense,
subject to the provisions of Section 7(d) hereof. DMX US agrees that it
shall provide DMX '95 with such technical information as DMX US may have
in order to assist DMX '95 and its Affiliates with such distribution by
means of Alternative Technologies.
d) Changes in Reception System: Notwithstanding the provisions of Section
7(c) above, DMX US acknowledges and agrees that it shall be solely
responsible for all costs incurred by DMX '95 and the Affiliates if,
during the Term, DMX '95 and, or the Affiliates are required to make
any changes or modifications to or replacements of, in any manner
whatsoever, its or their reception and decoding equipment, technology or
systems in order to make such equipment, technology or systems capable
of receiving the US Channels from any Alternative Technology employed by
DMX US to transmit the US Channels to the Territory other than the
method or format of transmission from the 402R Satellite utilized by DMX
US at the date of this Agreement. If there is any such requirement to
modify or replace the reception and decoding equipment, technology or
system, DMX US shall immediately deliver to DMX '95 written notice
thereof in reasonable detail explaining what modifications or
replacements must be made, together with a written proposal outlining a
reasonable time period within which it shall make such payments arising
hereunder to DMX '95. DMX US shall ensure at its own cost and expense
that the transmission format utilized by it will be compatible at all
times during the Term with the reception and decoding equipment,
technology or systems purchased and utilized by DMX '95 or the
Affiliates, and that regardless of what technology, system or method DMX
US employs to transmit the US Channels to the Territory, DMX US shall
maintain the quality and integrity of the
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<PAGE> 15
transmission of the digital audio signal.
e) Interruption in Transmission of Service: With respect to the
interruption or interference in the transmission of the US Channels to
the Territory DMX US and DMX '95 agree as follows:
(i) Involuntary Minor Interruption: If there is an Involuntary Minor
Interruption during the Term, DMX '95 may, at its option and
without notice, withhold billing, collecting and paying all the
service fees which would otherwise be accruing and payable to
DMX US for the period of the Involuntary Minor Interruption
until the end of the Involuntary Minor Interruption (provided
DMX '95 credits the Affiliates affected by the Involuntary Minor
Interruption for such service fees payable by the Affiliate)
notwithstanding any provision in this Agreement to the contrary.
DMX '95 shall not have any other rights or remedies available at
law or equity against DMX US as a result of such Involuntary
Minor Interruption.
(ii) Involuntary Major Interruption: If there is an Involuntary Major
Interruption during the Term, the provisions of Section 19
hereof shall apply subject to the obligations of the parties
hereto set out in this subsection (e)(ii), and DMX '95 may, at
its option and without notice: (A) withhold billing, collecting,
and paying all the service fees which would otherwise be
accruing and payable to DMX US for the period of the Involuntary
Major Interruption until the end of the Involuntary Major
Interruption, if applicable, (provided DMX '95 credits the
Affiliates affected by the Involuntary Major Interruption for
such service fees payable by the Affiliate) notwithstanding any
provision contained in the Agreement to the contrary; and (B)
offer a Competitive Service to any Private Residence located in
the Territory in accordance with the provisions set out in
Section 4 hereof.
Notwithstanding such Involuntary Major Interruption, if an
alternate satellite exists such that DMX US is technically able
to re-transmit the US Channels to the Territory, DMX US shall
engage in good faith prior consultations with DMX '95 regarding
utilizing such alternate satellite and shall make commercially
reasonable efforts to utilize such alternate satellite within a
reasonable time period following the commencement of the
Involuntary Major Interruption. If such an alternate satellite
is not available and there exists an Alternative Technology to
re-transmit the US Channels to the Territory, which would not
reduce the quality and integrity of the transmission of the
digital audio signal from that maintained prior to such
Involuntary Major Interruption, DMX US shall engage in good
faith prior consultations with DMX '95 regarding using such
Alternative Technology and shall make commercially reasonable
efforts to use such Alternative Technology to re-transmit the US
Channels to the Territory. If the Involuntary Major Interruption
continues for a period greater than or equal to Thirty (30)
consecutive calendar days, then the rights and obligations set
out in this Agreement shall be suspended for a
12
<PAGE> 16
maximum period of Three Hundred and Sixty-Five (365) from the
first date of such Involuntary Major Interruption (the
"Suspension Period") such that the provisions of Section 19
hereof shall apply without qualification and the parties hereto
shall be relieved of observing and performing their respective
obligations hereunder without liability therefor, excepting only
the obligation of DMX '95 to pay to DMX US any service fees
outstanding for period prior to the Suspension Period and any
obligations of either party arising under this Section. DMX '95
shall have the right, in its absolute and sole discretion, to
terminate the Agreement at any time during the Suspension Period
without any liability therefor. If after the expiry of the
Suspension Period DMX US fails to re-transmit the US Channels to
the Territory using any manner of technology or systems
whatsoever, then this Agreement shall be terminated without
liability of either party therefor. Notwithstanding such
termination, the parties hereto agree that DMX '95 shall
maintain the right of first negotiation during the remainder of
the unexpired portion of the Term for the exclusive right to
distribute the Service in the Territory such that if DMX US is
able to re-transmit the US Channels to the Territory using any
manner of technology or systems whatsoever after the expiry of
the Suspension Period, it shall so notify DMX '95 in writing and
the parties shall engage in diligent and good faith negotiations
for the commencement of the transmission of the US Channels to
the Territory. The provisions of this Section shall survive the
expiration of the Term or early termination of this Agreement.
(iii) Voluntary Minor Interruption: If there is a Voluntary Minor
Interruption in the transmission of the US Channels to the
Territory during the Term, then: (A)DMX US shall give notice to
DMX '95 in writing of the same Forty-five (45) days prior to the
commencement of such interruption, unless such interruption is
unavoidably imminent in which case DMX US shall give written
notice to DMX '95 as soon as reasonably possible; and (B) DMX
'95 may, at its option and without notice, withhold billing,
collecting, and paying all the service fees which would
otherwise be accruing and payable to DMX US for the period of
the Voluntary Minor Interruption until the end of the Voluntary
Minor Interruption (provided DMX '95 credits the Affiliates
affected by the Voluntary Minor Interruption for such service
fees payable by the Affiliate) notwithstanding any provision in
this Agreement to the contrary. Following completion of the
Voluntary Minor Interruption, DMX US shall continue to transmit
the US Channels to the Territory. DMX '95 shall not have any
other rights or remedies available at law or equity against DMX
US as a result of such Voluntary Minor Interruption, except only
that the indemnity granted by DMX US in favor of DMX '95 as set
out in Section 18(d) hereof shall apply hereto.
(iv) Voluntary Major Interruption: If there is a Voluntary Major
Interruption in the transmission of the US Channels to the
Territory during the Term, then: (A) DMX US shall give notice to
DMX '95 in writing of the same Forty-five (45) days prior to the
commencement of such interruption, unless such interruption is
unavoidably
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<PAGE> 17
imminent in which case DMX US shall give written notice to DMX
'95 as soon as reasonably possible; and (B) DMX '95 may, at its
option and without notice; (1) withhold billing, collecting and
paying all the service fees which would otherwise be accruing
and payable to DMX US for the period of the Voluntary Major
Interruption (provided DMX '95 credits the Affiliates affected
by the Voluntary Major Interruption for such service fees
payable by the Affiliate) until: (a) the end of the Voluntary
Major Interruption, if applicable; or (b) such time as DMX '95
has recovered the direct costs it and the Affiliates have
incurred as a result of: (i) not being able to provide the
Service in the Territory for the period of the Voluntary Major
Interruption; and (ii) re-establishing the distribution of the
Service in the Territory following such Voluntary Major
Interruption, as reasonably determined by DMX '95, in its sole
discretion, including, without limitation, the costs incurred by
DMX '95 to realign its and the Affiliates' receiving equipment,
if any, notwithstanding any provision in this Agreement to the
contrary excepting only the provisions of Section 7(f) hereof;
and (2) DMX '95 may offer a Competitive Service to any Private
Residence located in the Territory in accordance with the
provisions set out in Section 4 hereof. The indemnity granted by
DMX US in favor of DMX '95 as set out in Section 18(d) shall
apply hereto.
Notwithstanding such Voluntary Major Interruption, if an
alternate satellite exists such that DMX US is technically able
to re-transmit the US Channels to the Territory, DMX US shall
engage in good faith prior consultations with DMX '95 regarding
utilizing such alternate satellite and shall make commercially
reasonable efforts to utilize such alternate satellite within a
reasonable time period following the commencement of the
Voluntary Major Interruption. If such alternate satellite is not
available and there exists an Alternative Technology to transmit
the US Channels to the Territory, which would not reduce the
quality and integrity of the transmission of the digital audio
signal from that maintained prior to such Voluntary Major
Interruption, DMX US shall engage in prior consultations with
DMX '95 regarding using such Alternative Technology and shall
make commercially reasonable efforts to use such Alternative
Technology to transmit the US Channels to the Territory. If the
Voluntary Major Interruption continues for a period greater than
or equal to Thirty (30) consecutive calendar days, then the
obligations of the parties set out in this Agreement shall be
suspended for a maximum period of Three Hundred and Sixty-Five
(365) days from the first date of such Voluntary Major
Interruption (the "Suspension Period") such that the parties
shall be relieved from observing and performing their
obligations hereunder without liability therefor, excepting only
the obligation of DMX '95 to pay to DMX US any service fees
outstanding for periods prior to the Suspension Period and any
obligations of either party arising under this Section and
Section 18. DMX '95 shall have the right, in its absolute and
sole discretion, to terminate this Agreement at any time during
the Suspension Period without any liability therefor. If after
the expiry of the Suspension Period DMX US fails to transmit the
US Channels to the Territory using any manner of technology or
14
<PAGE> 18
systems whatsoever, then this Agreement shall be terminated.
Notwithstanding such termination, the parties hereto agree that
DMX '95 shall maintain the right of first negotiation during
the remainder of the unexpired portion of the Term for the
exclusive right to distribute the Service in the Territory such
that if DMX US is able to transmit the US Channels to the
Territory using any manner of technology or systems whatsoever
after the expiry of the Suspension Period, it shall so notify
DMX '95 in writing and the parties shall engage in diligent and
good faith negotiations for the commencement of the
transmission of the US Channels to the Territory. The
provisions of this section shall survive the expiration of the
Term or the early termination of this Agreement.
(f) Satellite Transition: Notwithstanding any provision in Section 7(e)
above to the contrary, DMX US may transmit the US Channels to the
Territory using another satellite subject to the provisions hereof. It
is the intention of the parties hereto that in the event of a change of
a satellite by DMX US other than as set out in this Section 7(f), DMX US
shall be responsible, at its sole cost and expense, for the direct costs
incurred by DMX '95 and the Affiliates in connection with the
realignment of DMX '95's and the Affiliates' receiving equipment in
order that it may receive the modified digital audio signal transmitted
from such alternate satellite. DMX '95 shall be responsible, at its sole
cost and expense, for the realignment of its receiving equipment if, and
only if: (i) DMX US transmits the US Channels on an alternate satellite
as a result of the expiration of the scheduled operating life of the
402R Satellite or its successor: and (ii) on one occasion only during
the scheduled operating life of the 402R Satellite DMX US elects to
change the satellite used to transmit the US Channels for any reason
whatsoever. DMX US shall deliver written notice to DMX '95, if possible,
of such satellite transition as contemplated in this Section 7(f) at
least Forty-five (45) days in advance, and shall provide DMX '95 and the
Affiliates with Sixty (60) consecutive calendar days of overlap of
transmission using both the 402R Satellite and its successor satellite,
and subsequently with such other alternate satellites, in order than DMX
'95 may coordinate and complete the realignment of its receiving
equipment necessary to receive the digital audio signal transmitted from
such successor satellite(s).
8. DELIVERY AND DISTRIBUTION OF THE SERVICE
a) Subscriber Equipment: DMX US and DMX '95 acknowledge and agree that the
Affiliates shall provide by way of lease or sale to each Service
Subscriber any and all equipment as required for reception of the
Service at Private Residences.
b) No Additions, Deletion, etc.: Subject to the provisions of Section 5
regarding the exclusive right of DMX '95 to program the Canadian
Channels, DMX '95 and its Affiliates shall distribute the US Channels
together with the accompanying program data throughout the Territory
without deletion, alteration, editing or amendment, unless required to
do so to comply with Canadian Regulatory Law and any other applicable
law or regulation of any authority having jurisdiction.
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<PAGE> 19
c) Payment Required: Except with respect to any Approved Purpose, as
hereinafter set out, DMX '95 and the Affiliates shall
distribute or deliver the Service only to Service Subscribers who pay a
fee therefor.
d) Private Use or Recording: Nothing in this Agreement shall be deemed to
authorize DMX '95, or the Affiliates to record the US Channels
for their private use or to install recording devices for the purposes
of so doing. DMX '95 shall not have any liability to DMX US for the
unauthorized recording of the Service by the Affiliates or the Service
Subscribers.
9. SERVICE FEES
DMX '95 and its Affiliates shall have the option to distribute the
Service to Service Subscribers as a Basic Service or a Discretionary Service.
In addition, DMX '95 and its Affiliates may offer a Premium Tier supplementary
to the Service. "Basic Service" means the delivery of the Service to Service
Subscribers as part of a package of services for which no separate charge is
made. "Discretionary Service" means the delivery of the Service to Service
Subscribers sold on a "stand alone" basis for which there is a separate charge.
Premium Tier means the delivery of a selection of Canadian Channels and US
Channels in addition to the Basic Service and sold as a separate package from
the Basic Service for which there is a separate charge.
1) (i) Basic Service Fees: DMX '95 shall pay to DMX US each month
during the Term through August 31, 2002, a service fee (the
"Basic Fee") for the Basic Service consisting of Fifteen (15)
(or fewer) US Channels [***] US multiplied by the number of
Private Residences in the Territory to which DMX '95 and its
Affiliates distribute the Basic Service during such month; or
[***] to DMX '95 by its Affiliate for the Service.
(ii) Discretionary Service: DMX '95 shall pay to DMX US each month
during the Term a service fee (the "Discretionary Fee") equal
to:
(A) If DMX '95 records during such month, either directly
or through its Affiliates, [***] Service Subscribers,
[***] of the fees paid by the Service Subscribers, if
directly, or the Affiliates, if indirectly, to DMX '95
for such Discretionary Service; and
(B) If DMX '95 records and maintains during such month,
either directly or through its Affiliates, [***]
Service Subscribers, [***] of the fees paid by the
Service Subscribers, if directly, or the Affiliates, if
indirectly, to DMX '95 for such Discretionary Service.
The parties hereto agree that the minimum monthly fee payable
by the Affiliates to DMX '95 shall be [***]
*** Confidential portions omitted and filed separately with the Securities
and Exchange Commission pursuant to a request for confidential
treatment.
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<PAGE> 20
of the Discretionary Service.
(iii) FM Band Delivery: DMX '95 shall pay to DMX US each month during
the Term a service fee of:
(A) [***] of the FM Band Service which consists of five (5)
or fewer US Channels; and
(B) [***] for each US Channel that a subscriber receives of
the FM Band Service [***]
The service fee payable hereunder are only applicable to those
subscribers receiving the FM Band Service.
(iv) Premium Tier: In the event that DMX '95 desires to offer a
Premium Tier to Service Subscribers, the parties agree to
negotiate in good faith with respect to the service fee payable
by DMX '95 to DMX US for such Premium Tier. Notwithstanding
anything to the contrary contained herein. DMX '95 shall not
offer a Premium Tier or any other tier or level of the Service
to Service Subscribers unless and until the parties agree in
writing with respect to the fees payable by DMX '95 to DMX US
for such level of service.
The amount of the service fees payable under this Section 9(a) and
otherwise in this Section shall be determined by DMX '95 and a statement
including reasonable detail as to the calculation thereof shall be
delivered to DMX US in accordance with Section 10 hereof.
b) Time For Payment: The service fees payable by DMX '95 to DMX US
hereunder shall be paid not later than Forty-five (45) days after the
end of the respective calendar month for which they are payable. If any
fees described in this section remain unpaid Five (5) business days
after the due date, the delinquent amount shall accrue interest at the
rate of 1 1/2% per month, being 18% per annum, or the highest lawful
rate, whichever is less, from the due date until payment is received by
DMX US, as the case may be. DMX '95 shall be liable for all reasonable
costs and expenses (including, without limitation, reasonable counsel
fees and arbitration or Court costs) in connection with the collection
of any overdue amount.
c) Payment in American Dollars: All payments made by DMX '95 hereunder to
DMX US shall be made in American Dollars.
d) Service Fee Renegotiation: Subject to the provisions of Section 9(e),
the rates for the service fees payable by DMX '95 to DMX US set forth in
Section 9(a), shall be effective for a Five (5) year period commencing
on September 1, 1997 and ending on August 31, 2002. The parties agree to
negotiate diligently and in good faith commencing on March 1, 2002 with
*** Confidential portions omitted and filed separately with the Securities
and Exchange Commission pursuant to a request for confidential
treatment.
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<PAGE> 21
respect to the service fees ("New Rate") to be payable by DMX '95 after
August 31, 2002. Until such time as the parties hereto agree to New Rate,
the Basic Fees set forth in Section 9(a) shall continue in full force and
effect. In the event that the parties are unable to agree upon such New
Rate by August 31, 2003, the New Rate shall be an increase: [***] of the
then current rate for the Basic Service Fee commencing on September 1, 2002
and on each anniversary date thereof during the term, if there is no change
in the condition of the license regarding the ratio of Canadian Channels to
US Channels from those set out in the CRTC Decision or (ii) if there is a
change in the condition of the CRTC license renewal regarding the ratio of
Canadian Channels to US Channels from those set out in the CRTC Decision
which change requires the Service to be comprised of more Canadian Channels
than US Channels, by [***] on the Basic Service Fee of [***] US multiplied
by the number of US Channels included in the Service on and after September
1, 2002 for the first such year and thereafter on each anniversary date
thereof until the end of the Term by [***] provided that in no event shall
the New Rate be less than [***] US for the Basic Service Fee. The New Rate
shall be retroactive to the effective date of the change of the condition
of the license as established by the CRTC and the parties hereto shall make
such adjustment payments as required within Ninety (90) days following the
determination of the New Rate.
e) Service Fee Exemption: Notwithstanding anything to the contrary contained
in this Agreement. DMX '95 and the Affiliates may transmit, distribute,
re-transmit or deliver the Service to Promotional or Demonstration
Receivers, in both cases, at the option of DMX '95, acting reasonably,
[***] for the distribution of the Service to the Promotional Receivers or
the Demonstration Receivers, [***] with respect thereto and [***], DMX '95
shall report on a quarterly basis to DMX US the names and locations of the
Demonstration Receivers and Promotional Receivers and the durations for
which they were offered and DMX US may question such terms if they appear
to it to be unreasonable. DMX '95 may also provide "trial" periods for
potential Affiliates for a period not to exceed Ninety (90) days with
respect [***] from the potential Affiliate for such "trial" period, and
further provided that each potential Affiliate [***].
10. REPORTS AND RECORDS
a) Books, Records and Audits: DMX '95 shall keep accurate and complete books
and records of billings, numbers of Private Residences, retired accounts,
monthly service fee charges, interruptions or other failure in the delivery
of the Service and all other records for each Affiliate necessary to sub-
stantiate the number of Private Residences served on the first and last days
of each month and the calculation of the monthly service fee. All such
records relating to the foregoing shall be kept in accordance with generally
accepted accounting principles and the most recent Three (3) calendar years
of such records shall be available for
*** Confidential portions omitted and filed separately with the Securities
and Exchange Commission pursuant to a request for confidential
treatment.
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<PAGE> 22
inspection, copy and audit (collectively, the "Inspection") by DMX US or
its representatives, at its own expense, on at least two weeks notice to
DMX '95 during normal business hours throughout the Term, and for three
(3) years thereafter. The right of DMX US to conduct any Inspection
shall be limited to only one opportunity during any 365 days period, and
shall be conducted as to any statement delivered in accordance with
Section 10(b) below within 3 years from the date of such statement.
b) Monthly accounting statements: DMX '95 shall, within Sixty (60) days
following the calendar month end provide DMX US with a statement
containing the calculation of the service fees payable by DMX '95 for
such earlier month pursuant to this Agreement and such additional
account and statistical information as may be reasonably required by DMX
US to monitor the number of Private Residences served by DMX '95 and the
service fees payable to DMX US pursuant to Section 9.
c) Dispute: If any Inspection of DMX '95's records reveals that DMX '95 has
underpaid any monthly service fee or other amount payable hereunder, DMX
US shall provide DMX '95 with written notice thereof setting out in
reasonable detail an invoice for any balance owing to DMX US and the
reasons therefor. DMX '95 shall have the right to review the report of
the Inspection and satisfy itself, in its absolute and sole discretion,
as to the findings thereof. If DMX '95 concurs with the findings of the
Inspection it shall pay DMX US the amount of such underpayment within
Ten (10) days of the date of the invoice therefor. If DMX '95 shall
dispute the findings of the Inspection it shall provide DMX US with a
written notice thereof within Ten (10) days of the date of the invoice
therefor explaining in reasonable detail the reasons for such dispute.
The parties hereto agree that they shall negotiate in good faith the
amount of the underpayment, if any, failing which the matter shall be
resolved by arbitration pursuant to Section 23(l) hereof. The remedies
set forth in this paragraph shall be limited to a period of three (3)
years from the date of such underpayment.
11. COLLECTIONS
DMX '95 shall be responsible for billing and using commercially
reasonable efforts to collect all amounts due from the Affiliates.
12. PAYMENT OF TAXES
DMX '95 or the Affiliates, as the case may be, shall be responsible for
collecting and paying any income, franchise, sales, use, occupational, general
service, value added, or other taxes, assessments, licenses or other charges
assessed, levied, or imposed by any government, agency or regulatory body
having jurisdiction within the Territory with respect to DMX '95's distribution
of the Service in the Territory.
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<PAGE> 23
13. MUSIC PERFORMANCE AND OTHER MUSIC RIGHTS
DMX US shall not be responsible for nor pay the Canadian Rights Payment
arising out of the delivery and distribution of the Service in the Territory.
14. RESEARCH
a) Each Party to Provide Information: DMX US shall provide DMX '95 with
free access to and the right to use, pursuant to the terms hereof, all
research and marketing information pertaining to the operation of the
Service internationally, except where providing such information would
violate any agreement DMX US may have with any third party. Any and all
such information shall be provided by DMX US subject to DMX '95 paying
DMX US for the costs of reproducing and shipping materials, or any other
out-of-pocket costs which DMX US may incur in making such information
available to DMX '95. DMX '95 shall provide DMX US with free access to
and the right to use, pursuant to the terms hereof, all research and
marketing information pertaining to the provision of the Service in the
Territory except where providing such information would violate any
agreement DMX '95 may have with any third party. Any and all such
information shall be provided by DMX '95 to DMX US upon receipt of a
written request therefor, subject to DMX US paying DMX '95 for the costs
of reproducing and shipping materials, or any other out-of-pocket costs
which DMX '95 may incur in making such information available to DMX US.
Notwithstanding the foregoing, neither party hereto shall be obligated
to provide the other with any materials which are considered by it to be
confidential in nature or relate to its particular business plan.
b) Other Research: DMX US may from time to time, wish to undertake
marketing tests and surveys, ratings polls and other research in
connection with the distribution of the Service or the Adjunct Services.
With respect to any tests, surveys or research which applies to the
Territory or a portion thereof, DMX US shall provide DMX '95 with
written notice Two (2) weeks in advance, setting out the nature and
scope of each such project and DMX '95 shall, to the extent permitted by
applicable law, cooperate in such project by rendering such assistance
as DMX US may reasonably request and which DMX '95 can reasonably
provide, it being understood that the cost of which assistance shall be
borne solely by DMX US. DMX US shall treat the Service Subscriber lists
received from DMX '95 or any of the Affiliates in connection with such
research as confidential and the sole and exclusive property of DMX '95
and shall use such information solely for the purpose of conducting such
marketing research. DMX US shall provide DMX '95 with the results of
such research immediately upon the completion thereof.
15. PROPRIETARY MARKS
a) Rights in Proprietary Marks: DMX US hereby grants to DMX '95 the
exclusive royalty-free license to use and display in connection with and
only in connection with, DMX '95's
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<PAGE> 24
offering of the Service and any Adjunct Service offered according to
the terms of this Agreement, the trademarks, trade names, logo types,
insignia, designs and service marks (collectively, the "Proprietary
Marks") designated, from time to time, by DMX US as the Proprietary
Marks, including, as of the date hereof, the marks "Digital Music
Express", "DMX" and all marks or trade names containing the term "DMX"
including "DMX CANADA" and the DMX logo. Notwithstanding anything in
this Section 15 to the contrary, DMX US agrees that it shall not grant
during the Term the right or license to use or display the Proprietary
Marks in the Territory to any party other than DMX '95, or its
Affiliates. DMX US further grants to DMX '95 the exclusive right to
use, solely in accordance with the terms hereof, the "DMX" mark as part
of DMX '95's trade name, or corporate name in connection with, and only
in connection with, DMX '95's offering of the Services and any Adjunct
Services offered according to the terms of this Agreement. DMX '95
acknowledges the ownership of the Proprietary Marks by DMX US, and the
ownership by DMX US of the goodwill associated therewith and agrees
that it will do nothing inconsistent with such ownership and that all
use of the Proprietary Marks by DMX '95 shall enure to the benefit of
and be on behalf of DMX US with the exception of the rights and
benefits to which DMX '95 is entitled pursuant to this Agreement. DMX
'95 agrees further that nothing in this Agreement shall give DMX '95
any right, title or interest in the Proprietary Marks other than in
accordance with this Agreement and DMX '95 agrees that it will not
attack the title of DMX US to the Proprietary Marks or attack the
validity of this Agreement.
b) Acknowledgement of Rights: DMX '95 covenants to execute such agreements
and other documents which DMX US reasonably deems necessary to maintain
or preserve DMX US's interest in the Proprietary Marks, provided
that the form of any such document shall be agreed upon by DMX '95 and
DMX US.
c) Quality Standards and Samples: DMX '95 may use the Proprietary Marks in
such manner as it may determine provided that any such use shall not, in
the opinion of DMX US, acting reasonably, detract from the good will
associated with such Proprietary Marks in the United States and in the
Territory. DMX '95 agrees to review a copy of the policies and
procedures manual established by DMX US with respect to the use of the
Proprietary Marks immediately following execution of this Agreement and
it shall report to DMX US within a reasonable time any exceptions by it
in its use of the Proprietary Marks.
d) Protection of Proprietary Marks: The parties shall cooperate in
developing procedures necessary and appropriate for the protection of
the Proprietary Marks in the Territory including, without
limitation, in connection with the use of display of the Proprietary
Marks by the Affiliates.
e) Form of Use:
(i) DMX '95 and its Affiliates shall use the Proprietary Marks only
in the form and manner and with appropriate legends as
prescribed herein or additionally from time
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<PAGE> 25
to time by DMX US and not to use any other trademark, trade
name, logo type, insignia, copyright, design, service mark or
trade name in combination with any Proprietary Mark without
prior written approval of DMX US. Notwithstanding the foregoing,
DMX '95 and its Affiliates may use the Proprietary Marks in
association with their own positioning statements, trade names,
logo types, insignia, copyright, design or trade marks without
the prior written approval of DMX US, provided that such use
does not detract from the goodwill associated with the
Proprietary Marks in the United States or Canada.
ii) DMX '95 and its Affiliates shall not at any time apply for any
registration of any trademark or other designation which would
affect the ownership of any Proprietary Mark nor file any
document with any governmental authority to take any action
which would affect the ownership of any Proprietary Mark.
iii) DMX '95 and its Affiliates shall not use or permit the use of
the Proprietary Marks in any unlawful or deceptive manner or in
any way that shall directly or indirectly tend to impair or
lessen the value of the Proprietary Marks.
f) Infringement Proceedings: If DMX '95 becomes aware of any unauthorized
use of any other Proprietary Marks by third parties, it shall
immediately notify DMX US of such unauthorized use. DMX US shall have
the sole right and discretion to take whatever action it deems
necessary, at its sole cost, to deal with such unauthorized use.
16. MARKETING AND PROMOTION
DMX '95 shall require that the Affiliates: (a) use reasonable commercial
efforts to market and promote the Service and if applicable, the Adjunct
Services, to Private Residences within the Territory at all times during the
Term; (b) shall not cease distribution, marketing or promotional efforts of the
Service in the Territory during the Term unless required by law, regulation or
by any authority having jurisdiction; and (c) use best commercial reasonable
efforts to promote the DMX brand name. DMX '95 and DMX US shall provide to the
other party upon request thereof, at no cost, copies of all materials relating
to the marketing or promotion of the Service, including, without limitation,
print ads, radio and television commercials, brochures, literature, training
programs and sales kits, and the party receiving such materials shall have the
right to reproduce, and alter (except that the Proprietary marks shall not be
altered) such materials for its own use in the marketing or promotion of the
Services.
17. TERMINATION, OBLIGATIONS UPON TERMINATION OR EXPIRATION
A) Right to Terminate: If either DMX US or DMX '95 commits a substantial
breach of any covenant or condition contained in this Agreement
(substantial being understood to include but not limited to all matters
related to payments, minimum obligations and covenants and warranties)
on its part to be performed, and such breach shall not be remedied
within Sixty
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<PAGE> 26
(60) days after receipt of written notice thereof, then this Agreement
shall, at the option of the party claiming breach, be deemed terminated
on the effective date set out in such written notice. If DMX '95 fails
to obtain any renewal or extension of the CRTC Decision such that it no
longer holds a license from the CRTC or its successor to offer the
Service in the Territory, DMX '95 may, at its option, terminate this
Agreement without liability therefor and this Agreement shall thereafter
be of no force or effect.
b) Obligations Upon Termination or Expiration: Upon expiration, or in the
event of termination for any cause, including but not limited to those
specified above, DMX '95 shall (i) permanently cease using the
Proprietary Marks as defined in Section 15; (ii) permanently cease using
any trademark, trade name, service mark or other designation similar to
the Proprietary Marks; (iii) make all alterations necessary to
distinguish its business from any identity with DMX US; (iv) immediately
return to DMX US all technical research and marketing materials, files
and all other information or materials provided by DMX US or developed
from materials provided by DMX US and related to the Service or any
Adjunct Services; (v) render up or destroy, at the sole option of DMX
US, any material and means for producing material bearing the
Proprietary Marks; (vi) immediately cancel any registrations for its
corporate name, or trade name which may include the Proprietary Marks
or any component thereof; and (vii) cease using any trade name which
may include the Proprietary Marks or any component thereof.
c) Effect of Expiration or Termination: Upon the expiration or earlier
termination of this Agreement, all rights granted to DMX '95 hereunder,
shall immediately terminate and revert to DMX US, and DMX '95 shall
undertake such further action as required to effect such reversion.
18. WARRANTIES AND INDEMNITIES
a) DMX US's Warranties: DMX US represents and warrants to DMX '95 effective
as of the date of this Agreement and throughout the Term as follows: (i)
DMX Inc. is a corporation duly organized and validly existing under the
laws of the State of Delaware; (ii) DMX US has the right to grant the
rights granted hereunder to DMX '95, and DMX US shall not grant such
rights in the Territory to any other person or entity during the Term,
subject to the provisions of Section 7 hereof; (iii) DMX US has the
power and authority to enter into this Agreement and has taken all
necessary action to authorize the execution and delivery of the same and
the consummation of the transactions contemplated herein; (iv) DMX US is
under no contractual or other legal obligation which shall in any way
interfere with its full, prompt and complete performance hereunder (or
to the extent that there are such obligations, DMX US shall promptly
obtain any and all consents necessary to permit DMX US to fully,
promptly and completely perform hereunder); (v) the individual executing
this Agreement on behalf of DMX US has the authority to do so; (vi) DMX
US is in full compliance with all laws, including all rules and
regulations to which it is subject; (vii) neither the US Channels, any
program related thereto, or any component thereof is subject to, or the
subject
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<PAGE> 27
of, any lien, encumbrance, charge, lis pendens, or litigation pending or
threatened which would affect, in any way, the ability of DMX US to
observe and perform its obligations under this Agreement; (viii) the
obligations created by this Agreement, insofar as they purport to be
binding on DMX US, constitute valid and binding obligations of DMX US
enforceable against it in accordance with their terms; (ix) the methods
utilized by DMX US for recording and transmitting the US Channels do not
violate any applicable law, regulation or ordinance or the rights of any
third party; (x) neither the performance nor observance of any
obligations of DMX US under this Agreement, nor the programming or
transmission of the US Channels by DMX US, to the Territory, nor any
other rights or materials provided by DMX US to DMX '95 hereunder, shall
violate any third party rights, including, without limitation, any
confidentiality, intellectual property, copyright, trademark, trade
name, service mark, patent, statutory or equitable right of any person
whatsoever or otherwise give rise to civil or criminal liability or to
any additional payment of fees by DMX '95 to any copyright owner or
collective, association or other body, other than as expressly provided
in this Agreement, licensed to collect such payments on behalf of the
copyright owner on account of the use of the copyrighted materials
whether related in any way whatsoever to the US Channels, the
Proprietary Marks, the Adjunct Services, if applicable, or any other
rights or privileges granted herein; (xi) the transmission of the US
Channels is, and shall be during the Term, fully compatible and
functional with the reception and decoding equipment or technology
provided to DMX '95 or the Affiliates pursuant to this Agreement,
subject to the condition that such equipment and technology is
manufactured, used and maintained in accordance with each of their
respective operational, functional and technical specifications that
have been agreed to between DMX US and such manufactures thereof; and
(xii) DMX US has the exclusive right, title and interest in and to the
Proprietary Marks and the goodwill associated therewith. The foregoing
representations and warranties shall survive the expiration or earlier
termination of this Agreement.
b) DMX '95's Warranties: DMX '95 represents and warrants to DMX US
effective as of the date of this Agreement and throughout the Term as
follows: (i) DMX '95 is a body corporate duly organized and validly
existing under the laws of Canada; (ii) DMX '95 has the authority to
enter into this Agreement and has taken all necessary action to
authorize the execution and delivery of the same and the consummation of
the transactions contemplated herein; (iii) DMX '95 is under no
contractual or other legal obligation which shall in any way interfere
with its full, prompt and complete performance hereunder (or to the
extent that there are such obligations, DMX '95 shall promptly obtain
any and all consents necessary to permit DMX '95 to fully, promptly and
completely perform hereunder); (iv) the individual executing this
Agreement on behalf of DMX '95 has the authority to do so; (v) DMX '95
is in full compliance with all laws to which it or its affiliates or
subsidiaries are subject; (vi) the obligations created by this
Agreement, insofar as they purport to be binding on DMX '95, constitute
valid and binding obligations of DMX '95 enforceable against it in
accordance with their terms; (vii) the methods utilized by DMX '95 for
recording and transmitting the Canadian Channels do not violate any
applicable law, regulation or ordinance or the rights of any third
party; and (viii) neither the performance nor observance of any
obligations of
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<PAGE> 28
DMX '95 under this Agreement, nor the programming or transmission of the
Canadian Channels by DMX '95 to the Territory shall violate any third
party rights, including, without limitation, any confidentiality,
intellectual property, copyright, trademark, trade name, service mark,
patent, statutory or equitable right of any person whatsoever or
otherwise give rise to civil or criminal liability or to any additional
payment of fees by DMX US to any copyright owner or collective,
association or other body, other than as expressly provided in this
Agreement, licensed to collect such payments on behalf of the copyright
owner on account of the use of the copyrighted materials whether related
in any way whatsoever to the Canadian Channels. The foregoing
representations and warranties shall survive the expiration or earlier
termination of this Agreement.
c) DMX '95's Indemnification: DMX '95 shall indemnify and forever hold
harmless DMX US, DMX US's affiliates, subsidiaries, successors and
assigns and their respective officer, directors, employees and agents
(the "DMX US Parties") from any and all liabilities, losses, damages,
claims, actions, suits, costs, expenses and disbursements of whatsoever
kind and nature including, without limitation, reasonable legal fees and
expenses on a solicitor and his client basis which arise in connection
with or result from: (i) the incorrectness of any representation or
breach of any warranty of DMX '95 contained in this Agreement; (ii) the
breach by DMX '95 of any of its covenants or agreement contained in this
Agreement or its failure to observe and perform any of its obligations
or covenants hereunder; (iii) the distribution, promotion or marketing
of the Service by DMX '95, pursuant to (and as permitted by) this
Agreement; and (iv) the Canadian Rights payment obligations arising out
of the delivery and distribution of the Canadian Channels in the
Territory. The foregoing indemnification shall survive the expiration or
earlier termination of this Agreement.
d) DMX US's Indemnification: DMX US shall indemnify and forever hold
harmless DMX '95, Shaw, its affiliates, as that term is defined in the
Companies Act, British Columbia, the Affiliates and all of their
respective successors, assigns, officers, directors, employees and
agents (collectively, the "DMX '95 Parties") from any and all
liabilities, losses, damages, claims, actions, suits, costs, expenses
and disbursements of whatsoever kind and nature including, without
limitation, reasonable legal fees and expenses on a solicitor and his
client basis which arise in connection with or result from: (i) the
incorrectness of any representation of breach of any warranty of DMX US
contained in this Agreement; (ii) the breach by DMX US of its covenants
or agreements contained in this Agreement or its failure to observe and
perform any of its obligations or covenants hereunder; (iii) a Voluntary
Major Interruption in the transmission of the US Channels to the
Territory, including, without limitation, all direct losses and costs
arising in connection with the realignment, modification, alteration or
change made to the reception equipment, technology or system used by DMX
'95 or its Affiliates to distribute the Service in the Territory or to
receive the digital audio signal transmitted by DMX US; and (iv) a
Voluntary Minor Interruption in the transmission of the US Channels to
the Territory, including, without limitation, all direct losses and
identifiable costs arising in connection with the realignment,
modification, alteration, or change made to the reception equipment,
technology or system used by DMX '95 or the Affiliates to
25
<PAGE> 29
distribute the Service in the Territory or to receive the digital audio
signal transmitted by DMX US. The foregoing indemnification shall
survive the expiration or earlier termination of this Agreement.
e) Notice of Claims: In connection with any indemnification provided in
this Agreement, each party shall so indemnify the other only if such
other party claiming indemnity shall give the indemnifying party prompt
notice of any claim or litigation to which its indemnity applies; it
being agreed that the indemnifying party shall have the right to assume
the defence of any or all claims or litigation to which its indemnity
applies and that the indemnified party will cooperate fully (at the cost
of the indemnifying party) with the indemnifying party in such defence
and in the settlement of such claim or litigation.
f) Limitation of Liability: Each party's entire liability and the exclusive
remedies of either party against the other for any damages caused by any
defect or failure in the Service or arising from the performance or
nonperformance of any obligation under this Agreement, regardless of the
form of action, whether in contract, tort, including negligence, strict
liability or otherwise, except as specifically provided for otherwise in
this Agreement, shall be the actual direct damages which are proven.
Neither party shall be liable for any costs of the procurement of
substitute services, incidental, indirect, special or consequential
damages, or for lost profits or revenues of any kind, however caused,
whether for breach of contract, or otherwise, and whether or not such
party was previously advised of the possibility of such damages.
19. FORCE MAJEURE
Except as herein otherwise expressly provided, if and whenever and to
the extent that the parties hereto shall be prevented, delayed or restricted in
fulfillment of any obligation hereunder in respect of the supply or provision
of any service or the observance or performance of any of the terms and
conditions hereunder by reason of strikes or work stoppages or being unable to
obtain any material, service, utility or labor required to fulfil such
obligation or by reason for any statute, law or regulation of, or inability to
obtain any permission from, any governmental authority having lawful
jurisdiction including, without limitation, any order, decision, or declaration
by the Government of Canada or its agencies, commissions or tribunals having
jurisdiction, regarding maintaining or regulating the Canadian content of the
Service which prevents, delays or restricts such fulfillment, or by reason of
any other cause beyond the control of such party, the time for fulfillment of
such obligation shall be extended during the period in which such circumstance
operates to prevent, delay or restrict the fulfillment thereof, and the other
party to this Agreement shall not be entitled to compensation for any
inconvenience, nuisance or discomfort thereby occasioned.
20. NOTICES
Any notice or other communication required or permitted to be given
hereunder shall be in
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<PAGE> 30
writing and shall be delivered in person, transmitted by telecopy or similar
means of recorded electronic communication or sent by registered mail, charges
prepaid, addressed as follows:
If to DMX '95:
DMX Canada (1995) Ltd.
Suite 900
630 - 3rd Avenue S.W.
Calgary, Alberta
T2P 4L4
Attention: The President
With a courtesy copy to:
Shaw Communications Inc.
Suite 900
630 - 3rd Avenue S.W.
Calgary, Alberta
T2P 4L4
Attention: Corporate Counsel
If to DMX US:
DMX Inc.
11400 W. Olympic Boulevard, Suite 110
Los Angeles, California 90064-1507
Attention President
With a courtesy copy to:
Gerald F. Edelstein, Esq.
Peter Laird, Esq.
Edelstein, Laird & Sobel, LLP
9255 Sunset Boulevard, Suite 800
Los Angeles, California 90069
Any such notice or other communication shall be deemed to have been
given and received on the day on which it was delivered or transmitted (or, if
transmitted and such day is not a business day, on the next following business
day) or, if mailed, on the fifth business day following the date of mailing;
provided, however, that if at the time of mailing or within five business days
thereafter
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<PAGE> 31
there is or occurs a labor dispute or other event that might reasonably be
expected to disrupt the delivery of documents by mail, any notice or the
communication hereunder shall be delivered or transmitted by means of recorded
electronic communication as aforesaid. Any party may at any time change its
address for service from time to time by giving notice to the other parties in
accordance with this Section.
21. CONFIDENTIALITY
Without the prior consent of the other party, neither DMX US nor DMX
'95 shall disclose to any third party (other than the Affiliates and each
party's respective employees, agents, and professional advisors, in their
capacity as such, with a need to know in the performance of their ordinary
employee functions, or parties with which such party is participating in a
joint venture, which need to know as part of such joint venture, provided in
either case, such employees and parties agree to be bound by the provisions of
this paragraph), including, without limitation, any municipality or other
governmental entity, any information with respect to DMX US's proprietary
technology, any research or other information provided by either party
hereunder (including information with respect to the Affiliates and DMX US's
agents and affiliates) except: (i) to the extent required by the other party to
perform its obligations under this Agreement or approved in writing by the
other party; (ii) to the extent necessary to comply with law, administrative
rules, regulations or requirements, or the valid order of a court of competent
jurisdiction, in which event the party making such disclosure shall so notify
the other as promptly as practicable (and, if possible, prior to making such
disclosure) and shall seek confidential treatment of such information and of
this Agreement; (iii) as part of its normal reporting or review procedure to
its auditors, its attorneys or to performing rights societies; (iv) in order to
enforce its rights pursuant to this Agreement; or (v) to the extent the
information has already been publicly released by the other party.
22. ASSIGNMENT
a) Assignment; Binding Effect; Reorganization: This Agreement, including
both its obligations and benefits, shall enure to the benefit of, and be
binding on, the respective assignees, transferees and successors of the
parties, except that neither this Agreement nor either party's rights or
obligations hereunder shall be assigned or transferred by either party
without the prior written consent of the other party provided, however,
no consent shall be necessary in the event of any assignment to a
successor entity resulting from a merger, acquisition or consolidation
by either party or assignment to any person under common control,
controlled by or in control of either party. DMX US acknowledges and
agrees that any sale by DMX '95 to a third person pursuant to Section
2(c) hereof shall not constitute an assignment for the purposes of this
Section 22(a).
b) Insolvency: If either party makes an assignment for the benefit of its
creditors, or commences bankruptcy, receivership, insolvency,
reorganization, dissolution or liquidation proceedings, that party shall
be deemed to be in default of its obligations under this Agreement, and
the other party shall be entitled to exercise any and all remedies
provided
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<PAGE> 32
at law or in equity or otherwise provided in this Agreement.
23. MISCELLANEOUS
a) Entire Agreement; Amendments; Waivers: This Agreement contains the
entire understanding of the parties hereto relating to the subject
matter hereof and supersedes and replaces the Original License and the
various letter agreements amending the same (collectively, the "1992
Agreement") but only with respect to the distribution of the Service to
Private Residences. This Agreement shall be amended, modified or
terminated only in writing signed by both parties. Any waiver must be in
writing and signed by the party whose rights are being waived and no
waiver by either DMX '95 or DMX US of any breach of any provision hereof
shall be or be deemed to be a waiver of any preceding or subsequent
breach of the same or any other provision of this Agreement.
b) Governing Law: The obligations of DMX '95 and DMX US under this
Agreement and all matters collateral thereto shall be governed by the
laws of the Province of British Columbia.
c) No Agency: Neither DMX '95 nor DMX US shall be or hold itself out as the
agent of the other under this Agreement. No Service Subscriber shall be
deemed to have any privity of contract or direct contractual or other
relationship with DMX US by virtue of this Agreement of DMX US's
delivery of the Service to DMX '95 hereunder.
d) Jurisdiction for Disputes: In the event of any controversy or claim
arising out of or relating to this Agreement or the making, performance
or interpretation thereof, the parties hereto shall recognize and be
subject to the laws in force in the Province of British Columbia,
Canada.
e) Injunctive Relief: If DMX '95 breaches the non-competition provisions of
Section 4(b) hereof, or if DMX '95 breaches Section 16 hereof, then DMX
'95 agrees that DMX US shall be entitled to seek injunctive relief in
connection with such breach. If DMX US breaches the exclusivity
provisions of Section 3 hereof, then DMX US agrees that DMX '95 shall be
entitled to seek injunctive relief in connection with such breach, and
if DMX US breaches the provisions of Sections 6, 8, 16 and 17 hereof,
then DMX US agrees that DMX '95 shall be entitled to seek specific
performance in connection with such breach.
f) No Partnership: Nothing contained herein shall be deemed to create, and
the parties do not intend to create, any partnership or joint venture as
and between DMX '95 and DMX US and neither party is authorized to or
shall act toward third parties or the public in any manner which would
indicate any such relationship with the other.
g) Severability: The invalidity under applicable law of any provisions of
this Agreement shall not affect the validity of any other provision of
this Agreement, and in the event that any provision hereof is determined
to be invalid or otherwise illegal, this Agreement shall remain
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<PAGE> 33
effective and shall be construed in accordance with its terms; provided
however, that the provision of this Agreement which is affected shall,
to the extent possible, be curtailed and limited only to the extent
necessary to bring it within the requirements of the law.
h) Headings and Captions: The titles and headings of the paragraphs in this
Agreement are for convenience only and shall not in any way affect the
interpretation of this Agreement.
i) Counterparts: This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original and all of which
shall constitute one and the same Agreement, and shall become effective
when each party has received an original counterpart which has been
executed by the other party. In proving this Agreement, it shall not be
necessary to produce or account for more than one such counterpart.
j) No Inference Against Author: DMX US and DMX '95 each acknowledge that
this Agreement was fully negotiated by the parties and, therefore, no
provision of this Agreement shall be interpreted against any party
because such party or its legal representative drafted such provision.
k) No Third Party Beneficiaries: The provisions of this Agreement are for
the exclusive benefit of the parties hereto and their permitted
assigns, and no third party shall be a beneficiary of, or have any
rights by virtue of, this Agreement.
l) Arbitration: In the event that a dispute arises between the parties
hereto pursuant to this Agreement, differences or unresolved matters
shall be referred to arbitration which arbitration shall be conducted
in accordance with the following procedures and principles:
(i) Upon the written demand of either party and within ten (10) days
from the date of such demand, each party shall appoint an
arbitrator and the two appointed arbitrators shall then promptly
appoint a third. If either party shall fail to appoint an
arbitrator within ten (10) days from the date of the demand,
then the arbitrator shall, upon the application of the other
party, be appointed by a Justice of the Supreme Court of British
Columbia. If the two arbitrators shall fail, within ten (10)
days from the appointment of the second of them, to agree upon
and appoint the third arbitrator, then upon the application of
either party, the third arbitrator shall be appointed by a
Justice of the Supreme Court of British Columbia.
(ii) The arbitrators shall proceed promptly to hear and shall
determine the matter in dispute subject to any reasonable delay.
(iii) The award of the arbitrators shall be drawn up in writing and
signed by the arbitrators, or a majority of them, and shall be
final and binding on the parties, and the parties shall abide by
the award and perform its terms and conditions. Each party shall
be responsible for the fees and expenses of the arbitrator named
by it and the
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<PAGE> 34
fees and expenses of the third arbitrator shall be paid in equal
proportion by DMX US and DMX '95.
(iv) Save as otherwise expressly provided, the provisions of the
Commercial Arbitration Act of British Columbia shall apply
provided that then there is a conflict between the provisions of
this section and the Act, the provisions of this section shall
apply.
(v) When appointing arbitrators and in nominating persons for
consideration for appointment by the Supreme Court of British
Columbia the parties shall use their best efforts to appoint or
nominate persons who by experience or profession are qualified
to hear and determine the dispute or difference brought before
them.
(vi) Notwithstanding any dispute or difference or arbitration
proceedings arising from this Agreement, the parties shall
continue to perform their respective obligations under this
Agreement while any matter is the subject of negotiation,
discussion or arbitration and prior to the rendering of the
arbitral award.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first above written.
DMX INC.
Per: /s/ LON A. TROXEL
------------------------------
Title: COO
DMX CANADA (1995) LTD.
Per: /s/ HEATHER SHAW
------------------------------
Title: President
Per: /s/ J. R. SHAW
------------------------------
Title: Director
31
<PAGE> 1
EXHIBIT 10.77
CHANNEL DISTRIBUTION AGREEMENT
THIS CHANNEL DISTRIBUTION AGREEMENT (the "AGREEMENT") is made this 3rd
day of July, 1997, between DMX Inc., ("DMX") a Delaware corporation having its
registered office at 11400 West Olympic Boulevard, Suite 1100, Los Angeles,
California 90064-1507, and Xtra Music Limited, a company incorporated under the
laws of the United Kingdom ("XTRA") (collectively hereinafter referred to as
the "PARTIES" and individually as a "PARTY").
WHEREAS DMX distributes various channels of digital audio programming
in the United States and other markets;
WHEREAS DMX formerly distributed such digital audio programming in
Europe through two subsidiaries of DMX, DMX-Europe N.V. and DMX-Europe (UK)
Limited (the "COMPANIES") pursuant to that certain Technology License and
Services Agreement dated as of May 19, 1993, and that certain Trademark
Agreement effective as of July 1, 1992 (the "FORMER LICENSES"); the Companies
have been placed in insolvency proceedings;
WHEREAS, in connection with the Subscription and Shareholders
Agreement dated as of December 18, 1996 (the "SUBSCRIPTION AGREEMENT"), DMX has
agreed to license such digital audio programming to Xtra for distribution in
Europe on the terms and conditions set forth herein.
NOW, THEREFORE, for and in consideration of the mutual covenants and
conditions hereinafter set forth, the Parties agree as follows:
l. CERTAIN DEFINITIONS
As used in this Agreement, the following terms shall have the
following meanings:
1.1 "AFFILIATE(S)" shall mean, with respect to either Party, a
company directly or indirectly controlling, controlled by or under common
control with such Party. A company shall be deemed, for the purposes of this
Agreement, to control a corporation or other entity if such company possesses,
directly or indirectly, the power to direct or cause the direction of the
management and policies of such corporation or other entity, whether through
the ownership of voting securities, by contract or otherwise.
1.2 "CHANNELS" shall mean all channels of audio programming
provided by DMX to its Customers (except for those channels which are subject
to an exclusive license from DMX to any Customer) and all Territory-Specific
Channels.
<PAGE> 2
1.3 "COMMERCIAL ESTABLISHMENT" shall mean each and every premise
(including, without limitation, any restaurant, bar or similar social facility,
office, factory, work-place, place of business, school, university or other
educational facility, religious, government or other public facility, military
installation or facility, air, train, bus or other public transportation
facility, park, place frequented by the public, hotel, motel, club or similar
hospitality facility or medical facility), whether or not business is conducted
at such premises, except for premises which are Private Residences, it being
understood that in the case of a shopping center or other multiple-business
facility, each separate business occupying a distinct space within such
facility shall be deemed to constitute a separate Commercial Establishment.
1.4 "CONFIDENTIAL INFORMATION" shall mean financial, marketing,
Subscriber, engineering, satellite, broadcast and other technical or
transmission data, software, computer and systems management, programming,
licensing, and any other information relating to the conduct of the business of
either Party, and not generally available to the public, in any form
whatsoever.
1.5 "CONTENT SUPERVISION AUTHORITIES" shall have the meaning
described in Section 2.5, below.
1.6 "CUSTOMERS" shall mean any and all third parties located
outside of the Territory who are authorized by DMX to receive the Channels.
1.7 "DELIVERY SITE" shall mean the site used from time to time by
DMX as its studio to create the signal for the Channels, which site is located
as of the date of this Agreement at Denver, Colorado, U.S.A.
1.8 "DMX MARKS" shall mean the trademarks, service marks, and
trade names and other similar property relating to DMX and/or the Channels that
are specified on Exhibit "A" attached hereto.
1.9 "ENHANCEMENTS" shall mean revisions, modifications or
additions to any or all of the Channels by DMX and made available in the
ordinary course by DMX to its Customers.
1.10 "EXPLOIT" shall mean to sell directly to customers or to
license another to sell to customers, but only if the holder of such license
sells to customers.
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1.11 "FORCE MAJEURE" shall mean any delays, pre-emptions or other
failure to perform when such delays, pre-emptions or failures are due to any
cause beyond the control of the Party whose performance is so affected,
including, without limitation, an act of God, fire, war, strike, riot, labor
dispute, natural disaster, technical failure (including the failure of all or
part of the equipment of others, including the communications satellite(s) on
which the Channels are delivered) or any other reason beyond the control of the
Party whose performance is prevented during the period of such occurrence,
including any legal prohibition, significant, change of law or application of
laws governing performance hereunder, decree, regulation or requirement of any
governmental authority having jurisdiction.
1.12 "INCREMENTAL COSTS" shall have the meaning described in
Section 5.1, below.
1.13 "MAINTENANCE" SHALL mean the general updating of the formats
and contents of the Channels by DMX and made available in the ordinary course
by DMX to its Customers.
1.14 "XTRA SERVICE" shall mean the digital audio service provided
to Subscribers by Xtra, its Affiliates, or its Licensees.
1.15 "PRIVATE RESIDENCE" shall mean any single dwelling unit or
multiple dwelling unit private residences, including without limitation,
apartment and condominium buildings, residential hotels, residences for
military personnel or separate unit student housing, but not including
transient or temporary residence establishments such as hotels, motels or
medical care facilities.
1.16 "PROMOTIONAL MATERIALS" shall mean any marketing, promotional
or advertising materials which incorporate the DMX Marks.
1.17 "SERVICE TECHNOLOGY" shall mean the technology, that
(i) is owned by, acquired by, or licensed to DMX, (ii) DMX has the right
to license as provided herein, and (iii) is necessary for the reception,
transmission or distribution of the Channels, including, without limitation,
the addressing system for cable decoder boxes.
1.18 "SUBSCRIBER" shall mean a paying customer to whom Xtra, its
Affiliate, or its Licensee provides, for the payment of a prescribed fee, any
or all of the Channels.
1.19 "TECHNICAL ACCESSORIES" shall mean all other portions of the
signal that transmits the Channels that may be created or made usable now or in
the future for purposes other than transmitting the Channels.
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1.20 "TERM" shall mean the term of this Agreement as set out in
Section 11.1, below.
1.21 "TERRITORY" shall mean the territory within the countries
listed on Exhibit "B", attached hereto, as such countries are constituted as of
the date of this Agreement, and such territory shall not be affected by any
subsequent alteration of the boundaries of those countries or the emergence of
new political entities within or including such territory.
1.22 "TERRITORY-SPECIFIC CHANNELS" shall mean any Channels which
are produced by DMX specifically for Use and distribution to Subscribers in the
Territory, or any part thereof.
1.23 "TRADEMARK TERM" shall mean that two-year period beginning on
the Closing Date (as defined in the Subscription Agreement).
1.24 "USE" shall mean to down-link from the Delivery Satellite,
receive, decode, digitize, compress, encode, scramble, edit, substitute
programming, insert advertising in, uplink and transmit the signal of the
Channels to Subscribers in the Territory, as permitted by the terms of this
Agreement.
2. RIGHTS OF XTRA WITH RESPECT TO THE CHANNELS
2.1 GRANT OF LICENSE. Subject to the terms of this Agreement, DMX
hereby grants to Xtra and Xtra hereby accepts the exclusive, non-transferable,
royalty-free license and right during the Term to market, distribute and
license the Channels to Subscribers and to Use the signal of the Channels, the
Service Technology, and the Technical Accessories in the Territory. This
Agreement does not give Xtra any right or license to distribute or to Use the
Channels, the Service Technology, or the Technical Accessories outside of the
Territory.
2.2 FAILURE TO EXPLOIT LICENSE. Xtra agrees to Exploit the
Channels in substantially all of the Territory; provided, however, that DMX's
only remedy for the failure by Xtra to Exploit the Channels shall be to take
the actions described in this Section 2.2. If Xtra fails to Exploit the
Channels in a substantial portion of the Territory, and does not cure such
failure to Exploit within ninety (90) days of notice by DMX, then at the
conclusion of such ninety day period the license granted pursuant to Sections
2.1 and 2.4 shall become a non-exclusive license and DMX shall be relieved of
its obligations under Section 2.10, below. If Xtra fails to Exploit the
Channels in any country that is a part of the Territory, and does not cure such
failure to Exploit within ninety (90) days of notice by DMX, then at the
conclusion of such ninety day
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period the license granted pursuant to Section 2.1 and 2.4 shall become a
non-exclusive license with respect to such country and DMX shall be relieved of
its obligations under Section 2.10, below, with respect to such country. All or
any part of the Territory that becomes non-exclusive pursuant to this Section
2.2 shall be referred to as a "NON-EXCLUSIVE TERRITORY", and the date on which
that Non-Exclusive Territory becomes non-exclusive pursuant to this Section 2.2
shall be referred to as the "NON-EXCLUSIVE DATE". If DMX does not Exploit the
Channels within a Non-Exclusive Territory within 180 days of the Non-Exclusive
Date, and if Xtra does Exploit the Channels within that Non-Exclusive Territory
within 180 days of the Non-Exclusive Date, then the license granted pursuant to
Sections 2.1 and 2.4 shall again become an exclusive license for that
Non-Exclusive Territory and the rights of Xtra under Section 2.10, below, with
respect to that Non-Exclusive Territory shall be restored.
2.3 SUBLICENSE. During the Term Xtra shall be entitled to
sublicense third parties to redistribute the Channels in the Territory,
provided that such sublicensing does not entitle such sub-licensee to do any
act or thing which if done by Xtra would be a breach of the terms of this
Agreement.
2.4 TECHNICAL ACCESSORIES. During the Term and subject to the other
restrictions described in this Agreement, Xtra shall have the exclusive right to
Use in the Territory any Technical Accessories included within the signal of the
Channels for any lawful purpose, including, but not limited to close captioning,
games, sweepstakes, contests, advertising and promotions. Xtra shall obtain any
license or authorization required under applicable law for such Use, and shall
not use the Technical Accessories in a jurisdiction in any manner which is not
lawful in that jurisdiction. If Xtra determines in its sole discretion not to
use any part of the Technical Accessories, Xtra may license such Technical
Accessories to DMX or to another third party for any lawful purpose.
2.5 CENSORSHIP AND PROGRAM SUBSTITUTION. DMX acknowledges and
agrees that the Channels may be subject to censorship by certain government
authorities and may be edited by them or by Xtra according to guidelines and
directives prescribed by such authorities ("CONTENT SUPERVISION AUTHORITIES")
prior to distribution within certain countries in the Territory. Xtra shall
have the right to edit programs and, with the prior approval of DMX where
reasonably possible, which approval shall not be unreasonably withheld,
substitute programs solely in order to comply with codes, practices, directives
or orders from the Content Supervision Authorities. To enable Xtra to comply
with any governmental programming standards and practices and other
governmental and regulatory directives, Xtra may retransmit the Channels with a
delay from the time the signal is received. Except as expressly provided
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in this Agreement, including this Section 2.5, Xtra shall use the Channels
without insertion (whether of advertising or otherwise), deletion, or editing.
2.6 INSERTION OF LOGO AND MARK OF XTRA. Xtra shall have the right
to use its own logo, station identity mark, trade name, service mark or other
identifiers within the Channels as part of its network identity and branding
within the Xtra Service.
2.7 INCLUDING CHANNELS IN XTRA SERVICE; ADDITION OF CHANNELS. Xtra
shall be entitled, in its sole discretion, to include any or all of the
Channels in the Xtra Service. Xtra shall be entitled, at its sole discretion,
to create and distribute additional channels within the Xtra Service and within
the Territory; provided, however, that DMX shall have to right to approve
(acting reasonably) such additional channels that are distributed with the
Channels. Xtra may request that DMX create such additional Channels or
Territory-Specific Channels on terms and conditions to be agreed between the
Parties, or Xtra may create such channels itself or through the engagement of
third parties. Any such additional channels created by or on behalf of Xtra
shall be owned solely by Xtra.
2.8 COMMERCIAL ANNOUNCEMENTS. Xtra shall be entitled, in its sole
discretion, to include commercial announcements within the Channels distributed
to Commercial Establishments, so long as such commercial announcements relate
specifically to the Commercial Establishment to which such Channels are
distributed. Furthermore, Xtra shall be entitled to include in the Channels the
same types of commercial announcements and/or advertisements that DMX includes
in the Channels as provided to its Customers. Except as provided herein, no
commercial announcements will be included in any of the Channels.
2.9 RESTRICTIONS ON USE. In order to ensure the integrity of the
Channels and compliance with the restrictions that may be applicable to the
underlying programming, sound recording, music and statutory use permits, Xtra
shall not, and the rights granted herein shall not be interpreted to grant Xtra
or any other person any right to:
2.9.1 Record, make or manufacture any recordings or other
reproductions of any Channel for commercial use, other than to
effect distribution as part of the Xtra Service; or
2.9.2 Transmit, re-transmit or authorize the transmission
or re-transmission of any Channel outside the Territory.
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Xtra shall not distribute the Channels over any medium or in any manner that
does not permit Xtra to institute adequate controls to prevent the reception,
transmission, or retransmission of any Channel outside the Territory by any
person. Controls imposed by Xtra that are equivalent to the controls imposed
by DMX in the United States on the same medium to prevent unauthorized
transmission or retransmission shall be deemed to be adequate controls for
purposes of the preceding sentence. Notwithstanding anything else contained in
this Agreement, the transmission of the Channels outside the Territory solely
because a portion of the footprint of the satellite used by Xtra falls outside
the geographical boundaries of the Territory shall not violate Xtra"s
obligations under this Agreement if (i) DMX-UK does not otherwise Exploit or
Use the Channels outside the Territory, and (ii) substantially all of the
footprint of the satellite used by DMX-UK falls within the Territory.
2.10 NON-COMPETITION. DMX agrees that during the Term it will not
distribute the Channels or any of them in the Territory via any medium, nor
will DMX authorize any other person to do the same. Notwithstanding the
foregoing, DMX shall be entitled to distribute video channels or music services
other than the Channels in the Territory, so long as the format of such other
music services is not substantially similar to that of the Channels.
2.11 DELETION OF CHANNEL. At any time and from time to time, DMX
shall be entitled, in its sole discretion, to delete one or more Channels from
the Channels offered to its Customers, and upon such deletion such Channel
shall cease to be available to Xtra. DMX may not delete a Channel pursuant to
this Section 2.11 unless, at least thirty days before the effective date of
such deletion, DMX provides to Xtra (i) notice of the deletion, (ii) one or
more disks inscribed with the music programming for the Channel as of the date
of the notice, and (iii) a copy of the software prepared by DMX to select the
music for such Channel; provided, however, that in order to delete a Channel,
DMX shall not be required to provide any software or other intellectual
property that DMX does not own or otherwise have right to transfer to Xtra. The
provisions of Section 6.3 shall apply to the use by Xtra of any items provided
pursuant to this Section 2.11.
2.12 ENHANCEMENTS AND MAINTENANCE. DMX shall provide Enhancements
and Maintenance to Xtra at the same time as DMX provides Enhancements and
Maintenance to DMX's Customers.
3. DELIVERY AND DISTRIBUTION
3.1 DELIVERY OF THE CHANNELS. DMX shall deliver to Xtra at the
Delivery Site digital audio signals of the Channels, to enable Xtra to Use the
signal in a manner and quality as contemplated by this Agreement. DMX shall
provide Xtra with
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any technical information in its possession that is reasonably requested by
Xtra for the purpose of uplinking, downlinking, receiving the Channels in the
Territory, and interfacing the signal of the Channels to the Xtra Service.
3.2 SATELLITE AND UPLINK ARRANGEMENTS. Xtra shall designate the
satellite to be used to transmit the Channels to Europe (the "Designated
Satellite") and shall arrange to uplink the Channels from the delivery point
at DMX's Denver studio to the Designated Satellite.
3.3 CHANGE IN DELIVERY SATELLITE. Xtra shall provide written
notice to DMX of any planned permanent change in the Designated Satellite not
less than ninety (90) days prior to such change, If a temporary change in the
Designated Satellite is required, DMX and Xtra shall each use their reasonable
efforts (including the earliest practicable notice by Xtra to DMX of such
events) to avoid any interruption of or disruption in delivery of the Channels
to the Subscribers. Each Party shall be responsible for its own costs
associated with any permanent or temporary change in the Designated Satellite,
including administrative and technical costs of aligning or setting reception
equipment.
4. LICENSE OF TRADEMARKS
4.1 LICENSE TO TRADEMARKS FOR PROMOTIONAL PURPOSES. DMX hereby
grants to Xtra for the Trademark Term a non-exclusive, non-transferable,
royalty-free license to use the DMX Marks for the distribution, marketing and
promotion of the Channels to Subscribers and potential Subscribers within the
Territory.
4.2 APPROVAL RIGHTS. Xtra shall not use the DMX Marks in
distribution, marketing, promotion or advertising without the prior written
approval of such use by DMX. In its sole discretion, DMX shall be entitled to
provide Xtra with a copy of its corporate guidelines or style guides for proper
usage of the DMX Marks, which guidelines shall be followed by Xtra. In
addition, Xtra agrees to use the DMX Marks on materials of high quality and in
a manner which upholds the image and reputation of DMX.
4.3 PROCEDURE FOR APPROVAL. In the event that Xtra proposes to
produce Promotional Materials, Xtra shall provide samples of such proposed
Promotional Materials to DMX for its approval. Within ten (10) days of receipt
of such proposed Promotional Materials, DMX shall, in writing, either approve
or object to the use of the DMX Marks on such proposed Promotional Materials,
and, in the event of an objection, DMX shall state its reasons for such
objection. In the event that DMX does not object to the use of the DMX Marks
within such ten (10) day period, such use shall be deemed to be approved and
the proposed Promotional Materials may be used. Upon
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request, Xtra shall provide DMX with samples of all approved Promotional
Materials as used by Xtra.
4.4 CONSEQUENCES OF TERMINATION. Upon the earlier of the
expiration of the Trademark Term or the termination of this Agreement
("TRADEMARK TERMINATION DATE"), Xtra shall immediately discontinue all use of
the DMX Marks or marks confusingly similar thereto.
4.5 USE OF "FORMERLY KNOWN AS DMX". For two (2) years after the
earlier of the expiration of the Trademark Term or the date on which Xtra stops
using the DMX Marks for the distribution, marketing and promotion of the
Channels to Subscribers and potential Subscribers within the Territory, Xtra
shall be entitled to refer to the Channels in its promotional materials as
"formerly known as DMX" or "formerly know as Digital Music Express".
5. COSTS AND REPORTING REQUIREMENTS
5.1 PAYMENT OF INCREMENTAL COSTS. Xtra shall pay to DMX the
incremental costs incurred by DMX for the creation and delivery of the Channels
to Xtra ("INCREMENTAL COSTS"), including without limitation, the following
costs and charges:
a. All costs of creation and delivery of the Territory-Specific
Channels made at the request of Xtra; and
b. All costs of modifications to the Channels, Enhancements, or
Maintenance made at the request of Xtra.
On a quarterly basis, DMX shall provide to Xtra an invoice which sets forth the
amount and nature of such Incremental Costs, and within thirty (30) days of
receipt of the invoice, Xtra shall pay to DMX the amount of Incremental Costs
set forth in such invoice. DMX shall have no obligation to create, deliver, or
effect any Territory-Specific Channels, Enhancements, or Maintenance requested
by Xtra.
5.2 INTEREST. In the event that any payments due under Section 5.1
from Xtra are not paid on the due date therefor, there shall be added to the
amount of such payment interest for the period from the due date until payment
is made, at an interest rate equal to the lesser of 10 percent per annum or the
highest legal rate under applicable law.
5.3 WITHHOLDING AND SIMILAR CHARGES. All payments shall be made in
U.S. Dollars and shall be paid in full without setoff or counterclaim and free
and clear of and without any deduction or withholding for or on account of any
taxes, unless required to do so by law. Each party shall make application to
any relevant tax authority for double tax
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relief in respect of amounts payable hereunder if the other party so requests
in writing. Xtra shall be responsible for collecting and paying any income,
franchise, sales, use, occupational, general service or other taxes,
assessments, licenses, or other charges assessed, levied, imposed or collected
by any governmental or political entity, or any agencies or instrumentalities
thereof, with respect to its receipt or distribution of the channels or any
other activity hereunder, except income taxes payable by DMX. Each party shall
provide the other party with any documentation reasonably requested by the
other party to permit the other party to claim a credit or deduction for
foreign taxes paid or born by the other party.
5.4 COST RECORDS AND AUDITS. DMX shall keep accurate and complete
records and accounts of all Incremental Costs. No more than twice in each one
(1) year period during the Term, and for one (1) year following expiration or
termination of this Agreement, on reasonable notice to DMX during normal
business hours, Xtra shall have the right to appoint an internationally
recognized accounting firm to examine and audit such Incremental Cost records.
All costs of conducting such an audit shall be borne by Xtra, unless it is
determined that the Incremental Costs paid to DMX for the period to which such
audit relates have been over-reported by DMX by more than five percent (5%), in
which case DMX shall pay the cost of the audit. All information obtained by
Xtra as a result of such audit shall be treated as Confidential Information in
accordance with the provisions of Section 7 of this Agreement.
6. OWNERSHIP OF INTELLECTUAL PROPERTY
6.1 OWNERSHIP OF CHANNELS. Except as otherwise provided herein,
DMX retains all rights, title and interest in and to the Channels and all
programming produced for or included in the Channels, including worldwide
rights for use in all media.
6.2 OWNERSHIP OF MARKS. Xtra hereby acknowledges the right, title
and interest of DMX and its Affiliates in and to the DMX Marks and the right of
DMX to use and license the use of the DMX Marks. Xtra agrees not to claim any
title to the DMX marks or any right to use the DMX Marks except as permitted by
this Agreement. At no time shall Xtra adopt or use, without the prior written
consent of DMX, any variation of the DMX Marks or any work or mark likely to be
similar to, or confused with, the DMX Marks. Any and all goodwill arising from
the use by Xtra of the DMX Marks shall inure solely to the benefit of DMX. As
may be required by law, Xtra will at its expense record this Agreement and
register the DMX Marks with appropriate government authorities in the
Territory, and DMX will cooperate in effecting such recordation and
registration. Xtra shall not assert any claim to the DMX Marks or such
goodwill, either during or after the Term of this Agreement, and Xtra shall not
take any action that could
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be detrimental to the goodwill associated with the DMX Marks.
6.3 COPYRIGHT, MUSIC PERFORMANCE, SOUND RECORDING AND REPRODUCTION
RIGHTS AND FEES. Xtra shall acquire from the owners, composers, licensees
and/or music or copyright rights societies all of the intellectual property
rights necessary for the distribution of the Channels in the Territory,
including copyrights, synchronization of music contained in the Channels and
non-dramatic performing rights, mechanical, performing and author's rights in
each musical composition and sound recording contained in the Channels. Xtra
shall also be responsible for all royalties, fees, and other charges of any
kind with respect to such rights.
7. CONFIDENTIALITY
7.1 NON-DISCLOSURE OF CONFIDENTIAL INFORMATION. Neither Xtra nor
DMX shall disclose to any third party (other than its respective employees or
financial and legal advisers, in their capacity as such) any Confidential
Information concerning the other Party derived in the course of performance
hereunder, including, without limitation, any information relating to
identification of Subscribers or financial material obtained through any audit,
or any of the terms of this Agreement, except:
7.1.1 to the extent necessary to comply with law or the
valid order of a court of competent jurisdiction or a regulatory
authority having jurisdiction, in which event the Party making such
disclosure shall so notify the other Party as promptly as practicable
(and, if possible, prior to making such disclosure) and shall seek
confidential treatment of such information;
7.1.2 as part of its reporting or review procedure to its
parent company, its auditors, attorneys and potential investors
provided, however, that such parent company, auditors, its attorneys
and potential investors agree to be bound by the provisions of the
confidentiality provisions of this Agreement;
7.1.3 in order to enforce its rights pursuant to this
Agreement;
7.1.4 as part of its obligation to make timely disclosure
to public investors in its securities; or
7.1.5 to the extent necessary to engage third parties to
distribute the Channels or manufacture equipment for distribution of
the Channels in accordance with this Agreement, provided that such
third party distributors or manufacturers agree to comply with the
confidentiality provisions of this Agreement.
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8. REPRESENTATIONS AND WARRANTIES
8.1 REPRESENTATIONS OF DMX. DMX hereby represents and warrants to
Xtra that:
8.1.1 DMX is a corporation duly organized and validly
existing under the laws of Delaware.
8.1.2 DMX has the power and authority to enter into this
Agreement and to perform fully its obligations hereunder.
8.1.3 DMX is under no contractual or other legal obligation
which shall in any way interfere with its full, prompt and complete
performance hereunder, except to the extent that any continuing rights
of the Companies under the Former Licenses would interfere with the
rights granted under this Agreement.
8.1.4 Within the United States, neither the Channels nor
any material or programming contained therein shall libel, slander or
defame any person, or violate, infringe upon or give rise to or
advance any claim with respect to any contractual right, common law
right or any other right of any party (including, without limitation,
any copyright, patent, trademark, literary or dramatic right, music
synchronization or performance right or right of privacy or publicity)
or violate any law.
8.2 REPRESENTATIONS OF XTRA. Xtra hereby represents and warrants
to DMX that:
8.2.1 Xtra is a corporation duly organized and validly
existing under the laws of the United Kingdom.
8.2.2 Xtra has the corporate power and authority to enter
into this Agreement and to perform fully its obligations hereunder.
8.2.3 Xtra is under no contractual or other legal
obligation which shall in any way interfere with its full, prompt and
complete performance hereunder.
8.2.4 Xtra shall during the Term have valid licenses or
other authorizations granted by the appropriate governmental
authorities throughout the Territory, if required under applicable
law, to distribute the Channels in accordance with this Agreement, and
will operate such systems throughout the Term in accordance with such
licenses or authorizations.
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9. COMPLIANCE WITH LAWS AND LICENSES
9.1 REGULATORY COMPLIANCE. Xtra shall ensure that the content of
the Xtra Service complies in all aspects with the regulatory requirements in
the Territory or any part thereof. Xtra further undertakes to obtain any
requisite governmental approvals required in the Territory or any part thereof
for the distribution of the Xtra Service.
9.2 PIRACY. Xtra agrees that it will not authorize parties other
than Subscribers to receive the signal of the Channels, nor will it authorize
others to copy, take or otherwise reproduce any part of the Channels without
the prior written consent of DMX. Xtra further agrees to take all reasonable
and practical security measures to prevent the unauthorized or otherwise
unlawful copying, taping or distribution of the Channels by others; provided,
however, security measures that are equivalent to the security measures taken
by DMX in the United States on the same medium to prevent unauthorized or
otherwise unlawful copying, taping or distribution of the Channels by others
shall be deemed to be adequate security measures for purposes of this sentence.
10. INDEMNIFICATION
10.1 INDEMNIFICATION. Each Party shall indemnify and hold the other
Party harmless from and against any and all claims, liabilities, costs and
expenses, including attorneys fees and costs, arising out of any breach by such
Party of any of its respective representations, warranties or covenants herein
contained. In addition, without limiting the foregoing, Xtra shall indemnify
and hold DMX harmless against any and all claims, liabilities, costs and
expenses, including attorneys fees and costs, arising from and in connection
with (i) any non-payment of any amounts payable in respect of copyrights, and
music and sound recording performance and reproduction rights, arising from the
distribution of the Channels in the Territory; (ii) any assertion by any third
party that the distribution, promotion, and other exploitation of the Channels,
and any programming contained therein, violate or infringe upon any rights of
such third party in the Territory, unless such third party is not a creditor
(as of the date of this Agreement), receiver or trustee of the Companies and
the claims of such third party derive from a purported grant of rights by DMX
to the third party that is inconsistent with this Agreement; or (iii) the
failure of Xtra to obtain or maintain proper governmental authority to
distribute the Channels in the Territory.
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10.2 PROCEDURE FOR INDEMNIFICATION. The Party entitled to
indemnification hereunder (the "INDEMNIFIED PARTY") shall notify the other
Party hereto (the "INDEMNIFYING PARTY") in writing of the claim or action for
which such indemnity applies. The Indemnifying Party shall undertake the
defense of any such claim or action and permit the Indemnified Party to
participate therein at the Indemnified Party's own expense. The settlement of
any such claim or action by an Indemnified Party, without the Indemnifying
Party's prior written consent, shall release the Indemnifying Party from its
obligations hereunder with respect to such claim or action so settled. The
Indemnifying Party shall not settle or otherwise dispose of any claim without
the prior written consent of the Indemnified Party, which consent shall not be
unreasonably withheld.
11. TERM AND TERMINATION
11.1 TERM. Unless terminated earlier pursuant to the provisions of
this Agreement, the Term of this Agreement shall be a period of five (5) years
from the Closing Date (a defined in the Subscription Agreement).
11.2 TERMINATION FOR BREACH. This Agreement may be terminated by a
party (the "NOTICING PARTY") as follows:
11.2.1 thirty (30) days following written notice by the
Noticing Party to the other Party (the "NOTICED PARTY") of any
material inaccuracy of a representation made by the Noticed Party
herein or in the Subscription Agreement or of a material breach by the
Noticed Party of any of its obligations hereunder or under the
Subscription Agreement, if such misrepresentation or breach is not
cured within the thirty (30) period following such notice;
11.2.2 immediately upon written notice by the Noticing Party
to the Noticed Party if the Noticed Party has made a voluntary
petition for protection under the bankruptcy laws, or if the Noticed
Party has taken any similar action in consequence of debt;
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11.2.3 thirty (30) days following written notice by the
Noticing Party to the Noticed Party if the Noticed Party has been the
subject of the filing of an involuntary petition in bankruptcy, or if
any distress or attachment is levied or any receiver is appointed in
respect of the business or a substantial part of the property or
assets of the Noticed Party, unless such petition, distress,
attachment, or receiver is dismissed within such thirty-day period; or
11.2.4 upon thirty (30) days following written notice by
the Noticing Party to the Noticed Party if any event of Force Majeure
shall continue for a period of sixty (60) consecutive days.
The exercise of any right to termination under this Section 11.2 is not an
exclusive remedy, and the Noticing Party may in addition exercise any other
remedy available to it in law or equity.
11.3 EFFECT OF TERMINATION. The expiration or termination of this
Agreement for whatever reason shall not affect any rights of either Party which
may have accrued prior to such expiration or termination. Subject to the
foregoing, neither party shall by reason of the expiration or termination of
this Agreement be liable to the other for compensation or damage on account of
the loss of present or prospective profits on distribution or anticipated
distribution of the Channels, or expenditures, investments or commitments made
in connection therewith. Upon the expiration or termination of this Agreement,
Xtra shall promptly pay all outstanding and/or accrued Incremental Costs to DMX
and return to DMX, or otherwise dispose of as DMX may reasonably instruct, all
tapes and materials in relation to the Channels, programming contained therein,
advertisements or Promotional Materials, and other materials, documents and
papers provided to Xtra and relating to the Channels which Xtra may have in its
possession or under its control.
12. MISCELLANEOUS
12.1 NOTICES. Any notice in connection with this Agreement shall be
in writing and shall be delivered by air courier or by facsimile to the
addresses or facsimile numbers given below. Notice given by air courier shall
be deemed given when recorded on the records of the air courier as received by
the receiving party. Notice given by facsimile shall be deemed given upon
transmission if on a business day and during business hours in the country of
receipt, otherwise notice shall be deemed to have been given at 9:00 a.m. on
the next business day in the country of receipt.
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<PAGE> 16
If to DMX:
DMX Inc.
11400 West Olympic Blvd., Suite 1100
Los Angeles, California 90064
If to Xtra:
Xtra Music, Limited
c/o Wiggin and Co.
Imperial Square
Cheltenham
Gloucestershire GL50 1YX
Attn: Timothy Osborne and Michael Turner
with a copy to:
Jerold H. Rubinstein
700 Park Lane
Santa Barbara, CA 93108
Either party may change its address by giving notice to the other in the manner
set forth above.
12.2 GOVERNING LAW; JURISDICTION AND VENUE. This Agreement
has been negotiated and entered into in the State of California and this
Agreement shall be governed by and construed in accordance with the laws of the
State of California, without giving effect to its conflict of laws rules. The
Parties hereby irrevocably agree that any legal action or proceedings with
respect to this Agreement may be brought in the courts of the State of
California, or in any United States District Court of California and by
execution and delivery of this Agreement, each party irrevocably submits to
each such jurisdiction and irrevocably waives any and all objections which it
may have as to venue in any of the above courts.
12.3 WAIVER OF JURY TRIAL. EACH PARTY HEREBY AGREES TO
WAIVE ITS RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR
ARISING OUT OF THIS AGREEMENT OR ANY DEALINGS AMONG THE PARTIES RELATING TO THE
SUBJECT MATTER OF THE TRANSACTION CONTEMPLATED BY THIS AGREEMENT. The scope of
this waiver is intended to be all encompassing of any and all disputes that may
be filed in any court and that relate to the subject matter of this
transaction, including contract claims, tort claims, breach of duty claims, and
all other common law and statutory claims. Each Party acknowledges that this
waiver is a material inducement to enter into a business relationship, that
each other Party has already relied on this waiver in entering into this
Agreement, and will continue to rely on this waiver in any future dealings.
Each Party further warrants and represents that it has reviewed this waiver
with its legal counsel, and that it knowingly and
-16-
<PAGE> 17
voluntarily waives its jury trial rights following consultation with legal
counsel. THIS WAIVER IS IRREVOCABLE, MEANING THAT IT MAY NOT BE MODIFIED EITHER
ORALLY OR IN WRITING, AND THE WAIVER SHALL APPLY TO ANY SUBSEQUENT AMENDMENTS,
RENEWALS, SUPPLEMENTS OR MODIFICATIONS TO THIS AGREEMENT. In the event of
litigation, this Agreement may be filed as a written consent to a trial by the
court.
12.4 ASSIGNMENT. The right and obligations of the Parties
may be assigned in whole or in part, voluntarily or by operation of law,
without the prior written consent of the other Party if such assignment is to
an Affiliate of the assigning Party. Each Party shall notify the other within
seven (7) days of any such assignment. In addition, DMX shall be entitled to
assign its rights and obligations under this Agreement in connection with a
merger or acquisition transaction (in whatever form) between DMX and a
subsidiary of Tele-Communications, Inc. Except as expressly provided, neither
Party may assign or transfer this Agreement to any third party without the
consent of the other Party, which consent shall not be unreasonably withheld.
12.5 NO PARTNERSHIP. Nothing contained herein shall be
deemed to create, and the Parties do not intend to create, any relationship of
partners or joint venturers as between Xtra and DMX with respect to this
Agreement. Neither Xtra nor DMX shall be, or shall hold itself out to be, the
agent of the other under this Agreement. No Subscriber shall be deemed to have
any privity of contract or direct contractual or other relationship with DMX by
virtue of this Agreement or DMX's delivery of the Channels to Xtra hereunder.
12.6 SEVERABILITY. If at any time, any provision of this
Agreement is, or becomes under any law, or is found by a court of competent
jurisdiction to be illegal, void, invalid, prohibited or unenforceable, then
such provision shall be ineffective to the extent of such illegality, voidness,
invalidity, prohibition or unenforceability and the remaining provisions of
this Agreement shall remain in full force and effect. In such event, the
Parties shall thereafter use their respective best endeavors to negotiate and
agree upon a substitute provision which is valid and enforceable and achieves
to the greatest extent the legal and commercial objectives of the prohibited
provision.
12.7 CAPTIONS AND HEADINGS. The captions and headings
herein are included for convenience only and shall not be considered a part of
or used to construe this Agreement.
12.8 COSTS OF PREPARATION. Each of the Parties herein
undertakes to bear its own costs in relation to and arising from the
preparation and execution of this Agreement.
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<PAGE> 18
12.9 ATTORNEYS' FEES AND EXPENSES. Each Party hereby
agrees to be responsible for and to pay upon demand all costs and expenses,
including, without limitation, reasonable attorneys' fees incurred by another
Party in connection with any dispute between such parties concerning this
Agreement and the transactions contemplated herein in which the latter Party
prevails (whether or not suit is filed).
12.10 SUCCESSORS AND PERMITTED ASSIGNS. This Agreement
shall be binding upon and shall inure to the benefit of the Parties and their
respective successors, assigns and permitted assignees.
12.11 FORCE MAJEURE. Neither DMX nor Xtra shall be liable
to the other for any event of Force Majeure. In the event of any such delay,
pre-emption or failure due to Force Majeure, the Party whose performance is
affected shall promptly notify the other Party of the nature and anticipated
length of continuance of such Force Majeure, and during such period both
Parties shall be excused from performance.
12.12 SURVIVAL. Upon termination of this Agreement for any
reason, Sections 4.4, 6.1, 6.2, 7.1, 10.1, 10.2, 12.1, 12.2, 12.3, 12.9, and
12.12 (including any definitions that are necessary to the operation of such
sections) shall continue to remain in full force and effect.
-18-
<PAGE> 19
12.13 ENTIRE AGREEMENT. This Agreement (together with all
Schedules attached hereto, which are incorporated herein by this reference) and
the Subscription Agreement (and all documents delivered pursuant thereto)
constitute the whole agreement between the Parties and it is expressly declared
that no variations hereof shall be effective unless made in writing and signed
by both Parties. All prior terms sheets and other correspondence between the
parties shall be deemed to have lapsed upon the signing of this Agreement.
IN WITNESS WHEREOF, the parties hereto have entered into this
Agreement as of the date first set forth above.
DMX Inc.
By: /s/ JOANNE WENDY KIM
-------------------------
Its: CFO
------------------------
Xtra Music, Limited
By: /s/ JEROLD H. RUBINSTEIN
-------------------------
Its:
------------------------
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<PAGE> 20
EXHIBIT A
TRADEMARKS
O ICT
O INTERNATIONAL CABLECASTING TECHNOLOGIES INC.
O ICT & DESIGN (FORMER CORPORATE LOGO)
O DMX DJ
O DMX
O DIGITAL MUSIC EXPRESS
O DMX & DESIGN:
[DIGITAL MUSIC EXPRESS LOGO]
O DMX WORLD LOGO:
[LOGO]
-20-
<PAGE> 21
EXHIBIT B
TERRITORY
1. EUROPE: Albania, Andorra, Austria, Belarus, Belgium, Bosnia
and Herzegovina, Bulgaria, Croatia, the Czech Republic, Denmark, Estonia,
Finland, France, Germany, Greece, Hungary, Iceland, Ireland, Italy, Latvia,
Liechtenstein, Lithuania, Luxembourg, Macedonia, Malta, Moldova, Monaco,
Netherlands, Norway, Poland, Portugal, Romania, Russia, San Marino, Serbia &
Montenegro, Slovakia, Slovenia, Spain, Sweden, Switzerland, Turkey, Ukraine,
United Kingdom, Vatican City, Yugoslavia, and any political entity whose borders
are enclosed entirely within the countries listed in this paragraph 1.
2. MIDDLE EAST: Bahrain, Cyprus, Egypt, Iran, Iraq, Israel, Jordan,
Kuwait, Lebanon, Oman, Palestine, Qatar, Saudi Arabia, Syria, United Arab
Emirates, Yemen, and any political entity whose borders are enclosed entirely
within the countries listed in this paragraph 2.
-21-
<PAGE> 1
EXHIBIT 10.78
TERMINATION CERTIFICATE
DMX Inc. ("DMX"), a Delaware corporation and Jerold H. Rubinstein, an
individual ("RUBINSTEIN"), agree and acknowledge that:
1. Pursuant to the terms of the Subscription and Shareholders
Agreement dated as of December 18, 1996, and pursuant to the terms of
the Stock Purchase and Shareholders Agreement dated as of December 18,
1996 (the "STOCK PURCHASE AGREEMENT"),the Stock Purchase Agreement is
terminated.
2. Each of DMX and Rubinstein mutually release the other from
any obligation or liability under the Stock Purchase Agreement.
DMX Inc.,
a Delaware corporation
By /s/ JOANNE WENDY KIM
------------------------
Its
---------------------
JEROLD H. RUBINSTEIN,
an individual
/s/ JEROLD H. RUBINSTEIN
---------------------------
<PAGE> 1
EXHIBIT 10.79
TERMINATION AGREEMENT
This Termination Agreement is made as of July 3, 1997, between DMX,
Inc., a Delaware corporation ("DMX"), and DMX-Europe N.V., a Netherlands
corporation ("DMX-NV").
WHEREAS, DMX and DMX-NV entered into the Technology License and
Services Agreement dated May 19, 1993 (the "Technology Agreement");
NOW THEREFORE, the parties agree as follows:
1. The Technology Agreement is terminated by mutual agreement of
DMX and DMX-NV pursuant to Section 17.2(a) of the Technology Agreement.
2. Each of DMX and DMX-NV mutually release the other from any
obligation or liability under the Technology Agreement.
IN WITNESS WHEREOF, the parties hereto have entered into this
Termination Agreement as of the date first set forth above.
DMX Inc.,
a Delaware corporation
By /s/ JOANNE WENDY KIM
------------------------------
Its
--------------------------
DMX-Europe N.V.,
a Netherlands corporation
By /s/ LANCE THOMAS
------------------------------
Its SOLE DIRECTOR
--------------------------
DMX-Europe (UK) Limited,
a United Kingdom Company
By /s/ LANCE THOMAS
------------------------------
Its SOLE DIRECTOR
--------------------------
<PAGE> 1
EXHIBIT 10.80
TERMINATION AGREEMENT
This Termination Agreement is made as of July 3, 1997, between DMX,
Inc., a Delaware corporation ("DMX"), and DMX-Europe N.V., a Netherlands
corporation ("DMX-NV").
WHEREAS, DMX and DMX-NV entered into the Trademark Agreement dated
May 19, 1993 (the "Trademark Agreement");
NOW THEREFORE, the parties agree as follows:
1. The Trademark Agreement is terminated by mutual agreement of
DMX and DMX-NV pursuant to Section 25(b) of the Trademark Agreement.
2. Each of DMX and DMX-NV mutually release the other from any
obligation or liability under the Trademark Agreement.
IN WITNESS WHEREOF, the parties hereto have entered into this
Termination Agreement as of the date first set forth above.
DMX Inc.,
a Delaware corporation
By /s/ JOANNE WENDY KIM
------------------------------
Its
--------------------------
DMX-Europe N.V.,
a Netherlands corporation
By /s/ LANCE THOMAS
------------------------------
Its SOLE DIRECTOR
--------------------------
DMX-Europe (UK) Limited,
a United Kingdom Company
By /s/ LANCE THOMAS
------------------------------
Its SOLE DIRECTOR
--------------------------
<PAGE> 1
EXHIBIT 10.81
ASSIGNMENT AGREEMENT
THIS ASSIGNMENT AGREEMENT is made on the 8th day of July, 1997, by DMX
Inc., a Delaware corporation (hereinafter referred to as "ASSIGNOR"), and
Jerold H. Rubinstein, an individual (hereinafter referred to as "ASSIGNEE").
WHEREAS, Assignor has certain rights under (i) the Loan Agreement between
TCI-Euromusic, Inc., a Colorado corporation ("TCI-EUROMUSIC"), and
International Cablecasting Technologies Europe N.V., a Netherlands corporation
("ICT-NV"), dated May 19, 1993 (the "LOAN AGREEMENT") , (ii) the Debenture made
by way of deed between International Cablecasting Technologies - Europe (U.K.)
Limited, a United Kingdom company ("ICT-UK"), and TCI-Euromusic, dated May 19,
1993 (the "DEBENTURE"), and (iii) the Guaranty Agreement made by ICT-UK in
favor of TCI-Euromusic, dated May 19, 1993 (the "GUARANTY AGREEMENT");
WHEREAS, DMX-Europe N.V., a Netherlands corporation (formerly ICT-NV)
("DMX-NV"), is in default of the Loan Agreement, and DMX-Europe (UK) Limited, a
United Kingdom company (formerly ICT-UK) ("DMX-UK"), agreed to secure the
repayment of loans under the Loan Agreement by guaranteeing the full
performance and satisfaction thereof and by granting a security interest in
substantially all of its assets to TCI-Euromusic under the Guaranty Agreement.
WHEREAS, both DMX-NV and DMX-UK (collectively, the "COMPANIES") are
insolvent and about to be liquidated;
WHEREAS, Assignee has agreed to exercise his votes acquired hereunder as a
creditor in favor of the Companies being placed in creditors' voluntary
liquidation and desires to acquire the Assignor's rights under the Loan
Agreement, the Debenture, and the Guaranty Agreement in order to facilitate the
liquidation of the Companies;
WHEREAS, in Section 5.1.1 of the Subscription and Shareholders Agreement
between Assignor and Xtra Music Limited, a United Kingdom company ("XTRA"),
dated December 18, 1996 (the "SUBSCRIPTION AGREEMENT"), Assignor covenants that
it holds certain debt obligations of the Companies and that Assignor will use
its best efforts to obtain from the Companies the assets of the Companies (in
partial or complete satisfaction of the indebtedness of the Companies to
Assignor), and if any tangible assets are obtained by Assignor, Assignor will
promptly transfer such tangible assets to XTRA without receipt of any
additional consideration;
<PAGE> 2
NOW THEREFORE, based on the above premises and in consideration of the
mutual covenants and agreements contained herein, the parties agree as follows:
1. Assignment. Assignor hereby irrevocably sells, assigns and transfers to
Assignee all of its rights under the Loan Agreement, the Debenture, and the
Guaranty Agreement (the "Rights").
2. Liquidation of DMX-UK and DMX-NV. Assignee acknowledges and agrees that
the Rights are being assigned to him to facilitate the liquidation of the
Companies and agrees that he will, so far as he is able, take all steps
necessary to place the Companies in creditors' voluntary liquidation and
complete the liquidation as promptly as possible.
3. Without Recourse. Assignee acknowledges and agrees that Assignor's
assignment of the Rights to Assignee shall be without recourse to Assignor and
without any representations or warranties of any kind. Assignee further
acknowledges and agrees that Assignee is not relying, and will not rely, on
Assignor in any manner whatsoever or to any extent with respect to the
assignment of the Rights. Assignee specifically acknowledges and agrees that
the Companies are insolvent and in default of the Loan Agreement and the
Guaranty Agreement and that the Assignor has not made any representation about
the accuracy of any financial information concerning the Companies or their
assets, the potential or prospects of the business of the Companies or any
claims that might be asserted against Assignee by the Companies or any creditor
of the Companies.
4. Assignee's Assumption of Assignor's Obligation. Assignee acknowledges
that Section 5.1.1 of the Subscription Agreement creates certain obligations on
the part of Assignor to use its best efforts to obtain from the Companies the
assets of the Companies subject to payment to preferential creditors (in
partial or complete satisfaction of the indebtedness of the Companies to
Assignor) and to transfer such tangible assets to XTRA without receipt of any
additional consideration, and Assignee agrees to assume Assignor's obligations
under Section 5.1.1 of the Subscription Agreement.
2
<PAGE> 3
IN WITNESS WHEREOF, Assignor and Assignee have executed this Assignment
below on the date given above.
DMX INC.,
a Delaware corporation
By /s/ LON A. TROXEL
---------------------------
Its COO
------------------------
JEROLD H. RUBINSTEIN,
an individual
/s/ JEROLD H. RUBINSTEIN
------------------------------
3
<PAGE> 1
EXHIBIT 10.82
THIRD AMENDMENT TO EMPLOYMENT AGREEMENT
This Third Amendment to Employment Agreement (this "Amendment") is
made as of August 22, 1997 by and between DMX Inc. ("Employer") and Lon A.
Troxel ("Employee") and amends the Employment Agreement between Employer and
Employee dated as of October 1, 1991, as amended by the First Amendment to
Agreement dated as of December 1, 1993 and the Second Amendment to Agreement
dated as of September 16, 1996 (as so amended, the "Agreement").
RECITALS
Employer and Employee wish to modify and extend the terms under which
Employee is employed by Employer.
AGREEMENT
In consideration of the mutual promises and covenants set forth in
this Agreement and for other good and valuable consideration, the receipt and
sufficiency of which are acknowledged, the parties agree as follows:
1. Recital A is amended by deleting the phrase "President of its
Commercial Division" and inserting in its place "President and Chief Executive
Officer of Employer."
2. Recital B is amended by deleting the phrase "President of the
Commercial Division" and inserting in its place "President and Chief Executive
Officer of Employer."
3. Paragraph 1.0 is amended by deleting the phrase "President of
the Commercial Division" and inserting in its place "President and Chief
Executive Officer of Employer."
4. Paragraph 2.1(b) is amended by deleting the phrase "president
of an commercial division" and inserting in its place "President and Chief
Executive Officer."
5. Paragraph 2.2 is amended by deleting the phrase "President of
the Commercial Division" and inserting in its place "President and Chief
Executive Officer."
6. Paragraph 2.4 is amended to read in its entirety as follows:
"During the term of this Agreement, Employee shall perform the
services contemplated under this Agreement at Employer's corporate headquarters
in Los Angeles, California or such other location as mutually agreed upon by
Employer and Employee. Employer may from time to time require Employee to
travel temporarily to other locations on Employer's business. Employer will
not
<PAGE> 2
relocate its headquarters without consulting with Employee regarding such
relocation. In the event Employer relocates its headquarters, Employer will,
promptly after the determination to relocate is made, offer Employee the option
to terminate this Agreement by written notice within 30 days after receipt of
such offer. If Employee so terminates this Agreement, Employee will have a
period of 12 months from the date of such termination during which to exercise
any vested stock options. If within 30 days after receipt of such offer
Employee has not so terminated this Agreement, Employer will reimburse Employee
for all reasonable expenses incurred by Employee in connection with such
relocation."
7. Paragraph 3.0 is amended to read in its entirety as follows:
"The term of Employee's employment by Employer pursuant to this
Agreement shall be for 5 years commencing on July 1, 1997 and ending on June
30, 2002."
8. Paragraph 3.2 is deleted in its entirety.
9. Paragraph 4.1 is amended to read in its entirety as follows:
"Employer shall pay to Employee a salary at the annual rate of
$275,000 during the year ending May 31, 1998, $300,000 during the year ending
May 31, 1999 and $325,000 during the years ending May 31, 2000, 2001 and 2002."
10. Paragraph 4.2 is amended to read in its entirety as follows:
"Each year, the board of directors of TCI Music, Inc. (the "Board")
will consider granting to Employee an annual bonus based on the performance of
Employee and the business generally. In no event, however, will Employer be
obligated to grant any bonus to Employee."
11. Paragraph 9.6 is deleted in its entirety.
12. Paragraph 10.0 is amended to read in its entirety as follows:
"If Employee dies during the term of this Agreement, Employer will pay
to Employee's estate the salary otherwise payable to Employee for a period of
six months from the date of Employee's death. Upon the death of Employee, all
outstanding options to acquire shares of TCI Music Series A Common Stock will
vest and become immediately exercisable and will be exercisable for a period of
12 months from the date of Employee's death."
13. Paragraph 11.1 is amended to read in its entirety as follows:
"Employer will grant to Employee options to acquire 200,000 shares of
TCI Music Series A Common Stock (the "Options") pursuant to the TCI Music 1997
Stock Option Plan, and all of
- 2 -
<PAGE> 3
Employee's existing options to acquire shares of common stock of DMX Inc. will
be canceled in exchange therefor. The Options will vest in increments to
acquire 40,000 shares of Music Stock on June 1, 1997, 1998, 1999, 2000 and
2001."
14. Paragraph 11.3 is deleted in its entirety.
15. Except as expressly modified by this Amendment, the Agreement
will continue in full force and effect.
IN WITNESS WHEREOF, the parties have executed this Amendment as of the
date first above written.
/s/ LON A. TROXEL
---------------------------
Lon A. Troxel
DMX INC.
By: /s/ STEPHEN M. BRETT
------------------------
Its: Vice President
-----------------------
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<PAGE> 1
EXHIBIT 10.83
TCI MUSIC INC.
1997 STOCK INCENTIVE PLAN
Article I.
Purpose and Effectiveness
1.1 Purpose. The purpose of the TCI Music, Inc. 1997 Stock
Incentive Plan (the "Plan") is to promote the success of TCI Music, Inc. (the
"Company") by providing a method whereby (i) eligible employees of the Company
and its Subsidiaries and (ii) eligible non-employee consultants and advisors to
the Company and its Subsidiaries may be awarded additional remuneration for
services rendered and encouraged to invest in capital stock of the Company,
thereby increasing their proprietary interest in the Company's businesses,
encouraging them to remain in the employ of the Company or its Subsidiaries,
and increasing their personal interest in the continued success and progress of
the Company or its Subsidiaries. The Plan is also intended to aid in
attracting persons of exceptional ability (i) to become officers and employees
of the Company and its Subsidiaries or (ii) to provide services to the Company
as non-employee consultants and advisors.
1.2 Effective Date. The Plan shall be effective as of the date it
is approved by both the Board of Directors of the Company and the sole
stockholder of the Company.
Article II.
Definitions
2.1 Certain Defined Terms. Capitalized terms not defined
elsewhere in the Plan shall have the following meanings (whether used in the
singular or plural):
"Affiliate" of the Company means any corporation, partnership,
or other business association that, directly or indirectly, through
one or more intermediaries, controls, is controlled by, or is under
common control with the Company.
"Agreement" means a stock option agreement, stock appreciation
rights agreement, restricted shares agreement, stock units agreement,
performance award agreement or agreement evidencing more than one type
of Award, as specified in Section 11.5, as any such Agreement may be
supplemented or amended from time to time.
"Approved Transaction" means any transaction in which the
Board (or, if approval of the Board is not required as a matter of
law, the stockholders of the Company) shall approve (i) any
consolidation or merger of the Company, or binding share exchange,
pursuant to which shares of Common Stock would be changed or converted
into or exchanged for cash, securities or other property, other than
any
<PAGE> 2
such transaction in which the holders of the Common Stock immediately
prior to such transaction have the same proportionate ownership of the
common stock of, and voting power with respect to, the surviving
corporation immediately after such transaction, (ii) any merger,
consolidation or binding share exchange to which the Company is a
party as a result of which the persons who are holders of the Common
Stock immediately prior thereto have less than a majority of the
combined voting power of the outstanding capital stock of the Company
ordinarily (and apart from the rights accruing under special
circumstances) having the right to vote in the election of directors
immediately following such merger, consolidation or binding share
exchange, (iii) the adoption of any plan or proposal for the
liquidation or dissolution of the Company, or (iv) any sale, lease,
exchange or other transfer (in one transaction or a series of related
transactions) of all, or substantially all, of the assets of the
Company.
"Award" means a Performance Award and/or a grant of Options,
SARs, Restricted Shares and/or Stock Units under this Plan.
"Board" means the Board of Directors of the Company.
"Board Change" means, during any period of two consecutive
years, individuals who at the beginning of such period constituted the
entire Board cease for any reason to constitute a majority thereof
unless the election, or the nomination for election, of each new
director was approved by a vote of at least two-thirds of the
directors then still in office who were directors at the beginning of
the period.
"Code" means the Internal Revenue Code of 1986, as amended
from time to time, or any successor statute or statutes thereto.
Reference to any specific Code section shall include any successor
section.
"Committee" means the entire Board, the Compensation Committee
or any committee of the Board appointed pursuant to Section 3.1 to
administer the Plan.
"Common Stock" means the Series A Stock and the Series B
Stock.
"Company" has the meaning ascribed to such term in Section 1.1.
"Control Purchase" means any transaction (or series of related
transactions) in which (i) any person (as such term is defined in
Sections 13(d)(3) and 14(d)(2) of the Exchange Act), corporation or
other entity (other than Tele-Communications, Inc., the Company, any
Subsidiary or any employee benefit plan sponsored by the Company or
any Subsidiary, or any Controlling Person (as defined below)) shall
purchase any common stock of the Company (or securities convertible
into common stock of the Company) for cash, securities or any other
consideration pursuant to a
-2-
<PAGE> 3
tender offer or exchange offer, without the prior consent of the
Board, or (ii) any person (as so defined), corporation or other entity
(other than Tele-Communications, Inc., the Company, any Subsidiary,
any employee benefit plan sponsored by the Company or any Subsidiary,
or any Controlling Person) shall become the "beneficial owner" (as
such term is defined in Rule 13d-3 under the Exchange Act), directly
or indirectly, of securities of the Company representing 20% or more
of the combined voting power of the then outstanding securities of the
Company ordinarily (and apart from rights accruing under special
circumstances) having the right to vote in the election of directors
(calculated as provided in Rule 13d-3(d) under the Exchange Act in the
case of rights to acquire the Company's securities), other than in a
transaction (or series of related transactions) approved by the Board.
For purposes of this definition, "Controlling Person" means each of
(a) the Chairman of the Board, the President and each of the directors
of the Company as of the Effective Date of this Plan, (b) John C.
Malone, (c) Bob Magness, (d) the respective family members, estates
and heirs of each of the persons referred to in clauses (a) through
(c) above and any trust or other investment vehicle for the primary
benefit of any of such persons or their respective family members or
heirs and (e) Kearns-Tribune Corporation, a Delaware corporation. As
used with respect to any person, the term "family member" means the
spouse, siblings and lineal descendants of such person.
"Disability" means the inability to engage in any substantial
gainful activity by reason of any medically determinable physical or
mental impairment that (a) can be expected to result in death or (b)
has lasted or can be expected to last for a continuous period of not
less than 12 months.
"Dividend Equivalents" means, with respect to Restricted
Shares to be issued at the end of the Restriction Period, to the
extent specified by the Committee only, an amount equal to all
dividends and other distributions (or the economic equivalent thereof)
that are payable to stockholders of record during the Restriction
Period on a like number of shares of Series A Stock.
"Domestic Relations Order" means a domestic relations order as
defined by the Code or Title I of the Employee Retirement Income
Security Act, or the rules thereunder.
"Effective Date" means the date on which the Plan became
effective pursuant to Section 1.2.
"Equity security" has the meaning ascribed to such term in
Section 3(a)(11) of the Exchange Act, and an equity security of an
issuer has the meaning ascribed thereto in Rule 16a-1 promulgated
under the Exchange Act, or any successor Rule.
-3-
<PAGE> 4
"Exchange Act" means the Securities Exchange Act of 1934, as
amended from time to time, or any successor statute or statutes
thereto. Reference to any specific Exchange Act section shall include
any successor section.
"Fair Market Value" of a share of Series A Stock or Series B
Stock on any day means the last sale price (or, if no last sale price
is reported, the average of the high bid and low asked prices) for a
share of Series A Stock or Series B Stock, as applicable, on such day
(or, if such day is not a trading day, on the next preceding trading
day) as reported on NASDAQ or, if not reported on NASDAQ, as quoted by
the National Quotation Bureau Incorporated, or if the Series A Stock
or Series B Stock is listed on an exchange, on the principal exchange
on which the Series A Stock or Series B Stock, as applicable, is
listed. If for any day the Fair Market Value of a share of Series A
Stock or Series B Stock, as applicable, is not determinable by any of
the foregoing means, then the Fair Market Value for such day shall be
determined in good faith by the Committee on the basis of such
quotations and other considerations as the Committee deems
appropriate.
"Free Standing SAR" has the meaning ascribed thereto in
Section 7.1.
"Holder" means an employee or former employee of the Company
or a Subsidiary, or a present or former consultant or advisor to the
Company or a Subsidiary, who has in either case received an Award
under this Plan.
"Incentive Stock Option" means a stock option granted under
Article VI which is intended to be an incentive stock option within
the meaning of Section 422 of the Code.
"NASDAQ" means the Nasdaq Stock Market.
"Nonqualified Stock Option" means a stock option granted under
Article VI that is designated a nonqualified stock option, or is
otherwise not an Incentive Stock Option.
"Option" means any Incentive Stock Option or Nonqualified
Stock Option.
"Performance Award" means an award made pursuant to Article X
that is subject to the attainment of one or more Performance Goals.
"Performance Goal" means a standard established by the
Committee to determine in whole or in part whether a Performance Award
shall be earned.
"Plan" has the meaning ascribed thereto in Section 1.1.
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"Restricted Shares" means shares of Series A Stock or the
right to receive shares of Series A Stock, as the case may be, awarded
pursuant to Article VIII.
"Restriction Period" means a period of time beginning on the
date of each award of Restricted Shares and ending on the Vesting Date
with respect to such award.
"Retained Distribution" has the meaning ascribed thereto in
Section 8.3.
"SARs" means stock appreciation rights, awarded pursuant to
Article VII, with respect to shares of Series A Stock.
"Series A Stock" means the Series A Common Stock, $.01 par
value per share, of the Company.
"Series B Stock" means the Series B Common Stock, $.01 par
value per share, of the Company.
"Stock Unit Award" has the meaning ascribed thereto in Section
9.1.
"Subsidiary" of the Company means any present or future
subsidiary (as defined in Section 424(f) of the Code) of the Company,
or any business entity in which the Company owns, directly or
indirectly, 50% or more of the voting, capital or profits interests.
An entity shall be deemed a subsidiary of the Company for purposes of
this definition only for such periods as the requisite ownership or
control relationship is maintained.
"Tandem SARs" has the meaning ascribed thereto in Section 7.1.
"Vesting Date" with respect to any Restricted Shares awarded
hereunder means the date on which such Restricted Shares cease to be
subject to a risk of forfeiture, as designated in or determined in
accordance with the Agreement with respect to such award of Restricted
Shares pursuant to Article VIII. If more than one Vesting Date is
designated for an award of Restricted Shares, reference in the Plan to
a Vesting Date in respect of such Award shall be deemed to refer to
each part of such Award and the Vesting Date for such part.
Article III.
Administration
3.1 Committee. The Plan shall be administered by the Board or the
Compensation Committee of the Board or any other committee appointed by the
Board for such purpose. The
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Committee shall be comprised of not less than two persons. With respect to
Awards granted to a person subject to Rule 16b-3 of the Exchange Act (or any
successor rule) ("Rule 16b-3"), unless otherwise determined by the Board, the
Committee granting such Award (a) shall be the entire Board or (b) shall be
comprised solely of two or more "non-employee directors" as defined by Rule
16b-3. With respect to Awards granted to a "covered employee" under Section
162(m) of the Code (or any successor statute) and the rules and regulations of
the Treasury Department promulgated thereunder ("Section 162(m)"), unless
otherwise determined by the Board, the Committee granting such Award shall be
comprised solely of two or more "outside directors" as defined by Section
162(m). With respect to Awards granted to a person subject to both Rule 16b-3
and Section 162(m), unless otherwise determined by the Board, all grants will
be made in a manner that complies with both Rule 16b-3 and Section 162(m).
Subject to the foregoing, the Board may from time to time appoint members of
the Committee in substitution for or in addition to members previously
appointed, may fill vacancies in the Committee and may remove members of the
Committee. The Committee shall select one of its members as its chairman and
shall hold its meetings at such times and places as it shall deem advisable. A
majority of its members shall constitute a quorum and all determinations shall
be made by a majority of such quorum. Any determination reduced to writing and
signed by all of the members shall be fully as effective as if it had been made
by a majority vote at a meeting duly called and held.
3.2 Powers. The Committee shall have full power and authority to
grant to eligible persons Options under Article VI of the Plan, SARs under
Article VII of the Plan, Restricted Shares under Article VIII of the Plan,
Stock Units under Article IX of the Plan, and/or Performance Awards under
Article X of the Plan, to determine the terms and conditions (which need not be
identical) of all Awards so granted, to interpret the provisions of the Plan
and any Agreements relating to Awards granted under the Plan and to supervise
the administration of the Plan. The Committee in making an Award may provide
for the granting or issuance of additional, replacement or alternative Awards
upon the occurrence of specified events, including the exercise of the original
Award. The Committee shall have sole authority to select persons to whom
Awards may be granted under the Plan and to determine the timing, pricing and
amount of any such Award, subject only to the express provisions of the Plan.
In making determinations hereunder, the Committee may take into account the
nature of the services rendered by the respective employees, consultants and
advisors, their present and potential contributions to the success of the
Company and its Subsidiaries and such other factors as the Committee in its
discretion deems relevant.
3.3 Interpretation. The Committee is authorized, subject to the
provisions of the Plan, to establish, amend and rescind such rules and
regulations as it deems necessary or advisable for the proper administration of
the Plan and to take such other action in connection with or in relation to the
Plan as it deems necessary or advisable. Each action and determination made or
taken pursuant to the Plan by the Committee, including any interpretation or
construction of the Plan, shall be final and conclusive for all purposes and
upon all persons. No member of the Committee shall be liable for any action or
determination made or taken by him or the Committee in good faith with respect
to the Plan.
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Article IV.
Shares Subject to the Plan
4.1 Number of Shares. Subject to the provisions of this Article
IV, the maximum number of shares of Series A Stock with respect to which Awards
may be granted during the term of the Plan shall be 4,000,000 shares. No
shares of Series B Stock may be the subject of Awards under the Plan. Shares
of Series A Stock will be made available from the authorized but unissued
shares of the Company or from shares reacquired by the Company, including
shares purchased in the open market. The shares of Series A Stock subject to
(i) any Award granted under the Plan that shall expire, terminate or be
annulled for any reason without having been exercised (or considered to have
been exercised as provided in Section 7.2), (ii) any Award of any SARs granted
under the Plan that shall be exercised for cash and (iii) any Award of
Restricted Shares or Stock Units that shall be forfeited prior to becoming
vested (provided that the Holder received no benefits of ownership of such
Restricted Shares or Stock Units other than voting rights and the accumulation
of Retained Distributions and unpaid Dividend Equivalents that are likewise
forfeited), shall again be available for purposes of the Plan.
4.2 Adjustments. If the Company subdivides its outstanding shares
of Series A Stock into a greater number of shares of Series A Stock (by stock
dividend, stock split, reclassification or otherwise) or combines its
outstanding shares of Series A Stock into a smaller number of shares of Series
A Stock (by reverse stock split, reclassification or otherwise), or if the
Committee determines that any stock dividend, extraordinary cash dividend,
reclassification, recapitalization, reorganization, split-up, split-off, spin-
off, combination, exchange of shares, warrants or rights offering to purchase
Series A Stock, or other similar corporate event (including mergers or
consolidations other than those which constitute Approved Transactions) affects
the Series A Stock such that an adjustment is required in order to preserve the
benefits or potential benefits intended to be made available under this Plan,
then the Committee shall, in its sole discretion and in such manner as the
Committee may deem equitable and appropriate, make such adjustments to any or
all of (i) the number and kind of shares which thereafter may be awarded,
optioned, or otherwise made subject to the benefits contemplated by the Plan,
(ii) the number and kind of shares subject to outstanding Awards, and (iii) the
purchase or exercise price and the relevant appreciation base with respect to
any of the foregoing, provided, however, that the number of shares subject to
any Award shall always be a whole number. The Committee may, if deemed
appropriate, provide for a cash payment to any Holder of an Award in connection
with any adjustment made pursuant to this Section 4.2.
Article V.
Eligibility
General. The persons who shall be eligible to participate in the Plan
and to receive Awards under the Plan shall be such employees (including
officers and, subject to Section 3.1, directors) of
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the Company and its Subsidiaries or consultants or advisors to the Company and
its Subsidiaries as the Committee shall select. Awards may be made to
employees, consultants and advisors who hold or have held Awards under this
Plan or hold or have held awards under any other plan of the Company or any of
its Affiliates
Article VI.
Stock Options
6.1 Grant of Options. Subject to the limitations of the Plan, the
Committee shall designate from time to time those eligible persons to be
granted Options, the time when each Option shall be granted to such eligible
persons, the number of shares subject to such Option, whether such Option is an
Incentive Stock Option or a Nonqualified Stock Option and, subject to Section
6.2, the purchase price of the shares of Series A Stock subject to such Option.
Subject to the other provisions of the Plan, the same person may receive
Incentive Stock Options and Nonqualified Stock Options at the same time and
pursuant to the same Agreement, provided that Incentive Stock Options and
Nonqualified Stock Options are clearly designated as such.
6.2 Option Price. The price at which shares may be purchased upon
exercise of an Option shall be fixed by the Committee and may be more than,
less than or equal to the Fair Market Value of the Series A Stock as of the
date the Option is granted.
6.3 Limitation on Grants. Except for grants of Awards described in
Section 11.1, no Person may be granted Options covering more than 1% of
outstanding shares of the Common Stock in the calendar year ending December 31,
1997, or in any one subsequent calendar year (in each case as adjusted as
provided in Section 4.2).
6.4 Term of Options. Subject to the provisions of the Plan with
respect to death, retirement and termination of employment, the term of each
Option shall be for such period as the Committee shall determine as set forth
in the applicable Agreement.
6.5 Exercise of Options; Vesting. An Option granted under the
Plan shall become (and remain) exercisable during the term of the Option to the
extent provided in the applicable Agreement and this Plan and, unless the
Agreement otherwise provides, may be exercised to the extent exercisable, in
whole or in part, at any time and from time to time during such term; provided,
however, that subsequent to the grant of an Option, the Committee, at any time
before complete termination of such Option, may accelerate the time or times at
which such Option may be exercised in whole or in part (without reducing the
term of such Option).
6.6 Manner of Exercise.
(a) Form of Payment. An Option shall be exercised by
written notice to the Company upon such terms and conditions as the
Agreement may provide and in
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accordance with such other procedures for the exercise of Options as
the Committee may establish from time to time. The method or methods
of payment of the purchase price for the shares to be purchased upon
exercise of an Option and of any amounts required by Section 11.10
shall be determined by the Committee and may consist of (i) cash, (ii)
check, (iii) promissory note, (iv) whole shares of Series A Stock or
Series B Stock already owned by the Holder, (v) the withholding of
shares of Series A Stock issuable upon such exercise of the Option,
(vi) the delivery, together with a properly executed exercise notice,
of irrevocable instructions to a broker to deliver promptly to the
Company the amount of sale or loan proceeds required to pay the
purchase price, (vii) any combination of the foregoing methods of
payment, or (viii) such other consideration and method of payment as
may be permitted for the issuance of shares under the Delaware General
Corporation Law. The permitted method or methods of payment of the
amounts payable upon exercise of an Option, if other than in cash,
shall be set forth in the applicable Agreement and may be subject to
such conditions as the Committee deems appropriate. Without limiting
the generality of the foregoing, if a Holder is permitted to elect to
have shares of Series A Stock issuable upon exercise of an Option
withheld to pay all or any part of the amounts payable in connection
with such exercise, then the Committee may reserve the discretion to
approve or disapprove such election.
(b) Value of Shares. Shares of Series A Stock or Series
B Stock delivered in payment of all or any part of the amounts payable
in connection with the exercise of an Option, and shares of Series A
Stock withheld for such payment, shall be valued for such purpose at
their Fair Market Value as of the exercise date.
(c) Issuance of Shares. The Company shall effect the
transfer of the shares of Series A Stock purchased under any Option as
soon as practicable after the exercise thereof and payment in full of
the purchase price therefor and of any amounts required by Section
11.10, and within a reasonable time thereafter such transfer shall be
evidenced on the books of the Company. No Holder or other person
exercising an Option shall have any of the rights of a stockholder of
the Company with respect to shares of Series A Stock subject to an
Option granted under the Plan until due exercise and full payment has
been made. No adjustment shall be made for cash dividends or other
rights for which the record date is prior to the date of such due
exercise and full payment.
6.7 Nontransferability. Unless otherwise determined by the
Committee and provided in the applicable Agreement, Options shall not be
transferable other than by will or the laws of descent and distribution or
pursuant to a Domestic Relations Order and, except as otherwise required
pursuant to a Domestic Relations Order, Options may be exercised during the
lifetime of the Holder thereof only by such Holder (or his or her court
appointed legal representative).
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Article VII.
SARs
7.1 Grant of SARs. Subject to the limitations of the Plan, SARs
may be granted by the Committee to such eligible persons in such numbers and at
such times during the term of the Plan as the Committee shall determine. An
SAR may be granted to a Holder of an Option (hereinafter called a "related
Option") with respect to all or a portion of the shares of Series A Stock
subject to the related Option (a "Tandem SAR") or may be granted separately to
an eligible employee (a "Free Standing SAR"). Subject to the limitations of
the Plan, SARs shall be exercisable in whole or in part upon notice to the
Company upon such terms and conditions as are provided in the Agreement.
Except for grants of Awards described in Section 11.1, no Person may be granted
SARs covering more than 1% of outstanding shares of Series A Stock in the
calendar year ending December 31, 1997, or in any one subsequent calendar year
(in each case as adjusted as provided in Section 4.2).
7.2 Tandem SARs. A Tandem SAR may be granted either concurrently
with the grant of the related Option or (if the related Option is a
Nonqualified Option) at any time thereafter prior to the complete exercise,
termination, expiration or cancellation of such related Option. Tandem SARs
shall be exercisable only at the time and to the extent that the related Option
is exercisable (and may be subject to such additional limitations on
exercisability as the Agreement may provide), and in no event after the
complete termination or full exercise of the related Option. Upon the exercise
or termination of the related Option, the Tandem SARs with respect thereto
shall be canceled automatically to the extent of the number of shares of Series
A Stock with respect to which the related Option was so exercised or
terminated. Subject to the limitations of the Plan, upon the exercise of a
Tandem SAR, the Holder thereof shall be entitled to receive from the Company,
for each share of Series A Stock with respect to which the Tandem SAR is being
exercised, consideration (in the form determined as provided in Section 7.4)
equal in value to the excess of the Fair Market Value of a share of Series A
Stock on the date of exercise over the related Option purchase price per share;
provided, however, that the Committee may, in any Agreement granting Tandem
SARs, provide that the appreciation realizable upon exercise thereof shall be
measured from a base higher than the related Option purchase price.
7.3 Free Standing SARs. Free Standing SARs shall be exercisable
at the time, to the extent and upon the terms and conditions set forth in the
applicable Agreement. The base price of a Free Standing SAR shall be not less
than 100% of the Fair Market Value of the Series A Stock on the date of grant
of the Free Standing SAR. Subject to the limitations of the Plan, upon the
exercise of a Free Standing SAR, the Holder thereof shall be entitled to
receive from the Company, for each share of Series A Stock with respect to
which the Free Standing SAR is being exercised, consideration (in the form
determined as provided in Section 7.4) equal in value to the excess of the Fair
Market Value of a share of Series A Stock on the date of exercise over the base
price per share of such Free Standing SAR.
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7.4 Consideration. The consideration to be received upon the
exercise of an SAR by the Holder shall be paid in cash, shares of Series A
Stock (valued at Fair Market Value on the date of exercise of such SAR) or a
combination of cash and shares of Series A Stock as specified in the Agreement,
or, if so provided in the Agreement, either as determined by the Committee in
its sole discretion or as elected by the Holder, provided that the Committee
shall have the sole discretion to approve or disapprove the election by a
Holder to receive cash in full or partial settlement of an SAR, which approval
or disapproval may be given at any time. The Company's obligation arising upon
the exercise of an SAR may be paid currently or on a deferred basis with such
interest or earnings equivalent as the Committee may determine. No fractional
shares of Series A Stock shall be issuable upon exercise of an SAR and, unless
otherwise provided in the applicable Agreement, the Holder will receive cash in
lieu of fractional shares. Unless the Committee shall otherwise determine, to
the extent a Free Standing SAR is exercisable, it will be exercised
automatically for cash on its expiration date.
7.5 Limitations. The applicable Agreement may provide for a limit
on the amount payable to a Holder upon exercise of SARs at any time or in the
aggregate, for a limit on the number of SARs that may be exercised by the
Holder in whole or in part for cash during any specified period, for a limit on
the time periods during which a Holder may exercise SARs and for such other
limits on the rights of the Holder and such other terms and conditions of the
SAR as the Committee may determine, including, without limitation, a condition
that the SAR may be exercised only in accordance with rules and regulations
adopted by the Committee from time to time. Unless otherwise so provided in
the applicable Agreement, any such limit relating to a Tandem SAR shall not
restrict the exercisability of the related Option. Such rules and regulations
may govern the right to exercise SARs granted prior to the adoption or
amendment of such rules and regulations as well as SARs granted thereafter.
7.6 Exercise. For purposes of this Article VII, the date of
exercise of an SAR shall mean the date on which the Company shall have received
notice from the Holder of the SAR of the exercise of such SAR.
7.7 Nontransferability. Unless otherwise determined by the
Committee and provided in the applicable Agreement, SARs shall not be
transferable other than by will or the laws of descent and distribution or
pursuant to a Domestic Relations Order and, except as otherwise required
pursuant to a Domestic Relations Order, SARs may be exercised during the
lifetime of the Holder thereof only by such Holder (or his or her court
appointed legal representative).
Article VIII.
Restricted Shares
8.1 Grant. Subject to the limitations of the Plan, the Committee
shall designate those eligible persons to be granted awards of Restricted
Shares, shall determine the time when each such Award shall be granted, whether
shares of Series A Stock covered by awards of Restricted Shares
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will be issued at the beginning or the end of the Restriction Period and
whether Dividend Equivalents will be paid during the Restriction Period in the
event shares of the Series A Stock are to be issued at the end of the
Restriction Period, and shall designate (or set forth the basis for
determining) the Vesting Date or Vesting Dates for each award of Restricted
Shares and may prescribe other restrictions, terms and conditions applicable to
the vesting of such Restricted Shares in addition to those provided in the
Plan. The Committee shall determine the price, if any, to be paid by the
Holder for the Restricted Shares; provided, however, that the issuance of
Restricted Shares shall be made for at least the minimum consideration
necessary to permit such Restricted Shares to be deemed fully paid and
nonassessable. All determinations made by the Committee pursuant to this
Section 8.1 shall be specified in the Agreement.
8.2 Issuance of Restricted Shares at Beginning of the Restriction
Period. If shares of Series A Stock are issued at the beginning of the
Restriction Period, the stock certificate or certificates representing such
Restricted Shares shall be registered in the name of the Holder to whom such
Restricted Shares shall have been awarded. During the Restriction Period,
certificates representing the Restricted Shares and any securities constituting
Retained Distributions shall bear a restrictive legend to the effect that
ownership of the Restricted Shares (and such Retained Distributions), and the
enjoyment of all rights appurtenant thereto, are subject to the restrictions,
terms and conditions provided in the Plan and the applicable Agreement. Such
certificates shall remain in the custody of the Company and the Holder shall
deposit with the Company stock powers or other instruments of assignment, each
endorsed in blank, so as to permit retransfer to the Company of all or any
portion of the Restricted Shares and any securities constituting Retained
Distributions that shall be forfeited or otherwise not become vested in
accordance with the Plan and the applicable Agreement.
8.3 Restrictions. Restricted Shares issued at the beginning of
the Restriction Period shall constitute issued and outstanding shares of Series
A Stock for all corporate purposes. The Holder will have the right to vote
such Restricted Shares, to receive and retain such dividends and distributions,
as the Committee may in its sole discretion designate, paid or distributed on
such Restricted Shares and to exercise all other rights, powers and privileges
of a Holder of Series A Stock with respect to such Restricted Shares; except,
that (a) the Holder will not be entitled to delivery of the stock certificate
or certificates representing such Restricted Shares until the Restriction
Period shall have expired and unless all other vesting requirements with
respect thereto shall have been fulfilled or waived; (b) the Company will
retain custody of the stock certificate or certificates representing the
Restricted Shares during the Restriction Period as provided in Section 8.2; (c)
other than such dividends and distributions as the Committee may in its sole
discretion designate, the Company will retain custody of all distributions
("Retained Distributions") made or declared with respect to the Restricted
Shares (and such Retained Distributions will be subject to the same
restrictions, terms and vesting and other conditions as are applicable to the
Restricted Shares) until such time, if ever, as the Restricted Shares with
respect to which such Retained Distributions shall have been made, paid or
declared shall have become vested, and such Retained Distributions shall not
bear interest or be segregated in a separate account; (d) the Holder may not
sell, assign, transfer, pledge, exchange, encumber or dispose of the Restricted
Shares or any Retained
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Distributions or his interest in any of them during the Restriction Period; and
(e) a breach of any restrictions, terms or conditions provided in the Plan or
established by the Committee with respect to any Restricted Shares or Retained
Distributions will cause a forfeiture of such Restricted Shares and any
Retained Distributions with respect thereto.
8.4 Issuance of Stock at End of the Restriction Period.
Restricted Shares issued at the end of the Restriction Period shall not
constitute issued and outstanding shares of Series A Stock and the Holder shall
not have any of the rights of a stockholder with respect to the shares of
Series A Stock covered by such an award of Restricted Shares, in each case
until such shares shall have been transferred to the Holder at the end of the
Restriction Period. If and to the extent that shares of Series A Stock are to
be issued at the end of the Restriction Period, the Holder shall be entitled to
receive Dividend Equivalents with respect to the shares of Series A Stock
covered thereby either (i) during the Restriction Period or (ii) in accordance
with the rules applicable to Retained Distributions, as the Committee may
specify in the Agreement.
8.5 Cash Awards. In connection with any award of Restricted
Shares, an Agreement may provide for the payment of a cash amount to the Holder
of such Restricted Shares at any time after such Restricted Shares shall have
become vested. Such cash awards shall be payable in accordance with such
additional restrictions, terms and conditions as shall be prescribed by the
Committee in the Agreement and shall be in addition to any other salary,
incentive, bonus or other compensation payments which such Holder shall be
otherwise entitled or eligible to receive from the Company.
8.6 Completion of Restriction Period. On the Vesting Date with
respect to each award of Restricted Shares, and the satisfaction of any other
applicable restrictions, terms and conditions (a) all or the applicable portion
of such Restricted Shares shall become vested, (b) any Retained Distributions
and any unpaid Dividend Equivalents with respect to such Restricted Shares
shall become vested to the extent that the Restricted Shares related thereto
shall have become vested and (c) any cash award to be received by the Holder
with respect to such Restricted Shares shall become payable, all in accordance
with the terms of the applicable Agreement. Any such Restricted Shares,
Retained Distributions and any unpaid Dividend Equivalents that shall not
become vested shall be forfeited to the Company and the Holder shall not
thereafter have any rights (including dividend and voting rights) with respect
to such Restricted Shares, Retained Distributions and any unpaid Dividend
Equivalents that shall have been so forfeited. The Committee may, in its
discretion, provide that the delivery of any Restricted Shares, Retained
Distributions and unpaid Dividend Equivalents that shall have become vested,
and payment of any cash awards that shall have become payable, shall be
deferred until such date or dates as the recipient may elect. Any election of
a recipient pursuant to the preceding sentence shall be filed in writing with
the Committee in accordance with such rules and regulations, including any
deadline for the making of such an election, as the Committee may provide.
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Article IX.
Stock Units
9.1 Grant. In addition to granting awards of Options, SARs and
Restricted Shares, the Committee shall have authority to grant to eligible
persons awards of Stock Units ("Stock Unit Awards") which may be in the form of
Series A Stock or units, the value of which is based, in whole or in part, on
the Fair Market Value of the Series A Stock. Subject to the provisions of the
Plan, including any rules established pursuant to Section 9.2, awards of Stock
Units shall be subject to such terms, restrictions, conditions, vesting
requirements and payment rules as the Committee may determine in its sole
discretion, which need not be identical for each Award. The determinations
made by the Committee pursuant to this Section 9.1 shall be specified in the
applicable Agreement.
9.2 Rules. The Committee may, in its sole discretion, establish
any or all of the following rules for application to an award of Stock Units :
(a) Any shares of Series A Stock which are part of an
award of Stock Units may not be assigned, sold, transferred, pledged
or otherwise encumbered prior to the date on which the shares are
issued, or if later, the date provided by the Committee at the time of
the Award.
(b) Such Awards may provide for the payment of cash
consideration by the person to whom such Award is granted or provide
that the Award, and Series A Stock to be issued in connection
therewith, if applicable, shall be delivered without the payment of
cash consideration; provided, however, that the issuance of any shares
of Series A Stock in connection with an award of Stock Units shall be
for at least the minimum consideration necessary to permit such shares
to be deemed fully paid and nonassessable.
(c) Awards of Stock Units may relate in whole or in part
to performance or other criteria established by the Committee at the
time of grant.
(d) Awards of Stock Units may provide for deferred
payment schedules, vesting over a specified period of employment, the
payment (on a current or deferred basis) of dividend equivalent
amounts with respect to the number of shares of Series A Stock covered
by the Award, and elections by the employee to defer payment of the
Award or the lifting of restrictions on the Award, if any.
(e) In such circumstances as the Committee may deem
advisable, the Committee may waive or otherwise remove, in whole or in
part, any restrictions or limitations to which a Stock Unit Award was
made subject at the time of grant.
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Article X.
Performance Awards
10.1 Terms of Performance Awards. Subject to the limitations of
the Plan, the Committee shall designate those eligible persons to be granted
Performance Awards, shall determine the form and amount of each such award, the
time when each such award shall be granted, and the Performance Goals
applicable thereto, and may prescribe other restrictions, terms and conditions
applicable to such Award in addition to those provided in the Plan. A
Performance Award may be payable in the form of cash, property or securities of
the Company, including, without limitation, Options, SARs, Restricted Shares
and/or Stock Units. A Performance Award shall be paid, vested or otherwise
deliverable solely on account of the attainment of one or more pre-established,
objective Performance Goals established by the Committee prior to the earlier
to occur of (i) 90 days after the commencement of the period of service to
which the Performance Goal relates and (ii) the passage of 25% of the period of
service (as scheduled in good faith at the time the goal is established), and
in any event while the outcome is substantially uncertain. A Performance Goal
is objective if a third party having knowledge of the relevant facts could
determine whether the goal is met.
10.2 Performance Goal Criteria. A Performance Goal may be based on
one or more business criteria that apply to the individual, one or more
business units of the Company, or the Company as a whole, and may include one
or more of the following: revenue, net income, cash flow (as defined for such
purpose by the Committee) stock price, market share, earnings per share, return
on equity, return on assets or decrease in costs. Unless otherwise stated,
such a Performance Goal need not be based upon an increase or positive result
under a particular business criterion and could include, for example,
maintaining the status quo or limiting economic losses (measured, in each case,
by reference to specific business criteria). In interpreting Plan provisions
applicable to Performance Goals and Performance Awards, it is the intent of the
Plan to conform with the standards of Section 162(m) of the Code and Treasury
Regulation (S) 1.162-27(e)(2)(i), and the Committee in establishing such goals
and interpreting the Plan shall be guided by such provisions.
10.3 Committee Certification. Prior to the payment of any
compensation based on the achievement of Performance Goals, the Committee must
certify in writing that applicable Performance Goals and any of the material
terms thereof were, in fact, satisfied. Subject to the foregoing provisions,
the terms, conditions and limitations applicable to any Performance Awards made
pursuant to this Plan shall be determined by the Committee.
10.4 Certain Limitations. Notwithstanding anything to the contrary
contained in this Plan, any Performance Awards made hereunder shall be limited
so that no person may be granted Performance Awards consisting of cash or in
any other form permitted under this Plan (other than Awards consisting of
Options or SARs or otherwise consisting of shares of Common Stock or units
denominated in such shares, or, in either case, additional cash amounts related
to such an Award) in respect of any one-year period having a value determined
on the date of grant in excess of $10,000,000.
-15-
<PAGE> 16
Article XI.
General Provisions
11.1 Acceleration of Options, SARs, Restricted Shares and Stock
Units and Performance Awards.
(a) Death or Disability. If a Holder's employment (which
term shall include, as the context shall require, a Holder's period of
service to the Company and its Subsidiaries as a consultant or
advisor) shall terminate by reason of death or Disability,
notwithstanding any contrary waiting period, installment period,
vesting schedule or Restriction Period in any Agreement or in the
Plan, unless the applicable Agreement provides otherwise: (i) in the
case of an Option or SAR, each outstanding Option or SAR granted under
the Plan shall immediately become exercisable in full in respect of
the aggregate number of shares covered thereby; (ii) in the case of
Restricted Shares, the Restriction Period applicable to each such
award of Restricted Shares shall be deemed to have expired and all
such Restricted Shares, any related Retained Distributions and any
unpaid Dividend Equivalents shall become vested and any cash amounts
payable pursuant to the applicable Agreement shall be adjusted in such
manner as may be provided in the Agreement, (iii) in the case of Stock
Units, each such award of Stock Units shall become vested in full, and
(iv) in the case of Performance Awards, each such Performance Award
shall become vested in full.
(b) Approved Transactions; Board Changes; Control
Purchases. In the event of any Approved Transaction, Board Change or
Control Purchase, notwithstanding any contrary waiting period,
installment period, vesting schedule or Restriction Period in any
Agreement or in the Plan, unless the applicable Agreement provides
otherwise: (i) in the case of an Option or SAR, each such outstanding
Option or SAR granted under the Plan shall become exercisable in full
in respect of the aggregate number of shares covered thereby; (ii) in
the case of Restricted Shares, the Restriction Period applicable to
each such award of Restricted Shares shall be deemed to have expired
and all such Restricted Shares, any related Retained Distributions and
any unpaid Dividend Equivalents shall become vested and any cash
amounts payable pursuant to the applicable Agreement shall be adjusted
in such manner as may be provided in the Agreement; (iii) in the case
of Stock Units, each such award of Stock Units shall become vested in
full; and (iv) in the case of Performance Awards, all Performance
Goals shall thereupon be deemed to have been achieved, fully vested
and immediately payable; in each case effective immediately prior to
consummation of the Approved Transaction; provided, however, that any
Options, SARs or, if applicable, Stock Units not theretofore exercised
shall terminate upon consummation of the Approved Transaction.
Notwithstanding the foregoing, unless otherwise provided in the
applicable Agreement, the Committee may, in its discretion, determine
that any or all outstanding Awards of any or all types granted
-16-
<PAGE> 17
pursuant to the Plan will not vest or become exercisable on an
accelerated basis, nor Performance Goals be deemed to have been
achieved, in connection with an Approved Transaction and/or will not
terminate if not exercised prior to consummation of the Approved
Transaction, if the Board or the surviving or acquiring corporation,
as the case may be, shall have taken, or made effective provision for
the taking of, such action as in the opinion of the Committee is
equitable and appropriate to substitute a new Award for such Award or
to assume such Award and in order to make such new or assumed Award,
as nearly as may be practicable, equivalent to the old Award (before
giving effect to any acceleration of the vesting or exercisability
thereof), taking into account, to the extent applicable, the kind and
amount of securities, cash or other assets into or for which the
Series A Stock may be changed, converted or exchanged in connection
with the Approved Transaction.
11.2 Termination of Employment.
(a) General. If a Holder's employment shall terminate
prior to the complete exercise of an Option or SAR (or deemed exercise
thereof, as provided in Section 7.2) or during the Restriction Period
with respect to any Restricted Shares or prior to the vesting or
complete exercise of any Stock Units or Performance Award, then such
Option, SAR, Stock Unit or Performance Award shall thereafter be
exercisable, and the Holder's rights to any unvested Restricted
Shares, Retained Distributions, unpaid Dividend Equivalents and cash
amounts and any such unvested Stock Units shall thereafter vest solely
to the extent provided in the applicable Agreement; provided, however,
that (i) no Option or SAR may be exercised after the scheduled
expiration date thereof; (ii) if the Holder's employment terminates by
reason of death or Disability, the Option or SAR shall remain
exercisable for a period of at least one year following such
termination (but not later than the scheduled expiration of such
Option or SAR); and (iii) any termination by the Company for cause
will be treated in accordance with the provisions of Section 11.2(b).
(b) Termination by Company for Cause. If a Holder's
employment with the Company or a Subsidiary shall be terminated by the
Company or such Subsidiary during the Restriction Period with respect
to any Restricted Shares, or prior to the exercise of any Option or
SAR, or prior to the vesting or exercise of any Stock Unit, or prior
to the vesting of any Performance Award, for cause, then (i) all
Options and SARs and all unvested or unexercised Stock Units held by
such Holder shall immediately terminate, (ii) such Holder's rights to
all Restricted Shares, Retained Distributions, any unpaid Dividend
Equivalents and any cash awards shall be forfeited immediately, and
(iii) such Holder's interest in all unvested Performance Awards shall
be forfeited immediately. For purposes of this Section 11.2, "cause"
shall have the meaning ascribed thereto in any employment agreement to
which such Holder is a party or, in the absence thereof, shall include
but not be limited to,
-17-
<PAGE> 18
insubordination, dishonesty, incompetence, moral turpitude, other
misconduct of any kind or refusal to perform one's duties and
responsibilities for any reason other than illness or incapacity;
provided, however, that if such termination occurs within 12 months
after an Approved Transaction, Board Change or Control Purchase,
"cause" shall mean only a felony conviction for fraud,
misappropriation or embezzlement.
(c) Miscellaneous. The Committee may determine whether
any given leave of absence constitutes a termination of employment;
provided, however, that, for purposes of the Plan (i) any leave of
absence, duly authorized in writing by the Company for military
service or sickness, or for any other purpose approved by the Company
if the period of such leave does not exceed 90 days, and (ii) any
leave of absence in excess of 90 days, duly authorized in writing by
the Company, if the employee's right to reemployment is guaranteed
either by statute or contract, shall not be a termination of
employment. Awards made under the Plan shall not be affected by any
change of employment so long as the Holder continues to be an employee
of the Company or any Subsidiary.
11.3 Right of Company to Terminate Employment. Nothing contained
in the Plan or in any Award, and no action of the Company or the Committee with
respect thereto, shall confer or be construed to confer on any Holder any right
to continue in the employ of the Company or any of its Subsidiaries or
interfere in any way with the right of the Company or a Subsidiary to terminate
the employment of the Holder at any time, with or without cause; subject,
however, to the provisions of any employment agreement between the Holder and
the Company or any Subsidiary.
11.4 Nonalienation of Benefits. No right or benefit under the Plan
shall be subject to anticipation, alienation, sale, assignment, hypothecation,
pledge, exchange, transfer, encumbrance or charge, and any attempt to
anticipate, alienate, sell, assign, hypothecate, pledge, exchange, transfer,
encumber or charge the same shall be void. No right or benefit hereunder shall
in any manner be liable for or subject to the debts, contracts, liabilities or
torts of the person entitled to such benefits.
11.5 Written Agreement. Each grant of an Option under the Plan
shall be evidenced by a stock option agreement which shall designate the
Options granted thereunder as Incentive Stock Options or Nonqualified Stock
Options; each SAR shall be evidenced by a stock appreciation rights agreement;
each award of Restricted Shares shall be evidenced by a restricted shares
agreement; each award of Stock Units shall be evidenced by a stock units
agreement; and each Performance Award shall be evidenced by a performance award
agreement; each in such form and containing such terms and provisions not
inconsistent with the provisions of the Plan as the Committee from time to time
shall approve; provided, however, that if more than one type of Award is made
to the same Holder, such Awards may be evidenced by a single agreement with
such Holder. Each grantee of an Option, SAR, Restricted Shares, Stock Units or
Performance Awards shall be notified promptly of such grant and a written
agreement shall be promptly executed and delivered by the Company and the
grantee, provided that, in the discretion of the Committee, such grant of
Options, SARs, Restricted Shares
-18-
<PAGE> 19
or Stock Units, or such Performance Award, as applicable, shall terminate if
such written agreement is not signed by such grantee (or his attorney) and
delivered to the Company within 60 days after the date the Committee approved
such grant. Any such written agreement may contain (but shall not be required
to contain) such provisions as the Committee deems appropriate (i) to insure
that the penalty provisions of Section 4999 of the Code will not apply to any
stock or cash received by the Holder from the Company or (ii) to provide cash
payments to the Holder to mitigate the impact of such penalty provisions upon
the Holder. Any such agreement may be supplemented or amended from time to
time as approved by the Committee as contemplated by Section 11.8(b).
11.6 Designation of Beneficiaries. Each person who shall be
granted an Award under the Plan may designate a beneficiary or beneficiaries
and may change such designation from time to time by filing a written
designation of beneficiary or beneficiaries with the Committee on a form to be
prescribed by it, provided that no such designation shall be effective unless
so filed prior to the death of such person.
11.7 Right of First Refusal. The Agreements may contain such
provisions as the Committee shall determine to the effect that if a Holder
elects to sell all or any shares of Series A Stock that such Holder acquired
upon the exercise of an Option or SAR or upon the vesting of Restricted Shares
or Stock Units awarded under the Plan, then such Holder shall not sell such
shares unless such Holder shall have first offered in writing to sell such
shares to the Company at Fair Market Value on a date specified in such offer
(which date shall be at least three business days and not more than ten
business days following the date of such offer). In any such event,
certificates representing shares issued upon exercise of Options or SARs and
the vesting of Restricted Shares or Stock Units shall bear a restrictive legend
to the effect that transferability of such shares are subject to the
restrictions contained in the Plan and the applicable Agreement and that the
Company may cause the transfer agent for the Series A Stock to place a stop
transfer order with respect to such shares.
11.8 Termination and Amendment.
(a) General. No Awards may be made under the Plan on or
after the tenth anniversary of the Effective Date, or such earlier
date as the Plan may be terminated as provided herein. The Board or
the Committee may at any time prior to the tenth anniversary of the
Effective Date terminate the Plan, and may, from time to time, suspend
or discontinue the Plan or modify or amend the Plan in such respects
as it shall deem advisable; except that no such modification or
amendment shall be effective prior to approval by the Company's
stockholders to the extent such approval is then required pursuant to
Section 162(m) of the Code in order to preserve the deductibility to
the Company of any compensation expense that may be incurred by the
Company with respect to any Award then outstanding (unless the Company
waives such condition with respect to any such amendment and/or any
such Award) or to the extent stockholder approval is otherwise
required by applicable legal requirements.
-19-
<PAGE> 20
(b) Modification. No termination, modification or
amendment of the Plan may, without the consent of the person to whom
any Award shall theretofore have been granted, adversely affect the
rights of such person with respect to such Award. No modification,
extension, renewal or other change in any Award granted under the Plan
shall be made after the grant of such Award, unless the same is
consistent with the provisions of the Plan. With the consent of the
Holder and subject to the terms and conditions of the Plan (including
Section 11.8(a)), the Committee may amend outstanding Agreements with
any Holder, including, without limitation, any amendment which would
(i) accelerate the time or times at which the Award may be exercised
and/or (ii) extend the scheduled expiration date of the Award.
Without limiting the generality of the foregoing, the Committee may,
but solely with the Holder's consent unless otherwise provided in the
Agreement, agree to cancel any Award under the Plan and issue a new
Award in substitution therefor, provided that the Award so substituted
shall satisfy all of the requirements of the Plan as of the date such
new Award is made. Nothing contained in the foregoing provisions of
this Section 11.8(b) shall be construed to prevent the Committee from
providing in any Agreement that the rights of the Holder with respect
to the Award evidenced thereby shall be subject to such rules and
regulations as the Committee may, subject to the express provisions of
the Plan, adopt from time to time, or impair the enforceability of any
such provision.
11.9 Government and Other Regulations. The obligation of the
Company with respect to Awards shall be subject to all applicable laws, rules
and regulations and such approvals by any governmental agencies as may be
required, including, without limitation, the effectiveness of any registration
statement required under the Securities Act of 1933, and the rules and
regulations of any securities exchange or association on or through which the
Series A Stock may be listed or quoted. For so long as the Series A Stock is
registered under the Exchange Act, the Company shall use its reasonable efforts
to comply with any legal requirements (i) to maintain a registration statement
in effect under the Securities Act of 1933 with respect to all shares of Series
A Stock that may be issued to Holders under the Plan, and (ii) to file in a
timely manner all reports required to be filed by it under the Exchange Act.
11.10 Withholding. The Company's obligation to deliver shares of
Series A Stock or pay cash in respect of any Award under the Plan shall be
subject to applicable federal, state and local tax withholding requirements.
Federal, state and local withholding tax due at the time of an Award, upon the
exercise of any Option or SAR or upon the vesting of, or expiration of
restrictions with respect to, Restricted Shares or Stock Units, as appropriate,
may, in the discretion of the Committee, be paid in shares of Series A Stock or
Series B Stock already owned by the Holder or through the withholding of shares
otherwise issuable to such Holder, upon such terms and conditions (including,
without limitation, the conditions referenced in Section 6) as the Committee
shall determine. If the Holder shall fail to pay, or make arrangements
satisfactory to the Committee for the payment, to the Company of all such
federal, state and local taxes required to be withheld by the Company, then the
Company shall, to the extent permitted by law, have the right to deduct from
any payment of any
-20-
<PAGE> 21
kind otherwise due to such Holder an amount equal to any federal, state or
local taxes of any kind required to be withheld by the Company with respect to
such Award.
11.11 Non-Exclusivity of the Plan. Neither the adoption of the Plan
by the Board nor the submission of the Plan to the stockholders of the Company
for approval shall be construed as creating any limitations on the power of the
Board to adopt such other incentive arrangements as it may deem desirable,
including, without limitation, the granting of stock options and the awarding
of stock and cash otherwise then under the Plan, and such arrangements may be
either generally applicable or applicable only in specific cases.
11.12 Exclusion from Pension and Profit-Sharing Computation. By
acceptance of an Award, unless otherwise provided in the applicable Agreement,
each Holder shall be deemed to have agreed that such Award is special incentive
compensation that will not be taken into account, in any manner, as salary,
compensation or bonus in determining the amount of any payment under any
pension, retirement or other employee benefit plan, program or policy of the
Company or any Subsidiary. In addition, each beneficiary of a deceased Holder
shall be deemed to have agreed that such Award will not affect the amount of
any life insurance coverage, if any, provided by the Company on the life of the
Holder which is payable to such beneficiary under any life insurance plan
covering employees of the Company or any Subsidiary.
11.13 Unfunded Plan. Neither the Company nor any Subsidiary shall
be required to segregate any cash or any shares of Series A Stock which may at
any time be represented by Awards, and the Plan shall constitute an "unfunded"
plan of the Company. Except as provided in Article VIII with respect to awards
of Restricted Shares and except as expressly set forth in writing, no employee
shall have voting or other rights with respect to shares of Series A Stock
prior to the delivery of such shares. Neither the Company nor any Subsidiary
shall, by any provisions of the Plan, be deemed to be a trustee of any Series A
Stock or any other property, and the liabilities of the Company and any
Subsidiary to any employee pursuant to the Plan shall be those of a debtor
pursuant to such contract obligations as are created by or pursuant to the
Plan, and the rights of any employee, former employee or beneficiary under the
Plan shall be limited to those of a general creditor of the Company or the
applicable Subsidiary, as the case may be. In its sole discretion, the Board
may authorize the creation of trusts or other arrangements to meet the
obligations of the Company under the Plan, provided, however, that the
existence of such trusts or other arrangements is consistent with the unfunded
status of the Plan.
11.14 Governing Law. The Plan shall be governed by, and construed
in accordance with, the laws of the State of Delaware.
11.15 Accounts. The delivery of any shares of Series A Stock and
the payment of any amount in respect of an Award shall be for the account of
the Company or the applicable Subsidiary, as the case may be, and any such
delivery or payment shall not be made until the recipient shall have paid or
made satisfactory arrangements for the payment of any applicable withholding
taxes as provided in Section 11.10.
-21-
<PAGE> 22
11.16 Legends. In addition to any legend contemplated by Section
11.7, each certificate evidencing Series A Stock subject to an Award shall bear
such legends as the Committee deems necessary or appropriate to reflect or
refer to any terms, conditions or restrictions of the Award applicable to such
shares, including, without limitation, any to the effect that the shares
represented thereby may not be disposed of unless the Company has received an
opinion of counsel, acceptable to the Company, that such disposition will not
violate any federal or state securities laws.
11.17 Company's Rights. The grant of Awards pursuant to the Plan
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.
-22-
<PAGE> 1
EXHIBIT 21.1
LIST OF SUBSIDIARIES
TEMPO Sound, Inc.,
an Oklahoma Corporation
450714 B.C.,
a British Columbia, Canada Corporation
DMX-Europe N.V.,
a Netherlands Corporation
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM TRANSACTION
REPORT ON FORM 10-K OF TCI MUSIC, INC. FOR THE PERIOD OCTOBER 1, 1996 TO JUNE
30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FORM 10-K FOR
THE PERIOD OCTOBER 1, 1996 TO JUNE 30, 1997
</LEGEND>
<RESTATED>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> OCT-01-1996
<PERIOD-END> JUN-30-1997
<CASH> 832,767
<SECURITIES> 0
<RECEIVABLES> 4,485,334
<ALLOWANCES> 450,455
<INVENTORY> 491,573
<CURRENT-ASSETS> 6,186,452
<PP&E> 10,382,595
<DEPRECIATION> 6,250,422
<TOTAL-ASSETS> 10,985,895
<CURRENT-LIABILITIES> 22,599,513
<BONDS> 0
0
0
<COMMON> 596,722
<OTHER-SE> (16,898,947)
<TOTAL-LIABILITY-AND-EQUITY> 10,985,895
<SALES> 16,594,278
<TOTAL-REVENUES> 16,594,278
<CGS> 0
<TOTAL-COSTS> 30,965,103
<OTHER-EXPENSES> 144,465
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 397,409
<INCOME-PRETAX> (14,707,744)
<INCOME-TAX> 0
<INCOME-CONTINUING> (14,707,744)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (14,707,744)
<EPS-PRIMARY> (0.25)
<EPS-DILUTED> (0.25)
</TABLE>
