<PAGE> 1
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________ to ________
Commission File Number 0-15445
THE BOX WORLDWIDE, INC.
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(Exact name of small business issuer as specified in its charter)
Florida 59-2605267
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
1221 Collins Avenue, Miami Beach, Florida 33139
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(Address of principal executive offices)
(305)-674-5000
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(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes X No
----- -----
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date:
Class Number of Shares Outstanding
on August 12, 1997
Common Stock, Par Value $.001 Per Share 24,001,781
Transitional Small Business Disclosure Format: Yes No X
---- -----
<PAGE> 2
THE BOX WORLDWIDE, INC.
INDEX
<TABLE>
<S> <C>
PART I FINANCIAL INFORMATION PAGE
Item 1 Financial Statements
Consolidated Balance Sheet at June 30,
1997 (Unaudited) 3
Consolidated Statements of Operations for the
Three Months and Six Months ended June 30,
1997 and 1996 (Unaudited) 4
Consolidated Statements of Cash Flows for the
Six Months ended June 30, 1997 and 1996
(Unaudited) 5
Notes to Financial Statements 6
Item 2 Management's Discussion and Analysis or
Plan of Operation 15
PART II OTHER INFORMATION
Item 1 Legal Proceedings 35
Item 5 Other Information 36
Item 6 Exhibits 40
SIGNATURES 41
</TABLE>
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<PAGE> 3
THE BOX WORLDWIDE, INC.
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
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<TABLE>
<CAPTION>
JUNE 30,
1997
------------
<S> <C>
ASSETS:
CURRENT ASSETS
Cash and cash equivalents $ 2,345,293
Accounts receivable, less allowances for
doubtful accounts of $332,000 3,065,001
Prepaid expenses and other current assets 319,239
------------
TOTAL CURRENT ASSETS 5,729,533
RECEIVABLE FROM OFFICER - LONG TERM 104,389
PROPERTY AND EQUIPMENT, NET 8,852,102
DEFERRED COSTS AND OTHER ASSETS, NET 1,644,619
INVESTMENT IN AND ADVANCES TO
UNCONSOLIDATED COMPANY 348,137
------------
TOTAL ASSETS $ 16,678,780
============
LIABILITIES AND STOCKHOLDERS' EQUITY:
CURRENT LIABILITIES
Accounts payable $ 1,210,562
Accrued expenses 3,375,933
------------
TOTAL CURRENT LIABILITIES 4,586,495
------------
COMMITMENTS AND CONTINGENCIES
6% CONVERTIBLE REDEEMABLE PREFERRED STOCK
$0.15 par value, $1.50 stated value, 1,800,000 shares
authorized, 1,666,667 issued and outstanding
including $83,630 of cumulative dividend payable 2,373,758
------------
STOCKHOLDERS' EQUITY
8% Cumulative convertible preferred
stock, $1.00 par value, 200,000 shares
authorized, none issued --
Common stock, $.001 par value,
40,000,000 shares authorized, 24,001,781
shares issued and outstanding at June 30, 1997 24,002
Additional paid in capital - Common Stock 30,238,761
Accumulated deficit (20,490,833)
Cumulative foreign currency translation (53,403)
------------
TOTAL STOCKHOLDERS' EQUITY 9,718,527
------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 16,678,780
============
</TABLE>
See Notes to Financial Statements
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<PAGE> 4
THE BOX WORLDWIDE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
=============================================================================
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
1997 1996 1997 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
REVENUES
Advertising revenues $ 2,619,218 $ 2,855,244 $ 4,968,935 $ 4,850,819
Net viewer revenues 2,321,527 2,677,276 4,368,208 5,456,361
Other revenues 172,384 82,149 281,932 144,587
------------ ------------ ------------ ------------
5,113,129 5,614,669 9,619,075 10,451,767
Interest income 71,372 80,930 237,628 194,157
------------ ------------ ------------ ------------
5,184,501 5,695,599 9,856,703 10,645,924
------------ ------------ ------------ ------------
COSTS AND EXPENSES
Affiliate fees, site costs and
telephone service 1,367,733 1,623,119 2,859,605 3,033,170
Distribution, general and
administrative 4,320,008 4,254,320 8,075,938 8,185,741
Satellite transponder and rent
paid to related parties 118,020 149,691 236,040 495,380
Depreciation and amortization 586,489 325,326 1,102,818 564,369
------------ ------------ ------------ ------------
6,392,250 6,352,456 12,274,401 12,278,660
------------ ------------ ------------ ------------
LOSS BEFORE INTEREST IN LOSSES OF
UNCONSOLIDATED COMPANIES (1,207,749) (656,857) (2,417,698) (1,632,736)
INTEREST IN LOSSES OF UNCONSOLIDATED
COMPANIES (145,473) (207,320) (316,737) (454,335)
------------ ------------ ------------ ------------
NET LOSS (1,353,222) (864,177) (2,734,435) (2,087,071)
Deduct required dividend on 6% convertible
redeemable preferred stock (37,500) 0 (75,000) 0
------------ ------------ ------------ ------------
Net loss attributable to common stock $ (1,390,722) $ (864,177) $ (2,809,435) $ (2,087,071)
============ ============ ============ ============
Net loss per common share after deduction for
required dividend on 6% convertible redeemable
preferred stock $ (0.06) $ (0.04) $ (0.12) $ (0.09)
============ ============ ============ ============
Weighted average number of common shares
outstanding 24,001,781 23,956,918 24,001,781 23,950,600
============ ============ ============ ============
</TABLE>
See Notes to Financial Statements
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<PAGE> 5
THE BOX WORLDWIDE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
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<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED
-----------------------------
JUNE 30, JUNE 30,
1997 1996
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(2,734,435) $(2,087,071)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 1,102,818 564,369
Interest in losses of unconsolidated companies 316,737 454,335
Change in assets and liabilities:
(Increase) decrease in accounts receivable (552,851) 736,492
Increase in prepaid expenses and other current assets (4,369) (736,830)
(Decrease) increase in accounts payable and accrued expenses (20,303) 328,444
----------- -----------
NET CASH USED IN OPERATING ACTIVITIES (1,892,403) (740,261)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (3,254,855) (2,706,219)
Increase in deferred costs (601,928) 0
Disposal of equipment 31,365 27,508
Increase in investment in and advances to unconsolidated companies (391,403) (383,205)
----------- -----------
NET CASH USED IN INVESTING ACTIVITIES (4,216,821) (3,061,916)
----------- -----------
EFFECT OF EXCHANGE RATE CHANGES ON CASH 3,113 (50,316)
----------- -----------
NET DECREASE IN CASH AND CASH EQUIVALENTS (6,106,111) (3,852,493)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 8,451,404 6,712,402
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 2,345,293 $ 2,859,909
=========== ===========
</TABLE>
See Notes to Financial Statements
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<PAGE> 6
THE BOX WORLDWIDE, INC.
NOTES TO FINANCIAL STATEMENTS
1. The financial information included herein is submitted pursuant to the
requirements of Form 10-QSB and does not include all disclosures required
by generally accepted accounting principles. It is suggested that these
unaudited financial statements be read in conjunction with the financial
statements and notes thereto included in the Company's Annual Report on
Form 10-KSB for the fiscal year ended December 31, 1996. The accompanying
interim financial statements reflect all normal recurring adjustments which
are, in the opinion of management, necessary for a fair statement of the
results for the interim periods presented. The results of operations for
interim periods are not necessarily indicative of the results to be
obtained for the entire year.
2. Net loss per share computations are based on the weighted average shares of
common stock outstanding during the quarter. Common stock equivalents were
not considered in the computation of net income or loss per share as their
effect would be to decrease net loss per share.
3. The consolidated financial statements include the balance sheet and
operating results of the Company's wholly-owned subsidiaries, VJN LPTV
Corp. (incorporated in February, 1994), The Box Worldwide Europe, B.V.,
(incorporated in August, 1995), Video Jukebox Network Europe,
Ltd.(incorporated in January, 1996), The Box Worldwide-Latin America, Inc.
(incorporated in January, 1996), The Box Argentina (incorporated in
December 1996), and The Box Italy, srl (incorporated in January 1997); and
include on the equity method the operating results of Video Jukebox Network
International, Limited ("VJNIL") for the first six months of 1996. The
Company also accounts for its 50% owned subsidiary, The Box Holland
(incorporated in October, 1995), on the equity method of accounting. All
significant consolidating and eliminating entries have been included.
UNCONSOLIDATED SUBSIDIARIES:
THE BOX HOLLAND --- The following is a summary of the balance sheet as of
June 30, 1997 and operating results for the three months and six months
ended June 30, 1997 and 1996, respectively, of The Box Holland:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 1997 JUNE 30, 1996 JUNE 30, 1997 JUNE 30, 1996
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Current assets $ 231,015 $ 156,414
Non-current assets 727,510 804,101
--------- ---------
$ 958,525 $ 960,515
========= =========
Current liabilities $ 205,531 $ 270,295
Equity, advances and notes
payable to shareholders 752,994 690,220
--------- ---------
$ 958,525 $ 960,515
========= =========
Net revenues $ 13,874 $ 74,750 $ 212,285 $ 91,424
========= ========= ========= =========
Net operating loss $(290,944) $(147,115) $(633,472) $(368,198)
========= ========= ========= =========
</TABLE>
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<PAGE> 7
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. (CONTINUED)
The Company recorded interest income of approximately $28,000 and $112,000
during the quarter and six months ended June 30, 1997, related to a
$994,000 loan outstanding with The Box Holland, Inc. during these periods.
Interest from inception of the loan in 1995 to the end of 1996 had not been
previously recognized, and was included in the first quarter of 1997.
VJNIL --- In September 1991, VJNIL, which began operations in 1992, was
founded in the United Kingdom to develop and launch a United Kingdom
version of the Company's music video television programming. The Company
had beneficially owned 91% of the outstanding common stock of VJNIL from
inception. On June 30, 1995, the Company purchased the remaining nine
percent of VJNIL from its minority shareholder in exchange for 225,000
shares of the Company's common stock, which were valued at $267,187 on that
day. Also on June 30, 1995, the Company completed the sale of a 50 percent
equity interest in VJNIL to a wholly-owned subsidiary of Ticketmaster
Corporation ("Ticketmaster") for $2,225,000 in cash. The Company's
remaining investment in VJNIL had been accounted for on the equity method
of accounting effective June 30, 1995. Prior to June 30, 1995, the
subsidiary's assets, liabilities and operations had been consolidated with
the Company.
On October 30, 1996, the Company completed the sale of its remaining 50%
equity interest in VJNIL to EMAP plc, a United Kingdom media and
entertainment company. EMAP paid VJN $4,550,000 in cash for VJN's 50%
remaining investment, plus reimbursed VJN $1,500,000 for the Company's
outstanding loan to VJNIL plus approximately $200,000 in accrued interest
related to the loan. The Company also received a one-time $100,000
licensing payment for trademark and other intellectual property rights in
the United Kingdom and Ireland. The Company paid approximately $400,000 in
investment fees and legal fees related to this transaction.
The following is a summary of VJNIL's balance sheet as of June 30, 1996 and
operating results for the quarter and six months ended June 30, 1996,
respectively, during which period the Company's share of these results were
accounted for on the equity method by the Company:
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<PAGE> 8
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. (CONTINUED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, 1996 June 30, 1996
----------------- ----------------
<S> <C> <C>
Current assets $ 1,979,308
Noncurrent assets 993,151
-----------
$ 2,972,459
===========
Current liabilities $ 1,118,289
Non-current liabilities 2,213
Equity, advances and notes
payable to shareholders 1,851,957
-----------
$ 2,972,459
===========
Net revenues $ 575,799 $ 1,067,913
=========== ===========
Net operating loss $ ( 316,162) $ (635,975)
=========== ===========
</TABLE>
The difference between the Company's recorded net investment in and
advances to VJNIL at June 30, 1996 and the underlying equity in VJNIL's net
assets relates primarily to previously recognized net losses prior to the
sale of 50% of its interest in VJNIL. The Company recorded interest income
of approximately $37,000 and $75,000 during the three and six months ended
June 30, 1996, respectively, related to a $1,500,000 loan outstanding with
VJNIL during the period.
4. LEGAL PROCEEDINGS:
In May 1997, the Company settled the litigation against Donald L. Barone
("Barone"), Kenneth Trzecki ("Trzecki") and Healthcare Communications, Inc.
("HCI") in the Circuit Court of the Seventeenth Judicial Circuit in and for
Broward County, Florida. Pursuant to the terms of the settlement, the
Company paid an aggregate of approximately $165,000 to Barone, Trzecki and
HCI, and all of the parties to the litigation exchanged releases and
dismissed their respective claims with prejudice.
5. SUBSEQUENT EVENTS:
As of August 12, 1997, the Company entered into an Agreement and Plan of
Merger (the "Merger Agreement") with TCI Music, Inc. ("TCI Music") and TCI
Music Acquisition Sub, Inc. ("Acquisition Sub"), a wholly-owned subsidiary
of TCI Music, pursuant to which Acquisition Sub will be merged (the
"Merger") with and into the Company, with the Company as the surviving
corporation.
-8-
<PAGE> 9
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. (CONTINUED)
The aggregate consideration deliverable by TCI Music in the Merger (the
"Merger Consideration") will be equal to (a) the sum of (i) $38,502,672 and
(ii) $1.50 times the number of shares of the Company's common stock, par
value $.001 per share ("Company Common Stock"), issued prior to the closing
of the Merger upon the exercise or conversion of options, warrants,
convertible securities or other rights to acquire Company Common Stock that
are outstanding as of the date of the Merger Agreement MINUS (b) the sum of
(i) $1.50 times the number of shares of Company Common Stock that are held
by holders of such shares who have not voted in favor of the Merger or
consented to the Merger in writing and who have demanded appraisal rights
with respect to such shares in accordance with the Florida Business
Corporation Act (the "Dissenting Shares"), (ii) $1.50 times the number of
shares of the Company's 6% convertible redeemable preferred stock, par
value $.15 per share and stated value of $1.50 per share (the "Company
Preferred Stock"), outstanding at the closing of the Merger that are not
Dissenting Shares and (iii) all accrued and unpaid dividends on shares of
Company Preferred Stock at the time of the closing of the Merger, whether
or not such shares are Dissenting Shares.
Pursuant to the Merger Agreement, among other things, each share of Company
Common Stock outstanding immediately prior to the closing of the Merger
(except Dissenting Shares) will be converted into the right to receive (a)
a fraction (the "Exchange Rate") of one share of TCI Music Series A
Convertible Preferred Stock, par value $.01 per share ("TCI Music Preferred
Stock"), and (b) as to any holder of shares of Company Common Stock, if the
total number of shares of Company Common Stock of such holder is not
convertible into a whole number of shares of TCI Music Preferred Stock, the
right to receive cash in lieu of any fractional share of TCI Music
Preferred Stock. Under the Merger Agreement, the Exchange Rate is defined
as the quotient of (a) the quotient of the Merger Consideration divided by
three times the average of the average daily closing bid and asked prices
of one share of TCI Music Series A Common Stock, par value $.01 per share
("TCI Music Series A Common Stock"), for a period of 20 consecutive trading
days ending on the third trading day prior to the closing of the Merger (as
reported on the NASDAQ SmallCap Market), divided by (b) the number of
shares of Company Common Stock outstanding immediately prior to the closing
of the Merger, less the number of shares of Company Common Stock that are
Dissenting Shares.
The holders of the TCI Music Preferred Stock will have the right, at any
time, to convert each share of TCI Music Preferred Stock into three shares
of TCI Music Series A Common Stock, subject to certain adjustments set
forth in the Certificate of Designations (the "Certificate of
Designations") for the TCI Music Preferred Stock.
-9-
<PAGE> 10
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. (CONTINUED)
Holders of the TCI Music Preferred Stock will be entitled to vote on all
matters submitted to a vote of the holders of the TCI Music Series A Common
Stock. Each share of TCI Music Preferred Stock will entitle the registered
holder thereof to a number of votes equal to the number of shares of TCI
Music Series A Common Stock into which each such share is convertible as of
the record date for the matter to be voted upon. Holders of the TCI Music
Preferred Stock will vote together with holders of the TCI Music Series A
Common Stock and will not be entitled to vote as a class except as
otherwise required by TCI Music's Certificate of Incorporation or the
General Corporation Law of the State of Delaware, the jurisdiction in which
TCI Music is incorporated.
Holders of the TCI Music Preferred Stock will be entitled to receive cash
dividends from time to time on each share of TCI Music Preferred Stock,
payable out of funds legally available therefore, in an amount equal to the
product of (a) the amount of the cash dividend declared on one share of TCI
Music Series A Common Stock or any other security into which the TCI Music
Preferred Stock is then convertible and (b) the number of shares of TCI
Music Series A Common Stock or other security into which one share of TCI
Music Preferred Stock may be converted as of the date such dividend is
declared. Such dividends will be payable to holders of the TCI Music
Preferred Stock only if, as and when the Board of Directors of TCI Music
declares cash dividends (and not dividends payable in other property) on
the TCI Music Series A Common Stock.
At the option of TCI Music, all or any portion of the TCI Music Preferred
Stock may be redeemed out of funds legally available therefor (a) during
the 30-day periods immediately following the fourth, sixth and eighth
anniversaries of the date on which the TCI Music Preferred Stock is first
issued or first deemed to have been issued as a result of the Merger (the
"Issue Date"), (b) at any time after the Closing Price (as defined in the
Certificate of Designations) of the TCI Music Series A Common Stock equals
or exceeds 125% of the average of the averages of the closing bid and asked
prices of one share of TCI Music Series A Common Stock for a period of 20
consecutive business days ending on the third business day prior to the
Issue Date (as adjusted to reflect the effects of any stock dividend, stock
split, reclassification or combination affecting the TCI Music Series A
Common Stock) for a period of at least 30 consecutive business days, and
(c) at any time after the tenth anniversary of the Issue Date, in each case
at the Liquidation Value per share of TCI Music Preferred Stock.
Liquidation Value is defined in the Certificate of Designations as the sum
of three times the average of the averages of the closing bid and asked
prices of one share of TCI Music Series A Common Stock for a period of 20
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<PAGE> 11
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. (CONTINUED)
consecutive business days ending on the third business day prior to the
Issue Date, as increased on each anniversary of the Issue Date by an amount
equal to the product of that sum and the greater of (a) the percentage
increase, if any in the Consumer Price Index, All Urban Consumers, U.S.
City Average, All Items, as published by the U.S. Department of Labor,
Bureau of Labor Statistics (in an amount not to exceed 5% in any year), and
(b) 3%.
Subject to (a) the rights of holders of any class or series of stock
("Senior Securities") of TCI Music authorized after the Issue Date ranking
senior to the TCI Music Preferred Stock in respect of the right to receive
payment of dividends prior to the TCI Music Preferred Stock or the right to
receive assets upon liquidation, dissolution or winding up of the affairs
of TCI Music prior to the TCI Music Preferred Stock and (b) any prohibition
or restriction set forth in any security or bond, debenture, note,
indenture, guarantee or other instrument or agreement evidencing any
indebtedness of TCI Music, each holder of TCI Music Preferred Stock will
have the right to require TCI Music, at any time, to redeem, out of funds
legally available therefore, all or any portion of the outstanding shares
of TCI Music Preferred Stock held by each holder at any time after the
tenth anniversary of the Issue Date at the Liquidation Value per share of
TCI Music Preferred Stock.
Upon any liquidation, dissolution or winding up of TCI Music, subject to
the prior payment in full of amounts to which any Senior Securities are
entitled, the holders of TCI Music Preferred Stock will be entitled to be
paid an amount in cash equal to the aggregate Liquidation Value at the date
fixed for liquidation of all shares of TCI Music Preferred Stock
outstanding before any distribution or payment is made upon all shares of
TCI Music Series B Common Stock, par value $.01 per share ("TCI Music
Series B Common Stock"), and any other class or series of stock of TCI
Music authorized after the Issue Date except Senior Securities and any
class or series of stock of TCI Music that is entitled to receive payment
of dividends on parity with the TCI Music Preferred Stock or is entitled to
receive assets upon liquidation, dissolution or winding up of the affairs
of TCI Music on parity with the TCI Music Preferred Stock.
Assuming (a) no shareholder of the Company has demanded appraisal rights in
accordance with the Florida Business Corporation Act, (b) all of the
outstanding shares of Company Preferred Stock are converted into Company
Common Stock prior to the completion of the Merger and (c) the Exchange
Rate is $7.00, immediately following the Merger (a) the outstanding shares
of TCI Music Preferred Stock into which the Company Common Stock will be
converted will represent
-11-
<PAGE> 12
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. (CONTINUED)
approximately 6.64% of, and .85% of the voting power relating to, the total
outstanding shares of TCI Music Series A Common Stock and TCI Music Series
B Common Stock (collectively, the "TCI Music Stock"); and (b) the
outstanding shares of TCI Music Series B Common Stock will represent
approximately 75.39% of, and 96.84% of the voting power related to, the
total outstanding shares of TCI Music Stock and TCI Music Preferred Stock.
Liberty VJN, Inc., an affiliate of TeleCommunications, Inc. ("TCI"),
beneficially owns approximately 5% of the outstanding shares of Company
Common Stock. Assuming the same facts as set forth in the immediately
preceding sentence, immediately following the Merger, TCI will beneficially
own approximately 4.69% of the outstanding shares of TCI Music Preferred
Stock, 45.73% of the TCI Music Series A Common Stock prior to any Preferred
Stock conversion, and 100% of the outstanding TCI Music Series B Common
Stock, which will collectively represent approximately 83.92% of the
outstanding shares of TCI Music Stock and 97.94% of the voting power of the
outstanding shares of TCI Music Stock and TCI Music Preferred Stock. The
TCI Music Series B Common Stock entitles the holder to ten votes on each
matter to be voted upon by the holders of TCI Music Series A Common Stock
and TCI Music Series B Common Stock.
The respective obligations to TCI Music and Acquisition Sub to effect the
Merger are subject to the satisfaction of certain conditions, including (a)
the Merger Agreement and the transactions contemplated by the Merger
Agreement will have been duly approved by holders of 75% of the outstanding
shares of Company Common Stock and Company Preferred Stock entitled to
vote, voting as a single class; (b) the number of Dissenting Shares do not
exceed 15% of the issued and outstanding shares of Company Common Stock and
Company Preferred Stock; (c) the waiting period applicable to the
consummation of the Merger under the Hart-Scott-Rodino Act will have
expired, or have been earlier terminated and any other notices or approvals
or consents required by or of governmental entities, to the extent required
to be obtained under the Merger Agreement, will have either been filed or
obtained; and (d) the registration statement (the "Registration Statement")
of TCI Music covering the TCI Music Preferred Stock and the TCI Music
Series A Common Stock (into which the TCI Music Preferred Stock will be
convertible) will have become effective in accordance with the provisions
of the Securities Act of 1933 and any necessary securities law approvals
will have been obtained and no stop orders suspending the effectiveness of
the Registration Statement will have been issued by the Securities and
Exchange Commission.
The obligations of the Company to consummate the transactions contemplated
by
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<PAGE> 13
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. (CONTINUED)
the Merger Agreement are subject to the satisfaction of certain matters,
including (a) the performance by TCI Music and Acquisition Sub, in all
material respects, of their respective agreements in the Merger Agreement
to be performed prior to the closing of the Merger and the accuracy of the
representations and warranties of each of them in all material respects;
and (b) the fiduciary obligations of the Board of Directors of the Company
to the Company and its shareholders.
The respective obligations of TCI Music and Acquisition Sub to consummate
the transactions contemplated by the Merger Agreement are also subject to
the satisfaction or waiver of the following conditions: (a) the performance
by the Company in all material respects, of the agreements of it in the
Merger Agreement to be performed by it by the closing of the Merger and the
accuracy of the Company's representations and warranties in all material
respects; (b) receipt of all consents, orders and approvals of governmental
entities and third parties, to the extent required to be obtained under the
Merger Agreement; and (c) the number of shares of the shareholders of the
Company exercising dissenter's rights does not exceed 15% of the
outstanding Company Common Stock and the Company Preferred Stock as of the
date of the closing of the Merger.
Contemporaneously with the signing of the Merger Agreement, three
shareholders of the Company, H.F. Lenfest, J. Patrick Michaels, Jr. and
StarNet/CEA II Partners, who beneficially own 14,210,419 shares of Company
Common Stock (representing approximately 55% of the outstanding shares of
Company Common Stock) entered into a voting agreement with TCI Music,
pursuant to which, among other things, each of such shareholders agreed to
vote all of the shares of voting stock of the Company beneficially owned by
each such shareholder in favor of the Merger and to vote all of such shares
against any proposal that would compete or interfere with, or that would in
any way delay or otherwise inhibit the timely consummation of the Merger.
Such voting agreement will terminate (a) upon the mutual consent of all
parties thereto, (b) at the closing of the Merger or (c) upon termination
of the Merger Agreement.
The foregoing description of the Merger Agreement and the Certificate of
Designations is qualified in its entirety by reference to the complete text
of the Merger Agreement and the Certificate of Designations, which are
incorporated by reference herein and copies of which (exclusive of exhibits
and schedules) are filed as Exhibits 2.1 and 2.2, respectively, to this
Report.
6. On August 7, 1997, the Federal Communications Commission (the "FCC")
-13-
<PAGE> 14
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. (CONTINUED)
adopted order FCC 97-279 (the "Order"). The Order establishes rules to
implement the closed captioning requirements of the Telecommunications Act
of 1996 (the "1996 Act"). The 1996 Act required the FCC to adopt, by August
8, 1997, rules and implementation schedules for the captioning of video
programming ensuring access to video programming by persons with hearing
disabilities. The Company estimates that it may cost approximately $430,000
to retrofit boxes that are currently in operation, in order to comply with
the Order.
-14-
<PAGE> 15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1997 COMPARED TO THE THREE MONTHS ENDED JUNE 30,
1996.
OVERVIEW:
Due to the wide brand recognition of THE BOX, the Company changed its corporate
name to The Box Worldwide, Inc. effective February 20, 1997. A corporate
restructuring has segregated domestic operations from the international
operations and from the purely corporate functions. This restructuring allows
the Company to organize its investments, operating structures and branding of
its trademarks and technology in a more efficient and economical manner.
Domestic operations are reflected through a new wholly-owned subsidiary, The Box
Worldwide - USA, Inc., formed as a Delaware corporation in March 1997.
Previously established subsidiaries, The Box Worldwide - Europe, B.V. and The
Box Worldwide - Latin America, Inc., contain the operating results and
development costs (through allocation from the parent company) for those
respective regions. Results from these two subsidiaries, along with all other
international regions and the general international development costs together
constitute "international operations and development", as referred to throughout
this document.
Costs of international development and general corporate charges, to the extent
they are not allocable to a reporting unit, are reported through the corporate
division of the Company. For the results for the quarter ended June 30, 1996,
however, no such expense allocations from the parent company to domestic and
international operations were made. For comparability with the current period's
results, all direct international and corporate expenses for the prior year
period have been segregated.
For the quarter ended June 30, 1997, the Company realized a consolidated net
loss of $1,353,222 as compared to a net loss of $864,177 for the quarter ended
June 30, 1996. This consolidated loss is composed of the following items:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------------------
JUNE 30, 1997 JUNE 30, 1996
------------- -------------
<S> <C> <C>
Income from domestic operations $ 108,891 $ 221,029
Loss from international operations
and development (1,267,114) (711,711)
Net corporate expenses (194,999) (373,495)
----------- -----------
Consolidated net loss $(1,353,222) $ (864,177)
=========== ===========
</TABLE>
As noted above, the 1997 results reflect allocations of certain corporate
charges to
-15-
<PAGE> 16
RESULTS OF OPERATIONS (CONT'D)
domestic and international operations, whereas no such allocations were made in
1996.
Management believes that these allocations more accurately reflect the true cost
to the domestic and international operating units for services provided by the
parent company, as these items generally represent costs which these divisions
would incur directly had such services not been provided by the parent. Prior to
giving effect to these allocations, the second quarter 1997 income from domestic
operations would have been $378,734 higher, and the same period loss from
international development and operations would have been $110,962 lower.
Please refer to the following Supplemental Schedule of Revenue and Expenses by
Segment for further detail:
THE BOX WORLDWIDE, INC.
SUPPLEMENTAL SCHEDULE OF REVENUE AND EXPENSES BY SEGMENT
FOR QUARTERS ENDED JUNE 30, 1997 AND 1996
(UNAUDITED)
<TABLE>
<CAPTION>
INTERNATIONAL
DEVELOPMENT &
CONSOLIDATED DOMESTIC OPERATIONS CORPORATE
----------------------- ---------------------- ---------------------- --------------------
1997 1996 1997 1996 1997 1996 1997 1996
----------- ---------- ---------- ---------- ---------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
REVENUES
Advertising revenues $ 2,619,218 $2,855,244 $2,604,370 $2,855,244 $ 14,848 $ 0 $ 0 $ 0
Net viewer revenues 2,321,523 2,677,276 2,035,586 2,651,730 285,937 25,546 0 0
Other revenues 172,383 82,149 42,544 67,860 113,866 6,801 15,973 7,488
----------- ---------- ---------- ---------- ----------- --------- --------- ---------
5,113,124 5,614,669 4,682,500 5,574,834 414,651 32,347 15,973 7,488
Interest income 71,372 80,930 0 0 0 0 71,372 80,930
----------- ---------- ---------- ---------- ----------- --------- --------- ---------
5,184,496 5,695,599 4,682,500 5,574,834 414,651 32,347 87,345 88,418
COSTS AND EXPENSES
Affiliate fees, site costs
and telephone service 1,367,717 1,623,119 1,138,019 1,607,310 229,698 15,809 0 0
Distribution, general and
administrative 4,320,020 4,254,320 2,857,890 3,296,870 1,231,696 495,537 230,434 461,913
Satellite transponder and
rent paid to related parties 118,020 149,691 118,020 149,691 0 0 0 0
Depreciation and amortization 586,488 325,326 459,680 299,934 74,898 25,392 51,910 0
----------- ---------- ---------- ---------- ----------- --------- --------- ---------
6,392,245 6,352,456 4,573,609 5,353,805 1,536,292 536,738 282,344 461,913
----------- ---------- ---------- ---------- ----------- --------- --------- ---------
INCOME (LOSS) BEFORE INTEREST
IN LOSS OF UNCONSOLIDATED
COMPANIES (1,207,749) (656,857) 108,891 221,029 (1,121,641) (504,391) (194,999) (373,495)
----------- ---------- ---------- ---------- ----------- --------- --------- ---------
INTEREST IN LOSS OF
UNCONSOLIDATED COMPANIES (145,473) (207,320) 0 0 (145,473) (207,320) 0 0
----------- ---------- ---------- ---------- ----------- --------- --------- ---------
NET INCOME (LOSS) $(1,353,222) $ (864,177) $ 108,891 $ 221,029 $(1,267,114) $(711,711) $(194,999) $(373,495)
----------- ---------- ---------- ---------- ----------- --------- --------- ---------
</TABLE>
-16-
<PAGE> 17
RESULTS OF OPERATIONS (CONT'D)
REVENUES:
ADVERTISING REVENUES:
Consolidated advertising revenue decreased by approximately $236,000 for the
quarter ended June 30, 1997 as compared with the same 1996 period. Domestic
advertising revenues decreased by approximately $251,000 for the quarter ended
June 30, 1997 as compared with the same 1996 period. National advertising
decreased 3.5%, or approximately $72,000, for the quarter ended June 30, 1997
from the comparable period in 1996. Proctor and Gamble, Coca Cola, MCI, Nike,
Nordic Trak, Reebok and various other national consumer goods and services all
advertised on THE BOX during the second quarter of 1997.
Record advertising decreased approximately $179,000 in the second quarter of
1997 as compared to the same quarter of 1996. Part of this decrease occurred due
to the change in music mixes throughout the Company's localized interactive
boxes. In the past, the Company had relied almost exclusively on record
advertising of urban and rap artists which is no longer compatible with the
programming offered on all boxes. Minimal new music product was released during
the second quarter of 1997, also resulting in lower advertising levels. During
the second quarter 1997, the Company's top management and record advertising
sales team have participated in presentations to eighty five percent of all the
major record labels. With these presentations, management informed the record
labels of the Company's music mix changes, digital technology changes and
overall localized programming strategy that will enable the labels to promote
all their music product on THE BOX rather than the exclusive niche of urban and
rap music. Management believes that the presentations were well received and,
while it cannot be assured, record label advertising is expected to improve
throughout 1997. International advertising revenue was $15,000 for the second
quarter of 1997, with no comparable amount in the second quarter of 1996.
Nearly $8.6 million in domestic advertising has already been booked for the
year. International advertising is anticipated to begin to contribute positively
to consolidated operations in 1997, due to subscriber increases in existing
international operations and the March 1997 broadcast launch of The Box Italy.
However, there can be no assurance that all booked revenue will actually be
aired and earned or that the international growth will result in increased
advertising.
NET VIEWER REVENUES:
The decrease in net viewer revenues of $356,000 results from the net effect of
reduced domestic gross viewer revenues (negative effect of $782,000), as offset
by
-17-
<PAGE> 18
RESULTS OF OPERATIONS (CONT'D)
the related reduction in the telephone service provider's billing and collection
charges (positive effect of $100,000), the reduction in chargebacks experienced
when consumers failed to pay for their requested videos (positive effect of
$66,000) and the increase in international viewer revenues (positive effect of
$260,000).
Gross domestic viewer revenues, which resulted from the interactive telephone
calls to THE BOX for video selections, decreased from $3,273,000 to $2,491,000,
a difference of approximately $782,000 or 23.9% from the second quarter of 1996
to the second quarter of 1997. Approximately $159,000 related to the loss of
carriage on a Detroit cable system in June 1996. The remaining decrease resulted
from a lower average performance per box during the second quarter of 1997. This
decrease in average performance may be attributed to factors involving both the
Company and the music industry. THE BOX removed certain violent or sexually
explicit videos from its playlists, which historically generated a significant
number of viewer requests. The Company also has introduced request emulation
when no viewer requests were in the queue in order to improve the on-air look of
its programming. Finally, the transactional revenue has been negatively affected
by airtime required for increased advertising and for additional programming
elements such as Box Big Break (on-air spots featuring local artists) and other
elements designed to strengthen viewing of THE BOX.
As the Company moves forward to improve its product, the interests of various
constituencies must be balanced. This involves attracting and maintaining
viewers while remaining cognizant of the concerns of cable operators and
advertisers. While many requests on THE BOX were directed towards controversial
videos, their frequent play resulted in the loss of cable distribution. To
address this issue, THE BOX has implemented a more stringent standard for video
content while at the same time maintaining its reputation for innovative
programming.
THE BOX also is taking additional steps to balance its appeal to both the
passive and the transacting audiences. Request emulation and pre-programmed
segments are increasing the attractiveness of the service to non-transacting
viewers which make up the bulk of THE BOX audience. These viewers are looking
for engaging and continuous programming, prefer less emphasis on a static
request menu and want fewer repetitive plays of the same music video selection.
The needs of advertisers and cable operators are generally more closely aligned
with these non-transacting viewers. However, some form of available video menu
with a call to action is important to prompt requests from transactional
viewers. The Company continues to make enhancements to serve both audience
groups.
In addition to taking viewer requests via 900 service, the Company introduced a
new program in 1996 to allow customers who would like to exceed the Company's
900 service credit limit to establish a prepaid account for the selection of
videos. In addition to generating additional viewer revenue, this program has
been designed to eliminate customer chargebacks and billing charges from service
providers, as well as reduce transport costs. Initiated as a test, this program
slowly expanded during 1996 so that, by the end of that year, it was available
to all customers. This new prepaid video program provided 30.9% of consolidated
gross viewer revenue in the current period,
-18-
<PAGE> 19
RESULTS OF OPERATIONS (CONT'D)
as compared with 11.3% in the second quarter of 1996. Revenue from this program
is recognized only as videos are selected, while prepaid account balances are
included in current liabilities.
With lower domestic viewer revenues, the billing and collection charges imposed
by the Company's telephone service provider were reduced proportionately.
Therefore, an offset to the decrease in domestic gross revenue is the reduction
in billing charges of approximately $100,000. Besides the lower revenue level,
the Company has been successful in renegotiating with the telco providers to
reduce billing and collection charges from eight percent during the second
quarter of 1996 to seven percent during the second quarter of 1997. Further,
revenue from the prepaid video program is not subject to billing and collection
charges, and therefore the increase in revenue from this program as a percentage
of total gross viewer revenue has also contributed to the reduction in these
charges.
An additional component of net viewer revenues relates to the adverse effect of
domestic customers who deny having made music video requests on THE BOX. In the
Company's current international markets, consumers are not allowed to refute
these charges, so the chargebacks are only occurring domestically. In an effort
to reduce chargebacks from telephone companies, the Company is in its third year
of call blocking for previous non-paying customers and applying credit
limitations for all its interactive viewers. After nearly three years of these
procedures, the Company has seen the chargeback rate reduced from over 16.7% in
1994, to approximately 13.5% currently. Chargebacks for the quarter ended June
30, 1997 totaled approximately $324,000 as compared to $390,000 for the same
prior year period. Revenue from the prepaid video program is not subject to
customer chargebacks since all money is collected before the videos air, and
therefore the increase in revenue from this program as a percentage of total
gross viewer revenue has also contributed to the reduction in these charges.
Net viewer revenue from international boxes increased by a net of $260,000 due
to the late 1996 international launches in Chile, Peru and Venezuela, none of
which were in operation during second quarter 1996, and the 1997 launches in New
Zealand and Italy.
OTHER REVENUE:
Miscellaneous revenues of $172,000 for the second quarter 1997 included $83,000
in domestic and international cable carriage fees, $36,000 for production
services provided to our unconsolidated Holland affiliate, $17,000 in gains on
the sale of some minor equipment, $23,000 from the sale of one of the Company's
low power television stations, and miscellaneous other revenue of approximately
$13,000. Interest income totaled approximately $71,000 in the second quarter of
1997, which included $28,000 related to an outstanding loan to the Company's
Holland affiliate.
-19-
<PAGE> 20
RESULTS OF OPERATIONS (CONT'D)
COSTS AND EXPENSES:
AFFILIATE FEES, SITE COSTS AND TELEPHONE SERVICES:
Expenses for affiliate fees, site costs and telephone services were 58.9% and
60.6% of net viewer revenues for the quarters ended June 30, 1997 and 1996,
respectively. The percentage for the second quarter of 1997 increased to 68.3%
after adjusting for a non-recurring credit of $218,000 due to a reversal of a
reserve relating to affiliate fees for discontinued systems. Recurring expenses
in this category as a percentage of net viewer revenues are up significantly for
1997 since a large portion of the affiliation fees, site costs and
telecommunications charges are fixed per location. With the reduced level of
domestic viewer transactional revenues, these expenses as a percentage of
revenues increased in the second quarter of 1997.
Expenses for affiliate fees, site costs and telephone services totaled $255,000
less for second quarter 1997 as compared with the same prior year period. The
total decrease resulted from decreased expenditures for domestic operations of
$469,000 offset by increased expenditures in international operations of
$214,000.
The domestic decrease in expenses of approximately $469,000 between the quarters
ended June 30, 1997 and 1996 was due to the net effect of the following:
- - A decrease of $312,000 in domestic transport costs due to a combination of
reduced levels of viewer transactional revenues and rerouting of certain
viewer calls in-house that were previously handled by outside service
bureaus (completed by end of current period). In the future, the Company
expects to continue to realize savings from the movement of these calls to
an in-house operation.
- - A decrease in the cable affiliation fees of approximately $213,000 resulted
from a non-recurring credit recognized in the quarter ended June 30, 1997
related to the reversal of a reserve for discontinued cable systems, with
no comparable item in the same prior year period.
- - A decrease in low power television affiliation fees of approximately
$18,000. Of this decrease, $107,000 relates to the discontinued affiliation
with a New York City low power station broadcasting from Queens. This
affiliation was terminated on January 31, 1997 to reduce carriage fee
expenditures since the other two low power affiliates in New York City had
improved their signals and were covering a majority of the market at lower
affiliation fees. This is offset by an increase in low power affiliation
fees related to newly launched low power stations and to improved
performance of certain existing low power boxes.
-20-
<PAGE> 21
RESULTS OF OPERATIONS (CONT'D)
- - A $9,000 decrease in the low power television site costs due to reductions
in the number of LPTV sites requiring such expenditures.
- - An increase in telecommunications expense of $44,000 due mainly to the
fixed VSAT transmission charges associated with the new digital box
operations. While these expenses will provide for higher telecommunications
expenses in 1997, the net cost savings of updating each Box location by
VSAT satellite as opposed to the development, production and distribution
of 3/4-inch tapes and laser discs required under the old analog technology
are expected to total at least $70,000 per month.
- - An increase in satellite transponder and uplink fees of $39,000 paid for
satellite service of THE BOX. In prior years and through the end of March
1996, the fees for satellite transponder and uplink services were paid to a
related party and were included in the related party expenditure category
in the financial statements. Beginning in April 1996, the Company entered
into an agreement for such service with an unrelated third party. The rates
for the transponder uplink increased from $42,500 per month to $55,300 per
month beginning in January 1997. The Company is negotiating a long-term
agreement with WTCI for these services, which are now provided on a
month-to-month basis.
International expenses for affiliate fees, site costs and telephone services
increased by $214,000 due to the start-up of new international operations in the
second half of 1996 and the first quarter of 1997 that were not in existence
during the second quarter of 1996.
DISTRIBUTION, GENERAL AND ADMINISTRATIVE:
Consolidated distribution, general and administrative expenses for the quarter
ended June 30, 1997 increased by approximately $66,000, from $4,254,000 in 1996
to $4,320,000 in 1997. This increase can be divided into the net effect of the
following components: a decrease in domestic expenditures of approximately
$439,000; an increase of approximately $736,000 related to international
development and operating expenses; and a decrease in corporate expenses of
$231,000 (after allocation to domestic and international units).
As part of the Company's corporate restructuring, corporate expenses have been
segregated from expenses relating to domestic and international development and
operations. These corporate costs primarily consist of parent company personnel,
administrative expenses, legal fees and the continuing development cost of the
digital box and related technology. All charges which relate to domestic and
international expenditures, which are essentially all charges except for the
corporate costs of a public company, have been allocated to the operating units
beginning with the first quarter of 1997. For the three month periods ended June
30, 1997 and 1996, the net corporate charges were as follows:
-21-
<PAGE> 22
RESULTS OF OPERATIONS (CONT'D)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JUNE 30,1997 JUNE 30, 1996
------------ -------------
<S> <C> <C>
Total corporate charges $ 720,131 $ 461,913
Allocated to The Box Worldwide-USA, Inc. (378,734) --
Allocated to international development and operations (110,962) --
--------- ---------
Net corporate charges $ 230,435 $ 461,913
========= =========
</TABLE>
The increase in total corporate charges from $462,000 in 1996 to $720,000 for
second quarter 1997 ($258,000) consisted of the following items:
- - The Company elected to settle a long standing claim for the amount of
$160,000 in cash, $5,000 in surrender of a replevin bond previously written
off plus related legal costs of $19,000. While the Company believed the
action was without merit, it appeared that the costs associated with going
to trial would be greater than the agreed settlement amount, therefore the
claim was settled.
- - An increase in compensation of $51,000 relating mostly to the transfer of
certain digital box development and engineering functions to the parent
company in 1997.
- - Cost of producing the 1997 Corporate Annual Report of $20,000 with no
comparable expenditures in the second quarter of 1996. The costs of the
1996 Annual Report were incurred in the third quarter of 1996.
- - An increase in various administrative expenses of $8,000.
Distribution, general and administrative expenses for domestic operations
decreased by $439,000 for the second quarter of 1997 as compared with the same
prior year period. The majority of the savings ($257,000) related to lower
salaries and benefits realized primarily due to three factors: (i) the departure
of the Executive Vice President, Programming in 1996 ($85,000); (ii) the
transfer of certain staff from domestic operations to corporate and
international operations ($20,000); and (iii) a general reduction of domestic
staff due to the elimination of a number of positions ($152,000).
Further decreases were experienced in trade advertising, consumer marketing,
research, industry events and travel and entertainment expenses of approximately
$325,000 as a result of the Company deferring the development of its new
marketing campaign until the latter part of 1997. Participation in several
industry trade events also were reduced in order to control costs. While trade
advertising will likely increase in 1997, the costs for trade events should
remain low and possibly even decrease given the reduction of cable industry
state association shows.
A decrease of $143,000 in production, discs and shipping costs resulted from
more in-house production and the use of VSAT technology to update the Digital
Box programming and advertising. Music costs associated with the Company's
revenues
-22-
<PAGE> 23
RESULTS OF OPERATIONS (CONT'D)
decreased approximately $10,000 for the second quarter of 1997 as compared with
the second quarter of 1996 due to the lower overall revenue levels.
Cost of sales associated with merchandise sold through the Company's retail
operation was approximately $17,000 lower for the quarter ended June 30, 1997,
as compared with the same prior year period. The Company closed the store at the
end of the first quarter of 1997, because it was unprofitable. This deletion of
operations is expected to save the Company over $100,000 in operating
expenditures for 1997.
Operational costs decreased $104,000 as a result of the full implementation of
the digital box rollout. The savings were related to lower telecommunication
costs ($47,000), lower repair and maintenance costs ($54,000), and other expense
reductions ($3,000).
Decreased national and direct response advertising sales revenues in the second
quarter of 1997, as compared with the same period in 1996, resulted in lower
agency commissions of approximately $10,000.
The Company also expended approximately $48,000 more in office and
administrative costs during the quarter ended June 30, 1997 than the same prior
year period. These increased charges related to increased use of consultants for
internet development, marketing and public relations ($37,000), and higher
property taxes relating to new digital box equipment ($19,000) offset by lower
costs of office administration ($8,000). As discussed above, corporate overhead
of approximately $379,000 was allocated to domestic operations in the second
quarter of 1997, with no comparable amount allocated in the second quarter of
1996. These expenses included, for example, charges for management salaries,
office space, telecommunications, travel and related expenses.
Distribution, general and administrative expenses for our international
development and consolidated operations increased by approximately $736,000 for
the quarter ended June 30, 1997, as compared to the same prior year period.
These expenses related to operations in Argentina, Chile, Peru and Venezuela,
which launched in 1996 and incurred minimal expenses in 1996, and start-up
operations in New Zealand and Italy in 1997. The increased expenditures involved
were: operations, office and administration ($173,000); salaries and benefits
($131,000); legal ($36,000); production, discs, tapes and shipping ($102,000);
corporate allocations ($111,000); and marketing, research, trade advertising,
travel and events ($183,000).
SATELLITE TRANSPONDER AND RENT PAID TO RELATED PARTIES:
Related party expenditures decreased from $150,000 for the second quarter of
1996 to $118,000 for the same current year period. Satellite transponder and
service fees for the Company's satellite distributed programming resulted in
related party expenditures of
-23-
<PAGE> 24
RESULTS OF OPERATIONS (CONT'D)
$25,000 for the quarter ended June 30, 1996 with no comparable expense in 1997.
WTCI, a subsidiary of Tele-Communications, Inc., is now providing the satellite
transponder and uplink services via the Hughes' satellite Galaxy 7, transponder
13. Beginning in January 1997, the fee charged by WTCI was $55,300 per month and
such expense was included in the financial statements under "Affiliate fees,
site costs and telephone service."
In the second quarter of 1997 and 1996, the Company incurred rental expense of
approximately $118,000 and $125,000, respectively, payable to Island Trading
Company, Inc. for its corporate headquarters location.
DEPRECIATION AND AMORTIZATION:
Depreciation and amortization expenses for the quarter ended June 30, 1997,
increased by approximately $261,000 due to capital expenditures for the
development, equipment and installation costs associated with the new digital
boxes launched in 1996 and 1997, as well as certain capital expenditures
relating to international operations.
-24-
<PAGE> 25
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1997 COMPARED TO THE SIX MONTHS ENDED JUNE 30, 1996.
OVERVIEW:
Due to the wide brand recognition of THE BOX, the Company changed its corporate
name to The Box Worldwide, Inc. effective February 20, 1997. A corporate
restructuring has segregated domestic operations from the international
operations and from the purely corporate functions.
Costs of international development and general corporate charges, to the extent
they are not allocable to a reporting unit, are reported through the corporate
division of the Company. For the results for the six months ended June 30, 1996,
however, no such expense allocations from the parent company to domestic and
international operations were made. For comparability with the current period's
results, all direct international and corporate expenses for the prior year
period have been segregated.
For the six months ended June 30, 1997, the Company realized a consolidated net
loss of $2,734,435 as compared to a net loss of $2,087,071 for the six months
ended June 30, 1996. This consolidated loss is composed of the following items:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------------------
JUNE 30, 1997 JUNE 30, 1996
------------- -------------
<S> <C> <C>
Loss from domestic operations $ (360,935) $ (16,650)
Loss from international operations
and development (2,137,356) (1,418,230)
Net corporate expenses (236,144) (652,191)
----------- -----------
Consolidated net loss $(2,734,435) $(2,087,071)
=========== ===========
</TABLE>
As noted above, the 1997 results reflect allocations of certain corporate
charges to domestic and international operations, whereas no such allocations
were made in 1996.
Management believes that these allocations more accurately reflect the true cost
to the domestic and international operating units for services provided by the
parent company, as these items generally represent costs which these divisions
would incur directly had such services not been provided by the parent. Prior to
giving effect to these allocations, the losses for the first six months of 1997
from domestic operations and international development and operations would have
been $643,952 and $226,718 lower, respectively.
Please refer to the following Supplemental Schedule of Revenue and Expenses by
Segment for further detail:
-25-
<PAGE> 26
THE BOX WORLDWIDE, INC.
SUPPLEMENTAL SCHEDULE OF REVENUE AND EXPENSES BY SEGMENT
FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996
(UNAUDITED)
<TABLE>
<CAPTION>
INTERNATIONAL
DEVELOPMENT &
CONSOLIDATED DOMESTIC OPERATIONS CORPORATE
------------------------- ------------------------- ------------------------ -----------------------
1997 1996 1997 1996 1997 1996 1997 1996
------------------------- ------------------------- ------------------------ -----------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
REVENUES
Advertising revenues $ 4,968,935 $ 4,850,819 $ 4,954,087 $ 4,850,819 $ 14,848 $ 0 $ 0 $ 0
Net viewer revenues 4,368,204 5,456,361 4,007,965 5,430,815 360,239 25,546 0 0
Other revenues 281,931 144,587 59,387 100,844 195,484 14,300 27,060 29,443
------------ ----------- ----------- ------------ ----------- ------------ ---------- ---------
9,619,070 10,451,767 9,021,439 10,382,478 570,571 39,846 27,060 29,443
Interest income 237,628 194,157 0 0 0 0 237,628 194,157
------------ ----------- ----------- ------------ ----------- ------------ ---------- ---------
9,856,698 10,645,924 9,021,439 10,382,478 570,571 39,846 264,688 223,600
COSTS AND EXPENSES
Affiliate fees, site costs
and telephone service 2,859,589 3,033,170 2,569,443 3,005,642 290,146 27,528 0 0
Distribution, general
and administrative 8,075,950 8,185,741 5,701,317 6,367,864 1,983,308 942,086 391,325 875,791
Satellite transponder and
rent paid to related
parties 236,040 495,380 236,040 495,380 0 0 0 0
Depreciation and
amortization 1,102,817 564,369 875,574 530,242 117,736 34,127 109,507 0
------------ ----------- ----------- ------------ ----------- ------------ ---------- ---------
12,274,396 12,278,660 9,382,374 10,399,128 2,391,190 1,003,741 500,832 875,791
------------ ----------- ----------- ------------ ----------- ------------ ---------- ---------
LOSS BEFORE INTEREST IN LOSS
OF UNCONSOLIDATED COMPANIES (2,417,698) (1,632,736) (360,935) (16,650) (1,820,619) (963,895) (236,144) (652,191)
------------ ----------- ----------- ------------ ----------- ------------ ---------- ---------
INTEREST IN LOSS OF
UNCONSOLIDATED COMPANIES (316,737) (454,335) 0 0 (316,737) (454,335) 0 0
------------ ----------- ----------- ------------ ----------- ------------ ---------- ---------
NET LOSS $ (2,734,435) $(2,087,071) $ (360,935) $ (16,650) $(2,137,356) $(1,418,230) $ (236,144) $(652,191)
------------ ----------- ----------- ------------ ----------- ------------ ---------- ---------
</TABLE>
-26-
<PAGE> 27
RESULTS OF OPERATIONS (CONT'D)
REVENUES:
ADVERTISING REVENUES:
Consolidated advertising revenue increased by approximately $118,000 for the six
months ended June 30, 1997 as compared with the same 1996 period. Domestic
advertising revenues increased by approximately $103,000 for the six months
ended June 30, 1997 as compared with the same 1996 period. National advertising
improved 12%, or approximately $427,000, for the six months ended June 30, 1997
from the comparable period in 1996. Proctor and Gamble, Coca Cola, MCI,
Nintendo, Nike, Nordic Trak, AT&T, Reebok and various other national consumer
goods and services all advertised on THE BOX during the first six months of
1997.
Record advertising decreased approximately $324,000 in the first six months of
1997 as compared to the same period of 1996. Part of this decrease occurred due
to the change in music mixes throughout the Company's localized interactive
boxes. In the past, the Company had relied almost exclusively on record
advertising of urban and rap artists which is no longer compatible with the
programming offered on all boxes. Minimal new music product was released during
the first half of 1997, also resulting in lower advertising levels. Management
believes that the presentations made by the Company's top management and record
label advertising sales team were well received and, while it cannot be assured,
record label advertising is expected to improve throughout 1997. International
advertising was $15,000 for the first six months of 1997, with no comparable
amount for the same period in 1996.
NET VIEWER REVENUES:
The decrease in net viewer revenues of $1,088,000 results from the net effect of
reduced domestic gross viewer revenues (negative effect of $1,915,000), as
offset by the related reduction in the telephone service provider's billing and
collection charges (positive effect of $242,000), the reduction in chargebacks
experienced when consumers failed to pay for their requested videos (positive
effect of $250,000); the increase in international viewer revenues (positive
effect of $335,000).
Gross domestic viewer revenues, which resulted from the interactive telephone
calls to THE BOX for video selections, decreased from $6,777,000 to $4,862,000,
a difference of approximately $1,915,000 or 28.3% from the first six months of
1996 to the first six months of 1997. Approximately $394,000 related to the loss
of carriage on a Detroit cable system in June 1996. The remaining decrease
resulted from a lower average performance per box during the first six months of
1997. This decrease in average performance may be attributed to factors
involving both the Company and the music industry. THE BOX removed certain
violent or sexually explicit videos from its playlists, which historically
generated a significant number of viewer requests. The Company also has
introduced request emulation when no viewer requests were in the queue. Finally,
the transactional revenue has been negatively affected by airtime required for
increased advertising and for additional programming elements such as Box
-27-
<PAGE> 28
RESULTS OF OPERATIONS (CONT'D)
Big Break (on-air spots featuring local artists) and other elements designed to
strengthen viewing of THE BOX.
In addition to taking viewer requests via 900 service, the Company introduced a
new program in 1996 to allow customers who would like to exceed the Company's
900 service credit limit to establish a prepaid account for the selection of
videos. In addition to generating additional viewer revenue, this program has
been designed to eliminate customer chargebacks and billing charges from service
providers, as well as reduce transport costs. Initiated as a test, this program
slowly expanded during 1996 so that, by the end of that year, it was available
to all customers. This new prepaid video program provided 27.3% of consolidated
gross viewer revenue in the current period, as compared with 8.7% in the first
six months of 1996. Revenue from this program is recognized only as videos are
selected, while prepaid account balances are included in current liabilities.
With lower domestic viewer revenues, the billing and collection charges imposed
by the Company's telephone service provider were reduced proportionately.
Therefore, an offset to the decrease in domestic gross revenue is the reduction
in billing charges of approximately $242,000. Besides the lower revenue level,
the Company has been successful in renegotiating with the telco providers to
reduce billing and collection charges from eight percent during the first six
months of 1996 to seven percent during the first six months of 1997. Further,
revenue from the prepaid video program is not subject to billing and collection
charges, and therefore the increase in revenue from this program as a percentage
of total gross viewer revenue has also contributed to the reduction in these
charges.
An additional component of net viewer revenues relates to the adverse effect of
domestic customers who deny having made music video requests on THE BOX. In the
Company's current international markets, consumers are not allowed to refute
these charges, so the chargebacks are only occurring domestically. In an effort
to reduce chargebacks from telephone companies, the Company is in its third year
of call blocking for previous non-paying customers and applying credit
limitations for all its interactive viewers. After nearly three years of these
procedures, the Company has seen the chargeback rate reduced from over 16.7% in
1994, to approximately 13.5% currently. Chargebacks for the six months ended
June 30, 1997 totaled approximately $601,000 as compared to $851,000 for the
same prior year period. Revenue from the prepaid video program is not subject to
customer chargebacks since all money is collected before the videos air, and
therefore the increase in revenue from this program as a percentage of total
gross viewer revenue has also contributed to the reduction in these charges.
Net viewer revenue from international boxes increased by a net of $335,000 due
to the late 1996 international launches in Chile, Peru and Venezuela, none of
which were in operation during first half of 1996, and the 1997 launches in New
Zealand and Italy.
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<PAGE> 29
RESULTS OF OPERATIONS (CONT'D)
OTHER REVENUE:
Miscellaneous revenues of $282,000 for the first six months of 1997 included
$154,000 in domestic and international cable carriage fees, $53,000 for
production services provided to the Company's unconsolidated Holland affiliate,
$28,000 in gains on the sale of some minor equipment, $23,000 for the sale of a
low power television station, revenue totaling $5,000 from the music
compilations marketed under the Company's BOXtunes label and miscellaneous other
revenue of approximately $19,000. Interest income totaled approximately $238,000
in the first six months of 1997, which included $112,000 related to an
outstanding loan to the Company's Holland affiliate. Interest from inception of
the loan in 1995 to the end of 1996 had not been previously recognized, and was
included in the first quarter of 1997.
COSTS AND EXPENSES:
AFFILIATE FEES, SITE COSTS AND TELEPHONE SERVICES:
Expenses were 65.5% and 55.6% of net viewer revenues for the six months ended
June 30, 1997 and 1996, respectively. The percentage for the first six months of
1997 increased to 70.5% after adjusting for a non-recurring credit of $218,000
due to a reversal of a reserve for affiliate fees related to discontinued
systems. Recurring expenses in this category as a percentage of net viewer
revenues are up significantly for 1997 since a large portion of the affiliation
fees, site costs and telecommunications charges are fixed per location. With the
reduced level of domestic viewer transactional revenues, these expenses as a
percentage of revenues increased in the first six months of 1997. However,
expenses for affiliate fees, site costs and telephone services totaled $174,000
less for first six months 1997 as compared with the same prior year period. The
total decrease resulted from decreased expenditures for domestic operations of
$436,000, offset by increased expenditures in international operations of
$262,000.
The domestic decrease in expenses of approximately $436,000 for the six months
ended June 30, 1997 as compared to 1996 was due to the net effect of the
following:
- - A decrease of $550,000 in domestic transport costs due to a combination of
reduced levels of viewer transactional revenues and rerouting of certain
viewer calls in-house that were previously handled by outside service
bureaus (completed by end of current period). In the future, the Company
expects to continue to realize savings from the movement of these calls to
an in-house operation.
- - A decrease in the cable affiliation fees of approximately $115,000 resulted
from a non-recurring credit recognized in the second quarter of 1997
related to a
-29-
<PAGE> 30
RESULTS OF OPERATIONS (CONT'D)
reversal of a reserve for discontinued cable systems, offset by credits
recognized in the quarter ended March 31, 1996 related to the removal of
the Company's programming from the New York City system in 1996.
- - A decrease in low power television affiliation fees of approximately
$117,000. Of this decrease, $143,000 relates to the discontinued
affiliation with a New York City low power station broadcasting from
Queens. This affiliation was terminated on January 31, 1997 to reduce
carriage fee expenditures since the other two low power affiliates in New
York City had improved their signals and were covering a majority of the
market at lower affiliation fees. This is offset by an increase in low
power affiliation fees related to newly launched low power stations and to
improved performance of certain existing low power boxes.
- - An increase in telecommunications expense of $141,000 due mainly to the
fixed VSAT transmission charges associated with the new digital box
operations. While these expenses will provide for higher telecommunications
expenses in 1997, the net cost savings of updating each Box location by
VSAT satellite as opposed to the development, production and distribution
of 3/4-inch tapes and laser discs required under the old analog technology
are expected to total a minimum of $70,000 per month.
- - An increase in satellite transponder and uplink fees of $205,000 paid for
satellite service of THE BOX. Beginning in April 1996, the Company entered
into an agreement for such service with an unrelated third party. In prior
years and through the end of March 1996, the fees for satellite transponder
and uplink services were paid to a related party and were included in the
related party expenditure category in the financial statements.
International expenses for affiliate fees, site costs and telephone services
increased by $262,000 due to the start-up of new international operations in the
second half of 1996 and the first six months of 1997 that were not in existence
during the first six months of 1996.
DISTRIBUTION, GENERAL AND ADMINISTRATIVE:
Consolidated distribution, general and administrative expenses for the six
months ended June 30, 1997 decreased by approximately $110,000, from $8,186,000
in 1996 to $8,076,000 in 1997. This decrease can be divided into the net effect
of the following components: a decrease in domestic expenditures of
approximately $666,000; an increase of approximately $1,041,000 related to
international development and operating expenses; and a decrease in corporate
expenses of $485,000 (after allocation to domestic and international units).
-30-
<PAGE> 31
RESULTS OF OPERATIONS (CONT'D)
As part of the Company's corporate restructuring, corporate expenses have been
segregated from expenses relating to domestic and international development and
operations. These corporate costs primarily consist of parent company personnel,
administrative expenses, legal fees and the continuing development cost of the
digital box and related technology. All charges which relate to domestic and
international expenditures, which are essentially all charges except for the
corporate costs of a public company, have been allocated to the operating units
beginning with the first quarter of 1997. For the six month periods ended June
30, 1997 and 1996, the net corporate charges were as follows:
<TABLE>
<CAPTION>
Six Months Ended
------------- -------------
June 30, 1997 June 30, 1996
------------- -------------
<S> <C> <C>
Total corporate charges $ 1,261,996 $ 875,791
Allocated to The Box Worldwide-USA, Inc. (643,952) --
Allocated to international development and operations (226,718) --
----------- -----------
Net corporate charges $ 391,326 $ 875,791
=========== ===========
</TABLE>
The increase in total corporate charges from $876,000 in 1996 to $1,262,000 for
first six months 1997 ($386,000) consisted of the following items:
- - The Company decided to settle a long standing claim for the amount of
$160,000 in cash, $5,000 in surrender of a replevin bond previously written
off plus related legal costs of $19,000. While the Company felt that the
claims asserted were without merit, costs associated with going to trial
would be greater than the agreed settlement amount, therefore the claim was
settled.
- - An increase in compensation of $90,000 relating mostly to the transfer of
certain digital box development and engineering functions to the parent
company in 1997.
- - Higher legal costs of $68,000 relating to the corporate legal expense for
regular SEC filings, a business controls study and costs associated with
the corporate reorganization.
- - Cost of producing the 1997 Corporate Annual Report of $20,000 with no
comparable expenditures in the same period in 1996. The cost of the 1996
Annual Report was incurred in the third quarter of 1996.
- - Increased travel and industry event participation of $15,000.
- - Increased telecommunications cost of $19,000.
- - A decrease in various administrative expenses of $5,000.
Distribution, general and administrative expenses for domestic operations
decreased by $666,000 for the first six months of 1997 as compared with the same
prior year period. The majority of the savings ($431,000) related to lower
salaries and benefits
-31-
<PAGE> 32
RESULTS OF OPERATIONS (CONT'D)
realized primarily due to three factors: (i) the departure of the Executive Vice
President, Programming in 1996 ($170,000); (ii) the transfer of certain staff
from domestic operations to corporate and international operations ($40,000);
and (iii) a general reduction of domestic staff due to the elimination of a
number of positions ($221,000).
Further decreases were experienced in trade advertising, consumer marketing,
research, industry events and travel and entertainment expenses of approximately
$614,000 as a result of the Company deferring the development of its new
marketing campaign until the latter part of 1997. Participation in several
industry trade events also were reduced in order to control costs. While trade
advertising will likely increase in the last half of 1997, the costs for trade
events should remain low and possibly even decrease given the reduction of cable
industry state association shows.
Domestic legal expenses decreased by approximately $8,000 in the last half of
1997 as compared with 1996. A decrease of $261,000 in production, discs and
shipping costs resulted from more in-house production and the use of VSAT
technology to update the Digital Box programming and advertising. Music costs
associated with the Company's revenues decreased approximately $31,000 for the
first six months of 1997 as compared with the first six months of 1996 due to
the lower overall revenue levels.
Cost of sales associated with merchandise sold through the Company's retail
operation was approximately $35,000 lower for the six months ended June 30,
1997, as compared with the same prior year period. The Company closed the store
at the end of the first quarter of 1997, because it was unprofitable. This
deletion of operations is expected to save the Company over $100,000 in
operating expenditures for 1997.
Operational costs decreased $91,000 as a result of the full implementation of
the digital box rollout. The savings were related to lower telecommunications
costs of $43,000 and lower repair and maintenance costs of $48,000.
Offsetting these domestic decreases, increased national and direct response
advertising sales revenues in the first six months of 1997, as compared with the
same period in 1996, resulted in higher agency commissions of approximately
$62,000. The Company also expended approximately $99,000 more in office and
administrative costs during the six months ended June 30, 1997 than to the same
prior year period. These increased charges related to increased use of
consultants for internet development, marketing and public relations ($97,000),
and higher property taxes relating to new digital box equipment ($31,000) offset
by lower costs of office administration ($29,000). As discussed above, corporate
overhead of approximately $644,000 was allocated to domestic operations in the
first six months of 1997, with no comparable amount allocated in the first six
months of 1996. These expenses included, for example, charges for management
salaries, office space, telecommunications, travel and related expenses.
-32-
<PAGE> 33
RESULTS OF OPERATIONS (CONT'D)
Distribution, general and administrative expenses for our international
development and consolidated operations increased by approximately $1,041,000
for the six months ended June 30, 1997, as compared to the same prior year
period. These expenses related to operations in Argentina, Chile, Peru and
Venezuela, which launched in late 1996 and incurred minimal expenses in 1996,
and start-up operations in New Zealand and Italy in 1997. The increased
expenditures involved were: operations, office and administration ($288,000);
salaries and benefits ($139,000); legal ($73,000); production, discs, tapes and
shipping ($146,000); corporate allocations ($227,000); and marketing, research,
trade advertising, travel and events ($168,000).
SATELLITE TRANSPONDER AND RENT PAID TO RELATED PARTIES:
Related party expenditures decreased from $495,000 for the first six months of
1996 to $236,000 for the same current year period. Satellite transponder and
service fees for the Company's satellite distributed programming resulted in
related party expenditures of $245,000 for the six months ended June 30, 1996
with no comparable expense in 1997. WTCI, a subsidiary of Tele-Communications,
Inc., is now providing the satellite transponder and uplink services via the
Hughes' satellite Galaxy 7, transponder 13. Beginning in January 1997, the fee
charged by WTCI was $55,300 per month and such expense was included in the
financial statements under "Affiliate fees, site costs and telephone service."
The Company is negotiating a long-term agreement with WTCI for these services,
which are now provided on a month-to-month basis.
In 1997 and 1996, the Company incurred rental expense of approximately $236,000
and $250,000, respectively, payable to Island Trading Company, Inc. for its
corporate headquarters location.
DEPRECIATION AND AMORTIZATION:
Depreciation and amortization expenses for the six months ended June 30, 1997,
increased by approximately $538,000 due to capital expenditures for the
development, equipment and installation costs associated with the new digital
boxes launched in 1996 and 1997, as well as certain capital expenditures
relating to international operations.
LIQUIDITY AND CAPITAL RESOURCES:
The Company's current ratio (current assets to current liabilities) was 1.25 to
1.00 at June 30, 1997 as compared to 1.59 to 1.00 at June 30, 1996. At June 30,
1997, the Company's current assets exceeded its current liabilities by
approximately $1,143,000.
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<PAGE> 34
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
The Company has used funds received from the 1995 and 1996 sales of its former
United Kingdom subsidiary to: (i) fully implement the Digital Box, replacing all
domestic analog boxes in the field with a Digital Box or a conversion to
satellite service; (ii) expand the distribution of the Company's programming by
constructing and installing additional box units with the new digital
technology; (iii) advertise, market and promote the Company's programming
including the staffing of a larger marketing and sales effort; (iv) research,
develop, maintain and improve the Company's software and equipment including the
continued development of the Digital Box; (v) fund working capital; and (vi)
fund certain international programming ventures.
The Company utilized approximately $8.2 million in cash during 1996 and first
half of 1997 for digital box equipment and related support equipment, software
development, production equipment and leasehold improvements. These expenditures
related mainly to the initial wave of development and installation of the
Company's digital box technology, including base digital support equipment and
enhancement to its in-house computer system during the past eighteen months,
plus costs associated with expanding the Company's office space in New York and
Miami Beach. The Company believes that the newly developed technology, known as
the Digital Box, is a critical element of the Company's future. The marketing
advantages provided by the Digital Box will allow enhanced localized programming
and advertising plus programming improvements through enhanced audio and video
quality, superior graphic quality, consumer friendly responsiveness (such as
nearly immediate video play), and operational efficiencies, such as reduction of
expenses associated with the manual process of tapes, discs, weekly change outs
of music product and limited availability for advertising. The Company now has
replaced all domestic analog boxes in the field with the Digital Box except for
certain low performing boxes, which were switched to the Company's satellite box
feed. There can be no assurance that this new technology will result in
additional distribution, additional advertising sales or higher viewership.
Analog box equipment taken out of domestic service has been or will be deployed
internationally, reducing the Company's cash requirements for expansion in new
and existing international markets.
Approximately $2,097,000 was spent during first six months 1997 in advances of
operating expenses for the Company's international operations, specifically
Holland, Argentina, Venezuela, Chile, Peru, New Zealand and Italy. Another
$410,000 was spent for corporate international development expenses. It is
anticipated that at least $2.3 million in cash will be required to support the
Company's international operations through the end of 1997. No expansion into
new international markets will be possible unless the Company is able to obtain
the necessary financing.
In February 1996, the Company entered into a five-year agreement with an
unaffiliated party to purchase satellite receiving equipment and satellite
transponder time for sending digitized video segments from the Company's
headquarters to the various box unit locations at cable head end and broadcast
station sites. The minimum cash commitment of the Company under this agreement
is approximately $1.9 million, of
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<PAGE> 35
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
which approximately $1,350,000 has already been paid through July 1997. The
remaining minimum commitment relates mainly to the monthly VSAT satellite
transponder and uplink fees for the period of August 1997 through February 1999.
Management has and will continue to undertake several operational measures in an
effort to continue to improve the Company's liquidity and cash flow position.
With full implementation of the Digital Box, the Company will save approximately
$70,000 in operating costs per month, or annual savings of $840,000. In 1995,
the Company completed the renegotiation of affiliation agreements with the two
largest multiple system operators. While considerable savings have resulted from
the renegotiation of these agreements and all new agreements are signed at these
similar reduced monthly guaranteed affiliation payments, it is not known if the
Company may be required to incur additional costs in order to gain distribution
in certain key markets.
On August 7, 1997, the Federal Communications Commission (the "FCC") adopted
order FCC 97-279 (the "Order"). The Order establishes rules to implement the
closed captioning requirements of the Telecommunications Act of 1996 (the "1996
Act"). The 1996 Act required the FCC to adopt, by August 8, 1997, rules and
implementation schedules for the captioning of video programming ensuring access
to video programming by persons with hearing disabilities. The Company estimates
that it may cost approximately $430,000 to retrofit boxes that are currently in
operation, in order to comply with the Order.
While domestically, the Company has been in a positive cash flow position,
additional funding will be required to expand upon domestic and international
distribution. The cost of a digital box installation totals $40,000 per box and
launch incentive payments are also often required to gain cable carriage
domestically. Internationally, the start-up costs of entering new countries is
prohibited by the Company's financial position at this time. The Company
anticipates that the closing of the merger transaction as discussed in Item 5
below, "Other Information", will provide the Company with the ability to gain
financing for distribution. There is however, no assurance that this transaction
will be completed, nor that such completion would result in the profitability of
the Company.
PART II: OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS:
In May 1997, the Company settled the litigation against Donald L. Barone
("Barone"), Kenneth Trzecki ("Trzecki") and Healthcare Communications, Inc.
("HCI") in the Circuit Court of the Seventeenth Judicial Circuit in and for
Broward County, Florida. Pursuant to the terms of the settlement, the Company
paid an aggregate of approximately $165,000 to Barone, Trzecki and HCI, and all
of the parties to the litigation exchanged releases and dismissed their
respective claims with prejudice.
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<PAGE> 36
ITEM 5. OTHER INFORMATION:
As of August 12, 1997, the Company entered into an Agreement and Plan of Merger
(the "Merger Agreement") with TCI Music, Inc. ("TCI Music") and TCI Music
Acquisition Sub, Inc. ("Acquisition Sub"), a wholly-owned subsidiary of TCI
Music, pursuant to which Acquisition Sub will be merged (the "Merger") with and
into the Company, with the Company as the surviving corporation.
The aggregate consideration deliverable by TCI Music in the Merger (the "Merger
Consideration") will be equal to (a) the sum of (i) $38,502,672 and (ii) $1.50
times the number of shares of the Company's common stock, par value $.001 per
share ("Company Common Stock"), issued prior to the closing of the Merger upon
the exercise or conversion of options, warrants, convertible securities or other
rights to acquire Company Common Stock that are outstanding as of the date of
the Merger Agreement MINUS (b) the sum of (i) $1.50 times the number of shares
of Company Common Stock that are held by holders of such shares who have not
voted in favor of the Merger or consented to the Merger in writing and who have
demanded appraisal rights with respect to such shares in accordance with the
Florida Business Corporation Act (the "Dissenting Shares"), (ii) $1.50 times the
number of shares of the Company's 6% convertible redeemable preferred stock, par
value $.15 per share and stated value of $1.50 per share (the "Company Preferred
Stock"), outstanding at the closing of the Merger that are not Dissenting Shares
and (iii) all accrued and unpaid dividends on shares of Company Preferred Stock
at the time of the closing of the Merger, whether or not such shares are
Dissenting Shares.
Pursuant to the Merger Agreement, among other things, each share of Company
Common Stock outstanding immediately prior to the closing of the Merger (except
Dissenting Shares) will be converted into the right to receive (a) a fraction
(the "Exchange Rate") of one share of TCI Music Series A Convertible Preferred
Stock, par value $.01 per share ("TCI Music Preferred Stock"), and (b) as to any
holder of shares of Company Common Stock, if the total number of shares of
Company Common Stock of such holder is not convertible into a whole number of
shares of TCI Music Preferred Stock, the right to receive cash in lieu of any
fractional share of TCI Music Preferred Stock. Under the Merger Agreement, the
Exchange Rate is defined as the quotient of (a) the quotient of the Merger
Consideration divided by three times the average of the average daily closing
bid and asked prices of one share of TCI Music Series A Common Stock, par value
$.01 per share ("TCI Music Series A Common Stock"), for a period of 20
consecutive trading days ending on the third trading day prior to the closing of
the Merger (as reported on the NASDAQ SmallCap Market), divided by (b) the
number of shares of Company Common Stock outstanding immediately prior to the
closing of the Merger, less the number of shares of Company Common Stock that
are Dissenting Shares.
The holders of the TCI Music Preferred Stock will have the right, at any time,
to convert each share of TCI Music Preferred Stock into three shares of TCI
Music Series A Common Stock, subject to certain adjustments set forth in the
Certificate of Designations (the "Certificate of Designations") for the TCI
Music Preferred Stock. Holders of the TCI Music Preferred Stock will be entitled
to vote on all matters submitted to a vote of the holders of the TCI Music
Series A Common Stock. Each share of TCI Music Preferred Stock will
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<PAGE> 37
OTHER INFORMATION (CONT'D):
entitle the registered holder thereof to a number of votes equal to the number
of shares of TCI Music Series A Common Stock into which each such share is
convertible as of the record date for the matter to be voted upon. Holders of
the TCI Music Preferred Stock will vote together with holders of the TCI Music
Series A Common Stock and will not be entitled to vote as a class except as
otherwise required by TCI Music's Certificate of Incorporation or the General
Corporation Law of the State of Delaware, the jurisdiction in which TCI Music is
incorporated.
Holders of the TCI Music Preferred Stock will be entitled to receive cash
dividends from time to time on each share of TCI Music Preferred Stock, payable
out of funds legally available therefore, in an amount equal to the product of
(a) the amount of the cash dividend declared on one share of TCI Music Series A
Common Stock or any other security into which the TCI Music Preferred Stock is
then convertible and (b) the number of shares of TCI Music Series A Common Stock
or other security into which one share of TCI Music Preferred Stock may be
converted as of the date such dividend is declared. Such dividends will be
payable to holders of the TCI Music Preferred Stock only if, as and when the
Board of Directors of TCI Music declares cash dividends (and not dividends
payable in other property) on the TCI Music Series A Common Stock.
At the option of TCI Music, all or any portion of the TCI Music Preferred Stock
may be redeemed out of funds legally available therefor (a) during the 30-day
periods immediately following the fourth, sixth and eighth anniversaries of the
date on which the TCI Music Preferred Stock is first issued or first deemed to
have been issued as a result of the Merger (the "Issue Date"), (b) at any time
after the Closing Price (as defined in the Certificate of Designations) of the
TCI Music Series A Common Stock equals or exceeds 125% of the average of the
averages of the closing bid and asked prices of one share of TCI Music Series A
Common Stock for a period of 20 consecutive business days ending on the third
business day prior to the Issue Date (as adjusted to reflect the effects of any
stock dividend, stock split, reclassification or combination affecting the TCI
Music Series A Common Stock) for a period of at least 30 consecutive business
days, and (c) at any time after the tenth anniversary of the Issue Date, in each
case at the Liquidation Value per share of TCI Music Preferred Stock.
Liquidation Value is defined in the Certificate of Designations as the sum of
three times the average of the averages of the closing bid and asked prices of
one share of TCI Music Series A Common Stock for a period of 20 consecutive
business days ending on the third business day prior to the Issue Date, as
increased on each anniversary of the Issue Date by an amount equal to the
product of that sum and the greater of (a) the percentage increase, if any in
the Consumer Price Index, All Urban Consumers, U.S. City Average, All Items, as
published by the U.S. Department of Labor, Bureau of Labor Statistics (in an
amount not to exceed 5% in any year), and (b) 3%.
Subject to (a) the rights of holders of any class or series of stock ("Senior
Securities") of TCI Music authorized after the Issue Date ranking senior to the
TCI Music Preferred Stock in respect of the right to receive payment of
dividends prior to the TCI Music Preferred Stock or the right to receive assets
upon liquidation, dissolution or winding up of the affairs of TCI Music prior to
the TCI Music Preferred Stock and (b) any prohibition or restriction set forth
-37-
<PAGE> 38
OTHER INFORMATION (CONT'D):
in any security or bond, debenture, note, indenture, guarantee or other
instrument or agreement evidencing any indebtedness of TCI Music, each holder of
TCI Music Preferred Stock will have the right to require TCI Music, at any time,
to redeem, out of funds legally available therefore, all or any portion of the
outstanding shares of TCI Music Preferred Stock held by each holder at any time
after the tenth anniversary of the Issue Date at the Liquidation Value per share
of TCI Music Preferred Stock.
Upon any liquidation, dissolution or winding up of TCI Music, subject to the
prior payment in full of amounts to which any Senior Securities are entitled,
the holders of TCI Music Preferred Stock will be entitled to be paid an amount
in cash equal to the aggregate Liquidation Value at the date fixed for
liquidation of all shares of TCI Music Preferred Stock outstanding before any
distribution or payment is made upon all shares of TCI Music Series B Common
Stock, par value $.01 per share ("TCI Music Series B Common Stock"), and any
other class or series of stock of TCI Music authorized after the Issue Date
except Senior Securities and any class or series of stock of TCI Music that is
entitled to receive payment of dividends on parity with the TCI Music Preferred
Stock or is entitled to receive assets upon liquidation, dissolution or winding
up of the affairs of TCI Music on parity with the TCI Music Preferred Stock.
Assuming (a) no shareholder of the Company has demanded appraisal rights in
accordance with the Florida Business Corporation Act, (b) all of the outstanding
shares of Company Preferred Stock are converted into Company Common Stock prior
to the completion of the Merger and (c) the Exchange Rate is $7.00, immediately
following the Merger (a) the outstanding shares of TCI Music Preferred Stock
into which the Company Common Stock will be converted will represent
approximately 6.64% of, and .85% of the voting power relating to, the total
outstanding shares of TCI Music Series A Common Stock and TCI Music Series B
Common Stock (collectively, the "TCI Music Stock"); and (b) the outstanding
shares of TCI Music Series B Common Stock will represent approximately 75.39%
of, and 96.84% of the voting power related to, the total outstanding shares of
TCI Music Stock and TCI Music Preferred Stock. Liberty VJN, Inc., an affiliate
of Tele-Communications, Inc. ("TCI"), beneficially owns approximately 5% of the
outstanding shares of Company Common Stock. Assuming the same facts as set forth
in the immediately preceding sentence, immediately following the Merger, TCI
will beneficially own approximately 4.69% of the outstanding shares of TCI Music
Preferred Stock, 45.73% of the TCI Music Series A Common Stock prior to any
Preferred Stock conversion, and 100% of the outstanding TCI Music Series B
Common Stock, which will collectively represent approximately 83.92% of the
outstanding shares of TCI Music Stock and 97.94% of the voting power of the
outstanding shares of TCI Music Stock and TCI Music Preferred Stock. The TCI
Music Series B Common Stock entitles the holder to ten votes on each matter to
be voted upon by the holders of TCI Music Series A Common Stock and TCI Music
Series B Common Stock.
The respective obligations to TCI Music and Acquisition Sub to effect the Merger
are subject to the satisfaction of certain conditions, including (a) the Merger
Agreement and the transactions contemplated by the Merger Agreement will have
been duly approved by
-38-
<PAGE> 39
OTHER INFORMATION (CONT'D):
holders of 75% of the outstanding shares of Company Common Stock and Company
Preferred Stock entitled to vote, voting as a single class; (b) the number of
Dissenting Shares do not exceed 15% of the issued and outstanding shares of
Company Common Stock and Company Preferred Stock; (c) the waiting period
applicable to the consummation of the Merger under the Hart-Scott-Rodino Act
will have expired, or have been earlier terminated and any other notices or
approvals or consents required by or of governmental entities, to the extent
required to be obtained under the Merger Agreement, will have either been filed
or obtained; and (d) the registration statement (the "Registration Statement")
of TCI Music covering the TCI Music Preferred Stock and the TCI Music Series A
Common Stock (into which the TCI Music Preferred Stock will be convertible) will
have become effective in accordance with the provisions of the Securities Act of
1933 and any necessary securities law approvals will have been obtained and no
stop orders suspending the effectiveness of the Registration Statement will have
been issued by the Securities and Exchange Commission.
The obligations of the Company to consummate the transactions contemplated by
the Merger Agreement are subject to the satisfaction of certain matters,
including (a) the performance by TCI Music and Acquisition Sub, in all material
respects, of their respective agreements in the Merger Agreement to be performed
prior to the closing of the Merger and the accuracy of the representations and
warranties of each of them in all material respects; and (b) the fiduciary
obligations of the Board of Directors of the Company to the Company and its
shareholders.
The respective obligations of TCI Music and Acquisition Sub to consummate the
transactions contemplated by the Merger Agreement are also subject to the
satisfaction or waiver of the following conditions: (a) the performance by the
Company in all material respects, of the agreements of it in the Merger
Agreement to be performed by it by the closing of the Merger and the accuracy of
the Company's representations and warranties in all material respects; (b)
receipt of all consents, orders and approvals of governmental entities and third
parties, to the extent required to be obtained under the Merger Agreement; and
(c) the number of shares of the shareholders of the Company exercising
dissenter's rights does not exceed 15% of the outstanding Company Common Stock
and the Company Preferred Stock as of the date of the closing of the Merger.
Contemporaneously with the signing of the Merger Agreement, three shareholders
of the Company, H.F. Lenfest, J. Patrick Michaels, Jr. and StarNet/CEA II
Partners, who beneficially own 14,210,419 shares of Company Common Stock
(representing approximately 55% of the outstanding shares of Company Common
Stock) entered into a voting agreement with TCI Music, pursuant to which, among
other things, each of such shareholders agreed to vote all of the shares of
voting stock of the Company beneficially owned by each such shareholder in favor
of the Merger and to vote all of such shares against any proposal that would
compete or interfere with, or that would in any way delay or otherwise inhibit
the timely consummation of the Merger. Such voting agreement will terminate (a)
upon the mutual consent of all parties thereto, (b) at the closing of the Merger
or (c) upon termination of the Merger Agreement.
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<PAGE> 40
OTHER INFORMATION (CONT'D):
The foregoing description of the Merger Agreement and the Certificate of
Designations is qualified in its entirety by reference to the complete text of
the Merger Agreement and the Certificate of Designations, which are incorporated
by reference herein and copies of which (exclusive of exhibits and schedules)
are filed as Exhibits 2.1 and 2.2, respectively, to this Report.
ITEM 6. EXHIBITS
2.1 Agreement and Plan of Merger dated as of August 12, 1997 among TCI
Music, Inc., TCI Music Acquisition Sub, Inc. and the Company.
2.2 Form of Certificate of Designations of TCI Music, Inc. Series A
Convertible Preferred Stock.
10.33 Domestic Financing Agreement dated October 3, 1997 between
Communications Equity Associates, Inc. ("CEA") and the Company.
10.34 Letter Agreement date August 7, 1997 between CEA and the Company.
10.35 Form of Indemnification Agreement between the Company and each of H.F.
Lenfest, Alan McGlade, Stanley Greene and David Burns, four of the
directors of the Company.
27 Financial Data Schedule (for SEC use only).
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<PAGE> 41
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE BOX WORLDWIDE, INC.
-----------------------
(REGISTRANT)
Date: August 12, 1997 By: /s/ Alan McGlade
-------------------------------
Alan McGlade
President and Chief Executive Officer
Date: August 12, 1997 By: /s/ Luann M. Hoffman
-------------------------------
Luann M. Hoffman
Chief Financial and
Administrative Officer
-41-
<PAGE> 1
Exhibit 2.1
AGREEMENT AND PLAN OF MERGER
DATED AS OF
AUGUST 12, 1997
AMONG
TCI MUSIC, INC.,
TCI MUSIC ACQUISITION SUB, INC.
AND
THE BOX WORLDWIDE, INC.
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
ARTICLE I
DEFINITIONS
<S> <C> <C>
Section 1.1 Definitions.....................................................................................1
Section 1.2 Other Definitions...............................................................................4
Section 1.3 Use of Terms....................................................................................5
ARTICLE II
THE MERGER AND RELATED MATTERS
Section 2.1 The Merger......................................................................................5
Section 2.2 Effective Time of the Merger....................................................................6
ARTICLE III
CONVERSION OF CAPITAL STOCK
Section 3.1 Merger Consideration and Conversion of Stock....................................................6
Section 3.2 Calculation of Exchange Rate....................................................................7
Section 3.3 Exchange of Certificates........................................................................8
Section 3.4 Dividends and Other Distributions...............................................................9
Section 3.5 No Fractional Shares............................................................................9
Section 3.6 No Liability...................................................................................10
Section 3.7 Lost Certificates..............................................................................10
Section 3.8 Dissenting Shares..............................................................................10
Section 3.9 Treatment of Stock Options, Etc................................................................11
Section 3.10 Shareholders' Approval.........................................................................11
Section 3.11 Closing of the Company's Transfer Books........................................................12
Section 3.12 Assistance in Consummation of the Merger.......................................................12
Section 3.13 Closing........................................................................................12
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF TCI MUSIC AND ACQUISITION SUB
Section 4.1 Organization and Qualification.................................................................12
Section 4.2 Capitalization.................................................................................12
Section 4.3 Subsidiaries...................................................................................13
</TABLE>
<PAGE> 3
<TABLE>
<CAPTION>
<S> <C> <C>
Section 4.4 Authority Relative to this Agreement...........................................................13
Section 4.5 No Breach; Required Consents...................................................................14
Section 4.6 Consents and Approvals.........................................................................14
Section 4.7 Reports and Financial Statements...............................................................14
Section 4.8 Compliance with Law; Litigation................................................................16
Section 4.9 Title to Assets................................................................................16
Section 4.10 Labor and Employee Matters.....................................................................16
Section 4.11 ERISA..........................................................................................17
Section 4.12 Operations of Acquisition Sub..................................................................18
Section 4.13 No Broker......................................................................................18
Section 4.14 Taxes..........................................................................................18
Section 4.15 Environmental Laws.............................................................................19
Section 4.16 Transactions with Affiliates...................................................................19
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
Section 5.1 Organization and Qualification.................................................................19
Section 5.2 Capitalization.................................................................................20
Section 5.3 Subsidiaries...................................................................................20
Section 5.4 Authority Relative to this Agreement...........................................................21
Section 5.5 No Breach; Required Consents...................................................................21
Section 5.6 Consents and Approvals.........................................................................21
Section 5.7 Reports and Financial Statements...............................................................22
Section 5.8 Compliance with Law; Litigation................................................................23
Section 5.9 Title to Assets................................................................................23
Section 5.10 Labor and Employee Matters.....................................................................24
Section 5.11 ERISA..........................................................................................24
Section 5.12 Approval.......................................................................................25
Section 5.13 Financial Advisor..............................................................................26
Section 5.14 Taxes..........................................................................................26
Section 5.15 Environmental Laws.............................................................................26
Section 5.16 Transactions with Affiliates...................................................................26
ARTICLE VI
CONDUCT OF BUSINESS PENDING THE MERGER
Section 6.1 Conduct of Business of the Company.............................................................27
Section 6.2 Conduct of Business of TCI Music...............................................................28
Section 6.3 Remedies for Breach. ..........................................................................28
</TABLE>
(ii)
<PAGE> 4
<TABLE>
<CAPTION>
ARTICLE VII
ADDITIONAL AGREEMENTS
<S> <C> <C>
Section 7.1 Access and Information.........................................................................29
Section 7.2 SEC Filings....................................................................................29
Section 7.3 Meeting of Shareholders of the Company.........................................................32
Section 7.4 Compliance with the Securities Act.............................................................32
Section 7.5 Listing........................................................................................33
Section 7.6 Reasonable Best Efforts........................................................................33
Section 7.7 Public Announcements...........................................................................33
Section 7.8 Notification...................................................................................33
Section 7.9 HSR Act Filings................................................................................33
Section 7.10 Further Assurances.............................................................................34
Section 7.11 Employee Matters...............................................................................34
Section 7.12 No Solicitation................................................................................35
Section 7.13 Indemnification of Executives..................................................................36
ARTICLE VIII
CONDITIONS PRECEDENT
Section 8.1 Conditions to Each Party's Obligation to Effect the Merger.....................................37
Section 8.2 Conditions to Obligation of the Company to Effect the Merger...................................38
Section 8.3 Conditions to Obligations of TCI Music and Acquisition Sub to Effect the Merger................38
ARTICLE IX
TERMINATION, AMENDMENT AND WAIVER
Section 9.1 Termination....................................................................................39
Section 9.2 Effect of Termination..........................................................................40
Section 9.3 Amendment......................................................................................40
Section 9.4 Waiver.........................................................................................40
ARTICLE X
GENERAL PROVISIONS; DEFINITIONS
Section 10.1 Non-Survival of Representations, Warranties and Agreements.....................................41
Section 10.2 Notices........................................................................................41
Section 10.3 Fees and Expenses..............................................................................42
</TABLE>
(iii)
<PAGE> 5
<TABLE>
<CAPTION>
<S> <C> <C>
Section 10.4 Specific Performance...........................................................................42
Section 10.5 Third Party Beneficiaries......................................................................42
Section 10.6 Entire Agreement...............................................................................42
Section 10.7 Miscellaneous..................................................................................42
Section 10.8 GOVERNING LAW AND VENUE; WAIVER OF JURY TRIAL..................................................43
</TABLE>
(iv)
<PAGE> 6
EXHIBITS
Exhibit Description
- ------- -----------
A Certificate of Designations for TCI Music Preferred Stock
B Form of Opinion of TCI Music Counsel
C Form of Opinion of Company Counsel
SCHEDULES
Schedule No. Description
3.9 Option Cancellation/Exercise Terms
4.3 TCI Music Subsidiaries and Equity Affiliates
4.6 TCI Music Consents
4.8(b) TCI Music Litigation
4.9 TCI Music Liens
4.10 TCI Music Employment Agreements
4.11(a) TCI Music Benefit Plans
4.14 TCI Music Taxes
5.2(b) Rights To Acquire Company Stock
5.3 Company Subsidiaries and Equity Affiliates
5.6 Company Consents
5.7(c) Material Changes
5.9 Company Liens
5.10 Company Employment Agreements
5.11(a) Company Benefit Plans
5.11(g) Benefits to Former Employees
5.14 Company Taxes
5.16 Company Affiliate Transactions
6.1 Conduct of Business Pending the Merger
7.13(a) Company Indemnification Agreements
8.2(e) Term Sheet for Amendment to Contribution Agreement
(v)
<PAGE> 7
AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER (this "Agreement") dated as of August
12, 1997, is entered into by and among TCI Music, Inc., a Delaware corporation
("TCI Music"), TCI Music Acquisition Sub, Inc., a Florida corporation and wholly
owned subsidiary of TCI Music ("Acquisition Sub"), and The Box Worldwide, Inc.
(formerly known as Video Jukebox Network, Inc.), a Florida corporation (the
"Company").
RECITALS
A. TCI Music has proposed that it will acquire the Company in a
transaction in which Acquisition Sub will merge with and into the Company, as a
result of which TCI Music will become the holder of all the outstanding shares
of common stock of the Company and the holders of shares of common stock of the
Company outstanding immediately prior to such merger will become holders of
shares of convertible preferred stock of TCI Music.
B. The Boards of Directors of TCI Music, Acquisition Sub and the
Company have each determined that the Merger is in the best interests of their
respective corporations and shareholders.
NOW, THEREFORE, in consideration of the foregoing premises and the
representations, warranties and agreements contained in this Agreement, the
parties to this Agreement agree as follows:
ARTICLE I
DEFINITIONS
Section 1.1 DEFINITIONS. As used in this Agreement, the following terms
with initial capital letters will have the meanings set forth below:
"Affiliate" means, as to any Person, any other Person which, directly
or indirectly, controls, is under common control with, or is controlled by, such
Person. As used in this definition, "control" (including, with correlative
meaning, "controlling," "controlled by" and "under common control with") means
possession, directly or indirectly, of the power to direct or cause the
direction of the management and policies of a Person (whether through the
ownership of voting securities, by contract or otherwise).
"Certificate of Designations" means the Certificate of Designations in
the form attached as Exhibit A.
<PAGE> 8
"Company Shareholders" means certain shareholders of the Company as
defined in the Voting Agreement.
"Company Common Stock" means the shares of common stock, par value
$.001 per share, of the Company.
"Company Preferred Stock" means the shares of 6% Convertible Redeemable
Preferred Stock, par value $.15 per share and stated value $1.50 per share, of
the Company.
"Company Stock" means shares of Company Common Stock and shares of
Company Preferred Stock.
"Contribution Agreement" means the Contribution Agreement dated July
11, 1997, by and between TCI and TCI Music.
"Code" means the Internal Revenue Code of 1986, as amended.
"Environmental Law" means any applicable Legal Requirement relating to
the protection, preservation or restoration of the environment (including, air,
water vapor, surface water, ground water, drinking water supply, surface land,
subsurface land, plant and animal life or any other natural resource).
"Equity Affiliate" means, as to any Person, any other Person in which
such Person or any of its Subsidiaries holds a five percent or greater equity
interest.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"ERISA Affiliate" means, as to any Person, any trade or business
(whether or not incorporated) that is treated as a single employer with such
Person under Section 414(b), (c), (m) or (o) or the Code.
"GAAP" means generally accepted accounting principles as in effect from
time to time in the United States of America.
"Knowledge" means the actual present knowledge of a Person that is a
human being and, in the case of a Person that is not a human being, the present
actual knowledge of any director or officer (or any human being having duties
comparable to those of a director or officer) of such Person.
-2-
<PAGE> 9
"Legal Requirement" means any statute, ordinance, code, law, rule,
regulation, order or other requirement, standard or procedure enacted, adopted
or applied by any Governmental Entity, including judicial decisions applying
common law or interpreting any other Legal Requirement or any agreement entered
into with a Governmental Entity in resolution of a dispute or otherwise.
"Lien" means any lien, security interest, pledge, charge, claim,
option, right to acquire, restriction on transfer, voting restriction or
encumbrance of any nature.
"Material Adverse Effect" means a material adverse effect on the
business, properties, assets, condition (financial or otherwise), liabilities or
operations of a Person and its Subsidiaries, taken as a whole, or on the ability
of such Person to perform its obligations under this Agreement.
"NASDAQ" means the over-the-counter market of the National Association
of Securities Dealers, Inc.
"PBGC" means the Pension Benefit Guaranty Corporation.
"Person" means any human being or any partnership, limited liability
company, corporation, business trust, joint stock company, trust, unincorporated
association, joint venture, Governmental Entity or other entity.
"SEC" means the United States Securities and Exchange Commission.
"Subsidiary" means, with respect to any Person, any other Person more
than 50% of whose outstanding voting securities or partnership or other equity
interests, as the case may be, are directly or indirectly owned by such Person.
"TCI" means Tele-Communications, Inc.
"TCI Music Preferred Stock" means the Series A Convertible Preferred
Stock of TCI Music, par value $.01 per share, having the powers, designations,
rights, qualifications and restrictions set forth in the Certificate of
Designations in the form attached as Exhibit A.
"TCI Music Series A Common Stock Value" means the average of the
average daily closing bid and asked prices of one share of TCI Music Series A
Common Stock for a period of 20 consecutive trading days ending on the third
trading day prior to the Closing, as reported on the NASDAQ SmallCap Market.
"Voting Agreement" means the Voting Agreement dated as of the date
hereof by and among TCI Music and the Company Shareholders (as defined therein).
-3-
<PAGE> 10
Section 1.2 OTHER DEFINITIONS. The following terms are defined in the
Sections indicated:
TERM SECTION
---- -------
Acquisition Proposal 7.12
Acquisition Sub Preamble
Articles of Incorporation 2.1(a)
Agreement Preamble
Antitrust Division 7.9
Articles of Merger 2.2
Capitalization Amendment 2.1(a)
Closing 3.13
Closing Date 3.13
Company Preamble
Company Benefit Plans 5.11(a)
Company Permits 5.8(a)
Company SEC Reports 5.7(a)
Company Stock Certificates 3.3(a)
Dissenting Shares 3.8
Effective Time 2.2
Exchange Act 4.6
Exchange Agent 3.3(a)
Exchange Rate 3.2
Executive 7.13(a)
FBCA 2.1
FTC 7.9
Governmental Entity 4.8(a)
HSR Act 4.6
Indemnified Party 7.2(h)(iii)
Indemnifying Party 7.2(h)(iii)
Joint Proxy Statement/Prospectus 7.2(a)
Losses 7.2(h)(i)
Meeting 7.3
Merger 2.1
Merger Consideration 3.1
Most Recent Company Balance Sheet 5.7(c)
Most Recent TCI Music Balance Sheet 4.7(c)
Other Filings 7.2(b)
Preliminary Joint Proxy Statement/ 7.2(a)
Prospectus
SEC Filings 7.2(c)
Securities Act 4.6
Surviving Corporation 2.1
-4-
<PAGE> 11
Tax 4.14
TCI Music Preamble
TCI Music Certificates 3.3(a)
TCI Music Permits 4.8(a)
TCI Music SEC Reports 4.7(a)
Section 1.3 USE OF TERMS. Terms used with initial capital letters will
have the meanings specified, applicable to both singular and plural forms, for
all purposes of this Agreement. All pronouns (and any variations) will be deemed
to refer to the masculine, feminine or neuter, as the identity of the Person may
require. The singular or plural includes the other, as the context requires or
permits. The word include (and any variation) is used in an illustrative sense
rather than a limiting sense. The word day means a calendar day. All accounting
terms not otherwise defined in this Agreement will have the meanings ascribed to
them under GAAP.
ARTICLE II
THE MERGER AND RELATED MATTERS
Section 2.1 THE MERGER. Subject to the terms and conditions of this
Agreement, and the Florida Business Corporation Act ("FBCA"), at the Effective
Time: (i) Acquisition Sub will be merged with and into the Company (the
"Merger"); (ii) the separate existence of Acquisition Sub will cease and the
Company will continue as the surviving corporation in the Merger (the "Surviving
Corporation"); and (iii) the name of the Surviving Corporation will be The Box
Worldwide, Inc. From and after the Effective Time, and without any further
action on the part of any Person, the Merger will have all the effects provided
by applicable Legal Requirements, including Sections 607.1302 and 607.1320 of
the FBCA, the effects described in Section 3.1 with respect to the capital stock
of Acquisition Sub and the Company and, subject to applicable Legal
Requirements, the following additional effects:
(a) ARTICLES OF INCORPORATION. The Fourth Amended and Restated Articles
of Incorporation of the Company, as amended, as in effect on the date of this
Agreement, will be amended (the "Capitalization Amendment") to increase the
authorized number of shares of Company Common Stock from 40,000,000 shares to
100,000,000 shares. At the Effective Time, the Fourth Amended and Restated
Articles of Incorporation of the Company, as so amended (the "Articles of
Incorporation"), will become the Articles of Incorporation of the Surviving
Corporation, and such Articles of Incorporation may thereafter be amended and/or
restated as provided therein and by the FBCA.
(b) BYLAWS. At the Effective Time, the Bylaws of Acquisition Sub, as in
effect immediately prior to the Effective Time, will become the Bylaws of the
Surviving Corporation, and such Bylaws may thereafter be amended or repealed in
accordance with their terms and the Articles of Incorporation of the Surviving
Corporation and as provided by the FBCA.
-5-
<PAGE> 12
(c) DIRECTORS. At the Effective Time, the directors of Acquisition Sub
immediately prior to the Effective Time will become the directors of the
Surviving Corporation, each to hold office in accordance with the Articles of
Incorporation and Bylaws of the Surviving Corporation and the FBCA and until the
earlier of such director's resignation or removal or such director's successor
is duly elected and qualified, as the case may be.
(d) OFFICERS. At the Effective Time, the officers of Acquisition Sub
immediately prior to the Effective Time will become the officers of the
Surviving Corporation, each to hold office in accordance with the Articles of
Incorporation and Bylaws of the Surviving Corporation and the FBCA and until the
earlier of such officer's resignation or removal or such officer's successor is
duly appointed and qualified, as the case may be.
(e) PROPERTIES AND LIABILITIES. At the Effective Time, all the
properties, rights, privileges, powers and franchises of the Company and
Acquisition Sub will vest in the Surviving Corporation, and all debts,
liabilities and duties of the Company and Acquisition Sub will become the debts,
liabilities and duties of the Surviving Corporation.
Section 2.2 EFFECTIVE TIME OF THE MERGER. Subject to the terms and
conditions in this Agreement, the parties will prepare, sign and acknowledge, in
accordance with the FBCA, articles of merger (the "Articles of Merger") and
deliver the Articles of Merger to the Secretary of State of the State of Florida
for filing pursuant to the FBCA on the Closing Date. The Merger will become
effective upon the filing of the Articles of Merger with the Secretary of State
of the State of Florida. As used in this Agreement, the "Effective Time" means
the time at which the Articles of Merger are filed with the Secretary of State
of the State of Florida.
ARTICLE III
CONVERSION OF CAPITAL STOCK
Section 3.1 MERGER CONSIDERATION AND CONVERSION OF STOCK. The aggregate
consideration deliverable by TCI Music in the Merger (the "Merger
Consideration") will be equal to (a) the sum of (i) $38,502,672 and (ii) $1.50
times the number of shares of Company Common Stock issued prior to the Effective
Time upon the exercise or conversion of options, warrants, convertible
securities or other rights to acquire Company Common Stock that are outstanding
as of the date of this Agreement minus (b) the sum of (i) $1.50 times the number
of Dissenting Shares (as defined in Section 3.8), (ii) $1.50 times the number of
shares of Company Preferred Stock outstanding at the Effective Time that are not
Dissenting Shares and (iii) all accrued and unpaid dividends on shares of
Company Preferred Stock as of the Effective Time, whether or not such shares are
Dissenting Shares. The Merger Consideration will be deliverable at the Effective
Time, by virtue of the Merger and without any action on the part of the holders
of any shares of capital stock of any corporation as follows:
-6-
<PAGE> 13
(a) Each share of Company Common Stock outstanding immediately prior to
the Effective Time (except shares subject to Section 3.1(b) and Dissenting
Shares) will be converted into and will thereafter evidence and become (i) a
fraction (rounded to the nearest one-hundredth), representing the Exchange Rate
calculated in accordance with Section 3.2, of one share of TCI Music Preferred
Stock and (ii) as to any holder of shares of Company Common Stock, if the total
number of shares of Company Common Stock of such holder is not convertible into
a whole number of shares of TCI Music Preferred Stock, the right to receive cash
in lieu of any fractional share of TCI Music Preferred Stock as provided in
Section 3.5.
(b) Each share of the capital stock of the Company issued and
outstanding immediately prior to the Effective Time and owned directly or
indirectly by the Company, if any, will be canceled and retired, and no TCI
Music Preferred Stock or other consideration will be delivered in exchange
therefor.
(c) Each share of common stock, par value $.01 per share, of
Acquisition Sub issued and outstanding immediately prior to the Effective Time
(except shares subject to Section 3.1(d)) will be converted into and will
thereafter evidence and become that number of validly issued, fully paid, and
nonassessable shares of common stock, par value $.001 per share, of the
Surviving Corporation equal to the quotient of (a) the number of shares of
Company Common Stock outstanding immediately prior to the Effective Time divided
by (b) the number of shares of common stock of Acquisition Sub outstanding
immediately prior to the Effective Time rounded, in the case of any fractional
share, down to the nearest whole number.
(d) Each share of the capital stock of Acquisition Sub issued and
outstanding immediately prior to the Effective Time and owned directly or
indirectly by Acquisition Sub, if any, will be canceled and retired, and no
common stock of the Surviving Corporation or other consideration will be
delivered in exchange therefor.
(e) Each share of Company Preferred Stock outstanding immediately prior
to the Effective Time will continue to be outstanding with all the rights,
privileges and preferences set forth in the Articles of Incorporation and the
FBCA, unless such share is a Dissenting Share, in which case such share only
will have the rights prescribed by Sections 607.1302 and 607.1320 of the FBCA.
Section 3.2 CALCULATION OF EXCHANGE RATE. For purposes of this
Agreement, the "Exchange Rate" will be the quotient (rounded to the nearest
hundredth) of (a) the quotient (rounded to the nearest hundredth) of the Merger
Consideration divided by three times the TCI Music Series A Common Stock Value,
divided by (b) the number of shares of Company Common Stock outstanding
immediately prior to the Effective Time, less the number of shares of Company
Common Stock that are Dissenting Shares.
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Section 3.3 EXCHANGE OF CERTIFICATES.
(a) EXCHANGE AGENT. The Bank of New York (or, if The Bank of New York
is unable or unwilling to serve in such capacity, another bank or trust company
selected by TCI Music and reasonably acceptable to the Company) will act as
exchange agent (the "Exchange Agent") in connection with the surrender of
certificates that, prior to the Effective Time, evidenced outstanding shares of
Company Common Stock ("Company Stock Certificates"). Prior to the Closing Date,
TCI Music will deposit with the Exchange Agent for exchange in accordance with
this Section 3.3 certificates evidencing the shares of TCI Music Preferred Stock
to be issued in the Merger ("TCI Music Certificates"), which shares of TCI Music
Preferred Stock will be deemed to be issued at the Effective Time. At and
following the Effective Time, TCI Music will deliver to the Exchange Agent such
cash as may be required from time to time to make payments of cash in lieu of
fractional shares of TCI Music Preferred Stock in accordance with Section 3.5.
(b) EXCHANGE. As soon as practicable after the Effective Time, but
subject to the provisions of Section 3.8 regarding Dissenting Shares, TCI Music
will cause the Exchange Agent to mail to each Person who was a holder of record
of Company Common Stock at the Effective Time: (i) a letter of transmittal
(which will specify that delivery will be effective, and risk of loss and title
to any Company Stock Certificates will pass, only upon delivery of the Company
Stock Certificates to the Exchange Agent and will be in such form and will have
such other provisions that are specified by TCI Music and reasonably acceptable
to the Company); and (ii) instructions for use in effecting the surrender of
Company Stock Certificates in exchange for TCI Music Certificates (together with
any dividend or distribution with respect thereto made after the Effective Time
and any cash to be paid in lieu of fractional shares of TCI Music Preferred
Stock pursuant to Section 3.5). Upon surrender of a Company Stock Certificate
for cancellation to the Exchange Agent or to such other agent or agents as may
be appointed by TCI Music, together with such letter of transmittal, duly
executed, and such other documents as may be required by the Exchange Agent or
such other agent, the holder of such Company Stock Certificate will be entitled
to receive in exchange therefor TCI Music Certificates representing the number
of whole shares of TCI Music Preferred Stock that such holder has the right to
receive pursuant to this Agreement (together with any dividend or distribution
with respect thereto made after the Effective Time and any cash to be paid in
lieu of fractional shares of TCI Music Preferred Stock pursuant to Section 3.5)
and the Company Stock Certificate so surrendered will be canceled. In the event
of a transfer of ownership of Company Common Stock that is not registered in the
transfer records of the Company, TCI Music Certificates representing the proper
number of shares of TCI Music Preferred Stock may be issued to a Person other
than the Person in whose name the surrendered Company Stock Certificate is
registered if the Company Stock Certificate representing such Company Common
Stock is presented to the Exchange Agent accompanied by all documents required
to evidence and effect such transfer and by evidence reasonably satisfactory to
TCI Music that any applicable stock transfer tax has been paid. TCI Music will
not directly or indirectly pay or reimburse any Person for any transfer taxes of
the type referred to in the preceding sentence. If any TCI Music Certificates
are to be delivered to a Person other than the Person in whose name the Company
Stock Certificates surrendered in exchange therefor are registered, it will be a
condition to the delivery of such TCI Music Certificates that the Company
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Stock Certificates so surrendered are properly endorsed or accompanied by
appropriate stock powers and otherwise in proper form for transfer, that such
transfer otherwise is proper and that the Person requesting such transfer pay to
the Exchange Agent any transfer or other taxes payable by reason of the
foregoing or establishes to the satisfaction of the Exchange Agent that such
taxes have been paid or are not required to be paid.
(c) CERTIFICATES NOT EXCHANGED. After the Effective Time, each
outstanding Company Stock Certificate will, until surrendered for exchange in
accordance with this Section 3.3, be deemed for all purposes to evidence
ownership of the number of whole shares of TCI Music Preferred Stock into which
the shares of Company Common Stock (which, prior to the Effective Time, were
represented thereby) are converted in accordance with Section 3.1, together with
the right to receive any dividend or distribution with respect thereto made
after the Effective Time and any cash to be paid in lieu of fractional shares of
TCI Music Preferred Stock pursuant to Section 3.5.
(d) EXPENSES. Except as otherwise expressly provided in this Agreement,
TCI Music will pay all charges and expenses, including those of the Exchange
Agent, in connection with the exchange of shares of TCI Music Preferred Stock
for shares of Company Common Stock, except any charges or expenses that are
otherwise solely the liability of one or more holders of Company Common Stock.
Any TCI Music Certificates deposited with the Exchange Agent that remain
unclaimed by the former shareholders of the Company after six months following
the Effective Time will be delivered to TCI Music upon its demand, and any
former shareholders of the Company who have not then complied with the
instructions for exchanging their Company Stock Certificates will thereafter
look only to TCI Music for exchange of Company Stock Certificates and for any
dividend or distribution with respect thereto made after the Effective Time and
any cash to be paid in lieu of fractional shares of TCI Music Preferred Stock
pursuant to Section 3.5.
Section 3.4 DIVIDENDS AND OTHER DISTRIBUTIONS. No dividends or other
distributions declared or made after the Effective Time with respect to shares
of TCI Music Preferred Stock with a record date after the Effective Time will be
paid to the holder of any unsurrendered Company Stock Certificate with respect
to the shares of TCI Music Preferred Stock issuable upon surrender thereof until
the holder of such Company Stock Certificate surrenders such Company Stock
Certificate in accordance with Section 3.3. Subject to the effect of applicable
Legal Requirements, following surrender of any such Company Stock Certificate,
TCI Music will pay or cause to be paid, without interest, to the record holder
of TCI Music Certificates issued in exchange therefor, (a) at the time of such
surrender, the amount of cash in lieu of fractional shares of TCI Music
Preferred Stock to which such holder is entitled pursuant to Section 3.5 and the
amount, if any, of dividends or other distributions by TCI Music with a record
date after the Effective Time theretofore paid with respect to such whole shares
of TCI Music Preferred Stock and (b) at the appropriate payment date, the amount
of dividends or other distributions (if any) by TCI Music with a record date
after the Effective Time but prior to surrender of such Company Stock
Certificate and a payment date subsequent to such surrender payable with respect
to such whole shares of TCI Music Preferred Stock.
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Section 3.5 NO FRACTIONAL SHARES.
(a) CASH PAYMENT IN LIEU OF FRACTIONAL SHARES. No certificates or scrip
representing fractional shares of TCI Music Preferred Stock will be issued upon
the surrender of Company Stock Certificates pursuant to Section 3.3. No such
fractional interest will entitle the owner thereof to any rights as a security
holder of TCI Music. In lieu of any such fractional shares of TCI Music
Preferred Stock, each holder of Company Common Stock entitled to receive shares
of TCI Music Preferred Stock in the Merger, upon surrender of such Person's
Company Stock Certificates for exchange pursuant to Section 3.3, will be
entitled to receive an amount in cash (without interest), rounded to the nearest
cent, determined by multiplying three times the TCI Music Series A Common Stock
Value by the fractional share interest in TCI Music Preferred Stock to which
such holder would otherwise be entitled (after taking into account all shares of
Company Common Stock held of record by such holder immediately prior to the
Effective Time).
(b) DEPOSIT WITH EXCHANGE AGENT. As soon as practicable after the
determination of the amount of cash, if any, to be paid to holders of shares of
TCI Music Preferred Stock in lieu of any fractional unit interests, TCI Music
will promptly deposit with the Exchange Agent cash in the required amounts and
the Exchange Agent will mail such amounts without interest to such holders;
provided however, that no such amount will be paid to any holder with respect to
any Company Stock Certificate prior to the surrender by such holder of such
Company Stock Certificate.
Section 3.6 NO LIABILITY. None of TCI Music, Acquisition Sub, the
Company, the Surviving Corporation or the Exchange Agent will be liable to any
holder of shares of Company Common Stock for any shares of TCI Music Preferred
Stock, dividends or distributions with respect thereto or cash payable in lieu
of fractional shares of TCI Music Preferred Stock delivered to a state abandoned
property administrator or other public official pursuant to any applicable
abandoned property, escheat or similar law.
Section 3.7 LOST CERTIFICATES. If any Company Stock Certificate is
lost, stolen or destroyed, the Exchange Agent will issue in exchange for such
lost, stolen or destroyed Company Stock Certificate the shares of TCI Music
Preferred Stock (and any dividend or distribution with respect thereto made
after the Effective Time and any cash payable in lieu of fractional shares of
TCI Music Preferred Stock pursuant to Section 3.5) deliverable in respect
thereof as determined in accordance with the terms of this Agreement, subject to
the condition that the Person to whom the TCI Music Preferred Stock (and any
dividend or distribution with respect thereto made after the Effective Time and
any cash payable in lieu of fractional shares pursuant to Section 3.5) are to be
issued, shall have (a) delivered to TCI Music an affidavit claiming such Company
Stock Certificate to be lost, stolen, or destroyed and (b) if required by TCI
Music, given TCI Music an indemnity satisfactory to TCI Music against any claim
that may be made against TCI Music with respect to the Company Stock Certificate
alleged to have been lost, stolen or destroyed.
Section 3.8 DISSENTING SHARES. Notwithstanding anything in this
Agreement to the contrary, shares of Company Stock outstanding immediately prior
to the Effective Time that are
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held by holders of such shares who have not voted in favor of the Merger or
consented thereto in writing and who have demanded appraisal rights with respect
thereto in accordance with Sections 607.1302 and 607.1320 of the FBCA (the
"Dissenting Shares") will not be converted into or be exchangeable for the right
to receive shares of TCI Music Preferred Stock or any dividend or distribution
with respect thereto made after the Effective Time or any cash payable in lieu
of fractional shares of TCI Music Preferred Stock pursuant to Section 3.5, but
holders of Dissenting Shares will be entitled to receive payment of the fair
value of their Dissenting Shares in accordance with the provisions of the FBCA
and this Section 3.8. Any shares of Company Stock held by a shareholder who,
prior to the Effective Time, withdraws a demand for appraisal of such shares or
loses the right to appraisal as provided in the FBCA will not be considered
Dissenting Shares. The Company will give TCI Music prompt notice of any written
demands for appraisal of any shares of Company Stock, attempted withdrawals of
such demand and any other notices or other documents received by the Company
pursuant to the FBCA relating to shareholders' rights of appraisal. The Company
will make all payments required by the FBCA to be made in respect of Dissenting
Shares, including any costs assessed against the Company pursuant to Sections
607.1302 and 607.1320 of the FBCA, and TCI Music or any of its Affiliates will
directly or indirectly reimburse or otherwise provide funds to the Company with
respect to such payments.
Section 3.9 TREATMENT OF STOCK OPTIONS, ETC.. The Company will take all
action necessary to cause any outstanding stock options, warrants or other
rights to acquire any capital stock of the Company to be canceled if not
exercised prior to or at the Effective Time, except for shares of Company
Preferred Stock; provided, however, that, except as provided in Schedule 3.9,
the Company will not pay or agree to pay or deliver any cash or other
consideration to the holder of any such option, warrant or other right in
consideration of the cancellation or termination thereof.
Section 3.10 SHAREHOLDERS' APPROVAL. Subject to fiduciary duty
obligations of the Board of Directors of the Company under applicable Legal
Requirements, the Company will use its best efforts, in accordance with
applicable Legal Requirements and the Articles of Incorporation and Bylaws of
the Company, to have this Agreement, the Merger, the Capitalization Amendment
and the transactions contemplated by this Agreement approved by the holders of
capital stock of the Company entitled to vote thereon. The Company will notify
TCI Music of the date set for any shareholder action to be taken in connection
with approval of the Merger not later than 30 days prior to such date. The Board
of Directors of the Company will, subject to fiduciary duty obligations under
applicable Legal Requirements, recommend that holders of Company Stock vote to
adopt this Agreement and approve the Merger, the Capitalization Amendment and
the transactions contemplated by this Agreement and will use best efforts to
solicit from such holders proxies in favor of such approval and adoption and
take all other action necessary or helpful to secure such favorable vote. Such
efforts will include causing the Joint Proxy Statement/Prospectus to include the
recommendation of the Board of Directors of the Company that its shareholders
approve the Merger and related transactions, including the Capitalization
Amendment; provided however, that the Board of Directors of the Company may
modify or withdraw its recommendation if it determines, with the advice of
outside counsel, that it may be required to do so in the exercise of its
fiduciary duties. Unless the Company's Board of Directors releases TCI Music and
Acquisition Sub from such
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obligation, each of TCI Music and Acquisition Sub will use its best efforts to
cause all shares of Company Stock beneficially owned (within the meaning of
Rule 13d-3 under the Exchange Act) by Liberty VJN, Inc. and any Affiliate of TCI
Music and Acquisition Sub, on the record date for the Meeting, to be voted in
favor of the Merger.
Section 3.11 CLOSING OF THE COMPANY'S TRANSFER BOOKS. At the Effective
Time, the stock transfer books of the Company will be closed and no transfer of
shares of Company Common Stock will be made thereafter. In the event that, after
the Effective Time, Company Stock Certificates are presented to the Surviving
Corporation, they will be canceled and exchanged for the TCI Music Certificates
(and, if required, cash) as provided in Section 3.3(b) and Section 3.5.
Section 3.12 ASSISTANCE IN CONSUMMATION OF THE MERGER. Each of TCI
Music, Acquisition Sub and the Company will provide all reasonable assistance
to, and will cooperate with, each other to bring about the consummation of the
Merger as soon as possible in accordance with the terms and conditions of this
Agreement.
Section 3.13 CLOSING. The closing of the transactions contemplated by
this Agreement (the "Closing") will take place (i) at the offices of Sherman &
Howard L.L.C., 633 Seventeenth Street, Suite 3000, Denver, Colorado, at
9:00 A.M. local time on the date that is the first business day after the day on
which the last of the conditions set forth in Article VIII (excluding delivery
of opinions and certificates) is fulfilled or waived or (ii) at such other place
and time as TCI Music and the Company agree in writing. The date on which the
Closing occurs is referred to in this Agreement as the "Closing Date."
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF TCI MUSIC AND ACQUISITION SUB
TCI Music and Acquisition Sub jointly and severally represent and
warrant to the Company as follows:
Section 4.1 ORGANIZATION AND QUALIFICATION. TCI Music is a corporation
duly organized, validly existing and in good standing under the laws of the
State of Delaware, Acquisition Sub is a corporation duly organized, validly
existing and in good standing under the laws of the State of Florida, and each
has all requisite corporate power and authority to carry on its business as it
is now being conducted. Each of TCI Music and Acquisition Sub is duly qualified
as a foreign corporation to do business, and is in good standing, in each
jurisdiction where the character of its properties owned or held under lease or
the nature of its activities make such qualification necessary, except where the
failure to be so qualified will not, individually or in the aggregate, have a
Material Adverse Effect on it.
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Section 4.2 CAPITALIZATION.
(a) As of the date of this Agreement, the authorized capital stock of
TCI Music consists of: (i) 495,000,000 shares of common stock, par value $.01
per share, divided into the following classes: 295,000,000 shares of common
stock designated as Series A Common Stock of which 14,896,649 shares are issued
and outstanding and 200,000,000 shares of common stock, designated as Series B
Common Stock of which 62,500,000 shares are issued and outstanding; and (ii)
5,000,000 shares of preferred stock, par value $.01 per share, none of which are
issued and outstanding.
(b) All shares of TCI Music Preferred Stock to be issued in connection
with the Merger, when issued in accordance with this Agreement, will be duly
authorized, validly issued, fully paid and nonassessable.
(c) As of the date of this Agreement, the authorized capital stock of
Acquisition Sub consists of 1,000 shares of common stock, par value $.01 per
share, of which 1,000 shares are issues and outstanding, all of which are owned
beneficially and of record by TCI Music.
Section 4.3 SUBSIDIARIES. All Equity Affiliates of TCI Music are listed
on Schedule 4.3 to this Agreement, which Schedule reflects the percentage and
nature of TCI Music's ownership of each Subsidiary and Equity Affiliate of TCI
Music. Each of TCI Music's Subsidiaries is a corporation or partnership duly
organized, validly existing and in good standing under the laws of its
jurisdiction of incorporation or formation and has the corporate or partnership
power to carry on its business as it is now being conducted or currently
proposed to be conducted. Each of TCI Music's Subsidiaries is duly qualified as
a foreign corporation or partnership to do business, and is in good standing, in
each jurisdiction where the character of its properties owned or held under
lease or the nature of its activities makes such qualification necessary except
where the failure to be so qualified will not have a Material Adverse Effect on
TCI Music. All the outstanding shares of capital stock of each of TCI Music's
Subsidiaries that is a corporation are validly issued, fully paid and
nonassessable. Except as set forth on Schedule 4.3, the shares of capital stock
or partnership or other ownership interests in each of TCI Music's Subsidiaries
or Equity Affiliates that are owned by TCI Music or by a Subsidiary of TCI Music
are owned free and clear of any Liens, are not subject to and have not been
issued in violation of any preemptive rights and have not been issued in
violation of any federal or state securities laws or any other Legal
Requirement. Except as set forth on Schedule 4.3, there are not, as of the date
hereof, and at the Effective Time there will not be, any outstanding options,
warrants, calls or other rights, agreements or commitments of any character, to
which TCI Music or any of its Subsidiaries is a party, relating to the issued or
unissued capital stock, other securities or partnership or other ownership
interests in any of the Subsidiaries or Equity Affiliates of TCI Music.
Section 4.4 AUTHORITY RELATIVE TO THIS AGREEMENT. Each of TCI Music and
Acquisition Sub has all requisite corporate power and authority to execute and
deliver this Agreement and to consummate the transactions contemplated by this
Agreement. The execution and delivery of this Agreement and the consummation of
the transactions contemplated by this Agreement by TCI Music and Acquisition Sub
have been duly authorized by the Boards of Directors
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of TCI Music and Acquisition Sub and by TCI Music as the sole stockholder of
Acquisition Sub, and no other corporate proceedings on the part of TCI Music or
Acquisition Sub are necessary to authorize this Agreement and the transactions
contemplated by this Agreement. This Agreement constitutes a valid and binding
obligation of each of TCI Music and Acquisition Sub enforceable against each of
them in accordance with its terms, except (i) as enforcement may be limited by
bankruptcy, insolvency or other similar Legal Requirements affecting the
enforcement of creditors' rights generally, (ii) as the availability of
indemnification and other remedies may be limited by federal and state
securities laws and (iii) for limitations imposed by general principles of
equity.
Section 4.5 NO BREACH; REQUIRED CONSENTS. The execution and delivery of
this Agreement by TCI Music and Acquisition Sub do not, and the consummation of
the transactions contemplated by this Agreement by TCI Music and Acquisition Sub
will not: (a) violate or conflict with the Certificate or Articles of
Incorporation or Bylaws of TCI Music or Acquisition Sub; (b) constitute a breach
or default (or an event that with notice or lapse of time or both would become a
breach or default) or give rise to any Lien, third-party right of termination,
cancellation, modification or acceleration under any agreement or undertaking to
which TCI Music or Acquisition Sub is a party or by which any of them is bound,
except where such breach, default, Lien, third-party right of termination,
cancellation, modification or acceleration would not have a Material Adverse
Effect on TCI Music or Acquisition Sub; or (c) subject to obtaining the
approvals and making the filings described in Section 4.6, constitute a
violation of any applicable Legal Requirement, except where such violation would
not have a Material Adverse Effect on TCI Music or Acquisition Sub.
Section 4.6 CONSENTS AND APPROVALS. Except as set forth on Schedule
4.6, neither the execution and delivery of this Agreement by TCI Music and
Acquisition Sub nor the consummation of the transactions contemplated by this
Agreement by TCI Music and Acquisition Sub will require TCI Music or Acquisition
Sub to make any filing or registration with, or obtain any authorization,
consent or approval of, any Governmental Entity, except those required in
connection, or in compliance, with the provisions of (i) the Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as amended (the "HSR Act"), (ii) the
Communications Act of 1934, as amended, (iii) the Securities Act of 1933, as
amended (the "Securities Act"), (iv) the Securities Exchange Act of 1934, as
amended (the "Exchange Act") and (v) the corporation, securities or blue sky
laws or regulations, or similar Legal Requirements, of various states of the
United States, and other than such filings, registrations, authorizations,
consents or approvals the failure of which to make or obtain would not have a
Material Adverse Effect on TCI Music or Acquisition Sub or prevent the
consummation of the transactions contemplated by this Agreement.
Section 4.7 REPORTS AND FINANCIAL STATEMENTS.
(a) SEC REPORTS. TCI Music has filed all required forms, reports and
documents required to be filed with the SEC since TCI Music was incorporated
(collectively, the "TCI Music SEC Reports"). As of their respective dates or
effective dates and except as the same may have been corrected, updated or
superseded by means of a subsequent filing with the SEC prior to the date of
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this Agreement, none of the TCI Music SEC Reports, including any financial
statements or schedules included or incorporated by reference therein, contained
any untrue statement of a material fact or omitted to state a material fact
required to be stated or incorporated by reference therein or necessary in order
to make the statements therein, in light of the circumstances under which they
were made, not misleading. TCI Music has delivered to the Company, in the forms
filed with the SEC, all the TCI Music SEC Reports.
(b) FINANCIAL STATEMENTS. The audited consolidated financial statements
of TCI Music contained in the TCI Music SEC Reports comply in all material
respects with applicable accounting requirements and with the published rules
and regulations of the SEC with respect thereto, were prepared in accordance
with GAAP applied on a consistent basis during the periods involved (except as
may be indicated in the notes thereto) and present fairly TCI Music's
consolidated financial condition and the results of its operations as of the
relevant dates thereof and for the periods covered thereby. The unaudited
consolidated interim financial statements of TCI Music contained in the TCI
Music SEC Reports comply in all material respects with applicable accounting
requirements and with the published rules and regulations of the SEC with
respect thereto, were prepared on a basis consistent with prior interim periods
(except as required by applicable changes in GAAP or in SEC accounting policies)
and include all adjustments (consisting only of normal recurring accruals)
necessary for a fair presentation of TCI Music's consolidated financial
condition and results of operations for such periods.
(c) ABSENCE OF CERTAIN CHANGES. Except as disclosed in the TCI Music
SEC Reports, since the date of the most recent balance sheet of TCI Music
included in TCI Music's Amendment No. 1 to Registration Statement on Form S-4
filed with the SEC on June 12, 1997 (the "Most Recent TCI Music Balance Sheet"),
there has not been any: (i)transaction, commitment, dispute or other event or
condition (financial or otherwise) of any character (whether or not in the
ordinary course of business) that, individually or in the aggregate, has had, or
would have, a Material Adverse Effect on TCI Music (other than as a result of
changes in laws or regulations of general applicability or any changes resulting
from general economic, financial, market or industry-wide conditions); (ii) any
declaration, setting aside or payment of any dividend or other distribution
(whether in cash, stock or property) with respect to the capital stock of TCI
Music; or (iii) entry into any commitment or transaction material to TCI Music
and its Subsidiaries taken as a whole (including any borrowing or sale of
assets) except in the ordinary course of business consistent with past practice.
(d) ABSENCE OF UNDISCLOSED LIABILITIES. Except as disclosed in the TCI
Music SEC Reports, TCI Music does not have any indebtedness, liability or
obligation required by GAAP to be reflected on a balance sheet that is not
reflected or reserved against in the Most Recent TCI Music Balance Sheet other
than liabilities, obligations and contingencies that (i) were incurred after the
date of the Most Recent TCI Music Balance Sheet in the ordinary course of
business or (ii) would not, in the aggregate, have a Material Adverse Effect on
TCI Music.
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Section 4.8 COMPLIANCE WITH LAW; LITIGATION.
(a) Except as disclosed in the TCI Music SEC Reports, TCI Music and its
Subsidiaries hold all permits, licenses, franchises, variances, exemptions,
concessions, leases, instruments, orders and approvals (the "TCI Music Permits")
of all courts, administrative agencies or commissions or other governmental
authorities or instrumentalities, domestic or foreign (each, a "Governmental
Entity") required to be held under applicable Legal Requirements, except for
such TCI Music Permits the failure of which to hold, individually or in the
aggregate, does not have and, in the future is not likely to have, a Material
Adverse Effect on TCI Music. To TCI Music's Knowledge, TCI Music and its
Subsidiaries are in compliance with the terms of the TCI Music Permits, except
for such failures to comply that, individually or in the aggregate, would not
have a Material Adverse Effect on TCI Music. To TCI Music's Knowledge, the
businesses of TCI Music and its Subsidiaries are not being conducted in
violation of any Legal Requirement, except for such violations which,
individually or in the aggregate, would not have a Material Adverse Effect on
TCI Music. No investigation or review by any Governmental Entity with respect to
TCI Music or any of its Subsidiaries is pending, or, to the Knowledge of TCI
Music, threatened, nor has any Governmental Entity indicated to TCI Music in
writing an intention to conduct the same, other than those the outcome of which
would not have a Material Adverse Effect on TCI Music.
(b) Except as disclosed in the TCI Music SEC Reports or on Schedule
4.8(b), there is no suit, action or proceeding pending or, to the Knowledge of
TCI Music, threatened, against or affecting TCI Music or any of its Subsidiaries
that has had or is likely to have a Material Adverse Effect on TCI Music nor is
there any judgment, decree, injunction, rule or order of any Governmental Entity
or arbitrator outstanding against TCI Music or any of its Subsidiaries that has
had or is likely to have a Material Adverse Effect on TCI Music.
Section 4.9 TITLE TO ASSETS. Except as disclosed in the TCI Music SEC
Reports, TCI Music and its Subsidiaries have good and merchantable title to all
material assets reflected on the unaudited pro forma combined balance sheet as
of March 31, 1997, included in TCI Music's Amendment No. 1 to Registration
Statement on Form S-4 filed with the SEC on June 12, 1997, free and clear of any
Lien except: (a) landlord's Liens and Liens for property taxes not delinquent;
(b) statutory Liens that were created in the ordinary course of business and do
not materially detract from the value of such assets or materially impair the
use thereof in the operation of TCI Music's business; (c) the Liens listed on
Schedule 4.3 or Schedule 4.9; (d) leased interests in property owned by others
and leased interests in property leased to others; and (e) zoning, building or
similar restrictions, easements, rights-of-way, reservations of rights,
conditions, or other restrictions or encumbrances relating to or affecting real
property that do not, individually or in the aggregate, materially interfere
with the use of such real property in the operation of TCI Music's business.
Section 4.10 LABOR AND EMPLOYEE MATTERS. TCI Music is not a party to
any contract with any labor organization and has not agreed to recognize any
union or other collective bargaining unit. As of the date of this Agreement, no
union or other collective bargaining unit has been certified as representing any
of TCI Music's employees. To TCI Music's Knowledge, as of the date of this
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Agreement, there is no representation or organizing effort pending or threatened
against or affecting or involving TCI Music. TCI Music and its Subsidiaries are
in compliance with all applicable Legal Requirements relating to the employment
of employees, including any obligations relating to employment standards
legislation, pay equity, occupational health and safety, labor relations and
human rights legislation except for such failures to comply as do not have, and
are not likely to have, a Material Adverse Effect on TCI Music. Schedule 4.10
sets forth all agreements or arrangements with any employee of TCI Music,
whether oral or in writing, with respect to such employee's employment with TCI
Music other than agreements or arrangements otherwise disclosed on Schedule
4.11(a).
Section 4.11 ERISA.
(a) Schedule 4.11(a) sets forth all "employee benefit plans," as
defined in ERISA, and all other material employee benefit arrangements, programs
or payroll practices, including severance pay, sick leave, vacation pay, salary
continuation for disability, deferred compensation, bonus, stock purchase,
hospitalization, medical insurance, life insurance, tuition reimbursement,
employee assistance and employee discounts, that TCI Music or any of its ERISA
Affiliates maintains or has an obligation to make contributions (the "TCI Music
Benefit Plans").
(b) Neither TCI Music nor any of its ERISA Affiliates has incurred any
unsatisfied withdrawal liability, as defined in Section 4201 of ERISA, with
respect to any multiemployer plan, nor has any of them incurred any liability
due to the termination or reorganization of any multiemployer plan, except any
such liability that would not have a Material Adverse Effect on TCI Music. To
the Knowledge of TCI Music, neither TCI Music nor any of its ERISA Affiliates
reasonably expects to incur any liability due to a withdrawal from or
termination or reorganization of a multiemployer plan, except any such liability
that would not have a Material Adverse Effect on TCI Music.
(c) Each TCI Music Benefit Plan that is intended to qualify under
Section 401 of the Code and the trust maintained pursuant thereto has been
determined to be exempt from federal income taxation under Section 501 of the
Code by the Internal Revenue Service, and to the Knowledge of TCI Music, nothing
has occurred with respect to any such plan since such determination that is
likely to result in the loss of such exemption or the imposition of any material
liability, penalty or tax under ERISA or the Code. Each TCI Music Benefit Plan
has at all times been maintained in all material respects, by its terms and in
operation, in accordance with all applicable Legal Requirements.
(d) All contributions (including all employer contributions and
employee salary reduction contributions) required to have been made under the
TCI Music Benefit Plans or pursuant to applicable Legal Requirements (without
regard to any waivers granted under Section 412 of the Code) to any funds or
trusts established thereunder or in connection therewith have been made by the
due date thereof (including any valid extension or grace period) and no
accumulated funding
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deficiency exists with respect to any of the TCI Music Benefit Plans subject to
Section 412 of the Code.
(e) To the Knowledge of TCI Music, there have been no violations of
ERISA or the Code with respect to the filing of applicable reports, documents
and notices regarding the TCI Music Benefit Plans with the Secretary of Labor
and the Secretary of the Treasury or the furnishing of such reports, documents
and notices to the participants or beneficiaries of the TCI Music Benefit Plans,
except such violations that, individually or in the aggregate, would not have a
Material Adverse Effect on TCI Music.
(f) There are no pending actions, claims or lawsuits that have been
asserted or instituted against the TCI Music Benefit Plans, the assets of any of
the trusts under such plans or the plan sponsor or the plan administrator, or
against any fiduciary of the TCI Music Benefit Plans, with respect to the
operation of such plans (other than routine benefit claims), nor does TCI Music
have Knowledge of facts that reasonably could be expected to form the basis for
any such action, claim or lawsuit, except any such actions, claims or lawsuits
that, individually or in the aggregate, would not have a Material Adverse Effect
on TCI Music.
(g) Except as provided in Schedule 4.11(g) and as may be required under
Section 4980B of the Code, neither TCI Music nor any of its ERISA Affiliates
maintains any TCI Music Benefit Plan that provides medical or welfare benefits
to former employees.
Section 4.12 OPERATIONS OF ACQUISITION SUB. As of the date of this
Agreement, Acquisition Sub has engaged in no other business activities other
than this Agreement and the transactions contemplated by this Agreement and has
no material assets or liabilities other than its rights and obligations under
this Agreement.
Section 4.13 NO BROKER. No broker, finder or investment banker is
entitled to any brokerage, finder's or other fee or commission in connection
with the Merger or the transactions contemplated by this Agreement based upon
arrangements made by or on behalf of TCI Music or Acquisition Sub.
Section 4.14 TAXES. TCI Music and each of its Subsidiaries have timely
filed all Tax returns required to be filed by any of them and have timely paid
or have established an adequate reserve for the payment of, all Taxes owed in
respect of the periods covered by such returns, except where the failure to file
such Tax returns or timely pay or establish an adequate reserve for the payment
of such Taxes will not have a Material Adverse Effect on TCI Music. The
information contained in such Tax returns is complete and accurate in all
material respects. Neither TCI Music's nor any Subsidiary of TCI Music is
delinquent in the payment of any Tax or other amount owed to any Governmental
Entity, except where the amount owed, when paid, or the delinquency in paying
the amount owed will not have a Material Adverse Effect on TCI Music. There are
no claims or investigations pending or, to TCI Music's Knowledge, threatened
against TCI Music or any of its Subsidiaries for past Taxes, except claims and
investigations that would not have a Material Adverse
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Effect on TCI Music and adequate provision for which has been made on the Most
Recent Balance Sheet. Except as set forth on Schedule 4.14, none of TCI Music or
its Subsidiaries has waived or extended any applicable statute of limitations
relating to the assessment of any Taxes that would be payable by TCI Music or
such Subsidiary. For the purposes of this Agreement, the term "Tax" includes all
federal, state, local and foreign income, profits, estimated, franchise, gross
receipts, payroll, sales, employment, use, property, withholding, excise and
other taxes, duties and assessments of any nature whatsoever together with all
interest, penalties and additions imposed with respect to such amounts.
Section 4.15 ENVIRONMENTAL LAWS.
(a) Each of TCI Music and its Subsidiaries is in compliance in all
respects with all Environmental Laws, except where the failure to so comply
would not have a Material Adverse Effect on TCI Music; and
(b) No orders, directions or notices have been issued pursuant to any
Environmental Law and no Governmental Entity has submitted to any of TCI Music
and its Subsidiaries any request for information pursuant to any Environmental
Law.
Section 4.16 TRANSACTIONS WITH AFFILIATES. Except as disclosed in the
TCI Music SEC Reports or as contemplated by this Agreement, there is no lease,
sublease, indebtedness, contract, agreement, commitment, understanding or other
arrangement of any kind entered into by TCI Music with any officer, director or
shareholder of TCI Music or any "affiliate" or "associate" of any of them (as
those terms are defined in the Exchange Act) or of TCI Music, except, in each
case, for compensation paid to directors and officers consistent with previously
established policies (including normal merit increases in such compensation in
the ordinary course of business), reimbursements of ordinary and necessary
expenses incurred in connection with their employment and amounts paid or
benefits granted pursuant to TCI Music Benefit Plans.
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company represents and warrants to TCI Music and Acquisition Sub as
follows:
Section 5.1 ORGANIZATION AND QUALIFICATION. The Company is a
corporation duly organized, validly existing and in good standing under the laws
of the State of Florida and has all requisite corporate power and authority to
carry on its business as it is now being conducted. The Company is duly
qualified as a foreign corporation to do business, and is in good standing, in
each jurisdiction where the character of its properties owned or held under
lease or the nature of its activities makes such qualification necessary, except
where the failure to be so qualified would not, individually or in the
aggregate, have a Material Adverse Effect on the Company.
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Section 5.2 CAPITALIZATION.
(a) The authorized capital stock of the Company consists of 40,000,000
shares of Company Common Stock, $.001 par value per share, of which 24,001,781
shares are issued and outstanding, 1,800,000 shares of Company Preferred Stock,
of which 1,666,667 shares are issued and outstanding, and 200,000 shares of 8%
convertible preferred stock, $1.00 par value per share, of which no shares are
issued and outstanding.
(b) Except as set forth on Schedule 5.2(b), there are no options,
warrants, calls, subscriptions or other rights, agreements or commitments of any
kind (including preemptive rights), to which the Company or any of its
Subsidiaries is a party, relating to the issued or unissued capital stock or
other securities of the Company. Schedule 5.2(b) sets forth for all such
options, warrants, calls, subscriptions or other rights, agreements or
commitments that are outstanding (i) the number of shares and the class or
series of capital stock of the Company issuable pursuant thereto, (ii) the
exercise or conversion price, (iii) the exercise or conversion period and (iv)
if not immediately exercisable or convertible, the date on which they can be
exercised or converted. Any such options, warrants, calls, subscriptions or
other rights, agreements or commitments set forth on Schedule 5.2(b), if not
exercised before the Effective Time, will be extinguished or otherwise will
cease to be in effect at the Effective Time, except for the preemptive rights of
holders of Company Preferred Stock that remain outstanding after the Effective
Time, which preemptive rights will not, however, apply to the issuance of
Company Common Stock upon conversion of shares of common stock of Acquisition
Sub pursuant to Section 3.1(c).
(c) All issued and outstanding shares of Company Stock have been duly
authorized and validly issued and are fully paid and nonassessable, are not
subject to, and have not been issued in violation of, any preemptive rights, and
have not been issued in violation of any federal or state securities laws or any
other Legal Requirement.
Section 5.3 SUBSIDIARIES. All Equity Affiliates of the Company are
listed on Schedule 5.3 to this Agreement, which Schedule reflects the percentage
and nature of the Company's ownership of each Subsidiary and Equity Affiliate of
the Company. Each of the Company's Subsidiaries is a corporation or partnership
duly organized, validly existing and in good standing under the laws of its
jurisdiction of incorporation or formation and has the corporate or partnership
power to carry on its business as it is now being conducted or currently
proposed to be conducted. Each of the Company's Subsidiaries is duly qualified
as a foreign corporation or partnership to do business, and is in good standing,
in each jurisdiction where the character of its properties owned or held under
lease or the nature of its activities makes such qualification necessary except
where the failure to be so qualified will not have a Material Adverse Effect on
the Company. All the outstanding shares of capital stock of each of the
Company's Subsidiaries that is a corporation are validly issued, fully paid and
nonassessable. Except as set forth on Schedule 5.3, the shares of capital stock
or partnership or other ownership interests in each of the Company's
Subsidiaries or Equity Affiliates that are owned by the Company or by a
Subsidiary of the Company are owned free and clear of any Liens, are not subject
to and have not been issued in violation of any preemptive
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rights and have not been issued in violation of any federal or state securities
laws or any other Legal Requirement. Except as set forth on Schedule 5.3, there
are not, as of the date hereof, and at the Effective Time there will not be, any
outstanding options, warrants, calls or other rights, agreements or commitments
of any character, to which the Company or any of its Subsidiaries is a party,
relating to the issued or unissued capital stock, other securities or
partnership or other ownership interests in any of the Subsidiaries or Equity
Affiliates of the Company.
Section 5.4 AUTHORITY RELATIVE TO THIS AGREEMENT. The Company has all
requisite corporate power and authority to execute and deliver this Agreement
and, subject to approval of this Agreement by the holders of the Company Stock,
to consummate the transactions contemplated by this Agreement. The execution and
delivery of this Agreement and the consummation of the transactions contemplated
by this Agreement have been duly authorized by the Company's Board of Directors.
Except for the approval of the holders of Company Stock, no other corporate
proceedings on the part of the Company are necessary to authorize this Agreement
and the transactions contemplated by this Agreement. The Board of Directors of
the Company has received the opinion of Houlihan Lokey Howard & Zukin as
financial advisor to the Company, to the effect that, as of the date of this
Agreement, the consideration to be received in the Merger by the Company's
shareholders is fair to them from a financial point of view. Subject to approval
of the shareholders of the Company in accordance with the FBCA, this Agreement
constitutes a valid and binding obligation of the Company enforceable in
accordance with its terms except (i) as enforcement may be limited by
bankruptcy, insolvency or other similar Legal Requirements affecting the
enforcement of creditors' rights generally, (ii) as the availability of
indemnification and other remedies may be limited by federal and state
securities laws and (iii) for limitations imposed by general principles of
equity.
Section 5.5 NO BREACH; REQUIRED CONSENTS. The execution and delivery of
this Agreement by the Company does not, and the consummation of the transactions
contemplated by this Agreement by the Company will not: (a) subject to the
approval of holders of Company Stock, violate or conflict with the Articles of
Incorporation or Bylaws of the Company; (b) constitute a breach or default (or
an event that with notice or lapse of time or both would become a breach or
default) or give rise to any Lien, third-party right of termination,
cancellation, modification or acceleration under any agreement or undertaking to
which the Company is a party or by which it is bound, except where such breach,
default, Lien, third-party right of termination, cancellation, modification, or
acceleration would not have a Material Adverse Effect on the Company; or
(c) subject to obtaining the consents, approvals or authorizations and making
the filings or registrations described in Section 5.6, constitute a violation of
any Legal Requirement, except where such violation would not have a Material
Adverse Effect on the Company.
Section 5.6 CONSENTS AND APPROVALS. Except as set forth on
Schedule 5.6, neither the execution and delivery of this Agreement by the
Company nor the consummation of the transactions contemplated by this Agreement
by the Company will require the Company to make any filing or registration with,
or obtain any authorization, consent or approval of, any Governmental Entity or
any other Person, except those required in connection, or in compliance, with
the provisions
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of (i) the HSR Act, (ii) the Communications Act of 1934, as amended, (iii) the
Securities Act, (iv) the Exchange Act and (v) the corporation, securities or
blue sky laws or regulations, or similar Legal Requirements, of the various
states of the United States, and other than such other filings, registrations,
authorizations, consents or approvals the failure of which to make or obtain
would not have a Material Adverse Effect on the Company or prevent the
consummation of the transactions contemplated by this Agreement.
Section 5.7 REPORTS AND FINANCIAL STATEMENTS.
(a) SEC REPORTS. The Company has filed all required forms, reports and
documents required to be filed with the SEC since July 1, 1995 (collectively,
the "Company SEC Reports"). As of their respective dates or effective dates and
except as the same may have been corrected, updated or superseded by means of a
subsequent filing with the SEC prior to the date of this Agreement, none of the
Company SEC Reports, including any financial statements or schedules included or
incorporated by reference therein, contained any untrue statement of a material
fact or omitted to state a material fact required to be stated or incorporated
by reference therein or necessary in order to make the statements therein, in
light of the circumstances under which they were made, not misleading. The
Company has delivered to TCI Music, in the forms filed with the SEC, all the
Company SEC Reports.
(b) FINANCIAL STATEMENTS. The audited consolidated financial statements
of the Company contained in the Company SEC Reports comply in all material
respects with applicable accounting requirements and with the published rules
and regulations of the SEC with respect thereto, were prepared in accordance
with GAAP applied on a consistent basis during the periods involved (except as
may be indicated in the notes thereto) and present fairly the Company's
consolidated financial condition and the results of its operations as of the
relevant dates thereof and for the periods covered thereby. The unaudited
consolidated interim financial statements of the Company contained in the
Company SEC Reports comply in all material respects with applicable accounting
requirements and with the published rules and regulations of the SEC with
respect thereto, were prepared on a basis consistent with prior interim periods
(except as required by applicable changes in GAAP or in SEC accounting policies)
and include all adjustments (consisting only of normal recurring accruals)
necessary for a fair presentation of the Company's consolidated financial
condition and results of operations for such periods.
(c) ABSENCE OF CERTAIN CHANGES. Since the date of the most recent
consolidated balance sheet of the Company included in the Company's Quarterly
Report on Form 10-QSB for the quarter ended March 31, 1997 (the "Most Recent
Company Balance Sheet") and except as set forth on Schedule 5.7(c), there has
not been any: (i) transaction, commitment, dispute or other event or condition
(financial or otherwise) of any character (whether or not in the ordinary course
of business) that, individually or in the aggregate, has had, or would have, a
Material Adverse Effect on the Company (other than as a result of changes in
laws or regulations of general applicability or any changes resulting from
general economic, financial, market or industry-wide conditions); (ii) any
declaration, setting aside or payment of any dividend or other distribution
(whether in cash, stock
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or property) with respect to the capital stock of the Company; or (iii) entry
into any commitment or transaction material to the Company and its Subsidiaries
taken as a whole (including any borrowing or sale of assets) except in the
ordinary course of business consistent with past practice.
(d) ABSENCE OF UNDISCLOSED LIABILITIES. The Company does not have any
indebtedness, liability or obligation required by GAAP to be reflected on a
balance sheet that is not reflected or reserved against in the Most Recent
Company Balance Sheet other than liabilities, obligations and contingencies that
(i) were incurred after the date of the Most Recent Company Balance Sheet in the
ordinary course of business or (ii) would not, in the aggregate, have a Material
Adverse Effect on the Company.
Section 5.8 COMPLIANCE WITH LAW; LITIGATION.
(a) To the Company's Knowledge, the Company and its Subsidiaries hold
all permits, licenses, franchises, variances, exemptions, concessions, leases,
instruments, orders and approvals (the "Company Permits") of all Governmental
Entities required to be held under applicable Legal Requirements, except such
Company Permits the failure of which to hold, individually or in the aggregate,
does not have and, in the future is not likely to have, a Material Adverse
Effect on the Company. To the Company's Knowledge, the Company and its
Subsidiaries are in compliance with the terms of the Company Permits, except for
such failures to comply that, individually or in the aggregate, would not have a
Material Adverse Effect on the Company. To the Company's Knowledge, the
businesses of the Company and its Subsidiaries are not being conducted in
violation of any Legal Requirement, except for such violations which,
individually or in the aggregate, would not have a Material Adverse Effect on
the Company. No investigation or review by any Governmental Entity with respect
to the Company or any of its Subsidiaries is pending, or, to the Knowledge of
the Company, threatened, nor has any Governmental Entity indicated to the
Company in writing an intention to conduct the same, other than those the
outcome of which would not have a Material Adverse Effect on the Company.
(b) There is no suit, action or proceeding pending or, to the Knowledge
of the Company, threatened against or affecting the Company or any of its
Subsidiaries that has had or is likely to have a Material Adverse Effect on the
Company nor is there any judgment, decree, injunction, rule or order of any
Governmental Entity or arbitrator outstanding against the Company or any of its
Subsidiaries that has had or is likely to have a Material Adverse Effect on the
Company.
Section 5.9 TITLE TO ASSETS. The Company and its Subsidiaries have good
and merchantable title to all material assets reflected on the Most Recent
Company Balance Sheet, free and clear of any Lien except: (a) landlord's Liens
and Liens for property taxes not delinquent; (b) statutory Liens that were
created in the ordinary course of business and do not materially detract from
the value of such assets or materially impair the use thereof in the operation
of the Company's business; (c) the Liens listed on Schedule 5.3 or Schedule 5.9;
(d) leased interests in property owned by others; and leased interests in
property leased to others; and (e) zoning, building or similar restrictions,
easements, rights-of-way, reservations of rights, conditions, or other
restrictions or
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encumbrances relating to or affecting real property that do not, individually or
in the aggregate, materially interfere with the use of such real property in the
operation of the Company's business.
Section 5.10 LABOR AND EMPLOYEE MATTERS. The Company is not a party to
any contract with any labor organization and has not agreed to recognize any
union or other collective bargaining unit. As of the date of this Agreement, no
union or other collective bargaining unit has been certified as representing any
of the Company's employees. To the Company's Knowledge, as of the date of this
Agreement, there is no representation or organizing effort pending or threatened
against or affecting or involving the Company. The Company and its Subsidiaries
are in compliance with all applicable Legal Requirements relating to the
employment of employees, including any obligations relating to employment
standards legislation, pay equity, occupational health and safety, labor
relations and human rights legislation except for such failures to comply as do
not have, and are not likely to have, a Material Adverse Effect on the Company.
Schedule 5.10 sets forth all agreements or arrangements with any employee of the
Company, whether oral or in writing, with respect to such employee's employment
with the Company other than agreements or arrangements otherwise disclosed on
Schedule 5.11(a).
Section 5.11 ERISA.
(a) Schedule 5.11(a) sets forth all "employee benefit plans," as
defined in ERISA, and all other material employee benefit arrangements, programs
or payroll practices, including severance pay, sick leave, vacation pay, salary
continuation for disability, deferred compensation, bonus, stock purchase,
hospitalization, medical insurance, life insurance, tuition reimbursement,
employee assistance and employee discounts, that the Company or any of its ERISA
Affiliates maintains or has an obligation to make contributions (the "Company
Benefit Plans").
(b) Neither the Company nor any of its ERISA Affiliates has incurred
any unsatisfied withdrawal liability, as defined in Section 4201 of ERISA, with
respect to any multiemployer plan, nor has any of them incurred any liability
due to the termination or reorganization of any multiemployer plan, except any
such liability that would not have a Material Adverse Effect on the Company. To
the Knowledge of the Company, neither the Company nor any of its ERISA
Affiliates reasonably expects to incur any liability due to a withdrawal from or
termination or reorganization of a multiemployer plan, except any such liability
that would not have a Material Adverse Effect on the Company.
(c) Each Company Benefit Plan that is intended to qualify under Section
401 of the Code, and a form of trust that is similar in all material respects to
the trust maintained pursuant thereto, have been determined to be exempt from
federal income taxation under Section 501 of the Code by the Internal Revenue
Service, and to the Knowledge of the Company, nothing has occurred with respect
to any such plan since such determination that is likely to result in the loss
of such exemption or the imposition of any material liability, penalty or tax
under ERISA or the Code. Each Company Benefit Plan has at all times been
maintained in all material respects, by its terms and in operation, in
accordance with all applicable Legal Requirements.
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(d) All contributions (including all employer contributions and
employee salary reduction contributions) required to have been made under the
Company Benefit Plans or pursuant to applicable Legal Requirements (without
regard to any waivers granted under Section 412 of the Code) to any funds or
trusts established thereunder or in connection therewith have been made by the
due date thereof (including any valid extension or grace period) and no
accumulated funding deficiency exists with respect to any of the Company Benefit
Plans subject to Section 412 of the Code.
(e) To the Knowledge of the Company, there have been no violations of
ERISA or the Code with respect to the filing of applicable reports, documents
and notices regarding the Company Benefit Plans with the Secretary of Labor and
the Secretary of the Treasury or the furnishing of such reports, documents and
notices to the participants or beneficiaries of the Company Benefit Plans,
except such violations that, individually or in the aggregate, would not have a
Material Adverse Effect on the Company.
(f) There are no pending actions, claims or lawsuits that have been
asserted or instituted against the Company Benefit Plans, the assets of any of
the trusts under such plans or the plan sponsor or the plan administrator, or
against any fiduciary of the Company Benefit Plans, with respect to the
operation of such plans (other than routine benefit claims), nor does the
Company have Knowledge of facts that reasonably could be expected to form the
basis for any such action, claim or lawsuit, except any such actions, claims or
lawsuits that, individually or in the aggregate, would not have a Material
Adverse Effect on the Company.
(g) Except as provided in Schedule 5.11(g) and as may be required under
Section 4980B of the Code, neither the Company nor any of its ERISA Affiliates
maintains any Company Benefit Plan that provides medical or welfare benefits to
former employees.
Section 5.12 APPROVAL.
(a) The Board of Directors of the Company at a meeting duly called and
held: (i) determined that the Merger is advisable and fair and in the best
interests of the Company and its shareholders; (ii) approved the Merger, the
Capitalization Amendment and this Agreement and the transactions contemplated by
this Agreement in accordance with the provisions of Section 607.1101 of the
FBCA; (iii) recommended the approval of this Agreement, the Capitalization
Amendment and the Merger by the holders of the Company Stock and directed that
the Merger be submitted for consideration by the Company's shareholders at the
Meeting in accordance with the provisions of Section 607.1103 of the FBCA; and
(iv) adopted a resolution having the effect of causing the Merger not to be
subject to Section 607.0902 of the FBCA.
(b) The vote of 75% of the outstanding shares of the Company Stock
entitled to vote, voting as a single class, is the vote required for the
adoption and approval of this Agreement, the Merger and the other transactions
contemplated by this Agreement, except that the vote of a majority of the
outstanding shares of Company Stock entitled to vote, voting as a single class,
will
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be sufficient for adoption and approval of the Capitalization Amendment. No
class or series of shares of capital stock of the Company is entitled to vote on
the adoption and approval of this Agreement, the Merger, the Capitalization
Amendment or the other transactions contemplated by this Agreement as a separate
class or series.
Section 5.13 FINANCIAL ADVISOR/INVESTMENT BANKER. Except for amounts
payable to Houlihan Lokey Howard & Zukin and Communications Equity Associates,
Inc. in the amounts and on the terms and conditions set forth on Schedule 5.13,
no broker, finder or investment banker is entitled to any brokerage, finder's or
other fee or commission in connection with the Merger or the transactions
contemplated by this Agreement based upon arrangements made by or on behalf of
the Company. There has been delivered to TCI Music true and complete copies of
the agreements pursuant to which Houlihan Lokey Howard & Zukin has been retained
to act as financial advisor to, and Communications Equity Associates, Inc. has
been retained to obtain financing for, the Company in connection with the
Merger.
Section 5.14 TAXES. The Company and each of its Subsidiaries have
timely filed all Tax returns required to be filed by any of them and have timely
paid or have established an adequate reserve for the payment of, all Taxes owed
in respect of the periods covered by such returns, except where the failure to
file such Tax returns or timely pay or establish an adequate reserve for the
payment of such Taxes, will not have a Material Adverse Effect on the Company.
The information contained in such Tax returns is complete and accurate in all
material respects. Neither the Company nor any Subsidiary of the Company is
delinquent in the payment of any Tax or other amount owed to any Governmental
Entity, except where the amount owed, when paid, or the delinquency in paying
the amount owed will not have a Material Adverse Effect on the Company. There
are no claims or investigations pending or, to the Company's Knowledge,
threatened against the Company or any of its Subsidiaries for past Taxes, except
claims and investigations that would not have a Material Adverse Effect on the
Company and adequate provision for which has been made on the Most Recent
Balance Sheet. Except as set forth on Schedule 5.14, none of the Company or its
Subsidiaries has waived or extended any applicable statute of limitations
relating to the assessment of any Taxes that would be payable by the Company or
such Subsidiary.
Section 5.15 ENVIRONMENTAL LAWS.
(a) Each of the Company and its Subsidiaries is in compliance in all
respects with all Environmental Laws, except where the failure to so comply
would not have a Material Adverse Effect on the Company; and
(b) No orders, directions or notices have been issued pursuant to any
Environmental Law and no Governmental Entity has submitted to any of the Company
and its Subsidiaries any request for information pursuant to any Environmental
Law.
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Section 5.16 TRANSACTIONS WITH AFFILIATES. Except as disclosed in the
Company SEC Reports or Schedule 5.16, there is no lease, sublease, indebtedness,
contract, agreement, commitment, understanding or other arrangement of any kind
entered into by the Company with any officer, director or shareholder of the
Company or any "affiliate" or "associate" of any of them (as those terms are
defined in the Exchange Act) or of the Company, except, in each case, for
compensation paid to directors and officers consistent with previously
established policies (including normal merit increases in such compensation in
the ordinary course of business), reimbursements of ordinary and necessary
expenses incurred in connection with their employment and amounts paid or
benefits granted pursuant to Company Benefit Plans.
ARTICLE VI
CONDUCT OF BUSINESS PENDING THE MERGER
Section 6.1 CONDUCT OF BUSINESS OF THE COMPANY. Prior to the Effective
Time, except as set forth on Schedule 6.1 to this Agreement, without the prior
consent of TCI Music:
(a) The Company will conduct, and will cause each of its Subsidiaries
to conduct, its business in the ordinary course, and will use, and will cause
each of its Subsidiaries to use, its reasonable best efforts to preserve intact
its present business organization and to preserve relationships with customers,
suppliers and others having business dealings with them.
(b) Except as required or permitted by this Agreement the Company will
not, and will not permit any of its Subsidiaries to: (i) sell or pledge or agree
to sell or pledge any capital stock or other ownership interest in any of its
Subsidiaries; (ii) amend or propose to amend the Articles of Incorporation or
Bylaws of the Company or any of its Subsidiaries; (iii) split, combine or
reclassify its outstanding capital stock or issue or authorize or propose the
issuance of any other securities in respect of, in lieu of or in substitution
for shares of capital stock of, or other ownership interests in, the Company or
any of its Subsidiaries, or declare, set aside or pay any dividend or other
distribution to shareholders of the Company; (iv) directly or indirectly redeem,
purchase or otherwise acquire or agree to redeem, purchase or otherwise acquire
any shares of capital stock of, or other ownership interests in, the Company or
any of its Subsidiaries; or (v) agree to do any of the foregoing.
(c) The Company will not, and will not permit any of its Subsidiaries
to: (i) issue, deliver or sell or agree to issue, deliver or sell any shares of
capital stock of, or other ownership interests in, the Company or any of its
Subsidiaries, or any option, warrant or other right to acquire, or any security
convertible into, shares of capital stock of, or other ownership interests in,
the Company or any of its Subsidiaries, except as required or permitted by this
Agreement; (ii) acquire, lease or dispose of any assets, other than in the
ordinary course of business consistent with past practice; (iii) (A) create,
assume or incur any indebtedness for borrowed money exceeding $200,000, other
than indebtedness incurred to refinance outstanding indebtedness in an amount
not exceeding the principal amount of the indebtedness being refinanced and
indebtedness owed by the Company
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to any of its Subsidiaries or by way of the Company's Subsidiaries to the
Company or any other Subsidiary of the Company, (B) mortgage, pledge or subject
to any Lien any of its assets except to secure indebtedness permitted by the
foregoing clause (A) and Liens described in clauses (a) through (e) of Section
5.9 or (C) enter into any other material transaction other than in each case in
the ordinary course of business consistent with past practice; (iv) make any
payments with respect to any indebtedness of the Company or its Subsidiaries
except such payments that are scheduled to come due prior to the Effective Time;
(v) acquire by merging or consolidating with, or by acquiring assets of, or by
purchasing a substantial ownership interest in, or by any other method, any
business or any other Person, in each case in this clause (v) that are material,
individually or in the aggregate, to the Company and its Subsidiaries taken as a
whole; or (vi) agree to do any of the foregoing.
(d) Except as required to comply with applicable Legal Requirements or
existing Company Benefit Plans or as otherwise contemplated by this Agreement,
the Company will not, and will not permit any of its Subsidiaries to: (i) adopt
or terminate or amend any bonus, profit sharing, compensation, severance,
termination, stock option, pension, retirement, deferred compensation,
employment or other Company Benefit Plan, agreement, trust, fund or other
arrangement for the benefit or welfare of any director, officer or current or
former employee; (ii) increase in any manner the compensation or benefits of any
director, officer or employee (except normal increases in the ordinary course of
business consistent with past practice); (iii) grant any awards under any bonus,
incentive, performance or other compensation plan or arrangement or Company
Benefit Plan; (iv) take any action to fund or in any other way secure the
payment of compensation or benefits under any employee plan, agreement, contract
or arrangement or Company Benefit Plan (except in the ordinary course of
business consistent with past practice); or (v) agree to do any of the
foregoing.
(e) The Company will not take or agree to take, and will cause its
Subsidiaries not to take or agree to take, any action that would: (i) make any
representation or warranty of the Company set forth in this Agreement untrue or
incorrect so as to cause the condition set forth in Section 8.3(a) of this
Agreement not to be fulfilled as of the Effective Time; or (ii) result in any of
the other conditions of this Agreement set forth in Section 8.1 or Section 8.3
of this Agreement not to be satisfied as of the Effective Time.
Section 6.2 CONDUCT OF BUSINESS OF TCI MUSIC. Prior to the Effective
Time, except as contemplated or permitted by this Agreement TCI Music will not
take or agree to take, and will cause its Subsidiaries not to take or agree to
take, any action that would (i) make any representation or warranty of TCI Music
or Acquisition Sub set forth in this Agreement untrue or incorrect so as to
cause the condition set forth in Section 8.2(a) of this Agreement not to be
fulfilled as of the Effective Time or (ii) result in any of the other conditions
set forth in Section 8.1 or Section 8.2 of this Agreement not to be satisfied as
of the Effective Time.
Section 6.3 REMEDIES FOR BREACH. The sole remedies (i) of TCI Music and
Acquisition Sub for any breach by the Company of Section 6.1(e), and (ii) of the
Company for any breach by TCI Music of Section 6.2, will be injunctive relief or
termination of this Agreement
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pursuant to Article X, unless, in any case, such breach is willful or
intentional, in which event any and all available legal or equitable remedies
may be obtained.
ARTICLE VII
ADDITIONAL AGREEMENTS
Section 7.1 ACCESS AND INFORMATION. Each of the Company and TCI Music
and their respective Subsidiaries will afford to the other and to the other's
accountants, counsel and other representatives full access during normal
business hours (and at such other times as the parties may mutually agree)
throughout the period prior to the Effective Time to all of its properties,
books, contracts, commitments, records and personnel.
Section 7.2 SEC FILINGS.
(a) The Company and TCI Music will prepare jointly, and, as soon as
reasonably practicable after the date of this Agreement, file with the SEC a
joint proxy statement/registration statement (the "Preliminary Joint Proxy
Statement/Prospectus") comprising preliminary proxy materials of the Company
under the Exchange Act with respect to the Merger and a Registration Statement
on Form S-4 and preliminary prospectus of TCI Music under the Securities Act
with respect to the TCI Music Preferred Stock and the TCI Music Series A Common
Stock underlying the TCI Music Preferred Stock to be issued in the Merger, and
will thereafter use their respective reasonable best efforts to respond to any
comments of the SEC with respect thereto and to cause a definitive joint proxy
statement/registration statement (including all supplements and amendments
thereto, the "Joint Proxy Statement/Prospectus") and proxy to be mailed to the
Company's shareholders as promptly as practicable.
(b) As soon as reasonably practicable after the date hereof, the
Company and TCI Music will prepare and file any other filings relating to the
Merger and the other transactions contemplated hereby that are required to be
filed by each under the Exchange Act and other applicable Legal Requirements,
including, if required, in the case of TCI Music, a registration statement on
the applicable form under the Exchange Act with respect to the TCI Music
Preferred Stock (collectively "Other Filings"), and will use their reasonable
best efforts to respond to any comments of the SEC or any other appropriate
government official with respect thereto.
(c) The Company, on the one hand, and TCI Music, on the other, will
cooperate with each other and provide all information necessary to prepare the
Preliminary Joint Proxy Statement/Prospectus, the Joint Proxy
Statement/Prospectus and the Other Filings (collectively "SEC Filings") and will
provide promptly to the other party any information that such party may obtain
that could necessitate amending any such document.
(d) Each of the Company and TCI Music will notify the other promptly of
the receipt of any comments from the SEC or its staff or any other government
official and of any
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requests by the SEC or its staff or any other government official for amendments
or supplements to any of the SEC Filings or for additional information and will
supply the other with copies of all correspondence between the Company or any of
its representatives or TCI or TCI Music or any of their respective
representatives, as the case may be, on the one hand, and the SEC or its staff
or any other government official, on the other hand, with respect thereto. If at
any time prior to the Effective Time, any event occurs that should be set forth
in an amendment of, or a supplement to, any of the SEC Filings, the Company and
TCI Music promptly will prepare and file such amendment or supplement and will
distribute such amendment or supplement as required by applicable Legal
Requirements, including, in the case of an amendment or supplement to the Joint
Proxy Statement/Prospectus, mailing such supplement or amendment to the
Company's shareholders.
(e) TCI Music covenants that the SEC Filings (other than any
information provided by the Company for inclusion in the SEC Filings) (i) will
comply in all material respects with the Securities Act and the Exchange Act and
(ii) will not contain any untrue statement of a material fact or omit to state
any material fact required to be stated therein or necessary in order to make
the statements contained therein, in light of the circumstances under which they
are made, not misleading.
(f) The Company covenants that the SEC Filings (other than any
information provided by TCI for inclusion in the SEC Filings) (i) will comply in
all material respects with the Securities Act and the Exchange Act and (ii) will
not contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary in order to make the
statements therein, in light of the circumstances under which they were made,
not misleading.
(g) TCI Music will be responsible for all reasonable expenses incurred
in complying with this Section 7.2, including all registration, qualification
and filing fees, printing expenses, fees and disbursements of counsel (other
than counsel to the Company) and applicable blue-sky fees and expenses.
(h) (i) TCI Music will indemnify, defend, and hold harmless the
Company, its officers, directors, employees and agents and each other Person, if
any, who controls any of the foregoing within the meaning of Section 15 of the
Securities Act or Section 20 of the Exchange Act, against any losses, claims,
damages or liabilities (collectively, "Losses"), joint or several, to which any
of the foregoing may become subject under the Securities Act or the Exchange Act
or otherwise, insofar as such Losses (or actions in respect thereof) arise out
of or are based upon (A) an untrue statement or alleged untrue statement of a
material fact contained in any SEC Filing, or (B) the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading, provided that such misstatement or
omission was based on or omitted from information provided by TCI Music in
writing for inclusion in the SEC Filings or was made in reliance upon and in
conformity with such information. TCI Music promptly will reimburse the Company
and each such officer, director, employee, agent and controlling Person for any
legal or any other expenses
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reasonably incurred by any of them in connection with investigating or defending
any such Losses (or action in respect thereof).
(ii) If this Agreement is terminated prior to the consummation
of the Merger, the Company will indemnify, defend and hold harmless each of TCI
Music and Acquisition Sub and their officers and directors and each other
Person, if any, who controls any of the foregoing within the meaning of Section
15 of the Securities Act or Section 20 of the Exchange Act, against any Losses,
joint or several, to which any of the foregoing may become subject under the
Securities Act or the Exchange Act or otherwise, insofar as such Losses (or
actions in respect thereof) arise out of or are based upon (A) an untrue
statement or alleged untrue statement of a material fact contained in any SEC
Filing or (B) the omission or alleged omission to state a material fact required
to be stated therein or necessary to make the statements therein, in light of
the circumstances under which they were made, not misleading, provided that the
misstatement or omission was based on or omitted from information provided by
the Company in writing for use in the SEC Filings or was made in reliance upon
and in conformity with such information. The Company promptly will reimburse TCI
Music and Acquisition Sub and each such officer, director and controlling Person
for any legal or any other expenses reasonably incurred by any of them in
connection with investigating or defending any such Losses (or action in respect
thereof).
(iii) For purposes of this Section 7.2, (A) "Indemnifying
Party" means the Person having an obligation hereunder to indemnify any other
Person pursuant to this Section 7.2, (B) "Indemnified Party" means the Person
having the right to be indemnified pursuant to this Section 7.2 and (C) any
information concerning the Company that is included in any SEC Filing that is
provided to the Company or its counsel for review within a reasonable period
before filing or use thereof and to which the Company has not provided written
notice of objection to TCI Music will be deemed to have been provided by the
Company for inclusion in such SEC Filing. Whenever any claim for indemnification
arises under this Section 7.2, the Indemnified Party will promptly notify the
Indemnifying Party in writing of such claim and, when known, the facts
constituting the basis for such claim (in reasonable detail). Failure by the
Indemnified Party so to notify the Indemnifying Party will not relieve the
Indemnifying Party of any liability hereunder except to the extent that such
failure materially prejudices the Indemnifying Party.
(iv) After such notice, if the Indemnifying Party undertakes
to defend any such claim, then the Indemnifying Party will be entitled, if it so
elects, to take control of the defense and investigation with respect to such
claim and to employ and engage attorneys of its own choice to handle and defend
such claim, at the Indemnifying Party's cost, risk and expense, upon notice to
the Indemnified Party of such election, which notice acknowledges the
Indemnifying Party's obligation to provide indemnification hereunder. The
Indemnifying Party will not settle any third- party claim that is the subject of
indemnification without the written consent of the Indemnified Party, which
consent will not be unreasonably withheld; provided however, that the
Indemnifying Party may settle a claim without the Indemnified Party's consent if
the settlement (A) makes no admission or acknowledgment of liability or
culpability with respect to the Indemnified Party, (B) includes a complete
release of the Indemnified Party and (C) does not require the Indemnified Party
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to make any payment or forego or take any action. The Indemnified Party will
cooperate in all reasonable respects with the Indemnifying Party and its
attorneys in the investigation, trial and defense of any lawsuit or action with
respect to such claim and any appeal arising therefrom (including the filing in
the Indemnified Party's name of appropriate cross claims and counterclaims) and
the Indemnifying Party will reimburse the Indemnified Party for all reasonable
direct out-of- pocket expenses incurred by the Indemnified Party in connection
with such cooperation. The Indemnified Party may, at its own expense,
participate in any investigation, trial and defense of such lawsuit or action
controlled by the Indemnifying Party and any appeal arising therefrom. If, after
receipt of a claim notice pursuant to Section 7.2(h)(iii), the Indemnifying
Party does not undertake to defend any such claim, the Indemnified Party may,
but will have no obligation to, contest any lawsuit or action with respect to
such claim and the Indemnifying Party will be bound by the result obtained with
respect thereto by the Indemnified Party (including the settlement thereof
without the consent of the Indemnifying Party). If there are one or more
defenses available to the Indemnified Party that conflict with, or are
additional to, those available to the Indemnifying Party, the Indemnified Party
will have the right, at the expense of the Indemnifying Party, to participate in
the defense of the lawsuit or action; provided however, that the Indemnified
Party may not settle such lawsuit or action without the consent of the
Indemnifying Party, which consent will not be unreasonably withheld.
(v) If the indemnification provided for in this Section 7.2(h)
is for any reason unavailable to the Indemnified Party in respect of any Losses
(or action in respect thereof) then the Indemnifying Party will, in lieu of
indemnifying the Indemnified Party, contribute to the amount paid or payable by
the Indemnified Party as a result of such Losses (or action in respect thereof),
in such proportion as is appropriate to reflect the relative fault of the
Indemnifying Party on the one hand and the Indemnified Party on the other with
respect to the statement or omission that resulted in such Losses (or action in
respect thereof) as well as any other relevant equitable considerations.
Relative fault with respect to an untrue or alleged untrue statement or omission
of a material fact will be determined by reference to whether the untrue or
alleged untrue statement or omission of a material fact related to information
supplied by the Indemnifying Party on the one hand or the Indemnified Party on
the other, the intent of the parties and their relative knowledge, access to
information and opportunity to correct or prevent such statement or omission.
The amount paid or payable by the Indemnified Party as a result of the Losses
(or action in respect thereof) referred to above will be deemed to include any
legal or other expenses reasonably incurred by the Indemnified Party in
connection with investigating, trying or defending any such action or claim. No
Person guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the Securities Act) will be entitled to contribution from any Person
who was not guilty of such fraudulent misrepresentation.
Section 7.3 MEETING OF SHAREHOLDERS OF THE COMPANY. The Company will
take all action necessary, in accordance with the FBCA and the Articles of
Incorporation and Bylaws of the Company, to duly call, give notice of, convene
and hold a meeting of its shareholders as promptly as practicable, to consider
and vote upon the adoption and approval of this Agreement (as a plan of merger
in accordance with Section 607.1101 of the FBCA), the Merger and the other
transactions
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contemplated by this Agreement (the "Meeting"), to the extent such approval is
required by the FBCA and the Articles of Incorporation of the Company.
Section 7.4 COMPLIANCE WITH THE SECURITIES ACT. Prior to the Closing
Date, the Company will cause to be delivered to TCI Music a letter from the
Company, identifying all Persons who were, in its opinion, at the time of the
Meeting, "affiliates" of the Company as that term is used in paragraphs (c) and
(d) of Rule 145 under the Securities Act. TCI Music may cause the TCI Music
Certificates evidencing shares of TCI Music Preferred Stock issued to such
Persons to bear a legend referring to the applicability of paragraphs (c) and
(d) of Rule 145 under the Securities Act.
Section 7.5 LISTING. TCI Music will use its best efforts to cause the
shares of TCI Music Preferred Stock issued in connection with the Merger and the
shares of TCI Music Series A Common Stock issuable upon conversion of TCI Music
Preferred Stock to be quoted on NASDAQ, subject to satisfaction, in each case,
of applicable NASDAQ requirements upon official notice of issuance.
Section 7.6 REASONABLE BEST EFFORTS. Subject to the fiduciary duty
obligations of the Board of Directors of the Company, each of the parties to
this Agreement will use its reasonable best efforts to take, or cause to be
taken, all appropriate action, and to do, or cause to be done, all things
necessary, proper or advisable under applicable Legal Requirements to consummate
and make effective the transactions contemplated by this Agreement in the most
expeditious manner practicable, including the satisfaction of all conditions to
the Merger.
Section 7.7 PUBLIC ANNOUNCEMENTS. No party to this Agreement will make
any public announcements or otherwise communicate with any news media with
respect to this Agreement or any of the transactions contemplated by this
Agreement without prior consultation with the other parties as to the timing and
contents of any such announcement as may be reasonable under the circumstances;
provided however, that nothing contained herein will prevent any party from
promptly making all filings with Governmental Entities that may, in its
reasonable judgment, be required or advisable in connection with the execution
and delivery of this Agreement or the consummation of the transactions
contemplated by this Agreement so long as such party gives timely notice to the
other parties of the anticipated disclosure and cooperates with the other
parties in designing reasonable procedural and other safeguards to preserve, to
the maximum extent possible, the confidentiality of all information furnished by
the other parties pursuant to this Agreement.
Section 7.8 NOTIFICATION. In the event of, or after obtaining knowledge
of the occurrence or threatened occurrence of, any fact or circumstance that
would cause or constitute a breach of any of its representations and warranties
set forth herein, each party to this Agreement promptly will give notice thereof
to the other parties and will use its best efforts to prevent or remedy such
breach.
Section 7.9 HSR ACT FILINGS. TCI Music and the Company each will make
or cause to be made an appropriate filing of a Notification and Report Form
pursuant to the HSR Act
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no later than 15 business days after the date of this Agreement. Each such
filing will request early termination of the waiting period imposed by the HSR
Act. The Company and TCI Music each will use its reasonable best efforts to
respond or cause a response to be made as promptly as reasonably practicable to
any inquiries received from the Federal Trade Commission (the "FTC") and the
Antitrust Division of the Department of Justice (the "Antitrust Division") for
additional information or documentation and to respond as promptly as reasonably
practicable to all inquiries and requests received from any other Governmental
Entity in connection with antitrust matters; provided however, that nothing
contained herein will be deemed to preclude either the Company or TCI from
negotiating reasonably with any Governmental Entity regarding the scope and
content of any such requested information or documentation. The Company and TCI
Music each will use their respective reasonable best efforts to overcome any
objections that may be raised by the FTC, the Antitrust Division or any other
Governmental Entity having jurisdiction over antitrust matters. Notwithstanding
the foregoing, neither TCI Music nor the Company will be required to make any
significant change in the operations or activities of the business (or any
material assets employed therein) of TCI Music or any of its Affiliates, or of
the Company or any of its Affiliates, as the case may be, if TCI Music or the
Company, as the case may be, determines in good faith that such change would be
materially adverse to the operations or activities of the business (or any
material assets employed therein) of TCI Music or any of its Affiliates or the
Company or any of its Affiliates, as the case may be.
Section 7.10 FURTHER ASSURANCES. Each of the parties to this Agreement
will execute such documents and other instruments and take such further actions
as may be reasonably necessary or desirable to carry out the provisions of this
Agreement and to consummate the transactions contemplated by this Agreement or,
at and after the Closing Date, to evidence the consummation of the transactions
contemplated by this Agreement. Upon the terms and subject to the conditions of
this Agreement, each of the parties to this Agreement will take or cause to be
taken all actions and to do or cause to be done all other things necessary,
proper or advisable to consummate and make effective as promptly as practicable
the transactions contemplated by this Agreement and to obtain in a timely manner
all necessary waivers, consents and approvals and to effect all necessary
registrations and filings.
Section 7.11 EMPLOYEE MATTERS.
(a) Prior to the Effective Time, if so requested by TCI Music, the
Company will give notice of termination of employment to its employees. TCI
Music may, but will have no obligation to, employ or offer employment to any
employees of the Company. The Company has provided to TCI Music a list of all
employees of the Company as of July 1, 1997, showing their current positions,
rates of compensation and dates of hire. Within 30 days after the date of
execution of this Agreement (or such later date as TCI Music and the Company may
mutually agree), TCI Music will provide to the Company in writing a list of
employees TCI Music desires to employ following the Closing (subject to
satisfaction of TCI Music's conditions for employment) (the "Desired
Employees"). TCI Music will notify the Company prior to distributing offer
notices to the Desired Employees and will coordinate in all reasonable respects
with TCI Music to allow TCI
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Music to evaluate personnel files and interview employees of the Company to make
hiring decisions. As of the Closing Date, the Company will terminate the
employment of all of its employees.
(b) The Company will pay or cause to be paid to all employees all
compensation, including salaries, commissions, bonuses, deferred compensation,
reasonable severance, insurance, pensions, profit sharing, vacation (other than
vacation which is allowed to be carried over pursuant to this Section), sick pay
and other compensation or benefits to which they are entitled for periods prior
to the Closing, including all amounts, if any, payable on account of the
termination of their employment. As to any employees who are entitled to
severance payments but are offered employment with TCI Music, the Company will
use its best efforts to obtain waivers of such employees' rights to severance
payments upon acceptance of such offers of employment.
(c) The Company will be responsible for maintenance and distribution of
benefits accrued under any employee benefit plan (as defined in ERISA)
maintained by the Company pursuant to the provisions of such plans. TCI Music
will not assume any obligation or liability for any such accrued benefits nor
any fiduciary or administrative responsibility to account for or dispose of any
such accrued benefits under any employee benefit plans maintained by the
Company.
(d) All claims and obligations under, pursuant to or in connection with
any welfare, medical, insurance, disability or other employee benefit plans of
the Company or arising under any Legal Requirement affecting employees of the
Company incurred on or before the Closing Date or resulting or arising from
events or occurrences occurring or commencing on or before the Closing Date will
be satisfied or provided for by the Company prior to the Closing, and TCI Music
will not have or assume any obligation or liability in connection with any such
plan.
(e) The Company will retain full responsibility and liability for
offering and providing "continuation coverage" of any "qualified beneficiary"
who is covered by a "group health plan" sponsored or contributed to by such
party and who has experienced a "qualifying event" or is providing "continuation
coverage" on or prior to the Closing Date. "Continuation coverage," "qualified
beneficiary," "group health plan," and "qualified event" all will have the
meanings given such terms under Code Section 4980B.
(f) Nothing in this Agreement will (i) require TCI Music to assume any
collective bargaining agreement between the Company and any labor organization
or (ii) be deemed to make any employee of the parties a third-party beneficiary
of this Agreement.
(g) To the extent permitted under TCI Music's Benefits Plans, each
employee of the Surviving Corporation who was an employee of the Company
immediately prior to the Effective Time (i) will receive credit for past service
with the Company for purposes of eligibility and vesting under the Surviving
Corporation's employee benefit plans, as defined in Section 3(3) of ERISA, to
the extent such service was credited under the Company Benefit Plans on the
Closing Date, (ii) will not be subject to any waiting periods or limitations on
benefits for pre-existing conditions under the Surviving Corporation's employee
benefit plans, including any group health and disability plans,
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except to the extent such employees were subject to such limitations under the
Company Benefit Plans and (iii) will receive credit for past service with the
Company for purposes of eligibility and vesting under the Surviving
Corporation's plans and policies with respect to seniority benefits, including
vacation and sick leave.
Section 7.12 NO SOLICITATION. Subject to the fiduciary duties of the
Board of Directors of the Company and its Subsidiaries, neither the Company nor
any of its Subsidiaries or any of their respective officers, directors,
representatives or agents will take any action to (i) initiate the submission of
any Acquisition Proposal, (ii) enter into any agreement with respect to any
Acquisition Proposal or (iii) participate in negotiations with, or provide
information concerning the Company, its assets, liabilities or business to, any
Person in connection with any Acquisition Proposal. The Company will promptly
communicate to TCI Music any solicitation or inquiry received by the Company and
the terms of any proposal or inquiry that it may receive in respect of any
Acquisition Proposal, or of any such information requested from it or of any
such negotiations or discussions being sought to be initiated with it. Nothing
in this Section 7.12 shall be construed as prohibiting the Board of Directors of
the Company from (i) making any disclosure to the Company's shareholders, or
(ii) responding to any unsolicited proposal or inquiry by advising the Person
making such proposal or inquiry of the terms of this Section 7.12. "Acquisition
Proposal" means any proposed (i) merger, consolidation or similar transaction
involving the Company, (ii) sale, lease or other disposition directly or
indirectly by merger, consolidation, share exchange or otherwise of all or any
substantial part of the assets of the Company or its Subsidiaries, (iii) issue,
sale or other disposition of securities representing 25% or more of the voting
power of the Company Stock or (iv) transaction in which any Person proposes to
acquire beneficial ownership (within the meaning of Rule 13d-3 under the
Exchange Act) of, or the right to acquire beneficial ownership of, or any
"group" (as such term is defined under the Exchange Act) shall have been formed
which beneficially owns or has the right to acquire beneficial ownership of, 25%
or more of the outstanding Company Stock.
Section 7.13 INDEMNIFICATION OF EXECUTIVES.
(a) INDEMNIFICATION. TCI Music will cause the Surviving Corporation to,
and, should the Surviving Corporation fail or be unable to do so, TCI Music
shall, indemnify, defend and hold harmless each person who is now, or has been
at any time prior to the date of this Agreement or who becomes prior to the
Effective Time, an officer or director of the Company (each, an "Executive"),
against all losses, expenses, damages, liabilities, costs, judgments, and
amounts paid in settlement in connection with any claim, action, suit,
proceeding, or investigation based on or arising out of, in whole or in part,
any actions or omissions of such Executive as an officer or director of the
Company on or prior to the Effective Time, including actions or omissions
relating to any of the transactions contemplated by this Agreement, to the
fullest extent permitted under the FBCA, the Articles of Incorporation and
Bylaws of the Company and the Indemnification Agreements listed on Schedule
7.13(a). TCI Music will cause the Surviving Corporation to pay expenses in
advance of the final disposition of any such claim, action, suit, proceeding, or
investigation to each Executive to the fullest extent permitted by applicable
Legal Requirements
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upon receipt of any undertaking required or contemplated by applicable Legal
Requirements. Without limiting the foregoing, in any case in which approval of
or a determination by the Surviving Corporation is required to effectuate any
indemnification, (i) the Executives will conclusively be deemed to have met the
applicable standards for indemnification with respect to any actions or
omissions of such Executives as an officer or director of the Company on or
prior to the Effective Time relating to any of the transactions contemplated by
this Agreement and (ii) TCI Music shall cause the Surviving Corporation to
direct, at the election of any Executive, that the determination of any such
approval shall be made by independent counsel selected by the Executive and
reasonably acceptable to TCI Music. If any such claim, action, suit, proceeding,
or investigation is brought against any Executive (whether arising before or
after the Effective Time), (i) the Executive may retain counsel satisfactory to
him or her that is reasonably acceptable, and (ii) TCI Music will pay or will
cause the Surviving Corporation to pay all reasonable fees and expenses of such
counsel for the Executive, as such fees and expenses are incurred, upon receipt
of a written undertaking by the Executive that the Executive will repay the
amounts so paid if it ultimately is determined that he is not entitled to be
indemnified by the Surviving Corporation as authorized by the FBCA. Neither TCI
Music nor the Surviving Corporation shall have any obligation hereunder to any
Executive when and if a court of competent jurisdiction shall ultimately
determine, after exhaustion of all avenues of appeal, that such Executive is not
entitled to indemnification hereunder.
(b) SUCCESSORS. If TCI Music or the Surviving Corporation or any of its
successors or assigns (i) consolidates with or merges into any other Person and
will not be the continuing or surviving Person of such consolidation or merger
or (ii) transfers all or substantially all of its properties and assets to any
Person, then and in each such case, proper provisions will be made so that the
successors and assigns of TCI Music or the Surviving Corporation assume the
obligations set forth in this Section 7.13.
ARTICLE VIII
CONDITIONS PRECEDENT
Section 8.1 CONDITIONS TO EACH PARTY'S OBLIGATION TO EFFECT THE MERGER.
The respective obligations of each party to effect the Merger will be subject to
the fulfillment at or prior to the Effective Time of the following conditions:
(a) This Agreement, the Merger and the transactions contemplated by
this Agreement shall have been duly approved by the holders of the outstanding
Company Stock entitled to vote.
(b) The waiting period applicable to the consummation of the Merger
under the HSR Act shall have expired or been earlier terminated.
(c) The Registration Statement on Form S-4 that includes the Joint
Proxy Statement/Prospectus shall have become effective in accordance with the
provisions of the Securities
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Act and any necessary state securities law approvals shall have been obtained
and no stop orders with respect thereto shall have been issued by the SEC and
remain in effect.
(d) No Governmental Entity shall have enacted, issued, promulgated,
enforced or entered any Legal Requirement that remains in effect and has the
effect of making the transactions contemplated by this Agreement illegal or
otherwise prohibiting the transactions contemplated by this Agreement, or that
questions the validity or the legality of the transactions contemplated by this
Agreement and that could reasonably be expected to materially and adversely
affect the value of the business of the Company, it being agreed that each party
will use its reasonable best efforts to have any such injunction lifted.
Section 8.2 CONDITIONS TO OBLIGATION OF THE COMPANY TO EFFECT THE
MERGER. The obligation of the Company to effect the Merger will be subject to
the fulfillment at or prior to the Effective Time of the additional following
conditions:
(a) TCI Music and Acquisition Sub shall have performed in all material
respects their agreements contained in this Agreement required to be performed
by them at or prior to the Effective Time and the representations and warranties
of TCI Music and Acquisition Sub set forth in this Agreement if qualified by
materiality are true in all respects and if not so qualified are true in all
material respects when made and at and as of the Effective Time as if made at
and as of such time and the Company shall have received a certificate of TCI
Music and Acquisition Sub executed on behalf of each such corporation by the
President or a Vice President of such corporation to that effect.
(b) The Company shall have received the opinion of counsel to TCI Music
and Acquisition Sub (which counsel may be an employee of TCI) substantially to
the effect set forth in Exhibit B.
(c) The Company shall have received the opinion of Eric J. Kaplan, Esq.
(or such other evidence as may be reasonably satisfactory to the Company) to the
effect that the Merger, when completed in accordance with this Agreement, will
be treated for federal income tax purposes as a reorganization within the
meaning of Section 368(a) of the Code or otherwise shall have been provided with
evidence reasonably satisfactory to the Company that the Merger will qualify for
such treatment.
(d) There shall have been no material adverse change in the financial
condition, results of operations, assets, liabilities or business of TCI Music
since the date of this Agreement.
(e) TCI (or one or more of its Subsidiaries) and TCI Music shall have
entered into an amendment to the Contribution Agreement in accordance with the
terms set forth in the term sheet attached as Schedule 8.2(e), together with one
or more other agreements as may be necessary to effect the transactions
contemplated by such term sheet.
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(f) TCI shall have agreed to extend the maturity of the promissory note
dated July 11, 1997, payable by TCI Music to the order of TCI in the principal
amount of $40,000,000, for a period, not to exceed 18 months, as may reasonably
be required to permit TCI Music to obtain other financing sufficient to repay
the loan evidenced thereby.
Section 8.3 CONDITIONS TO OBLIGATIONS OF TCI MUSIC AND ACQUISITION SUB
TO EFFECT THE MERGER. The obligations of TCI Music and Acquisition Sub to effect
the Merger will be subject to the fulfillment at or prior to the Effective Time
of the additional following conditions:
(a) The Company shall have performed in all material respects its
agreements contained in this Agreement required to be performed by it at or
prior to the Effective Time and, except as contemplated or permitted by this
Agreement, the representations and warranties of the Company set forth in this
Agreement if qualified by materiality are true in all respects and if not so
qualified are true in all material respects when made and at and as of the
Effective Time as if made at and as of such time, and TCI Music and
Acquisition Sub shall have received a certificate of the Company executed on
behalf of the Company by the President or an Executive Vice President of the
Company to that effect.
(b) All consents of third parties required to be obtained with respect
to the Merger and the other transactions contemplated by this Agreement shall
have been obtained, including consents of the Federal Communications Commission
to the acquisition by TCI Music of an interest in VJN LPTV Corp. and other
Governmental Entities.
(c) The number of Dissenting Shares do not exceed 15% of the issued and
outstanding shares of Company Stock.
(d) There shall have been no material adverse change in the financial
condition, results of operations, assets, liabilities or business of the Company
since the date of this Agreement.
(e) TCI Music shall have received the opinion of Lucio, Mandler,
Croland, Bronstein, Garbett, Stiphany & Martinez, P.A., counsel to the Company,
substantially to the effect set forth in Exhibit C.
ARTICLE IX
TERMINATION, AMENDMENT AND WAIVER
Section 9.1 TERMINATION. This Agreement may be terminated at any time
prior to the Effective Time, whether before or after approval by the
shareholders of the Company:
(a) by mutual consent of the Board of Directors of TCI Music and the
Board of Directors of the Company;
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(b) by either TCI Music or the Company (i) if at the Meeting (including
any postponement or adjournment thereof), this Agreement, the Merger and the
transactions contemplated by this Agreement are not approved and adopted by the
affirmative vote specified herein or (ii) after July 11, 1998, if the Merger has
not been consummated on or before such date and so long as the terminating party
is not in breach of any of its obligations hereunder in any material respect as
of the time such party gives notice of its election to terminate this Agreement
and, if the Company is the terminating party, so long as none of the Company
Shareholders is in breach of any obligations under the Voting Agreement as of
the time that the Company gives notice of its election to terminate this
Agreement;
(c) by the Company, provided the Company is not in breach of any of its
obligations under this Agreement in any material respect and none of the Company
Shareholders is in breach of any obligations under the Voting Agreement, in each
case as of the time that the Company gives notice of its election to terminate
this Agreement, if any of the conditions specified in Section 8.1 or Section 8.2
have not been satisfied or waived by the Company (or, in the case of
Section 8.1, waived by the Company, TCI Music and Acquisition Sub) at such time
as such condition is no longer capable of satisfaction;
(d) by the Company, provided the Company is not, in any material
respect, in breach of any of its obligations under Section 7.12 or any other
provision of this Agreement and none of the Company Shareholders is in breach of
any obligations under the Voting Agreement, in each case as of the time that the
Company gives notice of its election to terminate this Agreement, if the Company
is presented with an unsolicited Acquisition Proposal that, taking into account
all relevant factors (including the nature and amount of consideration to the
Company's shareholders and the certainty of, and time requirement for,
completion of the transactions proposed in such Acquisition Proposal), is more
favorable to the Company's shareholders from a financial point of view than the
transactions contemplated by this Agreement; or
(e) by TCI Music, provided that neither TCI Music nor Acquisition Sub
is in breach of any of its obligations hereunder in any material respect as of
the time TCI Music gives notice of its election to terminate this Agreement, if
any of the conditions specified in Section 8.1 or Section 8.3 have not been met
or waived by TCI Music (or, in the case of Section 8.1, waived by TCI Music,
Acquisition Sub and the Company) at such time as such condition is no longer
capable of satisfaction.
Section 9.2 EFFECT OF TERMINATION. In the event of termination of this
Agreement by either TCI Music or the Company, as provided above, this Agreement
will forthwith become void and (except for the willful breach of this Agreement
by any party to this Agreement) there will be no liability on the part of any of
the Company, TCI Music or Acquisition Sub.
Section 9.3 AMENDMENT. This Agreement may be amended by the parties to
this Agreement, by or pursuant to action taken by all of their Boards of
Directors, at any time before or after approval of this Agreement by the
shareholders of the Company and prior to the Effective
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Time, but, after such approval, no amendment will be made that alters the
indemnification provisions of Section 7.2, changes the ratio at which Company
Common Stock is to be converted into TCI Music Preferred Stock as provided in
Section 3.2 or changes, in any way adverse to such shareholders, the terms of
the TCI Music Preferred Stock or that in any other way materially adversely
affects the rights of such shareholders, without the further approval of such
shareholders. This Agreement may not be amended except by an instrument in
writing signed on behalf of each of the parties to this Agreement.
Section 9.4 WAIVER. At any time prior to the Effective Time, the
parties to this Agreement, by or pursuant to action taken by their respective
Boards of Directors, may (i) extend the time for performance of any of the
obligations or other acts of the other parties to this Agreement, (ii) waive any
inaccuracies in the representations and warranties set forth in this Agreement
or in any documents delivered pursuant to this Agreement and (iii) waive
compliance with any of the agreements or conditions set forth in this Agreement.
Any agreement on the part of a party to this Agreement to any such extension or
waiver will be valid if set forth in an instrument in writing signed on behalf
of such party.
ARTICLE X
GENERAL PROVISIONS; DEFINITIONS
Section 10.1 NON-SURVIVAL OF REPRESENTATIONS, WARRANTIES AND
AGREEMENTS. No representations and warranties contained in this Agreement will
survive beyond the Closing Date. This Section 10.1 will not limit any covenant
or agreement of the parties to this Agreement that by its terms requires
performance after the Closing Date.
Section 10.2 NOTICES. All notices or other communications under this
Agreement will be in writing and will be given (and will be deemed to have been
duly given upon receipt) by delivery in person, by cable, telegram, telex or
other standard form of telecommunications, or by registered or certified mail,
postage prepaid, return receipt requested, addressed as follows:
If to the Company: The Box Worldwide, Inc.
1221 Collins Avenue
Miami Beach, Florida
Attention: President
Telecopy No.: (305) 674-4906
With a copy to: Lucio, Mandler, Croland, Bronstein, Garbett,
Stiphany & Martinez, P.A.
701 Brickell Avenue, Suite 2000
Miami, Florida 33131
Attention: Leslie J. Croland, Esq.
Telecopy No.: (303) 375-8075
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If to TCI Music or
Acquisition Sub: TCI Music, Inc.
Terrace Tower II
5619 DTC Parkway
Englewood, Colorado 80111-3000
Attention: David B. Koff, President
Telecopy No.: 303-721-5443
With a copy to: Legal Department
Terrace Tower II
5619 DTC Parkway
Englewood, Colorado 80111-3000
Telecopy No.: (303) 488-3217
With a copy to: Sherman & Howard L.L.C.
633 Seventeenth Street
Suite 3000
Denver, Colorado 80202
Attention: Charles Y. Tanabe, Esq.
Telecopy No.: (303) 298-0940
or to such other addresses as any party may have furnished to the other parties
in writing in accordance with this Section.
Section 10.3 FEES AND EXPENSES. Whether or not the Merger is
consummated, all costs and expenses incurred in connection with this Agreement
and the transactions contemplated by this Agreement will be paid by the party
incurring such expenses. Subject to the provisions of Section 7.2(g), the
Company's expenses relating to the transactions contemplated by this Agreement,
including fees of Lucio, Mandler, Croland, Bronstein, Garbett, Stiphany &
Martinez, P.A., counsel to the Company, will be paid or accrued by the Company
prior to the Effective Time.
Section 10.4 SPECIFIC PERFORMANCE. The parties to this Agreement agree
that irreparable damage would occur in the event that any of the provisions of
this Agreement were not performed in accordance with their specific terms or
were otherwise breached. It is accordingly agreed that the parties will be
entitled to enforce specifically the terms and provisions of this Agreement in
any court of the United States or any state having jurisdiction, this being in
addition to any other remedy to which they are entitled at law or in equity.
Section 10.5 THIRD PARTY BENEFICIARIES. The parties to this Agreement
agree that the Company's shareholders, officers, directors and employees are
intended third party beneficiaries of the terms of this Agreement, to the extent
such terms refer expressly to such Persons, with full rights hereunder as if
each of them were a party to this Agreement.
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Section 10.6 ENTIRE AGREEMENT. This Agreement will be of no force or
effect until executed and delivered by all of the parties to this Agreement.
Section 10.7 MISCELLANEOUS. This Agreement (including the documents and
instruments referred to in this Agreement) when executed and delivered,
constitutes the entire agreement and supersedes all other prior agreements and
understandings, both written and oral, among the parties, or any of them, with
respect to the subject matter of this Agreement. This Agreement may be executed
in two or more counterparts which together will constitute a single agreement.
Any certificate delivered pursuant to this Agreement will be made without
personal liability on the part of the officer or employee of the Person giving
such certificate.
Section 10.8 GOVERNING LAW AND VENUE; WAIVER OF JURY TRIAL.
(a) THIS AGREEMENT SHALL BE DEEMED TO BE MADE UNDER, AND IN
ALL RESPECTS SHALL BE INTERPRETED, CONSTRUED AND GOVERNED BY AND IN ACCORDANCE
WITH, THE LAW OF THE STATE OF DELAWARE. The parties hereby irrevocably submit to
the jurisdiction of the court of the State of Delaware and the Federal courts of
the United States of America located in the State of Delaware solely in respect
of the interpretation and enforcement of the provisions of this Agreement and of
the documents referred to in this Agreement, and in respect of the transactions
contemplated hereby, and hereby waive, and agree not to assert, as a defense in
any action, suit or proceeding for the interpretation or enforcement hereof or
of any such document, that it is not subject thereto or that such action, suit
or proceeding may not be brought or is not maintainable in said courts or that
the venue thereof may not be appropriate or that this Agreement or any such
document may not be enforced in or by such courts, and the parties hereto
irrevocably agree that all claims with respect to such action or proceeding
shall be heard and determined in such a Delaware State or Federal court. The
parties hereby consent to and grant any such court jurisdiction over the person
of such parties and over the subject matter of such dispute and agree that
mailing of process or other papers in connection with any such action or
proceeding in the manner provided in Section 10.2 or in such other manner as may
be permitted by law shall be valid and sufficient service thereof.
(b) EACH PARTY ACKNOWLEDGES AND AGREES THAT ANY CONTROVERSY
WHICH MAY ARISE UNDER THIS AGREEMENT IS LIKELY TO INVOLVE COMPLICATED AND
DIFFICULT ISSUES, AND THEREFORE EACH SUCH PARTY HEREBY IRREVOCABLY AND
UNCONDITIONALLY WAIVES ANY RIGHT SUCH PARTY MAY HAVE TO A TRIAL BY JURY IN
RESPECT OF ANY LITIGATION DIRECTLY OR INDIRECTLY ARISING OUT OF OR RELATING TO
THIS AGREEMENT, OR THE TRANSACTIONS CONTEMPLATED BY THIS AGREEMENT. EACH PARTY
CERTIFIES AND ACKNOWLEDGES THAT (i) NO REPRESENTATIVE, AGENT OR ATTORNEY OF ANY
OTHER PARTY HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT SUCH OTHER PARTY WOULD
NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVER, (ii) EACH
PARTY UNDERSTANDS AND HAS CONSIDERED THE IMPLICATIONS OF THIS WAIVER, (iii) EACH
PARTY MAKES THIS WAIVER
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VOLUNTARILY, AND (iv) EACH PARTY HAS BEEN INDUCED TO ENTER INTO THIS AGREEMENT
BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS AND CERTIFICATIONS IN THIS SECTION
10.8.
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IN WITNESS WHEREOF, the parties have caused this Agreement to be signed
by their respective officers thereunder duly authorized all as of the date first
written above.
TCI MUSIC, INC.
By: /s/ David Koff
-------------------------------
Name: David Koff
Title: President
TCI ACQUISITION SUB, INC.
By: /s/ David Koff
--------------------------------
Name: David Koff
Title: President
THE BOX WORLDWIDE, INC.
By: /s/ Alan McGlade
-------------------------------
Name: Alan McGlade
Title: President and Chief Executive Officer
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<PAGE> 1
Exhibit 2.2
TCI MUSIC, INC.
CERTIFICATE OF DESIGNATIONS
------------------
SETTING FORTH A COPY OF A RESOLUTION
CREATING AND AUTHORIZING THE ISSUANCE
OF A SERIES OF PREFERRED STOCK DESIGNATED
AS "SERIES A CONVERTIBLE PREFERRED STOCK"
ADOPTED BY THE BOARD OF DIRECTORS
OF TCI MUSIC, INC.
--------------------
The undersigned, President and Secretary, respectively, of TCI Music,
Inc., a Delaware corporation (the "Corporation"), hereby certify that the Board
of Directors duly adopted the following resolutions creating a series of
preferred stock designated as "Series A Convertible Preferred Stock":
"BE IT RESOLVED that, pursuant to authority expressly granted by the
provisions of the Certificate of Incorporation of this Corporation, the Board of
Directors hereby creates and authorizes the issuance of a series of preferred
stock, par value $.01 per share, of this Corporation, to consist of __________
shares, and hereby fixes the designations, dividend rights, voting powers,
rights on liquidation and other preferences and relative, participating,
optional or other special rights and the qualifications, limitations or
restrictions of the shares of such series (in addition to the designations,
preferences and relative, participating, limitations or restrictions thereof set
forth in the Certificate of Incorporation that are applicable to preferred stock
of all series or to all stock) as follows:
1. DESIGNATION. The designation of the series of preferred stock, par
value $.01 per share, of this Corporation authorized hereby is "Series A
Convertible Preferred Stock" (the "Series A Convertible Preferred Stock").
2. CERTAIN DEFINITIONS. Unless the context otherwise requires, the
terms defined in this Section 2 shall have the meanings herein specified:
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BOARD OF DIRECTORS: The Board of Directors of this Corporation and any
authorized committee thereof.
BUSINESS DAY: Any day other than a Saturday, a Sunday or a day on which
banking Iinstitutions in Denver, Colorado are required or authorized to be
closed.
CAPITAL STOCK: Any and all shares, interests, participations or other
equivalents (however designated) of corporate stock of this Corporation.
CLOSING PRICE: For any security on any Business Day, (a) the last
reported sale price, regular way, of such security (or, if no reported sale
takes place on that day, the average of the reported closing bid and asked
prices, regular way) on the composite tape, or if such security is not quoted on
the composite tape, on the principal United States securities exchange
registered under the Securities Exchange Act of 1934, as amended, on which such
security is listed or admitted to trading, (b) if such security is not listed or
admitted to trading on any such exchange, the last reported sale price (or the
average of the quoted closing bid and asked prices if there were no reported
sales) as reported by NASDAQ or any comparable system, or (c) if such security
is not quoted on NASDAQ or any comparable system, the average of the closing bid
and asked prices as furnished by any member of the National Association of
Securities Dealers, Inc. selected from time to time by this Corporation.
COMMON STOCK: The Series A Common Stock and Series B Common Stock.
CONVERSION RATE: As defined in Section 5(b).
CONVERTIBLE SECURITIES: Securities of this Corporation, other than the
Series B Common Stock, that are convertible into Series A Common Stock.
DEBT INSTRUMENT: Any bond, debenture, note, indenture, guarantee or
other instrument or agreement evidencing any Indebtedness, whether existing at
the Issue Date or thereafter created, incurred, assumed or guaranteed.
DEEMED LIQUIDATION EVENT: As defined in Section 4.
INDEBTEDNESS: Any (a) liability, contingent or otherwise, of this
Corporation (i) for borrowed money (whether or not the recourse of the lender is
to the whole of the assets of this Corporation or only to a portion thereof),
(ii) evidenced by a note, debenture or similar instrument (including a purchase
money obligation) given other than in connection with the acquisition of
inventory or similar property in the ordinary course of business, or (iii) for
the payment of money relating to an obligation under a lease that is required to
be capitalized for financial accounting purposes in accordance with generally
accepted accounting principles; (b) liabilities of others described in the
preceding clause (a) which this Corporation has guaranteed or which is otherwise
its legal liability; (c) obligations secured by a mortgage, pledge, lien, charge
or other encumbrance
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<PAGE> 3
to which the property or assets of this Corporation are subject whether or not
the obligations secured thereby shall have been assumed by or shall otherwise be
this Corporation's legal liability; and (d) any amendment, renewal, extension or
refunding of any liability of the types referred to in clauses (a), (b) and (c)
above.
ISSUE DATE: The date on which any shares of the Series A Convertible
Preferred Stock are first issued or first deemed to have been issued.
JUNIOR SECURITIES: All shares of Common Stock and any other class or
series of stock of this Corporation authorized after the Issue Date except
Parity Securities and Senior Securities.
LIQUIDATION VALUE: For each Share of the Series A Convertible Preferred
Stock, the sum of $ [three times the Purchase Price Benchmark], increased on
each anniversary of the Issue Date by an amount equal to the product of that sum
(as previously increased) and the greater of (a) the percentage increase, if
any, in the Consumer Price Index, All Urban Consumers (CPI-U), U.S. City
Average, All Items, as published by the U.S. Department of Labor, Bureau of
Labor Statistics (or any similar successor index), from the last day of the
calendar month immediately preceding the Issue Date (or if the Issue Date is the
last day of a calendar month, the Issue Date) or from the last day of the
calendar month immediately preceding the previous anniversary of the Issue Date
(or if the Issue Date is the last day of a calendar month, the previous
anniversary of the Issue Date), as applicable, in any event not to exceed 5% in
any year, and (b) 3%.
MARKET PRICE: For any Capital Stock, as of any date of determination,
the average of the daily Closing Prices of such stock for 10 consecutive
Business Days ending on the Business Day immediately before the date of
determination if there is a public market for such stock, and if there is no
public market for such stock, any other method of determining the market price
of such stock as the Board of Directors shall from time to time deem to be fair.
The Market Price of any Capital Stock shall be appropriately adjusted to reflect
the effects of any stock dividend, stock split, reclassification or combination
affecting such Capital Stock, the record date, ex-dividend date or similar date
of which occurs during the period in which the Market Price is to be determined.
NASDAQ: The National Association of Securities Dealers Automated
Quotation System.
PARITY SECURITIES: Any class or series of stock of this Corporation
authorized after the Issue Date that is entitled to receive payment of dividends
on a parity with the Series A Convertible Preferred Stock or is entitled to
receive assets upon liquidation, dissolution or winding up of the affairs of
this Corporation on a parity with the Series A Convertible Preferred Stock.
PERSON: Any human being or any corporation, limited liability company,
partnership, trust, association, government or other entity.
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PURCHASE PRICE BENCHMARK: $_________ [(i.e., the average of the
averages of the closing bid and asked prices of one share of Series A Common
Stock for a period of 20 consecutive Business Days ending on the third Business
Day prior to the Issue Date)]. The Purchase Price Benchmark will be
appropriately adjusted to reflect the effects of any stock dividend, stock
split, reclassification or combination affecting the Series A Common Stock, the
record date, ex-dividend date or similar date of which occurs during the period
in which the Purchase Price Benchmark initially is to be determined and, after
such initial determination, will similarly be adjusted to reflect the effects of
any stock dividend, stock split, reclassification or combination affecting the
Series A Common Stock.
REDEMPTION DATE: As to any Share, the date fixed for redemption of such
Share as specified in the notice of redemption given in accordance with Section
6(c), PROVIDED that if the Redemption Price is not actually paid, or
consideration sufficient for the payment thereof set apart solely for such
purpose, on such date then the Redemption Date shall be the date on which such
Redemption Price is fully paid or consideration sufficient for the payment
thereof set apart solely for such purpose.
SENIOR SECURITIES: Any class or series of stock of this Corporation
authorized after the Issue Date ranking senior to the Series A Convertible
Preferred Stock in respect of the right to receive payment of dividends prior to
the Series A Convertible Preferred Stock or the right to receive assets upon
liquidation, dissolution or winding up of the affairs of this Corporation prior
to the Series A Convertible Preferred Stock.
SERIES A COMMON STOCK: The Series A Common Stock of this Corporation
and any Capital Stock of any class or series into which the Series A Common
Stock may be changed.
SERIES B COMMON STOCK: The Series B Common Stock of this Corporation
and any Capital Stock of any class or series into which the Series B Common
Stock may be changed.
SHARE: As defined in Section 3(a).
VOTING STOCK: With respect to this Corporation, Capital Stock having
general voting power under ordinary circumstances to elect directors of this
Corporation, but not including any Capital Stock that has or would have such
voting power solely by reason of the happening of any contingency.
3. DIVIDENDS.
(a) Subject to the rights of holders of Senior Securities and to any
prohibition or restriction set forth in any security or Debt Instrument, the
holders of Series A Convertible Preferred Stock shall be entitled to receive
cash dividends from time to time on each share of Series A Convertible Preferred
Stock (hereinafter referred to as a "Share"), payable solely out of funds
legally available therefor, in an amount equal to the product of (i) the amount
of the cash dividend declared
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on one share of Series A Common Stock or any other security into which the
Shares of Series A Convertible Preferred Stock is then convertible and (ii) the
number of shares of Series A Common Stock or other security into which one Share
of Series A Convertible Preferred Stock may be converted as of the date such
dividend is declared. Such dividends shall be payable to holders of Series A
Convertible Preferred Stock only if, as and when the Board of Directors declares
cash dividends (and not dividends payable in other property) on Series A Common
Stock. Dividends shall be payable to the holders of record of Series A
Convertible Preferred Stock as of the record date for the determination of
Series A Common Stock entitled to receive such cash dividends and shall be
payable on the date established by this Corporation for the payment of such
dividends to holders of Series A Common Stock.
(b) If this Corporation is prohibited or restricted from paying the
full dividends which have been declared to holders of the Series A Convertible
Preferred Stock and any Parity Securities pursuant to applicable law or the
terms of any security or Debt Instrument, the amount available for such payment
pursuant to applicable law and which is not restricted by the terms of any
security or Debt Instrument shall be distributed among the holders of the Series
A Convertible Preferred Stock and any Parity Securities ratably in proportion to
the full amounts to which they otherwise would be entitled.
4. LIQUIDATION. Upon any liquidation, dissolution or winding up of this
Corporation, whether voluntary or involuntary, subject to the prior payment in
full of amounts to which any Senior Securities are entitled, the holders of
Series A Convertible Preferred Stock shall be entitled to be paid an amount in
cash equal to the aggregate Liquidation Value at the date fixed for liquidation
of all Shares outstanding before any distribution or payment is made upon any
Junior Securities, which payment shall be made PARI PASSU with any such payment
made to the holders of any Parity Securities. The holders of Series A
Convertible Preferred Stock shall be entitled to no other or further
distribution of or participation in any remaining assets of this Corporation
after receiving the Liquidation Value per Share. If upon such liquidation,
dissolution or winding up the assets of this Corporation to be distributed among
the holders of Series A Convertible Preferred Stock and to holders of Parity
Securities are insufficient to permit payment in full to such holders of the
aggregate amounts which they are entitled to be paid, then the entire assets of
this Corporation to be distributed to such holders shall be distributed ratably
among them based upon the amounts to which the Shares of Series A Convertible
Preferred Stock and such Parity Securities otherwise would be entitled. Any (a)
sale or other transfer by this Corporation of all or substantially all of its
assets and (b) consolidation, merger or other transaction or series of
transactions in which the Persons that are stockholders of this Corporation
immediately prior to such transaction or series of transactions do not retain
Voting Stock representing at least 50% of the total voting power of all Voting
Stock of this Corporation outstanding immediately after such transaction or
series of transactions (any such sale, transfer, consolidation, merger or other
transaction or series of transactions described in the foregoing clauses (a) or
(b) being referred to as a "Deemed Liquidation Event"), shall be deemed to be a
liquidation, dissolution or winding up of this Corporation for purposes of this
Section 4 occurring on the date such Deemed Liquidation Event is consummated.
This Corporation shall mail written notice of any liquidation, dissolution or
winding up (including any Deemed Liquidation
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Event) to each record holder of Series A Convertible Preferred Stock not less
than 20 days (or 10 days in the case of a Deemed Liquidation Event that is a
tender offer) prior to the payment date stated in such written notice. Holders
of Series A Convertible Preferred Stock shall have the right to convert their
Shares to Series A Common Stock pursuant to Section 5 at any time prior to the
close of business on the Business Day immediately preceding the date of
liquidation or dissolution (or the date of consummation of any Deemed
Liquidation Event).
5. CONVERSION.
(a) Subject to the provisions of Section 6 hereof, each Share of Series
A Convertible Preferred Stock may be converted by the holder thereof at any time
in whole or in part (but if in part, in amounts not less than 100 Shares or any
whole multiple thereof) at such time, in such manner and upon such terms and
conditions as are provided in this Section 5 into fully paid and non-assessable
shares of Series A Common Stock at the Conversion Rate (as defined below). In
the case of Shares called for redemption by this Corporation pursuant to Section
6(a), the conversion right provided by this Section 5 shall terminate at the
close of business on the Business Day immediately preceding the applicable
Redemption Date. In the case of Shares required to be redeemed pursuant to
Section 6(b), the conversion right provided by this Section 5 shall terminate
immediately upon receipt by this Corporation of a notice given pursuant to such
Section. In case cash, securities or property other than Series A Common Stock
shall be payable, deliverable or issuable upon conversion as provided herein,
then all references to Series A Common Stock in this Section 5 shall be deemed
to apply, so far as appropriate and as nearly as may be, to such cash, property
or other securities. Whenever this Section 5 refers to the number of shares of
Series A Common Stock outstanding, such number shall include any shares of such
stock issuable upon exercise of rights or warrants or upon conversion of
Convertible Securities.
(b) Subject to the provisions for adjustment hereinafter set forth in
this Section 5, the Series A Convertible Preferred Stock may be converted into
Series A Common Stock at the initial conversion rate of three fully paid and
non-assessable shares of Series A Common Stock for one share of the Series A
Convertible Preferred Stock. This conversion rate as from time to time adjusted
cumulatively pursuant to the provisions of this Section is hereinafter referred
to as the "Conversion Rate."
(c) In case this Corporation shall (i) pay a dividend or make a
distribution on its outstanding shares of Series A Common Stock in shares of its
Capital Stock, (ii) subdivide the then outstanding shares of Series A Common
Stock into a greater number of shares of Series A Common Stock, (iii) combine
the then outstanding shares of Series A Common Stock into a smaller number of
shares of Series A Common Stock, or (iv) issue by reclassification of its shares
of Series A Common Stock any shares of any other class of Capital Stock of this
Corporation (including any such reclassification in connection with a merger in
which this Corporation is the surviving corporation), then the Conversation Rate
in effect immediately prior to the opening of business on the record date for
such dividend or distribution or the effective date of such subdivision,
combination or reclassification shall be adjusted so that the holder of each
share of the Series A
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<PAGE> 7
Convertible Preferred Stock thereafter surrendered for conversion shall be
entitled to receive the number and kind of shares of Capital Stock of this
Corporation that such holder would have owned or been entitled to receive
immediately following such action had such shares of Series A Convertible
Preferred Stock been converted immediately prior to such time. An adjustment
made pursuant to this Section 5(c) for a dividend or distribution shall become
effective immediately after the record date for the dividend or distribution and
an adjustment made pursuant to this Section 5(c) for a subdivision, combination
or reclassification shall become effective immediately after the effective date
of the subdivision, combination or reclassification. Such adjustment shall be
made each time any action listed above is taken.
(d) In case this Corporation issues any Series A Common Stock or rights
or warrants to subscribe for or purchase shares of Series A Common Stock or
Convertible Securities ("Additional Securities") for consideration per share of
Series A Common Stock (including, in the case of Convertible Securities, the
aggregate amount of any additional consideration payable upon conversion or
exercise thereof, determined as provided below) less than the then current
Market Price per share of Series A Common Stock, the number of shares of Series
A Common Stock into which each Share shall thereafter be convertible shall be
determined by multiplying the number of shares of Series A Common Stock into
which such Share was convertible immediately prior to the issuance of such
Additional Securities by a fraction of which the numerator shall be the number
of shares of Series A Common Stock outstanding prior to such issuance plus the
number of additional shares of Series A Common Stock offered for subscription or
purchase (or into which the Convertible Securities so offered are initially
convertible) and of which the denominator shall be the number of shares of
Series A Common Stock outstanding immediately prior to the issuance of such
Additional Securities plus the number of shares of Series A Common Stock which
the aggregate consideration received in respect of the total number of shares of
Series A Common Stock so offered (plus the aggregate amount of any additional
consideration payable upon conversion or exercise of the Convertible Securities
so offered) would purchase at the then current Market Price per share of Series
A Common Stock.
In case of the issuance (otherwise than upon conversion of shares of
Capital Stock of this Corporation) of additional shares of Series A Common Stock
or Convertible Securities for consideration that consists in whole or in part of
property other than cash, the amount of the consideration other than cash
received by this Corporation for such shares shall be deemed to be the value of
such consideration as determined by the Board of Directors, whose determination
shall be conclusive. In case of the issuance by this Corporation of any rights
to subscribe for or to purchase shares of Series A Common Stock or Convertible
Securities, all shares of Series A Common Stock or Convertible Securities to
which the holders of such rights or options shall be entitled to subscribe for
or purchase pursuant to such rights shall be deemed outstanding as of the date
of the offering of such rights, and the minimum aggregate consideration named in
such rights for the shares of Series A Common Stock or Convertible Securities
covered thereby, plus the consideration, if any, received by this Corporation
for such rights shall be deemed to be the aggregate consideration received by
this Corporation as of the date of the offering of such rights for the issuance
of such shares. In case of the issuance by this Corporation of Convertible
Securities, all shares of Series A Common Stock
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<PAGE> 8
issuable upon the conversion or exchange of such Convertible Securities shall be
deemed issued as of the date such Convertible Securities are issued, and the
amount of the aggregate consideration received by this Corporation for such
additional shares of Series A Common Stock shall be deemed to be the total of
(x) the amount of consideration received by this Corporation upon the issuance
of such Convertible Securities, plus (y) the minimum aggregate consideration, if
any, other than such Convertible Securities, payable to this Corporation upon
such conversion or exchange. On the expiration of any such rights or warrants to
purchase Series A Common Stock or the termination of any right of conversion
which is the subject of an adjustment hereunder (or upon any change in the
number of shares of Series A Common Stock issuable upon such exercise or
conversion) the Conversion Rate then in effect shall be readjusted to such
Conversion Rate as would have been in effect had the adjustments made upon the
issuance of such rights, warrants or Convertible Securities been made upon the
basis only of issuance of the number of shares of Series A Common Stock actually
issued or to be issued upon the exercise of such rights or warrants or
conversion of such Convertible Securities.
(e) In case this Corporation shall distribute to all holders of shares
of Series A Common Stock (including any such distribution made in connection
with a merger in which this Corporation is the surviving corporation, other than
a merger to which Section 5(g) is applicable) any evidences of its indebtedness
or assets (other than cash dividends, Capital Stock or rights to acquire Capital
Stock), then in each such case the number of shares of Series A Common Stock
into which each Share of Series A Convertible Preferred Stock shall thereafter
be convertible shall be determined by multiplying the number of shares of Series
A Common Stock into which such Share was convertible immediately prior to the
record date for the determination of stockholders entitled to receive the
distribution by a fraction of which the numerator shall be the then current
Market Price per share of Series A Common Stock on such record date and of which
the denominator shall be the then current Market Price per share of Series A
Common Stock less the value on such record date (as determined by the Board of
Directors, whose determination shall be conclusive) of the portion of the assets
or evidences of indebtedness so distributed applicable to one share of Series A
Common Stock. Such adjustment shall be made each time any such distribution is
made and shall become effective immediately after the record date for the
determination of stockholders entitled to receive such distribution.
(f) For the purpose of any determination of value to be made by the
Board of Directors hereunder, the Board of Directors shall specify in reasonable
detail the results of and basis for such determination in the notice delivered
pursuant to Section 5(h).
(g) In case of any reclassification or change in the Series A Common
Stock (other than any reclassification or change referred to in Section 5(c) and
other than a change in par value) or in case of any consolidation of this
Corporation with any other Person or any merger of this Corporation into another
Person or of another Person into this Corporation (other than (i) a merger in
which this Corporation is the continuing corporation and which does not result
in any reclassification or change (other than a change in par value or any
reclassification or change to which Section 5(c) is applicable) in the
outstanding Series A Common Stock or (ii) a Deemed Liquidation
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<PAGE> 9
Event), this Corporation (or its successor in such consolidation or merger)
shall make appropriate provision so that each holder of a Share of Series A
Convertible Preferred Stock shall have the right thereafter to convert such
Share into the kind and amount of shares of stock and other securities and
property that such holder would have owned immediately after such
reclassification, change, consolidation or merger if such holder had converted
such Share into Series A Common Stock immediately prior to the effective date of
such reclassification, change, consolidation, merger (assuming for this purpose
(to the extent applicable) that such holder failed to exercise any rights of
election and received per share of Series A Common Stock the kind and amount of
shares of stock and other securities and property received per share by a
plurality of the non-electing shares), and the holders of the Series A
Convertible Preferred Stock shall have no other conversion rights under these
provisions; PROVIDED, that effective provision shall be made in the constituent
and governing documents of the resulting or surviving Person or otherwise so
that the provisions set forth herein for the protection of the conversion rights
of the Series A Convertible Preferred Stock shall thereafter be made applicable,
as nearly as reasonably may be, to any such other shares of stock and other
securities and property deliverable upon conversion of the Series A Convertible
Preferred Stock remaining outstanding or other convertible preferred stock or
other Convertible Securities received by the holders of Series A Convertible
Preferred Stock in place thereof; and PROVIDED FURTHER, that any such resulting
or surviving Person or purchaser shall expressly assume the obligation to
deliver, upon the exercise of the conversion privilege, such shares, securities
or other property as the holders of the Series A Convertible Preferred Stock
remaining outstanding, or other convertible preferred stock or other Convertible
Securities received by the holders in place thereof, shall be entitled to
receive pursuant to the provisions hereof, and to make provisions for the
protection of the conversion rights as above provided.
(h) Whenever the Conversion Rate shall be adjusted or any other event
affecting the conversion rights of the holders of Series A Convertible Preferred
Stock shall occur as provided in Sections 5(c), (d), (e) or (g), this
Corporation shall promptly cause a notice to be mailed to the holders of record
of the Series A Convertible Preferred Stock describing the nature of the event
requiring such adjustment, the Conversion Rate in effect immediately thereafter
and the kind and amount of stock or other securities or property into which the
Series A Convertible Preferred Stock shall be convertible after such event. Such
notice may be given in advance and included as a part of a notice required to be
mailed under the provisions of Section 5(j).
(i) This Corporation may, but shall not be required to, adjust the
Conversion Rate if such adjustment would require an increase or decrease of less
than 1% in such Conversion Rate; PROVIDED, however, that any adjustments which
by reason of this Section 5(i) are not made shall be carried forward and taken
into account in any subsequent adjustment. All calculations under this Section 5
shall be made to the nearest cent or the nearest 1/100th of a share, as the case
may be. In any case in which this Section 5(i) shall require that an adjustment
shall become effective immediately after a record date for such event, the
Corporation may defer until the occurrence of such event (x) issuing to the
holder of any shares of Series A Convertible Preferred Stock converted after
such record date and before the occurrence of such event the additional shares
of Series A Common Stock or other Capital Stock issuable upon such conversion by
reason of the adjustment
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<PAGE> 10
required by such event over and above the shares of Series A Common Stock or
other Capital Stock issuable upon such conversion before giving effect to such
adjustment and (y) paying to such holder cash in lieu of any fractional share to
which such holder is entitled pursuant to Section 5(n); PROVIDED, however, that
if requested by such holder, this Corporation shall deliver to such holder a due
bill or other appropriate instrument evidencing such holder's right to receive
such additional shares of Series A Common Stock or other Capital Stock, and such
cash, upon the occurrence of the event requiring such adjustment.
(j) If at any time:
(i) this Corporation takes any action which would require an
adjustment in the Conversion Rate pursuant to this Section 5;
(ii) there occurs any capital reorganization or
reclassification of the Series A Common Stock (other than a change in
par value), or any consolidation or merger to which the Corporation is
a party and for which approval of any shareholders of this Corporation
is required, or any sale or other transfer of all or substantially all
of the assets of the Corporation, or a tender offer for shares of
Series A Common Stock constituting at least a majority of the total
voting power represented by the outstanding shares of Series A Common
Stock which has been recommended by the Board of Directors as being in
the best interests of the holders of Series A Common Stock; or
(iii) there is a voluntary or involuntary dissolution,
liquidation or winding up of this Corporation;
then this Corporation shall give written notice, in the manner provided in
Section 6(c) hereof, to the holders of the Series A Convertible Preferred Stock
at their respective addresses as the same appear on the books of the
Corporation, at least 20 days (or 10 days in the case of a recommended tender
offer as specified in clause (ii) above) prior to any record date for such
action, dividend or distribution or the date as of which it is expected that
holders of Series A Common Stock of record shall be entitled to exchange their
shares of Series A Common Stock for securities or other property, if any,
deliverable upon such reorganization, reclassification, consolidation, merger,
sale, transfer, tender offer, dissolution, liquidation or winding up; PROVIDED,
however, that any notice required by any event described in clause (ii) of this
Section 5(j) shall be given in the manner and at the time that such notice is
given to the holders of Series A Common Stock. Without limiting the obligations
of this Corporation to provide notice of corporate actions hereunder, the
failure to give the notice required by this Section 5(j) or any defect therein
shall not affect the legality or validity of any such corporate action of the
Corporation or the vote upon such action.
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<PAGE> 11
(k) Before any holder of Series A Convertible Preferred Stock shall be
entitled to convert the same into Series A Common Stock, such holder shall
surrender the certificate or certificates for such Series A Convertible
Preferred Stock at the office of this Corporation or at the office of the
transfer agent for the Series A Convertible Preferred Stock, which certificate
or certificates, if this Corporation shall so request, shall be duly endorsed to
this Corporation or in blank or accompanied by proper instruments of transfer to
this Corporation or in blank (such endorsements or instruments of transfer to be
in form satisfactory to this Corporation), and shall given written notice to
this Corporation at said office that it elects to convert all or a part of the
Shares represented by said certificate or certificates in accordance with the
terms of this Section 5, and shall state in writing therein the name or names in
which such holder wishes the certificates for Series A Common Stock to be
issued. Every such notice of election to convert shall constitute a contract
between the holder of such Series A Convertible Preferred Stock and the
Corporation, whereby the holder of such Series A Convertible Preferred Stock
shall be deemed to subscribe for the amount of Series A Common Stock which such
holder shall be entitled to receive upon conversion of the number of Shares of
Series A Convertible Preferred Stock to be converted, and, in satisfaction of
such subscription, to deposit the shares of Series A Convertible Preferred Stock
to be converted, and thereby this Corporation shall be deemed to agree that the
surrender of the Shares of Series A Convertible Preferred Stock to be converted
shall constitute full payment of such subscription for Series A Common Stock to
be issued upon such conversion. This Corporation shall as soon as practicable
after such deposit of a certificate or certificates for Series A Convertible
Preferred Stock, accompanied by the written notice and the statement above
prescribed, issue and deliver at the office of this Corporation or of said
transfer agent to the person for whose account such Series A Convertible
Preferred Stock was so surrendered, or to his nominee(s) or, subject to
compliance with applicable law, transferee(s), a certificate or certificates for
the number of full shares of Series A Common Stock to which such holder shall be
entitled, together with cash in lieu of any fraction of a share as hereinafter
provided. If surrendered certificates for Series A Convertible Preferred Stock
are converted only in part, this Corporation shall issue and deliver to the
holder, or to his nominee(s), without charge therefor, a new certificate or
certificates representing the unconverted Shares. Such conversion shall be
deemed to have been made as of the date of such surrender of the Series A
Convertible Preferred Stock to be converted, and the Person or Persons entitled
to receive the Series A Common Stock issuable upon conversion of such Series A
Convertible Preferred Stock shall be treated for all purposes as the record
holder or holders of such Series A Common Stock on such date.
The issuance of certificates for shares of Series A Common Stock upon
conversion of shares of Series A Convertible Preferred Stock shall be made
without charge for any issue, stamp or other similar tax in respect of such
issuance, PROVIDED, however, if any such certificate is to be issued in a name
other than that of the registered holder of the share or shares of Series A
Convertible Preferred Stock converted, the Person or Persons requesting the
issuance thereof shall pay to this Corporation the amount of any tax which may
be payable in respect of any transfer involved in such issuance or shall
establish to the satisfaction of this Corporation that such tax has been paid.
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<PAGE> 12
This Corporation shall not be required to convert any shares of Series
A Convertible Preferred Stock, and no surrender of Series A Convertible
Preferred Stock shall be effective for that purpose, while the stock transfer
books of this Corporation are closed for any purpose. The surrender of Series A
Convertible Preferred Stock for conversion during any period while such books
are so closed shall become effective for conversion immediately upon the
reopening of such books, as if the conversion had been made on the date such
Series A Convertible Preferred Stock was surrendered.
(l) This Corporation shall at all times reserve and keep available,
solely for the purpose of issuance upon conversion of the outstanding shares of
Series A Convertible Preferred Stock, such number of shares of Series A Common
Stock as shall be issuable upon the conversion of all outstanding Shares,
PROVIDED that nothing contained herein shall be construed to preclude this
Corporation from satisfying its obligations in respect of the conversion of
Shares of Series A Convertible Preferred Stock by delivery of shares of Series A
Common Stock which are held in the treasury of this Corporation. This
Corporation shall take all such corporate and other actions as from time to time
may be necessary to insure that all shares of Series A Common Stock issuable
upon conversion of Shares of Series A Convertible Preferred Stock at the
Conversion Rate in effect from time to time shall, upon issue, be duly and
validly authorized and issued, fully paid and non-assessable and free of any
preemptive or similar rights.
(m) All Shares of Series A Convertible Preferred Stock received by this
Corporation upon conversion thereof into Series A Common Stock shall be retired
and shall be restored to the status of authorized and unissued shares of
preferred stock and may be reissued as part of another series of the preferred
stock of this Corporation, but such shares shall not be reissued as Series A
Convertible Preferred Stock.
(n) This Corporation shall not be required to issue fractional shares
of Series A Common Stock or scrip upon conversion of the Series A Convertible
Preferred Stock. As to any fraction of a share of Series A Common Stock which a
holder of one or more Shares otherwise would be entitled to receive upon
conversion of such Shares, this Corporation shall pay cash in respect of such
fraction in an amount equal to the same fraction of the Market Price per share
of Series A Common Stock as of the date notice of conversion of such Shares is
received by this Corporation.
(o) Anything herein to the contrary notwithstanding, no adjustment
shall be made in respect of shares of Series A Common Stock issued (or issuable
upon exercise of options, warrants or other rights to acquire Series A Common
Stock or upon exercise or conversion of Convertible Securities) to officers,
directors, employees or agents of this Corporation or its subsidiaries under
plans or arrangements approved by the Board of Directors.
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<PAGE> 13
6. REDEMPTION.
(a) All or any portion of the Shares of Series A Convertible Preferred
Stock may be redeemed out of funds legally available therefor, at the option of
this Corporation exercised by giving written notice as prescribed by Section
6(c), (i) during the 30-day periods immediately following the fourth, sixth and
eighth anniversaries of the Issue Date, (ii) at any time after the Closing Price
of the Series A Common Stock equals or exceeds 125% of the Purchase Price
Benchmark for a period of at least 30 consecutive Business Days, and (iii) at
any time after the tenth anniversary of the Issue Date, in each case at the
Liquidation Value per Share as of the applicable Redemption Date. If only a
portion of the outstanding Shares are redeemed, the Shares to be redeemed shall
be redeemed ratably among all holders of Series A Convertible Preferred Stock.
(b) Subject to the rights of the holders of Senior Securities and to
any prohibition or restriction set forth in any security or Debt Instrument,
each holder of Series A Convertible Preferred Stock may require this Corporation
to redeem, out of funds legally available therefor, all or any portion of the
outstanding Shares of Series A Convertible Preferred Stock held by it at any
time after the tenth anniversary of the Issue Date at the Liquidation Value per
Share as of the applicable Redemption Date by giving written notice to this
Corporation stating the number of Shares such holder elects to have this
Corporation redeem. This Corporation shall redeem, out of funds legally
available therefor, the Shares so requested to be redeemed within 30 days
following this Corporation's receipt of such notice. If the funds of this
Corporation legally available for redemption of Shares are insufficient to
redeem the total number of Shares required to be redeemed pursuant to this
Section 6(b), those funds which are legally available for redemption of such
Shares shall be used to redeem the maximum possible number of such Shares
ratably among the holders that have required Shares to be redeemed and any
Parity Securities that are required by their terms to be redeemed. At any time
thereafter when additional funds of this Corporation are legally available for
such purpose, such funds shall immediately be used to redeem the Shares this
Corporation failed to redeem on such Redemption Date until the balance of such
Shares are redeemed.
(c) Notice of any redemption pursuant to this Section 6 shall be
mailed, first class, postage prepaid, not less than 20 days (or 10 days in the
case of a redemption pursuant to Section 6(b)) nor more than 60 days prior to
the Redemption Date, to the holders of record of the shares of Series A
Convertible Preferred Stock to be redeemed, at their respective addresses as the
same appear upon the books of this Corporation or are supplied by them in
writing to this Corporation for the purpose of such notice. No failure to mail
such notice or any defect therein or in the mailing thereof shall affect the
validity of the proceedings for the redemption of any shares of the Series A
Convertible Preferred Stock. Such notice shall set forth the Liquidation Value,
the Redemption Date, the number of Shares to be redeemed and the place at which
the Shares called for redemption shall, upon presentation and surrender of the
stock certificates evidencing such Shares, be redeemed.
(d) If notice of any redemption by this Corporation pursuant to this
Section 6 shall have been mailed as provided in Section 6(c) and if on or before
the Redemption Date specified in such notice the consideration necessary for
such redemption shall have been set apart so as to be available therefor and
only therefor, then on and after the close of business on the Redemption Date,
the Shares called for redemption, notwithstanding that any certificate therefor
shall not have been
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<PAGE> 14
surrendered for cancellation, shall no longer be deemed outstanding, and all
rights with respect to such Shares shall forthwith cease and terminate, except
the right of the holders thereof to receive upon surrender of their certificates
the consideration payable upon redemption thereof. Nothing in this Section 6(d)
shall affect the rights of holders of Series A Convertible Preferred Stock to
convert such Shares into Series A Common Stock in accordance with the provisions
of Section 5.
(e) All Shares of Series A Convertible Preferred Stock redeemed,
retired, purchased or otherwise acquired by this Corporation shall be retired
and shall be restored to the status of authorized and unissued shares and may be
reissued as part of another series of the preferred stock of this Corporation,
but such shares shall not be reissued as Series A Convertible Preferred Stock.
(f) If this Corporation shall fail to redeem on a Redemption Date
pursuant to Section 6(b) all Shares of Series A Convertible Preferred Stock
required by the holders thereof to be redeemed on such date, this Corporation
shall not redeem, or discharge any sinking fund obligation with respect to, any
Parity Securities (except pro rata with any Series A Convertible Preferred Stock
redeemed) or Junior Securities, until all outstanding shares of Series A
Convertible Preferred Stock and Parity Securities are redeemed, and shall not
purchase or otherwise acquire any Shares of Series A Convertible Preferred
Stock, Parity Securities or Junior Securities. Nothing contained in this Section
6(f) shall prevent the purchase or acquisition (i) of Shares of Series A
Convertible Preferred Stock and Parity Securities pursuant to a purchase or
exchange offer or offers made to holders of all outstanding Shares of Series A
Convertible Preferred Stock and Parity Securities, PROVIDED that (A) as to
holders of all outstanding Shares of Series A Convertible Preferred Stock, the
terms of the purchase or exchange offer for all such Shares are identical, (B)
as to holders of all outstanding shares of a particular series or class of
Parity Securities, the terms of the purchase or exchange offer for all such
shares are identical, and (C) as among holders of all outstanding Shares of
Series A Convertible Preferred Stock and Parity Securities, the terms of each
purchase or exchange offer or offers are substantially identical relative to the
liquidation price of the Shares of Series A Convertible Preferred Stock and each
series or class of Parity Securities, or (ii) of shares of Series A Convertible
Preferred Stock, Parity Securities or Junior Securities in exchange for
(together with a cash adjustment for fractional shares, if any), or through the
application of the proceeds of the sale of, shares of Junior Securities. The
provisions of this Section 6(f) are for the benefit of holders of Series A
Convertible Preferred Stock and Parity Securities and accordingly, at any time
when there are no Parity Securities outstanding, the provisions of this Section
6(f) shall not restrict any redemption by this Corporation of Shares held by any
holder.
7. VOTING RIGHTS. The holders of the Series A Convertible Preferred
Stock shall be entitled to vote on all matters submitted to a vote of the
holders of the Series A Common Stock. Each Share shall entitle the registered
holder thereof to a number of votes equal to the number of shares of Series A
Common Stock into which such Share is convertible as of the record date for the
matter to be voted upon. Holders of Series A Convertible Preferred Stock shall
vote together with holders of Series A Common Stock and shall not be entitled to
vote as a class except as otherwise required by law or this Corporation's
Certificate of Incorporation.
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<PAGE> 15
8. AMENDMENT. No amendment or modification of the designation, rights,
preferences, and limitations of the Shares set forth herein shall be binding or
effective without the prior consent of the holders of record of Shares
representing a majority of the voting power of all Shares outstanding at the
time such action is taken.
9. NO PREEMPTIVE RIGHTS. Holders of Series A Convertible Preferred
Stock shall not have any preemptive right to purchase or subscribe for any class
or series of securities issued by this Corporation after the Issue Date.
10. EXCLUSION OF OTHER RIGHTS. Except as may otherwise be required by
law and for the equitable rights and remedies that may otherwise be available to
holders of Series A Convertible Preferred Stock, the Shares of Series A
Convertible Preferred Stock shall not have any designations, preferences,
limitations or relative rights, other than those specifically set forth in these
resolutions (as such resolutions may, subject to Section 8, be amended from time
to time) and in the Certificate of Incorporation of this Corporation.
11. HEADINGS. The headings of the various sections and subsections
hereof are for convenience of reference only and shall not affect the
interpretation of any of the provisions hereof.
FURTHER RESOLVED that the appropriate officers of this Corporation are
hereby authorized to execute and acknowledge a certificate setting forth these
resolutions and to cause such certificate to be filed and recorded in accordance
with the requirements of Section 151(g) of the General Corporation Law of the
State of Delaware."
-----------------------------------
President
ATTEST:
- ------------------------------------
Secretary
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<PAGE> 1
Exhibit 10.33
DOMESTIC FINANCING AGREEMENT
----------------------------
This Domestic Financing Agreement (the "Agreement") is made and entered
into the 3rd day of October, 1996 between Video Jukebox Network, Inc., 1221
Collins Avenue, Miami Beach, Florida 33139 (the "Company"), and Communications
Equity Associates, Inc., 101 East Kennedy Boulevard, Suite 3300, Tampa, Florida
33602 ("CEA").
RECITALS:
A. The Company owns and operates a business which distributes music
video television programming known as "THE BOX" in the United States, the United
Kingdom, the Netherlands, Puerto Rico, Argentina, Venezuela, Peru and Chile.
B. CEA is engaged in the business of providing investment banking and
brokerage services to media companies in the United States and throughout the
world.
C. The Company desires to engage CEA to arrange Financing (as defined
in Section 2 hereof) for the Company and CEA desires to provide such services to
the Company.
NOW, THEREFORE, the parties hereto agree as follows:
1. RECITALS. The Recitals set forth hereinabove are incorporated herein
by reference and are and shall be deemed to be a part of this Agreement.
2. ENGAGEMENT. The Company hereby engages CEA as its exclusive
representative for purposes of: (a) arranging equity, debt and/or hybrid
financing ("Financing") for the Company, subject to Section 5(a) hereof, to
further develop the domestic interactive music television network, and (b) for
such other purposes as are mutually agreed to in writing by the Company and CEA.
The Company makes no representation, warranty, commitment or covenant that it
will complete, execute or enter into any transaction with any Prospect.
3. DUTIES OF CEA. CEA shall, in accordance with the Company's
directions and instructions, prepare informational material regarding the
Company's operations and/or projects to present to individuals and entities
("Prospect(s)"), who have been pre-approved in writing by the Company in
accordance with Section 5(a) hereof. CEA shall act as a liaison and intermediary
between the Company and the Prospects. CEA shall not be an agent of the Company
and shall not bind or obligate the Company in any way, without the Company's
prior written consent. Both CEA and the Company shall keep each other informed
as to the status of contacts, discussions and negotiations with Prospects. CEA
shall use its best efforts and endeavor to contact Prospects for Financing and
to accomplish transactions on terms that are acceptable to the Company, but CEA
makes no representations regarding the successful conclusion of any transaction.
CEA may perform its services hereunder through any person or entity that,
directly or indirectly, CEA controls, is controlled by CEA or is under common
control with CEA. The Company acknowledges that CEA may from time to time
represent entities which may be competitors with the Company or Prospects for a
Financing. CEA, however, shall not, without the Company's prior written consent,
represent any Prospect with regard to a Financing of the Company.
<PAGE> 2
4. TERM. The term of this Agreement commences on the date first written
herein above and terminates at the close of business on December 31, 1997 (the
"Term").
5. COMPENSATION.
(a) FINANCING. If the Company or an entity in which the Company has an
equity interest (the "Financed Entity") enters into an agreement for Financing
("Financing Agreement") during the Term or within twelve (12) months thereafter
with a Prospect who, during the Term and prior to the consummation of the
Financing Agreement, was: (i) identified in writing to the Company by CEA and
(ii) approved in writing by the Company, then the Company shall pay to CEA a fee
(the "Fee"). A Financing Agreement may contemplate, without limitation, a direct
or indirect loan, lease, guarantee, stock exchange, joint venture, partnership,
sale of assets, contribution of subscribers in exchange for equity, purchase of
securities or any other debt and/or equity investment. The term "Financing
Agreement" shall not apply to, and the Company shall not owe compensation to CEA
for, Financing raised through the sale of the Company's registered securities in
a second public offering of such securities or through receivables factoring,
equipment leasing, trade payables or accruals arising in the ordinary course of
the Company's business. The Company shall notify CEA in writing in advance of
any closing of a Financing Agreement so that CEA may attend such closing. CEA
shall have reasonable access to all closing documents and to any other materials
necessary to ascertain and collect any Fee hereunder.
(b) CEA FEE.
(i) CASH FINANCING. If cash forms all or a portion of a
Financing, then CEA shall receive a Fee (a "Cash Fee") for the cash portion of
the Financing, equal to five percent (5%) of the cash Financing.
(ii) NON-CASH FINANCING. If non-cash items form all or a
portion of a Financing, then CEA shall receive a Fee (a "Non-Cash Fee") for the
non-cash portion of such non-cash Financing, equal to five percent (5%) of the
cash equivalent value of the non-cash Financing, as mutually agreed upon by the
Company and CEA. The Company shall pay the Non- Cash Fee to CEA in cash. If the
Company does not have sufficient funds (taking into account the Company's
reasonable working capital needs) to pay the Non-Cash Fee as required by Section
5(b)(iii) hereof, the Company and CEA shall agree upon the payment terms of such
Non-Cash Fee.
(iii) TIMING OF PAYMENT OF FEE. Subject to Section 5(b)(ii)
hereof, the Company shall pay the Fee in increments to CEA, as and when the cash
or other consideration that constitutes the Financing is received by the
Company. The amount of such increments shall equal five percent (5%) of the
amount of cash or value of non-cash items received by the Company. The Company
shall pay Fees by wire transfer of immediately available United States funds to
a bank account specified in writing by CEA.
(iv) VALUATION OF NON-CASH FINANCING. If the Company and CEA
are unable to agree upon the cash equivalent of any non-cash Financing, either
party may deliver a
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notice of non-agreement (the "Deadlock Notice") to the other party. Within ten
(10) business days of the other party receiving the Deadlock Notice, each of the
Company and CEA shall appoint one appraiser, which appraisers shall jointly
determine the cash equivalent of such non-cash Financing. The final
determination of the appraisers (if they are able to agree) shall be binding
upon the Company and CEA. If the appraisers are unable to agree upon the cash
equivalent of such non-cash Financing within twenty (20) business days of the
last appraiser being appointed, the appraisers shall appoint one independent
appraiser who, within 45 days after appointment, shall independently determine
the cash equivalent of any non-cash Financing and whose final determination
shall be binding upon the Company and CEA.
(c) EXPENSE REIMBURSEMENT. Prior to commencing any of the services to
be provided by CEA hereunder, CEA and the Company shall agree in writing on the
maximum amount of out-of-pocket expenses of CEA which shall be reimbursed by the
Company. Reasonable expenses and costs incurred by CEA in excess of the
agreed-upon amount, which are supported by expense statements and other
reasonable supporting documentation, shall be reimbursed by the Company upon the
written pre-approval of the Chief Financial Officer of the Company. The Company
shall reimburse CEA up to the maximum amount of such agreed expenses within
thirty (30) days after receipt of an invoice and reasonable documentation
evidencing such expenses.
6. CONFIDENTIALITY. Subject to (a) any legal requirements imposed on
CEA compelling disclosure and (b) disclosures to Prospects or their
representatives, CEA shall consider all information received from the Company as
proprietary and confidential, except to the extent that such information is
generally available to the public at large. Material non-public or confidential
information relating to the Company shall only be provided by CEA to Prospects
who have executed a confidentiality agreement, which is satisfactory to the
Company and includes the Company as a party to such agreement. Upon termination
of this Agreement, at the Company's written request, CEA shall use its best
efforts to cause all Prospects either to destroy or to return to the Company all
copies of documents provided pursuant to this Agreement which contain
proprietary and confidential information relating to the Company. CEA
acknowledges that nothing contained in this Agreement shall be construed as
creating in CEA any rights of ownership or any property rights in any
proprietary or confidential information of the Company.
7. MUTUAL REPRESENTATIONS AND WARRANTIES.
(a) CEA warrants and represents that (i) CEA is registered as a
broker-dealer with the U.S. Securities and Exchange Commission (the
"Commission") and is registered as a broker-dealer in all states in which it
shall offer any securities of the Company and is a member in good standing of
the NASD; (ii) there is not now pending or threatened against CEA or, to the
best of CEA's knowledge, any "Associated Person" of CEA, as that term is defined
below, any action or proceeding of which it has been advised, either in any
court of competent jurisdiction, before the Commission, or any state securities
commission concerning its activities as a securities broker or dealer; (iii) CEA
is a corporation duly organized, validly existing, and in good standing under
the laws of the State of Florida, with all requisite power and authority to
enter into this Agreement and to carry out its obligation hereunder; (iv) this
Agreement has been duly authorized, executed and delivered and is a valid and
binding agreement; (v) the
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consummation of the transactions contemplated herein will not result in any
breach of any of the terms or conditions of, or constitute a default under, any
indenture, agreement, or other instrument to which CEA is a party, or violate
any law or any order directed to CEA by any court or any federal or state
regulatory body or administrative agency having jurisdiction over CEA, CEA's
affiliates, or CEA's property. For purposes of this Section, the term
"Associated Person" of CEA shall have the meaning set forth in Section 3(a)(21)
of the Securities Exchange Act of 1934, as amended.
(b) The Company warrants and represents that (i) it has full authority
and power to execute and perform this Agreement in accordance with its terms;
(ii) the execution or performance of this Agreement by the Company will not
violate any rights of, agreements with or obligations to any third parties;
(iii) the Company will comply with all applicable securities or other laws,
rules and regulations relating to the Agreement; and (iv) the Company will not
circumvent or otherwise frustrate the intent of this Agreement.
8. COVENANTS OF CEA. CEA shall during the course of CEA's efforts to
assist the Company with respect to obtaining Financing (a): use its best efforts
to conduct the Financing in accordance with the requirements of Regulation D
promulgated under the Securities Act of 1933; (b) not make any untrue statement
of a material fact or omit to state a material fact required to be stated or
necessary to make any statement made not misleading concerning the Company or
its securities; (c) not offer or sell any securities of the Company or of any
Financed Entity by means of (i) any advertisement, articles, notice, or other
communication mentioning the securities, published in any newspaper, magazine,
or similar medium or broadcast over television or radio; or (ii) any seminar or
meeting, the attendees of which have been invited by any general solicitation or
general advertisement; and (d) only use sale materials which have been approved
in writing by the Company.
9. MUTUAL INDEMNIFICATION. CEA and the Company each agree to indemnify
fully and forever each other and their affiliates and subsidiaries from any and
all losses, claims, damages, liabilities, costs and expenses arising from or
relating to the other party's breach of this Agreement, including, but not
limited to, all reasonable arbitration, attorneys' fees, collection and/or court
costs; provided, however, that the party seeking indemnification pursuant to
this Section 9 has not breached the terms of this Agreement or been grossly
negligent or engaged in willful misconduct in connection with such party's
obligations hereunder.
10. PUBLIC ANNOUNCEMENTS. Subject to the Company's prior written
approval, CEA shall have the right to publicly announce and/or advertise any of
the services provided to the Company hereunder. The Company shall mention the
role of CEA in key public announcements it may make regarding any completed
Financing hereunder.
11. CONTROVERSIES.
(a) In the event of any controversy arising out of or relating to
this Agreement or a breach or alleged breach hereof, which the parties are
unable to resolve among themselves, the parties shall resolve the dispute by
arbitration pursuant to the provision of 9 U.S.C. Sec. 1 ET SEC., and in
accordance with the Commercial Arbitration Rules of the American Arbitration
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Association (the "AAA"), by sending written notice to the other party to such
effect. The place of arbitration shall be Miami, Florida.
(b) In the event of arbitration, within thirty (30) days after
receipt of a request to arbitrate a dispute, the Company and CEA shall each
appoint one arbitrator, and within fifteen (15) days thereafter the two
appointed arbitrators shall select a third arbitrator. In the event the two
arbitrators are unable to agree on the selection of a third arbitrator, the two
arbitrators shall request the Federal District Court, Southern District of
Florida, to select such third arbitrator. If the Company or CEA shall fail to
make such appointment within such thirty (30) day period, the other party shall
be authorized to appoint the second arbitrator. All arbitrators shall be
impartial and unrelated, directly or indirectly, so far as employment or
services is concerned, to any of the parties hereto or to any person or entity
directly or indirectly related to the parties hereto. In any arbitration
proceedings involving any specialized area of knowledge or competence, the
arbitrators shall have substantial knowledge and experience in such specialized
area. The arbitration proceedings shall otherwise be governed by the rules of
the AAA then in force.
(c) The three arbitrators shall investigate the facts and shall
hold a hearing or hearings if required at which the parties may present evidence
and arguments, be represented by counsel and conduct cross-examination. In
determining any question, matter or dispute before them, the arbitrators shall
apply the provisions of this Agreement, without varying therefrom in any
material respect. They shall not have the power to add, to modify or change any
of the provisions of this Agreement. The three arbitrators shall render a
written decision upon the matter presented to them by a majority vote, and that
decision shall be final and binding on the parties. Judgment upon the decision
rendered by such arbitration may be entered by any court having jurisdiction
thereof.
12. NOTICES. Any notice from one party to the other shall be in writing
and deemed given when mailed if delivered by first class certified mail, return
receipt requested, or by overnight delivery, to the person at the address listed
below or to such other person and/or address as may be designated from time to
time in writing.
If to CEA:
Communications Equity Associates, Inc.
101 East Kennedy Boulevard, Suite 3300
Tampa, Florida 33602
Attention: Chief Operating Officer
If to the Company:
Video Jukebox Network, Inc.
1221 Collins Avenue
Miami Beach, Florida 33139
Attention: Chief Executive Officer
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13. SEVERABILITY. The invalidity or illegality of any provision, term,
or covenant contained in or made a part of this Agreement shall not affect the
validity of the remainder of this Agreement which shall remain in full force and
effect.
14. ENTIRE AGREEMENT. This Agreement contains all of the terms agreed
upon by the parties with respect to the subject matter hereof and there are no
representations or understandings between the parties except as provided herein.
This Agreement may not be amended or modified in any way except by a written
agreement duly executed by the parties. The execution of this Agreement
terminates all prior agreements, written or oral, between the Company and CEA
relating to the subject matter hereof.
15. WAIVER. No consent or waiver of any condition or provision shall be
effective unless evidenced by an instrument in writing, duly executed by the
party sought to be charged with such waiver or consent. No waiver of a breach
of, or default under, any provision of this Agreement shall be deemed a waiver
of any other breach or default under any provision of this Agreement.
16. HEADINGS. The headings in this Agreement are inserted for
convenience only and shall not affect the construction hereof.
17. GOVERNING LAW. This Agreement shall be construed as to both
validity and performance in accordance with and governed by the laws of the
State of Florida without regard to conflicts of laws principles thereof.
18. BENEFITS; ASSIGNMENTS. The rights under this Agreement shall not be
assignable nor the duties delegable by any party without first obtaining the
written consent of the other party hereto. Nothing contained in this Agreement,
express or implied, is intended to confer upon any person or entity, other than
the parties hereto and their successors in interest. Any rights or remedies
under or by reason of this Agreement shall be binding upon and inure to the
benefit of the parties hereto and their respective successors and permitted
assigns.
19. COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of the date first written above.
COMMUNICATIONS EQUITY ASSOCIATES, INC.
By: /s/ David A. Burns
-----------------------------
Executive Vice President
VIDEO JUKEBOX NETWORK, INC.
By: /s/ Alan Mcglade
----------------------------
President and CEO
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Exhibit 10.34
THE BOX WORLDWIDE, INC.
1221 Collins Avenue
Miami Beach, Florida 33139
August 7, 1997
David A. Burns, COO and
Executive Vice President
Communications Equity Associates, Inc.
101 East Kennedy Boulevard, Suite 3300
Tampa, Florida 33602
Re: Proposed Merger With TCI Music, Inc.
------------------------------------
Dear David:
As you know, we are in the process of finalizing the terms of a merger
agreement to be entered into among TCI Music, Inc., TCI Music Acquisition Sub,
Inc. and The Box Worldwide, Inc. (the "Company"). Pursuant to that certain
Domestic Financing Agreement, dated October 3, 1996 (the "Agreement"), between
the Company and Communications Equity Associates, Inc. ("CEA"), CEA has acted as
the Company's investment banking firm in connection with the proposed merger.
The purpose of this letter is to set forth the agreement of the parties
hereto with respect to the fee to be paid to CEA under the Agreement for its
services to the Company in connection with the merger. If CEA is in agreement
with the terms and conditions contained herein, please have an authorized
representative of CEA sign and date a copy of this letter and return it to the
undersigned.
Notwithstanding the terms of the Agreement, CEA hereby agrees to
receive as full payment for CEA's services in connection with the merger an
aggregate of $500,000 in cash from the Company as follows: $250,000 will be paid
contemporaneously with the signing of the definitive merger agreement and the
balance of $250,000 will be paid upon the closing of the transactions
contemplated by the definitive merger agreement. If the merger agreement is
terminated for any reason prior to closing, CEA will promptly return the
$250,000 paid to it by the Company.
Sincerely,
/s/ Alan McGlade
-----------------------
Chief Executive Officer
Agreed to and accepted by:
Communications Equity Associates, Inc.
By: /s/ David A. Burns
----------------------------------
Authorized Representative
<PAGE> 1
Exhibit 10.35
INDEMNIFICATION AGREEMENT
THIS INDEMNIFICATION AGREEMENT, dated as of the ____ day of ________
199__, between Video Jukebox Network, Inc., a Florida corporation (the
"Company"), and______________________________________________________________
___________________________, an individual whose mailing address is
the "Director").
RECITALS:
A. The Company desires to retain the services of the Director as a
director of the Company.
B. As a condition to the Director's agreement to continue to serve as a
director of the Company, the Director requires that he be indemnified from
liability to the fullest extent permitted by law.
C. The Company is willing to indemnify the Director to the fullest
extent permitted by law in order to retain the services of the Director.
NOW, THEREFORE, for and in consideration of the mutual premises and
covenants contained herein, the Company and the Director agree as follows:
SECTION 1. MANDATORY INDEMNIFICATION IN ACTIONS, SUITS OR PROCEEDINGS
OTHER THAN THOSE BY OR IN THE RIGHT OF THE COMPANY. Subject to Section 4 hereof,
the Company shall indemnify and hold harmless the Director from and against any
claims, damages, expenses (including attorneys' fees), judgments, fines
(including excise taxes assessed with respect to employee benefit plans) and
amounts paid in settlement actually and reasonably incurred by him in connection
with the investigation, defense, settlement or appeal of any threatened, pending
or completed action, suit or proceeding, whether civil, criminal, administrative
or investigative (other than an action by or in the right of the Company) and to
which the Director was or is a party, or is threatened to be made a party by
reason of the fact that the Director is or was a director, officer, stockholder,
employee or agent of the Company, or is or was serving at the request of the
Company as a director, officer, partner, trustee, employee or agent of another
corporation, partnership, joint venture, trust, employee benefit plan or other
enterprise, or by reason of anything done or not done by the Director in any
such capacity or capacities, provided that the Director acted in good faith and
in a manner he reasonably believed to be in or not opposed to the best interest
of the Company, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful.
<PAGE> 2
SECTION 2. MANDATORY INDEMNIFICATION IN ACTIONS OR SUITS BY OR IN THE
RIGHT OF THE COMPANY. Subject to Section 4 hereof, the Company shall indemnify
and hold harmless the Director from and against any expenses (including
attorneys' fees) or amounts paid in settlement actually and reasonably incurred
by him in connection with the investigation, defense, settlement or appeal of
any threatened, pending or completed action or suit by or in the right of the
Company to procure a judgment in its favor and to which the Director was or is a
party or is threatened to be made a party by reason of the fact that the
Director is or was a director, officer, stockholder, employee or agent of the
Company, or is or was serving at the request of the Company as a director,
officer, partner, trustee, employee or agent of another corporation,
partnership, joint venture, trust, employee benefit plan or other enterprise, or
by reason of anything done or not done by the Director in such capacity or
capacities, provided that the Director acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the Company
and except that no indemnification shall be made in respect of any claim, issue
or matter as to which the Director shall have been adjudged to be liable to the
Company unless and only to the extent that the court in which such action or
suit was brought (or any other court of competent jurisdiction) shall determine
upon application that, despite the adjudication of liability but in view of all
circumstances of the case, the Director is fairly and reasonably entitled to
indemnity for such expenses that the court shall deem proper.
SECTION 3. REIMBURSEMENT OF EXPENSES FOLLOWING ADJUDICATION OF
NEGLIGENCE. The Company shall reimburse the Director for expenses (including
attorneys' fees) or amounts paid in settlement actually and reasonably incurred
by him in connection with the investigation, defense, settlement or appeal of
any suit or action described in Section 2 hereof that results in an adjudication
that the Director was liable for negligence (including gross negligence but not
willful misconduct) in the performance of his duty to the Company; provided,
however, that no reimbursement shall be made by or on behalf of the Director if
a judgment or other final adjudication establishes that the Director's actions,
or omissions to act, were material to the cause of action so adjudicated and
reimbursement is prohibited under Section 607.0850(7) of the Florida Statutes,
or any amendment thereto.
SECTION 4. AUTHORIZATION OF INDEMNIFICATION. Any indemnification under
Sections 1 and 2 hereof (unless ordered by a court) and any reimbursement made
under Section 3 hereof shall be made by the Company only as authorized in the
specific case upon a determination (the "Determination") that indemnification or
reimbursement of the Director is proper in the circumstances because the
Director has met the applicable standard of conduct set forth in Section 1, 2 or
3 hereof, as the case may be. Subject to Sections 5.6, 5.7, 5.8 and 8 of this
Agreement, the Determination shall be made (in the following order of
preference):
(1) first, by the Company's Board of Directors (the "Board") by
majority vote or consent of a quorum consisting of directors ("Disinterested
Directors") who are not, at the time of the Determination, named parties to such
action, suit or proceeding; or
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(2) next, if such a quorum of Disinterested Directors cannot be
obtained, by majority vote or consent of a committee duly designated by the
Board (in which designation all directors, whether or not Disinterested
Directors, may participate) consisting solely of two or more Disinterested
Directors; or
(3) next, if such a committee cannot be designated, by independent
legal counsel (who may be the outside counsel regularly employed by the Company)
in a written opinion; or
(4) next, if such legal opinion cannot be obtained, by vote or consent
of the holders of a majority of the votes represented by the Company's common
stock (of all classes) that are represented in person or by proxy and entitled
to vote at a meeting called for such purpose.
4.1. NO PRESUMPTIONS. The termination of any action, suit or proceeding
by judgment, order, settlement, conviction, or upon a plea of nolo contendere or
its equivalent, shall not, of itself, create a presumption that the Director did
not act in good faith and in a manner that he reasonably believed to be in or
not opposed to the best interests of the Company, and with respect to any
criminal action or proceeding, had reasonable cause to believe that his conduct
was unlawful.
4.2 BENEFIT PLAN CONDUCT. The Director's conduct with respect to an
employee benefit plan for a purpose he reasonably believed to be in the
interests of the participants in and beneficiaries of the plan shall be deemed
to be conduct that the Director reasonably believed to be not opposed to the
best interests of the Company.
4.3 RELIANCE AS SAFE HARBOR. For purposes of any Determination
hereunder, the Director shall be deemed to have acted in good faith and in a
manner he reasonably believed to be in or not opposed to the best interests of
the Company, or, with respect to any criminal action or proceeding, to have had
no reasonable cause to believe his conduct was unlawful, if his action is based
on (i) the records or books of account of the Company or another enterprise,
including financial statements, (ii) information supplied to him by the officers
of the Company or another enterprise in the course of their duties, (iii) the
advice of legal counsel for the Company or another enterprise, or (iv)
information or records given or reports made to the Company or another
enterprise by an independent certified public accountant or by an appraiser or
other expert selected with reasonable care by the Company or another enterprise.
The term "another enterprise" as used in this Section 4.3 shall mean any other
corporation or any partnership, joint venture, trust, employee benefit plan or
other enterprise of which the Director is or was serving at the request of the
Company as a director, officer, partner, trustee, employee or agent. The
provisions of this Section 4.3 shall not be deemed to be exclusive or to limit
in any way the other circumstances in which the Director may be deemed to have
met the applicable standard of conduct set forth in Sections 1, 2 or 3 hereof,
as the case may be.
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4.4 SUCCESS ON MERITS OR OTHERWISE. Notwithstanding any other provision
of this Agreement, to the extent that the Director has been successful on the
merits or otherwise in defense of any action, suit or proceeding described in
Sections 1 and 2 hereof, or in defense of any claim, issue or matter therein, he
shall be indemnified against expenses (including attorneys' fees) actually and
reasonably incurred by him in connection with the investigation, defense,
settlement or appeal thereof. For purposes of this Section 4.4, the term
"successful on the merits or otherwise" shall include, but not be limited to,
(i) any termination, withdrawal, or dismissal (with or without prejudice) of any
claim, action, suit or proceeding against the Director without any express
finding of liability or guilt against him; (ii) the expiration of 90 days after
the making of any claim or threat of an action, suit or proceeding without the
institution of the same and without any promise or payment made to induce a
settlement, or (iii) the settlement of any action, suit or proceeding under
Section 1, 2 or 3 hereof pursuant to which the Director pays less than $15,000.
4.5 PARTIAL INDEMNIFICATION OR REIMBURSEMENT. If the Director is
entitled under any provision of this Agreement to indemnification and/or
reimbursement by the Company for some or a portion of the claims, damages,
expenses (including attorneys' fees), judgments, fines or amounts paid in
settlement by the Director in connection with the investigation, defense,
settlement or appeal of any action specified in Section 1, 2 or 3 hereof, but
not, however, for the total amount thereof, the Company shall nevertheless
indemnify and/or reimburse the Director for the portion thereof to which the
Director is entitled. The party or parties making the determination shall
determine the portion (if less than all) of such claims, damages, expenses
(including attorneys' fees), judgments, finds or amounts paid in settlement for
which the Director is entitled to indemnification and/or reimbursement under
this Agreement.
SECTION 5. PROCEDURES FOR DETERMINATION OF WHETHER STANDARDS HAVE
BEEN SATISFIED.
5.1 COSTS. All costs of making the Determination required to Section 4
hereof shall be borne solely by the Company, including, but not limited to, the
costs of legal counsel, proxy solicitations and judicial determinations. The
Company shall also be solely responsible for paying (i) all reasonable expenses
incurred by the Director to enforce this Agreement, including, but not limited
to, the costs incurred by the Director to obtain court-ordered indemnification
pursuant to Section 8 hereof, regardless of the outcome of any such application
or proceeding, and (ii) all costs of defending any suits or proceedings
challenging payments to the Director under this Agreement.
5.2 TIMING OF THE DETERMINATION. The Company shall use its best efforts
to make the Determination contemplated by Section 4 hereof promptly. In
addition, the Company agrees:
(a) if the Determination is to be made by the Board or a committee
thereof, such Determination shall be made not later than 15 days after a written
request for a Determination (a "Request") is delivered to the Company by the
Director;
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<PAGE> 5
(b) if the Determination is to be made by independent legal
counsel, such Determination shall be made not later than 30 days after a Request
is delivered to the Company by the Director; and
(c) if the Determination is to be made by the stockholders of the
Company, such Determination shall be made not later than 120 days after a
Request is delivered to the Company by the Director.
The failure to make a Determination with in the above-specified time period
shall constitute a Determination approving full indemnification or reimbursement
of the Director. Notwithstanding anything herein to the contrary, a
Determination may be made in advance of (i) the Director's payment (or
incurring) of expenses with respect to which indemnification or reimbursement is
sought, and/or (ii) final disposition of the action, suit or proceeding with
respect to which indemnification or reimbursement is sought.
5.3 REASONABLENESS OF EXPENSES. The evaluation and finding as to the
reasonableness of expenses incurred by the Director for purposes of this
Agreement shall be made (in the following order of preference) within 15 days of
the Director's delivery to the Company of a reasonable accounting of expenses
incurred (which may be part of the Request or delivered at any time before or
after delivery of a Request):
(a) first, by the Board by a majority vote of a quorum consisting
of Disinterested Directors; or
(b) next, if a quorum cannot be obtained under subdivision (a), by
majority vote or consent of a committee duly designated by the Board (in which
designation all directors, whether or not Disinterested Directors, may
participate), consisting solely of two or more Disinterested Directors; or
(c) next, if a finding cannot be obtained under either subdivision
(a) or (b), by vote or consent of the holders of a majority of the votes
represented by the Company's common stock that are represented in person or by
proxy and entitled to vote at a meeting called for such purpose.
All expenses shall be considered reasonable for purposes of this Agreement if
the finding contemplated by this Section 5.3 is not made within the prescribed
15 days. The finding required by this Section 5.3 may be made in advance of the
payment (or incurring) of the expenses for which indemnification or
reimbursement is sought.
5.4 PAYMENT OF INDEMNIFIED AMOUNT. Immediately following a
Determination that the Director has met the applicable standard of conduct set
forth in Section 1,2 or 3 hereof, as the case may be, and the finding of
reasonableness of expenses contemplated by Section 5.3 hereof, or the passage of
time prescribed for making such determination(s), the Company shall
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<PAGE> 6
pay to the Director in cash the amount to which the Director is entitled to be
indemnified and/or reimbursed, as the case may be, without further authorization
or action by the Board; provided, however, that the expenses for which
indemnification or reimbursement is sought have actually been incurred by the
Director.
5.5 STOCKHOLDER VOTE ON DETERMINATION. The Director and any other
stockholder who is a party to the proceeding for which indemnification or
reimbursement is sought shall be entitled to vote on any Determination to be
made by the Company's stockholders, including a Determination made pursuant to
Section 5.7 hereof. In addition, in connection with each meeting at which a
stockholder Determination will be made, the Company shall solicit proxies that
expressly include a proposal to indemnify or reimburse the Director. The Company
proxy statement relating to the proposal to indemnify or reimburse the Director
shall not include a recommendation against indemnification or reimbursement.
5.6 SELECTION OF INDEPENDENT LEGAL COUNSEL. If the Determination
required under Section 4 is to be made by independent legal counsel, such
counsel shall be selected by the Director with the approval of the Board, which
approval shall not be unreasonably withheld. The fees and expenses incurred by
counsel in making any Determination (including Determinations pursuant to
Section 5.8 hereof) shall be borne solely by the Company regardless of the
results of any Determination and, if requested by counsel, the Company shall
give such counsel an appropriate written agreement with respect to the payment
of its fees and expenses and such other matters as may be reasonably requested
by counsel.
5.7 RIGHT OF THE DIRECTOR TO APPEAL AN ADVERSE DETERMINATION BY BOARD.
If a Determination is made by the Board or a committee thereof that the Director
did not meet the applicable standard of conduct set forth in Section 1, 2 or 3
hereof, upon the written request of the Director and the Director's delivery of
$500 to the Company, the Company shall cause a new Determination to be made by
the Company's stockholders at the next regular or special meeting of
stockholders. Subject to Section 8 hereof, such Determination by the Company's
stockholders shall be binding and conclusive for all purposes of this Agreement.
5.8. RIGHT OF THE DIRECTOR TO SELECT FORUM FOR DETERMINATION. If, at
any time subsequent to the date of this Agreement, "Continuing Directors" do not
constitute a majority of the members of the Board, or there is otherwise a
change in control of the Company (as contemplated by Item 403(c) of Regulation
S-K), then upon the request of the Director, the Company shall cause the
Determination required by Section 4 hereof to be made by independent legal
counsel selected by the Director and approved by the Board (which approval shall
not be unreasonably withheld), which counsel shall be deemed to satisfy the
requirements of clause (3) of Section 4 hereof. If none of the legal counsel
selected by the Director are willing and/or able to make the Determination, then
the Company shall cause the Determination to be made by a majority vote or
consent of a Board committee consisting solely of Continuing Directors. For
purposes of this Agreement, a "Continuing Director"
6
<PAGE> 7
means either a member of the Board at the date of this Agreement or a person
nominated to serve as a member of the Board by a majority of the then Continuing
Directors.
5.9 ACCESS BY THE DIRECTOR TO DETERMINATION. The Company shall afford
to the Director and his representatives ample opportunity to present evidence of
the facts upon which the Director relies for indemnification or reimbursement,
together with other information relating to any requested Determination. The
Company shall also afford the Director the reasonable opportunity to include
such evidence and information in any Company proxy statement relating to a
stockholder Determination.
5.10 JUDICIAL DETERMINATIONS IN DERIVATIVE SUITS. In each action or
suit described in Section 2 hereof, the Company shall cause its counsel to use
its best efforts to obtain from the court in which such action or suit was
brought (i) an express adjudication whether the Director is liable to the
Company, and, if the Director is so liable, (ii) both (a) a determination
whether the liability is based upon willful misconduct, and (b) a determination
whether and to what extent, despite the adjudication of liability but in view of
all the circumstances of the case (including this Agreement), the Director is
fairly and reasonably entitled to the indemnification and/or reimbursement.
SECTION 6. SCOPE OF INDEMNITY. The actions, suits and proceedings
described in Sections 1, 2 or 3 hereof shall include, for purposes of this
Agreement, any actions that involve, directly or indirectly, activities of the
Director both in his official capacities as a Company director or officer and
actions taken in another capacity while serving as director or officer,
including, but not limited to, actions or proceedings involving (i) compensation
paid to the Director by the Company, (ii) activities by the Director on behalf
of the Company, including actions in which the Director is plaintiff, (iii)
actions alleging a misappropriation of a "corporate opportunity," (iv) responses
to a takeover attempt or threatened takeover attempt of the Company, (v)
transactions by the Director in Company securities, and (vi) the Director's
preparation for and appearance (or potential appearance) as a witness in any
proceeding relating, directly or indirectly, to the Company. In addition, the
Company agrees that, for purposes of this Agreement, all services performed by
the Director on behalf of, in connection with or related to any subsidiary of
the Company, any employee benefit plan established for the benefit of employees
of the Company or any subsidiary, any Company or partnership in which the
Company or any subsidiary has a five percent ownership interest or any other
affiliate shall be deemed to be at the request of the Company.
SECTION 7. ADVANCE FOR EXPENSES.
7.1 MANDATORY ADVANCE. Expenses (including attorneys' fees, court
costs, judgments, fines, amounts paid in settlement and other payments) incurred
by the Director in investigating, defending, settling or appealing any action,
suit or proceeding described in Section 1, 2 or 3 hereof shall be paid by the
Company in advance of the final disposition of such action, suit or proceeding.
The Company shall promptly pay the amount of such expenses to the Director, but
in no event later than 10 days following the Director's delivery
7
<PAGE> 8
to the Company of a written request for an advance pursuant to this Section 7,
together with a reasonable accounting of such expenses.
7.2 UNDERTAKING TO REPAY. The Director hereby undertakes and agrees to
repay to the Company any advances made pursuant to this Section 7 if it shall
ultimately be determined that the Director is not entitled to be indemnified by
the Company for such amounts.
7.3 MISCELLANEOUS. The Company shall make the advances contemplated by
this Section 7 regardless of the Director's financial ability to make repayment,
and regardless of whether indemnification of the Director by the Company will
ultimately be required. Any advances and undertakings to repay pursuant to this
Section 7 shall be unsecured and interest-free.
SECTION 8. COURT-ORDERED INDEMNIFICATION. Regardless of whether
the Director has met the standard of conduct set forth in Sections 1,2 or 3
hereof, as the case may be, and notwithstanding the presence or absence of any
Determination whether such standards have been satisfied, the Director may apply
for indemnification (and/or reimbursement pursuant to Section 3 or 11 hereof) to
the court conducting any proceeding to which the Director is a party or to any
other court of competent jurisdiction. On receipt of an application, the court,
after giving any notice the court considers necessary, may order indemnification
(and/or reimbursement) if it determines the Director is fairly and reasonably
entitled to indemnification (and/or reimbursement) in view of all the relevant
circumstances, including this Agreement.
SECTION 9. COVENANT NOT TO SUE, LIMITATION OF ACTIONS AND RELEASE OF
CLAIMS. No legal action shall be brought and no cause of action shall be
asserted by or on behalf of the Company (or any of its subsidiaries) against the
Director, his spouse, heirs, executors, personal representatives or
administrators after the expiration of 2 years from the date the Director ceases
(for any reason) to serve as either an officer or director of the Company, and
any claim or cause of action of the Company (or of any of its subsidiaries)
shall be extinguished and deemed released unless asserted by filing of a legal
action within such 2-year period.
SECTION 10. INDEMNIFICATION OF DIRECTOR'S ESTATE. Notwithstanding any
other provision of this Agreement, and regardless of whether indemnification of
the Director would be permitted and/or required under this Agreement, if the
Director is deceased, the Company shall indemnify and hold harmless the
Director's estate, spouse, heirs, administrators, personal representatives and
executors (collectively "the Director's Estate") against, and the Company shall
assume, any and all claims, damages, expenses (including attorneys' fees),
penalties, judgments, fines and amounts paid in settlement actually incurred by
the Director or the Director's Estate in connection with the investigation,
defense, settlement or appeal of any action described in Section 1, 2 or 3
hereof. Indemnification of the Director's Estate pursuant to this Section 10
shall be mandatory and not require a
8
<PAGE> 9
Determination or any other finding that the Director's conduct satisfied a
particular standard of conduct.
SECTION 11. REIMBURSEMENT OF ALL LEGAL EXPENSES. Notwithstanding any
other provision of this Agreement, and regardless of the presence or absence of
any Determination, the Company promptly (but not later than 30 days following
the Director's submission of a reasonable accounting) shall reimburse the
Director for all attorneys' fees, court costs and other related expenses (but
not judgments, fines or amounts paid in settlement) incurred by the Director in
connection with the investigation, defense, settlement or appeal of any action
described in Section 1, 2 or 3 hereof (including, but not limited to, the
matters specified in Section 6 hereof).
SECTION 12. CONTROL OF THIRD-PARTY ACTIONS BY COMPANY. Promptly after
the receipt by the Director of notice of the commencement of any action or
proceeding described in Section 1 hereof, the Director shall, if a claim for
indemnification and/or reimbursement in respect thereof is to be made against
the Company under this Agreement, notify the Company in writing of the
commencement thereof; but the omission to so notify the Company shall not
relieve it from any liability that it may have to the Director. In case such
action shall be brought against the Director and he shall notify the Company of
the commencement thereof, the Company shall be entitled to participate therein
and, to the extent that it shall wish, to assume the defense thereof, with
counsel reasonably satisfactory to the Director. After notice from the Company
of its election to assume the defense of any such action, the Company shall not
be liable to the Director for any legal or other expenses subsequently incurred
by the Director in connection with the defense thereof other than reasonable
costs of investigation, unless (i) the Company shall not have employed counsel
reasonably satisfactory to the Director to represent the Director within a
reasonable time after the notice of commencement of the action, or (ii) the
Company has authorized the employment of counsel for the Director at the expense
of the Company.
SECTION 13. MISCELLANEOUS.
13.1 NOTICE PROVISION. Any notice, payment, demand or communication
required or permitted to be delivered or given by the provisions of this
Agreement shall be deemed to have been effectively delivered or given and
received on the date personally delivered to the respective party to whom it is
directed, or when deposited by registered or certified mail, with postage and
charges prepaid and addressed to the parties at the addresses set forth above
their signatures to this Agreement.
13.2 ENTIRE AGREEMENT. Except for the Company's Bylaws, this Agreement
constitutes the entire understanding of the parties and supersedes all prior
understandings, whether written or oral, between the parties with respect to the
subject matter of this Agreement.
9
<PAGE> 10
13.3 SEVERABILITY OF PROVISIONS. If any provision of this Agreement is
held to be illegal, invalid, or unenforceable under present or future laws
effective during the term of this Agreement, such provision shall be fully
severable; this Agreement shall be construed and enforced as if such illegal,
invalid, or unenforceable provision had never comprised a part of this
Agreement; and the remaining provisions of this Agreement shall remain in full
force and effect and shall not be affected by the illegal, invalid or
unenforceable provision or by its severance from this Agreement. Furthermore, in
lieu of each such illegal, invalid, or unenforceable provision there shall be
added automatically as a part of this Agreement a provision as similar in terms
to such illegal, invalid or unenforceable provision as may be possible and be
legal, valid and enforceable.
13.4 APPLICABLE LAW. This Agreement shall be governed by and construed
under the laws of the State of Florida.
13.5 EXECUTION IN COUNTERPARTS. This Agreement and any amendment may be
executed simultaneously or in counterparts, each of which together shall
constitute one and the same instrument.
13.6 COOPERATION AND INTENT. The Company shall cooperate in good faith
with the Director and use its best efforts to ensure that the Director is
indemnified and/or reimbursed for liabilities described herein to the fullest
extent permitted hereunder.
13.7 AMENDMENT. No amendment, modification or alteration of the terms
of this Agreement shall be binding unless in writing, dated subsequent to the
date of this Agreement, and executed by the parties.
13.8 BINDING EFFECT. The obligations of the Company to the Director
hereunder shall survive and continue as to the Director even if the Director
ceases to be a director, officer, employee and/or agent of the Company. Each and
all of the covenants, terms and provisions of this Agreement shall be binding
upon and inure to the benefit of the successors to the Company and, upon the
death of the Director, to the benefit of the estate, heirs, executors,
administrators and personal representatives of the Director.
13.9 GENDER AND NUMBER. Wherever the context shall so require, all
words herein in the male gender shall be deemed to include the female and neuter
gender, all singular words shall include the plural and all plural words shall
include the singular.
13.10 NONEXCLUSIVITY. The rights of indemnification and reimbursement
provided in this Agreement shall be in addition to any rights to which the
Director shall otherwise be entitled to by statute, bylaw, agreement, vote of
stockholders or otherwise.
10
<PAGE> 11
13.11 EFFECTIVE DATE. The provisions of this Agreement shall cover
claims, actions, suits and proceedings whether now pending or hereafter
commenced and shall be retroactive to cover acts or omissions or alleged acts or
omissions which heretofore have taken place.
THE COMPANY:
Video Jukebox Network, Inc.
1221 Collins Avenue
Miami Beach, Florida 33139
By: ________________________________
Alan McGlade
Chief Executive Officer
THE DIRECTOR
------------------------------------
11
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