<PAGE>
As filed with the Securities and Exchange Commission on February 14, 1997
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1996
OR
[ ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934
For the transition period from __________________________ to
________________________
Commission File No. 0-18806
DMX INC.
(Exact name of Registrant as specified in its Charter)
Delaware 95-4275106
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
11400 WEST OLYMPIC BOULEVARD, SUITE 1100, LOS ANGELES, CA 90064-1507
(Address of Principal Executive Offices) (Zip code)
(310) 444-1744
(Registrant's telephone number, including area code)
________________________
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [ ] No [_]
At December 31, 1996, the Registrant had 59,586,594 shares of its Common
Stock outstanding, excluding 85,630 shares held as Treasury Stock.
This report includes a total of 15 pages, excluding exhibits. The exhibit
index appears on page 16.
<PAGE>
PART I.
ITEM 1. FINANCIAL STATEMENTS
DMX INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996
WITH COMPARATIVE FIGURES AT SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
DECEMBER 31, 1996 SEPTEMBER 30, 1996
----------------------------------------
ASSETS (Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 630,043 928,399
Prepaid expenses 537,251 464,545
Equipment inventory 564,260 438,163
Accounts receivable:
Trade related party 1,022,681 1,828,973
Other trade 2,760,741 2,732,018
Allowance for doubtful accounts (467,786) (251,247)
---------- ----------
Total current assets 5,047,190 6,140,851
Current assets DMX-Europe N.V.:
Cash 355,976 192,635
Prepaid expenses 534,771 851,586
Equipment inventory 95,852 98,517
Accounts receivable (net) 485,287 435,480
---------- ----------
Total current assets DMX-Europe N.V. 1,471,886 1,578,218
------------------------------------------
Total current assets 6,519,076 7,719,069
Investment in Galactic/TEMPO Sound (note 3) 598,807 504,156
Property and equipment, net (note 5) 4,291,617 4,418,799
Property and equipment DMX-Europe N.V., net (note 5) 1,272,482 1,475,189
Goodwill, net (note 2 and 4) 4,405,461 4,535,658
Other assets 114,381 99,148
------------------------------------------
TOTAL ASSETS $ 17,201,824 18,752,019
==========================================
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable $ 1,399,900 1,097,476
Accrued liabilities 5,219,063 4,886,837
Accrued loss on disposal - DMX-Europe N.V. (note 4) 1,468,530 1,468,530
Current portion of capital lease obligation 431,795 410,108
---------- ----------
Total current liabilities continuing operations 8,519,288 7,862,951
Current liabilities DMX-Europe N.V.:
Accounts payable 9,222,966 7,284,664
Accrued liabilities 2,086,853 1,488,492
----------- ----------
Total current liabilities DMX-Europe N.V. 11,309,819 8,773,156
------------------------------------------
Total current liabilities 19,829,107 16,636,107
Deferred revenue 276,996 295,461
Royalty payable 1,773,275 1,773,275
Capital lease obligation 1,289,860 1,401,426
Stockholders' deficit (note 6):
Common Stock, $.01 par value. Authorized 100,000,000 shares;
issued 59,672,224 shares in 1996 and 43,680,600 shares in 1995 596,722 596,722
Paid-in capital 136,895,686 136,758,259
Accumulated deficit (142,411,503) (138,078,913)
Foreign currency translation reserve (470,316) (52,315)
Treasury stock, 85,630 shares, at cost (578,003) (578,003)
-------------------------------------------
Net stockholders' deficit (5,967,414) (1,354,250)
Commitments and contingencies (note 7) - -
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 17,201,824 18,752,019
===========================================
</TABLE>
See accompanying notes to consolidated financial statements
2
<PAGE>
DMX INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED DECEMBER 31, 1996 AND 1995
(UNAUDITED)
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
Revenues:
Subscriber fee revenues - related party $ 2,389,644 2,143,946
Subscriber fee revenues - other 1,993,663 1,489,982
Other revenue, net 77,725 36,540
Revenue - DMX-Europe N.V. (note 4) 693,292 -
------------ ------------
5,154,324 3,670,468
Operating expenses:
General and administrative 1,537,439 1,513,240
Sales and marketing 1,696,910 2,249,931
Studio and programming 2,325,352 2,090,894
Research and development 192,311 217,470
Stock bonus and option compensation 137,427 137,427
Depreciation and amortization 591,469 380,326
Operating expenses - DMX-Europe N.V. (note 4) 3,077,137 -
------------ ------------
9,558,045 6,589,288
NET OPERATING LOSS (4,403,721) (2,918,820)
Other income (expense):
Galactic/TEMPO Sound 94,651 (31,696)
Equity in loss of DMX-Europe N.V. (note 4) - (4,507,501)
Interest income 9,658 58,842
Interest expense (58,529) (42,233)
Interest expense - DMX-Europe (43,853)
N.V. (note 4)
Other income 70,147 69,012
Other expense (943)
------------ ------------
71,131 (4,453,576)
NET LOSS $ (4,332,590) (7,372,396)
============ ============
Loss per share $ (.07) (.17)
============ ============
Weighted average number of shares 59,586,594 43,594,970
============ ============
</TABLE>
See accompanying notes to consolidated financial statements
3
<PAGE>
DMX INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY
FOR THE PERIOD FROM SEPTEMBER 30, 1995 TO DECEMBER 31, 1996
<TABLE>
<CAPTION>
FOREIGN
COMMON STOCK CURRENCY
----------------------
NUMBER OF PAID IN ACCUMULATED TREASURY TRANSLATION
SHARES AMOUNT CAPITAL DEFICIT STOCK RESERVE TOTAL
---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at September 30, 1995 43,680,600 $436,806 $ 99,210,706 $(104,224,136) $(578,003) $ 26,390 $ (5,128,237)
Issuance of common stock 15,991,624 159,916 37,237,643 - - - 37,397,559
Cost of issuance - - (239,798) - - - (239,798)
Accrued compensation - - 549,708 - - - 549,708
Foreign currency translation reserve
- - - - - (78,705) (78,705)
Net loss - - - (33,854,777) - - (33,854,777)
---------------------------------------------------------------------------------------------
Balance at September 30, 1996 59,672,224 $596,722 $136,758,259 $(138,078,913) $(578,003) $ (52,315) $ (1,354,250)
Accrued compensation (unaudited)
- - 137,427 - - - 137,427
Foreign currency translation reserve
(unaudited) - - - - - (418,001) (418,001)
Net loss (unaudited) - - - (4,332,590) - - (4,332,590)
---------------------------------------------------------------------------------------------
Balance at December 31, 1996
(unaudited) 59,672,224 $596,722 $136,895,686 $(142,411,503) $(578,003) $(470,316) $ (5,967,414)
=============================================================================================
</TABLE>
See accompanying notes to consolidated financial statements
4
<PAGE>
DMX INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED DECEMBER 31, 1996 AND 1995
(UNAUDITED)
<TABLE>
<CAPTION>
1996 1995
------------ -----------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (4,332,590) (7,372,396)
Adjustments to reconcile net
loss to net cash used in
operating activities:
Depreciation and amortization 835,720 380,326
Equity in loss (earnings) of
Galactic/TEMPO Sound (94,651) 31,696
Equity in loss of DMX-Europe N.V. - 4,507,501
Compensation expense for stock
bonus and options 137,427 137,427
Provision for doubtful accounts 341,424
Decrease (increase) in prepaid
and other current assets 190,082 (106,426)
Decrease (increase) in
receivables 606,642 (800,847)
(Increase) in other assets (15,233) (76,847)
(Decrease) in deferred revenue (18,465) (28,709)
Increase in royalty payable - 144,001
Increase in accounts payable and
accrued liabilities 2,616,678 242,400
------------ -----------
Net cash generated by (used) in
operating activities 267,034 (2,941,874)
------------ -----------
Cash flows from investing activities:
Purchase of property and
equipment, net (301,684) (414,995)
Advances to DMX-Europe N.V., net - (281,922)
Investment in preferred stock of
DMX-Europe (UK) Limited - (3,550,000)
------------ -----------
Net cash used in investing
activities (301,684) (4,246,917)
------------ -----------
Cash flows from financing activities:
Repayment of note payable to bank - (45,000)
Repayment of principal portion
of capital lease obligation (100,365) (127,439)
------------ -----------
Net cash used by financing
activities (100,365) (172,439)
------------ -----------
Net decrease in cash and cash
equivalents (135,015) (7,361,230)
Cash and cash equivalents, beginning
of year 1,121,034 8,622,119
------------ -----------
Cash and cash equivalents, end of year $ 986,019 1,260,889
============ ===========
</TABLE>
See accompanying notes to consolidated financial statements
5
<PAGE>
DMX INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTH PERIOD ENDED DECEMBER 31, 1996
(UNAUDITED)
(1) BASIS OF PRESENTATION.
- ---------------------------
The accompanying consolidated balance sheets of DMX Inc. and Subsidiaries
("the Company") at December 31, 1996, the related consolidated statements
of operations for the three months ended December 31, 1996 and 1995, and
related statements of cash flows and stockholders' deficit for the three
months ended December 31, 1996 are unaudited. However, such information
reflects all normal recurring adjustments which, in the opinion of
management, are necessary to present fairly the Company's financial
position at December 31, 1996 and the results of operations and cash flows
for the three months ended December 31, 1996 and 1995. The results of
operations for the three months ended December 31, 1996, are not
necessarily indicative of the results of operations to be expected for the
entire fiscal year. The accompanying financial information for the three
months ended December 31, 1996 and 1995, should be read in conjunction with
the audited consolidated financial statements and notes thereto included in
the Company's September 30, 1996, Form 10-K.
The Consolidated Financial Statement includes accounts of DMX Inc. and its
wholly owned subsidiaries TEMPO Sound, Inc., 450714 B.C., Ltd. and DMX-
Europe N.V. and subsidiary. All intercompany transactions and balances
have been eliminated.
Certain reclassifications of prior period amounts were made to conform to
the current period reporting format.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES.
- -----------------------------------------------
GOODWILL.
--------
Goodwill was calculated as the purchase price of DMX-Europe N.V. and
subsidiary ("DMX-E) less the fair value of net assets acquired and is being
amortized over 20 years. Goodwill will be eliminated upon the ultimate
disposition of DMX-E pursuant to the Company's plan to dispose of its
operations as described in note 4. In connection with the anticipated
disposal of operations and considering the terms of such agreements
goodwill has been reduced by $5,685,000 due the impairment of its value.
(3) INVESTMENT IN GALACTIC/TEMPO SOUND PARTNERSHIP.
- ---------------------------------------------------
The summarized balance sheet and operating data for the three months ended
December 31, 1996, and the twelve months ended September 30, 1996, of the
Galactic/TEMPO Sound Partnership follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED TWELVE MONTHS ENDED
DECEMBER 31, 1996 SEPTEMBER 30, 1996
(UNAUDITED) (UNAUDITED)
------------------------------------------
<S> <C> <C>
Current assets $ 719,000 890,000
Non-current assets 210,000 144,000
Current liabilities 32,000 26,000
Partners' capital 897,000 1,008,000
Partners' draws (300,000) (300,000)
Revenues 551,000 2,227,000
Operating expenses (362,000) (1,832,000)
Net income $ 189,000 394,000
==========================================
</TABLE>
6
<PAGE>
DMX INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTH PERIOD ENDED DECEMBER 31, 1996
(UNAUDITED)
(4) INVESTMENT IN DMX-EUROPE N.V. AND SUBSIDIARY.
- -------------------------------------------------
The summarized operating data for the three months ended December 31, 1996
of DMX-Europe N.V. and subsidiary follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
DECEMBER 31, 1996
STATEMENTS OF OPERATIONS DATA: (UNAUDITED)
------------------
<S> <C>
Revenue $ 693,292
Operating, selling, general and administrative expenses
(including $221,061 of intercompany expenses). 3,053,947
Depreciation and amortization 244,251
------------------
Operating loss (2,604,906)
Interest expense (including $591,406 of intercompany expense). (637,647)
Other 2,388
------------------
Net loss $ (3,240,165)
==================
</TABLE>
DISPOSITION OF DMX-EUROPE N.V. AND SUBSIDIARY.
---------------------------------------------
On December 13, 1996, the Company announced that its board of directors had
approved the disposition of DMX-Europe N.V. and its subsidiary, DMX-Europe
(UK) Limited collectively, ("DMX-E") to Jerold H. Rubinstein, Chairman and
Chief Executive Officer of the Company. The Company had previously
determined to cease financial support of DMX-E and, in the absence of some
other arrangements to provide financial support to those Companies, to
place them in receivership. The Company has since entered into definitive
agreements with Mr. Rubinstein providing for such disposition.
Mr. Rubinstein will seek to reorganize the operations of DMX-E and will
seek new equity investors. In the event DMX-E cannot be reorganized, Mr.
Rubinstein intends to organize a new company to distribute the music
service on essentially the same terms. DMX Inc. will retain or obtain a ten
percent equity interest in the European companies which would have an
exclusive, five year, royalty-free license to distribute the DMX service in
Europe, the former Soviet Union, and in the Middle East and will have the
right to use the Company's trademarks for two years.
The Company has accounted for the effects of this disposal and accordingly
has estimated the loss on the disposal of DMX-E in the September 30, 1996
consolidated statements of operations. The loss on disposal was estimated
as the net investment of DMX-E of $5,720,000 and the incurrence of certain
potential liabilities of $1,469,000 in conjunction with such disposal
activities.
DMX-E was formed by the Company to provide the necessary management,
marketing services and operating structure for the distribution of Digital
Music Express(R) ("DMX(R)"), throughout Europe. In 1993, TCI-Euromusic,
Inc. ("TCI-E"), an indirect affiliate of Tele-Communications, Inc. ("TCI"),
acquired a 49% equity interest in DMX-E through the purchase of 49% of the
outstanding common stock of DMX-E for $120,100, in addition to providing a
$24.4 million credit facility which was used for the start-up costs and
initial operations of DMX-E . The Company partially guaranteed the credit
facility, and would be liable for one-half of the TCI-E's "loss" as
defined, which was payable at the option of the Company, in the Company's
Common Stock.
On May 17, 1996, DMX Inc. consummated the merger of TCI-E pursuant to the
terms of the Agreement and Plan of Merger ("the Agreement"), dated August
28, 1995, as amended as of November 1, 1995 and January 17, 1996 among the
Company, TCI-E and United Artists Programming International, Inc. ("UAPI"),
an indirect affiliate of TCI and owner of the outstanding shares of TCI-E.
As a result of the merger, the Company acquired the remaining 49% interest
in DMX-E.
7
<PAGE>
DMX INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTH PERIOD ENDED DECEMBER 31, 1996
(UNAUDITED)
(4) INVESTMENT IN DMX-EUROPE N.V. AND SUBSIDIARY, CONTINUED.
- ------------------------------------------------------------
The merger was accounted for as a purchase and the Company issued
10,841,624 shares of its Common Stock to UAPI at a purchase price totaling
$27,104,060. The purchase price less the fair value of TCI-E net assets
acquired, resulted in goodwill of $10,415,701 which is being amortized over
20 years and was calculated as follows:
<TABLE>
<S> <C>
Purchase price $ 27,104,060
Less book value of TCI-E net assets acquired (3,479,694)
-----------------
23,624,366
Purchase price adjustments:
To adjust the investment in DMX-E
for losses recorded by TCI-E, which were also
recognized by DMX Inc. based on the modified
equity method of accounting (9,026,263)
To reverse allowance for uncollectible
interest recorded by TCI-E @ 49% of the interest
accrued on the notes receivable (4,213,793)
Other 31,391
-----------------
Goodwill $ 10,415,701
=================
</TABLE>
The accompanying consolidated balance sheets of the Company at December 31,
1996 and September 30, 1996 is consolidated with the accounts of DMX-E and
the accompanying consolidated statements of operations and cash flows of
the Company were consolidated with the accounts of DMX-E for the three
months ended December 31, 1996. Prior to May 18, 1996, the Company
accounted for its investment in DMX-E using the equity method of
accounting.
(5) PROPERTY AND EQUIPMENT.
- -----------------------------
Property and equipment as of December 31, 1996, and September 30, 1996,
consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, 1996 SEPTEMBER 30, 1996
----------------------------------------
<S> <C> <C>
Furniture and equipment $ 4,248,884 3,957,369
Leasehold improvements 181,347 181,348
Studio equipment 6,188,336 6,144,707
Music library 963,909 918,126
Computer system 1,321,381 1,251,460
----------------------------------------
12,903,857 12,453,010
Less accumulated depreciation and
amortization (7,339,758) (6,559,022)
--------------------------------------
$ 5,564,099 5,893,988
========================================
</TABLE>
At December 31, 1996, studio equipment included approximately $209,000 in
equipment, net of accumulated depreciation of $510,700, that is being
leased to DMX-E for a monthly fee of approximately $23,000. Lease income
related to equipment leased to DMX-E for the three months ended December
31, 1996 was $68,760 and was eliminated in consolidation. Lease income for
the three months ended December 31, 1995 was $68,760 and is included in
other income.
Studio equipment of $1,148,800, net of accumulated depreciation of
$1,028,000, at December 31, 1996 was financed under the capital lease
obligation.
8
<PAGE>
DMX INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTH PERIOD ENDED DECEMBER 31, 1996
(UNAUDITED)
(6) STOCKHOLDERS' (DEFICIT) EQUITY.
- -----------------------------------
STOCK OPTIONS AND COMMITMENTS.
-----------------------------
The Company has issued options to purchase common stock to certain
directors, officers and employees under various stock option plans. The
option prices represent fair market values at the date of grant.
Transactions in stock options under these plans are summarized as follows:
<TABLE>
<CAPTION>
SHARES OPTION PRICE
---------- ---------------------------------
<S> <C> <C>
Outstanding options at
September 30, 1996 4,115,833 $1.95 - $6.25 per share,
expiring on various dates,
December 31, 1996 to July 1, 2006
Options expired and canceled (456,250) $1.95 - $5.75 per share
-----------
Outstanding options at
December 31, 1996 3,659,583 $1.95 - $6.25 per share,
============ expiring on various dates,
May 1998 to July 1, 2006.
</TABLE>
At December 31, 1996, options to purchase 2,584,583 shares were exercisable
at prices ranging from $1.95 to $6.25 per share, 2,318,333 of the
exercisable options were held by officers and directors of the Company.
NEW ACCOUNTING PRONOUNCEMENTS
-----------------------------
The Financial Accounting Standards Board has issued Statement No. 123 which
is effective for years commencing after December 15, 1995. The Company does
not intend to adopt the measurement and recognition criteria of Statement
No. 123 but will be adopting the pro forma disclosure requirements of
Statement No. 123 in its 1996 financial statements.
(7) COMMITMENTS AND CONTINGENCIES.
- ----------------------------------
PARENT GUARANTEES.
-----------------
The Company has guaranteed certain contracts of DMX-E related to their
uplink services agreement and subscriber management services agreement. To
the extent DMX-E is unable to perform under the agreements, certain
creditors of DMX-E may pursue claims against the Company under the
guarantees. A claim under the guaranty of DMX-E's obligation to indemnify
British Sky Broadcasting under the uplink services agreement could
potentially approximate $1.3 million which is included in the loss on
disposal of DMX-E in the accompanying consolidated statement of operations.
The Company has also guaranteed certain other obligations of DMX-E under
the Subscriber Management Services Agreement between DMX-E and Selco
Servicegesellschaft Fur Elektronische Kommunikation mbH and the related
side letter agreement. The Company cannot estimate the amount of any
potential claims at this time under such guarantee; however, such
liabilities could have a material adverse effect upon the financial
position and results of operation of the Company.
As described in note 4, "Investment in DMX-Europe N.V. and subsidiary", the
Company has ceased funding the operations of DMX-E and has entered into
agreements providing for the disposition of DMX-E to Jerold Rubinstein,
Chairman and Chief Executive Officer of the Company. Mr. Rubinstein will
seek to reorganize the operations of DMX-E and also seek new equity
partners. To the extent a reorganization cannot be achieved and in the
absence of some other arrangement to provide financial support to DMX-E,
the European companies will be placed into receivership. In such
circumstances, claims may be filed under the guarantees discussed above or
other claims may be asserted.
9
<PAGE>
DMX INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTH PERIOD ENDED DECEMBER 31, 1996
(UNAUDITED)
(7) COMMITMENTS AND CONTINGENCIES, CONTINUED.
- ---------------------------------------------
LEGAL ACTIONS.
-------------
From time to time the Company may be a party to legal actions arising in
the ordinary course of business, including claims by former employees. In
the opinion of the Company's management, after consultation with counsel,
disposition of such matters are not expected to have a material adverse
effect upon the financial position, results of operations or liquidity of
the Company.
On September 8, 1996, a purported class action lawsuit entitled Brickell
--------
Partners v. Jerold H. Rubinstein, Donne F. Fisher, Leo J. Hindery, Jr.,
-----------------------------------------------------------------------
James R. Shaw, Sr., Kent Burkhart, J.C. Sparkman, Menon Bhaskar, DMX Inc.,
--------------------------------------------------------------------------
and Tele-Communications, Inc. (Civil Action No. 15206) was filed in the
-----------------------------
Delaware Chancery Court alleging, among other things, that the proposed
acquisition of the Company by TCI is wrongful, unfair and harmful to the
Company's public stockholders and seeking to enjoin the consummation of the
Merger. The Company believes that this action is without merit and intends
to defend it vigorously.
(8) SUBSEQUENT EVENTS.
- ----------------------
On February 6, 1997, the Company, TCI Music, Inc., and TCI Merger Sub, Inc.
executed an Agreement and Plan of Merger which provides for the merger (the
"Merger") of Merger Sub, Inc. with and into the Company. The stockholders
of the Company would receive stock of TCI Music, Inc. representing
approximately 19.25% of TCI Music, Inc. with TCI and its affiliates holding
the remaining 80.75%. Upon consummation of the merger, each outstanding
share of common stock of the Company will be converted into (i) one-half of
a share of TCI Music, Inc. Series A Common Stock, and (ii) one Right for
each whole share of TCI Music, Inc. Series A Common Stock received. Each
Right will entitle the holder to require TCI to purchase from such holder
one share of TCI Music, Inc. Series A Common Stock for $4.00 per share if
during the one year period beginning on the effective date of the merger,
the price of TCI Music, Inc. Series A Common Stock does not equal or exceed
$4.00 per share for a period of at least 20 consecutive trading days. The
$4.00 is payable at the election of TCI in either cash, a number of shares
of Tele-Communications, Inc. Series A TCI Group Common Stock having a
equivalent value, or a combination of cash and stock.
The Merger is conditioned upon certain regulatory and other approvals,
including approval by the affirmative vote of holders of a majority of the
outstanding shares of the Company's common stock.
(9) LIQUIDITY AND CAPITAL RESOURCES.
- ------------------------------------
The decrease in cash of $135,000 for the three months ended December 31,
1996, was the net result of $267,000 generated by operating activities and
$302,000 used to purchase equipment primarily related to the obtaining of
commercial customers, and $100,000 used to pay the Company's capital lease
obligation.
10
<PAGE>
DMX INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTH PERIOD ENDED DECEMBER 31, 1996
(UNAUDITED)
(9) LIQUIDITY AND CAPITAL RESOURCES, CONTINUED.
- -----------------------------------------------
With the discontinuation of the operations of DMX-E, management believes
that the Company will begin to generate cash from its operating activities
on a prospective basis, and has reduced its operating expenses to extend
its working capital. However, the Company will need additional funding to
meet certain obligations related to the discontinuance of operations of
DMX-E and to continue to expand and develop the Company's business pursuant
to management's current plans. On February 6, 1997 the Company entered into
a loan and security agreement with TCI which provides the Company up to
$3.5 million. The loan proceeds will be used to purchase and/or reimburse
the Company for equipment and certain costs related to obtaining commercial
customers. The loan bears an annual interest rate of 12.5% and is to be
paid in 36 equal monthly installments commencing July 1, 1997. However, the
Company is not seeking any other additional financing at this time to fund
its other operational requirements and its obligation related to the
discontinuance of the operations of DMX-E due to the pendency of the
Merger. As more fully described in note 8, on February 6, 1997, TCI and the
Company executed a definitive Merger Agreement pursuant to which the
Company would become a wholly-owned subsidiary of TCI Music, Inc., a newly
formed TCI subsidiary. Pursuant to a Contribution Agreement between TCI and
TCI Music, Inc., to be entered into at the closing of the merger, TCI will
transfer to TCI Music, Inc. among other things, the revenue it derives from
its business with the Company. After giving effect to these transactions,
TCI Music, Inc. as successor to the Company, is expected to be cash flow
positive. However, if such assumption is not accurate or if future
financing is required and is not available, then management would seek to
continue to reduce operating expenses and capital spending as necessary as
a means to stem cash shortfalls. These operating expenses include both
discretionary spending, such as sales and marketing expenses and overhead
costs, such as general and administrative expenses. Such expenses will
continually be evaluated giving consideration to the cash flow generated
from subscriber fee revenue, anticipated growth in such revenue and
available working capital. There can be no assurance that the Company will
be able to reduce its operating expenses sufficiently to meet its existing
cash requirements while maintaining its competitive position.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. The
consolidated financial statements do not include all potential adjustments
that could result from potential claims under the above noted parent
guarantees or other obligations of DMX-E. As described in notes 4 and 7,
the Company has ceased funding the operations of DMX-E and has entered into
agreements providing for disposition of DMX-E to Jerold Rubinstein,
Chairman and Chief Executive Officer of the Company. Mr. Rubinstein is
seeking to reorganize the operations of DMX-E and is also seeking new
equity partners. To the extent a reorganization cannot be achieved and in
the absence of some other arrangement to provide financial support to DMX-
E, the European companies will be placed into receivership. In such
circumstances, claims may be filed under the guarantees. Such adjustments
could have a material adverse effect upon the financial position and
results of operations of the Company.
To the extent that this Quarterly Report contains forward looking
statements with respect to the financial condition, results of operations
or business of the Company, such statements involve risks and uncertainties
including but not limited to those factors described above and those
described in the Company's Annual Report on Form 10-K ("10-K") for the year
ended September 30, 1996. The foregoing is not a complete description of
the Company's business or the risks associated with an investment in the
Company. A more complete discussion of these items can be found in the 10-K
under the heading "Business".
11
<PAGE>
DMX INC.
AND SUBSIDIARIES
THREE MONTHS ENDED DECEMBER 31, 1996
ITEM 2. MANAGEMENT'S' DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
----------------------------------------------------------------
SUMMARY OF PERFORMANCE.
The net loss for the three months ended December 31, 1996 was $4.3 million, or
$0.07 per share, compared to $7.4 million or $0.17 per share, for the three
months ended December 31, 1995. The decrease in the net loss was primarily
attributed to increased revenues to $5.2 million for the three months ended
December 31, 1996 compared to $3.7 million for the three months ended December
31, 1995 and decreased operating expenses of DMX-E. Prior to May 17, 1996 the
Company recorded the losses of DMX-E using the equity method and subsequent to
that date, the financial statements of DMX-E were consolidated. Total
consolidated operating expenses for the three months ended December 31, 1996
increased to $9.6 million from $6.6 million for the three months ended December
31, 1995. The increase of $3.0 million was due to the inclusion of DMX-E
operating expenses of $3.1 million as compared to the recorded equity loss in
DMX-E of $4.5 million in other income/expense for the three months ended
December 31, 1995.
RESULTS OF OPERATIONS
REVENUE - DMX INC.
- -----------------
The Company's revenues increased to $4.5 million for the three months ended
December 31, 1996 from $3.7 million for the three months ended December 31,
1995. The $791,000 increase was primarily attributed to increased subscriber
fee revenues from continued growth in commercial subscribers and residential
PrimeStar subscribers.
Commercial subscriber fee revenue for the three months ended December 31, 1996
represented approximately 40.5% of total subscriber fee revenue compared to
33.1% of total subscriber fee revenue for the three months ended December 31,
1995. Residential subscriber fee revenue for the three months ended December
31, 1996 represented approximately 59.5% of total subscriber fee revenue
compared to 66.9% of total subscriber fee revenue for the three months ended
December 31, 1995.
REVENUE - DMX-E.
- ---------------
The Company began consolidating the operations of DMX-E from the acquisition
date of May 17, 1996. As discussed below, the Company has decided to dispose of
or cease the operations of DMX- E
OPERATING EXPENSES.
- ------------------
Total operating expenses increased to $9.6 million for the three months ended
December 31, 1996 from $6.6 million for the three months ended December 31,
1995. The increase of $3.0 million was primarily attributable to the inclusion
of $3.1 million of DMX-E operating expenses for the three months ended December
31, 1996 as compared to the recorded equity in loss of DMX-E of $4.5 in other
income/expense for the three months ended December 31, 1995, when the Company
accounted for DMX-E on the equity method.
SALES AND MARKETING EXPENSES.
Sales and marketing decreased to $1.7 million for the three months ended
December 31, 1996 from $2.2 million for the three months ended December 31,
1995. The net decrease of $553,000 primarily represented a decrease in
royalties of $144,000 as the manufacture, distribution and servicing agreement
with Scientific Atlanta, Inc. expired in August 1996; a decrease in net
installation cost of $69,000 for commercial accounts as the Company typically
recoups the cost of installations; and decreases in salaries of $119,000, travel
and entertainment of $89,000, marketing expenses of $59,000, and office and
other related expenses of $53,000 due to the Company's efforts to reduce
overhead.
12
<PAGE>
DMX INC.
AND SUBSIDIARIES
THREE MONTHS ENDED DECEMBER 31, 1996
STUDIO AND PROGRAMMING EXPENSES.
Studio and programming expenses increased to $2.3 million for the three months
ended December 31, 1996 from $2.1 million for the three months ended December
31, 1995. The $234,000 increase was primarily attributed to an increase in
music rights of $152,000 commensurate with the growth in subscribers and fee
revenue. The remainder of the net increase representing approximately $77,000
relates to programming expenses incurred on behalf of DMX-E for the three months
ended December 31, 1996. Prior to the consolidation of DMX-E financial
statements with the Company's, these expenses were charged to DMX-E, however,
the benefit of DMX-E's reimbursement has been eliminated in the consolidated
financial statements for the three months ended December 31, 1996.
OPERATING EXPENSES -DMX-E.
- -------------------------
The Company began consolidating the operations of DMX-E from the acquisition
date of May 17, 1996. As discussed below, the Company has decided to dispose of
or cease the operations of DMX- E
DISPOSAL OF DMX-E.
- -----------------
The Company has entered into definitive agreements providing for the disposition
of DMX-E to Mr. Jerold Rubinstein, the Company's Chairman and Chief Executive
Officer. DMX Inc. will retain a ten percent equity interest in the companies
which would have an exclusive, five-year, royalty-free license to distribute
the DMX music service in Europe, the former Soviet Union and in the Middle East
and will have the right to use the Company's trademarks for two years. In
addition, Mr. Rubinstein has agreed to guaranty certain obligations of the
European operations for satellite-uplink capacity. The Company had previously
determined to cease financial support for DMX-E operations and in the absence of
some other arrangements to provide financial support to DMX-E, to place the
companies in receivership. Mr. Rubinstein will seek to reorganize the
operations of DMX-E and will seek new equity investors. If DMX-E cannot be
reorganized, then Mr. Rubinstein intends to organize a new company to distribute
the music service on essentially the same terms and the Company will subscribe
for a ten percent equity interest in the new venture.
The Company estimated the loss on the disposal of DMX-E, which included its net
investment of $5.7 million and other obligations guaranteed by the Company of
$1.4 million, was accounted for in the Company's consolidated financial
statements at September 30, 1996.
LIQUIDITY AND CAPITAL RESOURCES.
The decrease in cash of $135,000 for the three months ended December 31, 1996,
was the net result of $267,000 generated by operating activities and $302,000
used to purchase equipment primarily related to the obtaining of commercial
customers, and $100,000 used to pay the Company's capital lease obligation.
With the discontinuation of the operations of DMX-E, management believes that
the Company will begin to generate cash from its operating activities on a
prospective basis and has reduced its operating expenses to extend its working
capital. However, the Company will need additional funding to meet certain
obligations related to the discontinuance of operations of DMX-E and to continue
to expand and develop the Company's business pursuant to management's current
plans. On February 6, 1997 the Company entered into a loan and security
agreement with TCI which provides the Company up to $3.5 million. The loan
proceeds will be used to purchase and/or reimburse the Company for equipment and
certain costs related to obtaining commercial customers. The loan bears an
annual interest rate of 12.5% and is to be paid in 36 equal monthly installments
commencing July 1, 1997. However, the Company is not seeking any other
additional financing at this time to fund its other operational requirements and
its obligation related to the discontinuance of the operations of DMX-E due to
the pendency of the Merger. As more fully described in note 8 to the Company's
consolidated financial statements, on February 6, 1997, TCI and the Company
executed a definitive Merger Agreement pursuant to which the Company would
become a wholly-owned subsidiary of TCI Music, Inc., a newly formed TCI
subsidiary. Pursuant to a Contribution Agreement between TCI and TCI Music,
Inc., to be entered into at the closing of the merger, TCI will transfer to TCI
Music, Inc. among other things, the revenue it derives from its business with
the Company. After giving effect to these transactions, TCI Music, Inc. as
successor to the Company, is expected to be cash flow positive. However, if
such assumption is not accurate or if future financing is required and is not
available, then management would seek to continue to reduce operating expenses
and capital spending as necessary as a means to stem cash shortfalls. These
operating expenses include both discretionary spending, such as sales and
marketing expenses and overhead costs, such as general and administrative
expenses. Such expenses will continually be evaluated giving consideration to
the cash flow generated from subscriber fee revenue, anticipated growth in such
revenue and available
13
<PAGE>
DMX INC.
AND SUBSIDIARIES
THREE MONTHS ENDED DECEMBER 31, 1996
working capital. There can be no assurance that the Company will be able to
reduce its operating expenses sufficiently to meet its existing cash
requirements while maintaining its competitive position.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. The consolidated financial
statements do not include all potential adjustments that could result from
potential claims under the above noted parent guarantees or other obligations of
DMX-E. As described in notes 4 and 7 to the Company's consolidated financial
statements and in the Disposal of DMX-E above, the Company has ceased funding
the operations of DMX-E and has entered into agreements providing for
disposition of DMX-E to Jerold Rubinstein, Chairman and Chief Executive Officer
of the Company. Mr. Rubinstein is seeking to reorganize the operations of DMX-E
and also seeks new equity partners. To the extent a reorganization cannot be
achieved and in the absence of some other arrangement to provide financial
support to DMX-E, the European companies will be placed into receivership. In
such circumstances, claims may be filed under the guarantees. Such adjustments
could have a material adverse effect upon the financial position and results of
operations of the Company.
To the extent that this Quarterly Report contains forward looking statements
with respect to the financial condition, results of operations or business of
the Company, such statements involve risks and uncertainties including but not
limited to those factors described above and those described in the Company's
Annual Report on Form 10-K ("10-K") for the year ended September 30,1996. The
foregoing is not a complete description of the Company's business or the risks
associated with and investment in the Company. A more complete discussion of
these items can be found in the 10-K under the heading "Business".
14
<PAGE>
PART II - OTHER INFORMATION
---------------------------
ITEM 1. LEGAL PROCEEDINGS.
- --------------------------
NONE.
ITEM 2. CHANGES IN SECURITIES.
- ------------------------------
NONE.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
- ----------------------------------------
NONE.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
- ------------------------------------------------------------
NONE.
ITEM 5. OTHER EVENTS.
- ---------------------
On February 6, 1997, the Company, Tele-Communications, Inc., a Delaware
corporation ("TCI"), TCI Music, Inc., a Delaware corporation ("TCI Music"), and
TCI Merger Sub, Inc., a Delaware corporation ("Merger Sub") executed an
Agreement and Plan of Merger (the "Merger Agreement"), which provides for the
merger (the "Merger") of Merger Sub with and into the Company. Upon
consummation of the Merger, each outstanding share of common stock of the
Company (other than shares held by holders of such shares who have not voted in
favor of the Merger and who have demanded appraisal rights with respect thereto
in accordance with Delaware law) will be converted into (i) one-half of a share
of TCI Music Series A Common Stock, (ii) one right (the "Right") for each whole
share of TCI Music Series A Common Stock received in the Merger, and (iii) the
right to receive cash in lieu of the issuance of fractional shares of TCI Music
Series A Common Stock and Rights. Each Right will entitle the holder to require
TCI to purchase from such holder one share of TCI Music Series A Common Stock
for $4.00 per share if during the one year period beginning on the effective
date of the Merger, the price of a share of TCI Music Series A Common Stock does
not equal or exceed $4.00 per share for a period of at least twenty consecutive
trading days. The $4.00 per share is payable at the election of TCI either in
cash, a number of shares of Tele-Communications, Inc. Series A TCI Group Common
Stock having an equivalent value, or a combination of cash and stock.
The consummation of the Merger is subject to the satisfaction or waiver of
certain regulatory and other approvals, including approval by the affirmative
vote of holders of a majority of the outstanding shares of the Company's common
stock.
The foregoing description of the Merger Agreement is qualified in its
entirety by reference to the Merger Agreement, a copy of which is attached
hereto as Exhibit 2.4 and incorporated herein in its entirety by reference.
On February 6, 1997, DMX Inc. (the "Company") and TCI entered into a loan
and security agreement which provides the Company up to $3,500,000. The loan
proceeds will be used to purchase and/or reimburse the Company for equipment and
certain costs related to obtaining commercial customers. The loan bears an
annual interest rate of 12.5% and is to be paid in 36 equal monthly installments
commencing July 1, 1997. The foregoing description of the loan and security
agreement is qualified in its entirety by reference to the Loan and Security
Agreement, a copy of which is attached hereto as Exhibit 10.75 and incorporated
herein in its entirety by reference.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
- -----------------------------------------
(a) Exhibits. See Exhibit index.
--------
(b) Reports on Form 8-K. The Company filed no reports on Form 8-K during
-------------------
the quarter ended December 31, 1996.
15
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIALLY
NUMBER DESCRIPTION NUMBERED PAGE
- --------- ---------------------------------------------------------------- ---------------
<S> <C> <C>
2.4 Agreement and Plan of Merger between the Registrant, Tele-
Communications, Inc., TCI Music, Inc. and TCI Merger Sub,
Inc., dated February 6, 1997, including related Rights
Agreement and Contribution Agreement.
10.75 Loan and Security Agreement between the Registrant and Tele-
Communications, Inc., dated February 6, 1997.
10.76* Amendment to SSI Affiliation Agreement filed as Exhibit 10.2 on
Amendment No. 1 to Registration Statement on Form S-1, August
31, 1990, file #33-35690.
</TABLE>
* Registrant has requested confidential treatment for a portion of the
referenced exhibit.
16
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
DMX INC.
(Registrant)
By: /S/ JEROLD H. RUBINSTEIN Date: February 14, 1997
Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the Company
and in the capacities and on the dates indicated.
Signature Date Title
--------- ---- -----
/S/ JEROLD H. RUBINSTEIN February 14, 1997 Chairman of the Board and
Chief Executive Officer
/S/ JOANNE WENDY KIM February 14, 1997 Chief Financial Officer and
Corporate Secretary
17
<PAGE>
EXHIBIT 2.4
AGREEMENT AND PLAN
OF MERGER
DATED AS OF
FEBRUARY 6, 1997
AMONG
TELE-COMMUNICATIONS, INC.,
TCI MUSIC, INC.,
TCI MERGER SUB, INC.
AND
DMX INC.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
ARTICLE I
DEFINITIONS
Section 1.1 Definitions................................................. 2
Section 1.2 Other Definitions........................................... 3
Section 1.3 Use of Terms................................................ 4
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 Conversion of Stock......................................... 6
Section 3.2 [Intentionally omitted]..................................... 6
Section 3.3 Exchange of Certificates.................................... 7
Section 3.4 Distribution With Respect to Shares Represented by
Unsurrendered Company Stock Certificates.................... 8
Section 3.5 No Fractional Shares........................................ 9
Section 3.6 No Liability................................................ 9
Section 3.7 Lost Certificates........................................... 9
Section 3.8 Dissenting Shares........................................... 10
Section 3.9 Treatment of Stock Options and Other Company Benefit Plans.. 10
Section 3.10 Stockholders' Approval...................................... 10
Section 3.11 Closing of the Company's Transfer Books..................... 11
Section 3.12 Assistance in Consummation of the Merger.................... 11
Section 3.13 Closing..................................................... 11
ARTICLE IV
THE CONTRIBUTION; THE RIGHTS
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
Section 4.1 Contribution to MusicCo..................................... 11
Section 4.2 Consideration for Contribution.............................. 12
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF TCI, MUSICCO AND MERGER SUB
Section 5.1 Organization and Qualification.............................. 12
Section 5.2 Capitalization.............................................. 12
Section 5.3 Authority Relative to this Agreement........................ 12
Section 5.4 No Breach; Required Consents................................ 13
Section 5.5 Governmental Consents and Approvals......................... 13
Section 5.6 Operations of MusicCo and Merger Sub........................ 13
Section 5.7 No Broker................................................... 13
ARTICLE VI
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
Section 6.1 Organization and Qualification.............................. 14
Section 6.2 Capitalization.............................................. 14
Section 6.3 Subsidiaries................................................ 14
Section 6.4 Authority Relative to this Agreement........................ 15
Section 6.5 No Breach; Required Consents................................ 15
Section 6.6 Consents and Approvals...................................... 16
Section 6.7 Reports and Financial Statements............................ 16
Section 6.8 Compliance with Law; Litigation............................. 17
Section 6.9 Title to Assets............................................. 18
Section 6.10 Labor and Employee Matters.................................. 18
Section 6.11 ERISA....................................................... 18
Section 6.12 Approval.................................................... 19
Section 6.13 Financial Advisor........................................... 20
Section 6.14 Taxes....................................................... 20
Section 6.15 Environmental Laws.......................................... 20
Section 6.16 Transactions with Affiliates................................ 21
ARTICLE VII
CONDUCT OF BUSINESS PENDING THE MERGER
</TABLE>
(ii)
<PAGE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
Section 7.1 Conduct of Business of the Company.......................... 21
Section 7.2 Conduct of Business of TCI.................................. 22
Section 7.3 Remedies for Breach......................................... 23
ARTICLE VIII
ADDITIONAL AGREEMENTS
Section 8.1 Access and Information...................................... 23
Section 8.2 SEC Filings................................................. 23
Section 8.3 Meeting of Stockholders of the Company...................... 27
Section 8.4 Compliance with the Securities Act.......................... 27
Section 8.5 Listing..................................................... 27
Section 8.6 Reasonable Best Efforts..................................... 27
Section 8.7 Public Announcements........................................ 27
Section 8.8 Notification................................................ 27
Section 8.9 HSR Act Filings............................................. 28
Section 8.10 Further Assurances.......................................... 28
Section 8.11 Employee Benefits........................................... 28
Section 8.12 No Solicitation............................................. 29
Section 8.13 Indemnification of Executives............................... 29
ARTICLE IX
CONDITIONS PRECEDENT
Section 9.1 Conditions to Each Party's Obligation to Effect
the Merger.................................................. 30
Section 9.2 Conditions to Obligation of the Company to Effect
the Merger.................................................. 31
Section 9.3 Conditions to Obligations of TCI, MusicCo and Merger
Sub to Effect the Merger.................................... 31
ARTICLE X
TERMINATION, AMENDMENT AND WAIVER
Section 10.1 Termination................................................. 32
Section 10.2 Effect of Termination....................................... 33
Section 10.3 Amendment................................................... 33
Section 10.4 Waiver...................................................... 33
</TABLE>
(iii)
<PAGE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
ARTICLE XI
GENERAL PROVISIONS; DEFINITIONS
Section 11.1 Non-Survival of Representations, Warranties and Agreements.. 33
Section 11.2 Notices..................................................... 33
Section 11.3 Fees and Expenses........................................... 34
Section 11.4 Specific Performance........................................ 34
Section 11.5 Third Party Beneficiaries................................... 34
Section 11.6 Entire Agreement............................................ 35
Section 11.7 Miscellaneous............................................... 35
</TABLE>
(iv)
<PAGE>
EXHIBITS
- --------
Exhibit Description
- ------- -----------
A Form of Contribution Agreement
B Form of Rights Agreement
C Form of Opinion of TCI Counsel
D Form of Opinion of Company Counsel
SCHEDULES
- ---------
Schedule No. Description
- ------------ -----------
5.4 TCI Consents
6.2(b) Rights To Acquire Company Common Stock
6.3 Subsidiaries and Equity Affiliates
6.5 Company Consents
6.7(c) Certain Changes
6.7(d) Undisclosed Liabilities
6.8(a) Legal Requirements
6.8(b) Litigation
6.9 Liens
6.10 Employment Agreements
6.11(a) Company Benefit Plans
6.11(g) Benefits to Former Employees
6.14 Taxes
6.15 Environmental Matters
6.16 Affiliate Transactions
7.1 Conduct of Business Pending the Merger
(v)
<PAGE>
AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER (this "Agreement") dated as of February
6, 1997, by and among Tele-Communications, Inc., a Delaware corporation ("TCI"),
TCI Music, Inc., a Delaware corporation and wholly owned subsidiary of TCI
("MusicCo"), TCI Merger Sub, Inc., a Delaware corporation and wholly owned
subsidiary of MusicCo ("Merger Sub") and DMX Inc., a Delaware corporation (the
"Company"):
RECITALS
--------
A. Pursuant to the form of Contribution Agreement attached to this
Agreement as Exhibit A (the "Contribution Agreement"), (i) TCI will cause
certain of its wholly owned subsidiaries to contribute to MusicCo the right to
receive a substantial portion of the revenues attributable to the distribution
and sale by those subsidiaries of the Company's digital music services and (ii)
TCI will grant to each stockholder who becomes a stockholder of MusicCo pursuant
to the Merger, with respect to each whole share of MusicCo stock acquired by
such stockholder in the Merger, one right (a "Right") requiring TCI to purchase
from the holder thereof, at such holder's election, such stock for the price and
at the time specified in the form of Rights Agreement attached to this Agreement
as Exhibit B (the "Rights Agreement") in consideration of the issuance of shares
of Series B Common Stock, par value $.01 per share, of MusicCo ("MusicCo Series
B Common Stock") and a promissory note in the amount of $40,000,000.
B. TCI and MusicCo have proposed that MusicCo will acquire the
Company in a transaction in which: (i) simultaneously with the Contribution,
Merger Sub will merge with and into the Company, as a result of which the
Company will become a wholly owned subsidiary of MusicCo and the stockholders of
the Company immediately prior to such merger will become stockholders of
MusicCo; and (ii) TCI will issue to each stockholder who becomes a stockholder
of MusicCo pursuant to the Merger, with respect to each whole share of MusicCo
stock acquired by such stockholder in the Merger, one Right.
C. The Boards of Directors of TCI, MusicCo, Merger Sub and the
Company have each determined that the Merger is in the best interests of their
respective corporations and stockholders.
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:
<PAGE>
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 its correlative
meanings, "controlling," "controlled by" and "under common control with") means
possession, directly or indirectly, of the power to direct or cause the
direction of management and policies of a Person (whether through the ownership
of voting securities, by contract or otherwise).
"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).
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"GAAP" means generally accepted accounting principles as in effect
from time to time in the United States of America.
"Knowledge" means the actual present personal knowledge of any
director or any officer of the Company.
"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.
-2-
<PAGE>
"MusicCo Series A Common Stock Value" means the product of (a) $4.00
and (b) a fraction, the numerator of which is 59,586,594 and the denominator of
which is the total number of shares of MusicCo Series A Common Stock issuable to
stockholders of the Company at the Effective Time, assuming no Dissenting
Shares.
"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 corporation or
partnership more than 50% of whose outstanding voting securities or partnership
interests, as the case may be, are directly or indirectly owned by such Person.
Section 1.2 Other Definitions. The following terms are defined in
-----------------
the Sections indicated:
<TABLE>
<CAPTION>
Term Section
- ---- -------
<S> <C>
Acquisition Proposal 8.12
Agreement Preamble
Antitrust Division 8.9
Certificate of Incorporation of the Company 2.1(a)
Certificate of Merger 2.2
Closing 3.13
Closing Date 3.13
Company Preamble
Company Benefit Plans 6.11(a)
Company Common Stock 3.1(a)
Company Permits 6.8(a)
Company Stock Certificates 3.3(a)
Contribution 4.1
</TABLE>
-3-
<PAGE>
<TABLE>
<S> <C>
Contribution Agreement Recital A
DGCL 2.1
Dissenting Shares 3.8
Effective Time 2.2
Equity Affiliate 6.3
ERISA Affiliate 6.11(a)
Exchange Act 5.5
Exchange Agent 3.3(a)
Executive 8.13(a)
FTC 8.9
Governmental Entity 6.8(a)
HSR Act 5.5
Indemnified Party 8.2(h)(iii)
Indemnifying Party 8.2(h)(iii)
Joint Proxy Statement/Prospectus 8.2(a)
Losses 8.2(h)(i)
Meeting 8.3
Merger 2.1
Merger Sub Preamble
Most Recent Balance Sheet 6.7(c)
MusicCo Preamble
MusicCo Certificates 3.3(a)
MusicCo Series A Common Stock 3.1(a)
MusicCo Series B Common Stock Recital A
Other Filings 8.2(b)
Preliminary Joint Proxy Statement/Prospectus 8.2(a)
Right Recital A
Rights Agreement Recital A
SEC Filings 8.2(c)
SEC Reports 6.7(a)
Securities Act 5.5
Surviving Corporation 2.1
Tax 6.14
TCI Preamble
Termination Date 10.1(b)
</TABLE>
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
-4-
<PAGE>
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 Delaware General Corporation Law (the "DGCL"), at the
Effective Time: (i) Merger Sub will be merged with and into the Company (the
"Merger"); (ii) the separate existence of Merger Sub will cease and the Company
will continue as the surviving corporation in the Merger (the "Surviving
Corporation"); and the name of the Surviving Corporation will be DMX 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 Section 262 of the DGCL, the effects described in
Section 3.1 with respect to the capital stock of Merger Sub and the Company and,
subject to applicable Legal Requirements, the following additional effects:
(a) Certificate of Incorporation. At the Effective Time, the Amended
----------------------------
and Restated Certificate of Incorporation of the Company, as amended (the
"Certificate of Incorporation of the Company"), as in effect immediately prior
to the Effective Time, will become the Certificate of Incorporation of the
Surviving Corporation, and such Certificate of Incorporation may thereafter be
amended as provided therein and by the DGCL.
(b) Bylaws. At the Effective Time, the Bylaws of Merger 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 Certificate of Incorporation of the
Surviving Corporation and as provided by the DGCL.
(c) Directors. At the Effective Time, the directors of Merger Sub
---------
immediately prior to the Effective Time will become the directors of the
Surviving Corporation, each to hold office in accordance with the Certificate of
Incorporation and Bylaws of the Surviving Corporation and the DGCL 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 Merger Sub
--------
immediately prior to the Effective Time will become the officers of the
Surviving Corporation, each to hold office in accordance with the Certificate of
Incorporation and Bylaws of the Surviving Corporation and the DGCL 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 Merger
Sub will vest in the Surviving
-5-
<PAGE>
Corporation, and all debts, liabilities and duties of the Company and Merger 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 DGCL, a certificate of merger (the "Certificate of Merger")
and deliver the Certificate of Merger to the Secretary of State of the State of
Delaware for filing pursuant to the DGCL on the Closing Date. The Merger will
become effective upon the filing of the Certificate of Merger with the Secretary
of State of the State of Delaware. As used in this Agreement, the "Effective
Time" means the time at which the Certificate of Merger is filed with the
Secretary of State of the State of Delaware.
ARTICLE III
-----------
CONVERSION OF CAPITAL STOCK
Section 3.1 Conversion of Stock. At the Effective Time, by virtue
-------------------
of the Merger and without any action on the part of the holder of any shares of
capital stock of any corporation:
(a) Each share of Common Stock, $.01 par value per share, of the
Company ("Company Common Stock") issued and outstanding immediately prior to the
Effective Time (except shares subject to Section 3.1(b) and, to the extent
provided in Section 3.8, Dissenting Shares) will be converted into and will
thereafter evidence and become: (i) .5 of a share of Series A common stock,
$.01 par value per share, of MusicCo ("MusicCo Series A Common Stock"); (ii) one
Right with respect to each whole share of MusicCo Series A Common Stock; and
(iii) the right to receive cash in lieu of fractional shares of MusicCo Series A
Common Stock and Rights in accordance with 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 MusicCo
Series A Common Stock, Rights or other consideration will be delivered in
exchange therefor.
(c) Each share of Common Stock, $.01 par value per share, of Merger
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 one validly issued, fully paid, and nonassessable share of
Common Stock, $.01 par value per share, of the Surviving Corporation.
(d) Each share of the capital stock of Merger Sub issued and
outstanding immediately prior to the Effective Time and owned directly or
indirectly by Merger 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.
Section 3.2 [Intentionally omitted]
-6-
<PAGE>
Section 3.3 Exchange of Certificates.
------------------------
(a) Exchange Agent. Prior to the Closing Date, TCI will select The
--------------
Bank of New York or another bank or trust company reasonably acceptable to the
Company to 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, MusicCo and TCI will deposit with the Exchange Agent
for exchange in accordance with this Section 3.3 certificates evidencing the
shares of MusicCo Series A Common Stock and the Rights to be issued in the
Merger ("MusicCo Certificates"), which shares of MusicCo Common Stock and Rights
will be deemed to be issued at the Effective Time. At and following the
Effective Time, MusicCo 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
in accordance with Section 3.5.
(b) Exchange. As soon as practicable after the Effective Time,
--------
MusicCo 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 MusicCo and reasonably
acceptable to the Company); and (ii) instructions for use in effecting the
surrender of Company Stock Certificates in exchange for MusicCo 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 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,
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 MusicCo Certificates representing the number of whole shares of MusicCo
Series A Common Stock and one Right with respect to each whole share of MusicCo
Series A Common 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
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, MusicCo
Certificates representing the proper number of shares of MusicCo Series A Common
Stock and Rights 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 MusicCo that any applicable stock
transfer tax has been paid. MusicCo 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 MusicCo 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 MusicCo Certificates that the Company Stock Certificates so surrendered are
-7-
<PAGE>
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 MusicCo Series A Common Stock and the
whole number of Rights 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 pursuant to Section 3.5.
(d) Expenses. Except as otherwise expressly provided in this
--------
Agreement, MusicCo will pay all charges and expenses, including those of the
Exchange Agent, in connection with the exchange of shares of MusicCo Series A
Common Stock and Rights 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 MusicCo Certificates deposited with the Exchange
Agent that remain unclaimed by the former stockholders of the Company after six
months following the Effective Time will be delivered to MusicCo upon its
demand, and any former stockholders of the Company who have not then complied
with the instructions for exchanging their Company Stock Certificates will
thereafter look only to MusicCo 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 pursuant to Section
3.5.
Section 3.4 Distribution With Respect to Shares Represented by
--------------------------------------------------
Unsurrendered Company Stock Certificates. No dividends or other distributions
- ----------------------------------------
declared or made after the Effective Time with respect to MusicCo Series A
Common 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 MusicCo Series A Common 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,
MusicCo will pay or cause to be paid, without interest, to the record holder of
MusicCo Certificates issued in exchange therefor, (a) at the time of such
surrender, the amount of cash in lieu of fractional shares to which such holder
is entitled pursuant to Section 3.5 and the amount of dividends or other
distributions by MusicCo with a record date after the Effective Time theretofore
paid with respect to such whole shares of MusicCo Series A Common Stock and (b)
at the appropriate payment date, the amount of dividends or other distributions
by MusicCo 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 MusicCo Series A Common Stock.
-8-
<PAGE>
Section 3.5 No Fractional Shares.
--------------------
(a) Cash Payment in Lieu of Fractional Shares. No certificates or
-----------------------------------------
scrip representing fractional shares of MusicCo Series A Common Stock and Rights
will be issued upon the surrender of Company Stock Certificates pursuant to
Section 3.3. Such fractional share interests will not entitle the owner thereof
to any rights as a security holder of MusicCo. In lieu of any such fractional
shares of MusicCo Series A Common Stock and any fractional Rights, each holder
of Company Common Stock entitled to receive shares of MusicCo Series A Common
Stock and Rights in the Merger, upon surrender of a Company Stock Certificate
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
the MusicCo Series A Common Stock Value by the fractional interest in MusicCo
Series A Common Stock and Rights 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 MusicCo
Series A Common Stock in lieu of any fractional share interests, MusicCo 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, MusicCo, Merger 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 MusicCo Series A
Common Stock, Rights, dividends or distributions with respect thereto or cash
payable in lieu of fractional shares 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 MusicCo Series
A Common Stock and Rights (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) deliverable in respect thereof as determined in
accordance with the terms of this Agreement, subject to the condition that the
Person to whom the MusicCo Series A Common Stock and Rights (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 MusicCo an affidavit claiming such Company Stock
Certificate to be lost, stolen, or destroyed and (b) if required by MusicCo,
given MusicCo an indemnity satisfactory to MusicCo against any claim that may be
made against MusicCo with respect to the Company Stock Certificate alleged to
have been lost, stolen or destroyed.
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<PAGE>
Section 3.8 Dissenting Shares. Notwithstanding anything in this
-----------------
Agreement to the contrary, shares of Company Common Stock outstanding
immediately prior to the Effective Time that are 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
Section 262 of the DGCL (the "Dissenting Shares") will not be converted into or
be exchangeable for the right to receive MusicCo Series A Common Stock, Rights
or any dividend or distribution with respect thereto made after the Effective
Time or any cash payable in lieu of fractional shares 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 DGCL
and this Section 3.8. Any shares of Company Common Stock held by a stockholder
who, prior to the Effective Time, withdraws a demand for appraisal of such
shares or loses the right to appraisal as provided in the DGCL will not be
considered Dissenting Shares. The Company will give MusicCo and TCI prompt
notice of any written demands for appraisal of any shares of Company Common
Stock, attempted withdrawals of such demand and any other notices or other
documents received by the Company pursuant to the DGCL relating to stockholders'
rights of appraisal. The Company will make all payments required by the DGCL to
be made in respect of Dissenting Shares, including any costs assessed against
the Company pursuant to Section 262 of the DGCL, and none of TCI, MusicCo or any
of their 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 and Other Company Benefit
----------------------------------------------------
Plans. The Company will use its best efforts to cause each option that is
- -----
outstanding prior to the Effective Time that is not terminable pursuant to its
terms upon consummation of the transactions contemplated by this Agreement to be
canceled prior to or at the Effective Time and the Company will take all action
necessary to cause each such other option to be canceled if not otherwise
exercised prior to or at the Effective Time; provided however that the Company
will not pay any amount of cash or other consideration to the holder of any
option in consideration of the cancellation or termination of such option; and
provided further that with respect to each such option that remains outstanding
after the Effective Time (other than as a result of a breach by the Company of
the provisions of this Section) any Rights issued upon exercise of such option
after the Effective Time will terminate (or have terminated) at the time set
forth in the Rights Agreement. At or prior to the Effective Time, DMX will
terminate all Company Benefit Plans and the DMX Inc. Employee Handbook.
Section 3.10 Stockholders' Approval. Subject to the fiduciary duty
----------------------
obligations under applicable Legal Requirements, the Company will take all
action necessary, in accordance with applicable Legal Requirements and the
Certificate of Incorporation and Bylaws of the Company, to have this Agreement,
the Merger and the transactions contemplated by this Agreement approved by the
holders of capital stock of the Company. The Company will notify TCI of the date
set for any stockholder 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 Common Stock vote to adopt this
Agreement and approve the Merger, and will use reasonable best efforts to
solicit from such holders proxies in favor of such approval and adoption and
take all other action necessary or helpful
-10-
<PAGE>
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 stockholders approve the Merger and related transactions;
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 from such
obligation, TCI will cause all shares of Company Common Stock beneficially owned
(within the meaning of Rule 13d-3 under the Exchange Act) by it 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
MusicCo 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,
----------------------------------------
MusicCo, Merger 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. TCI will cause MusicCo and Merger Sub to perform all of their
respective obligations in connection with 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 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
----------
THE CONTRIBUTION; THE RIGHTS
Section 4.1 Contribution to MusicCo. Subject to the satisfaction
-----------------------
of the conditions to the parties' obligations to effect the Merger, as set forth
in Article IX of this Agreement, at the Closing, TCI will execute and deliver
the Contribution Agreement and the Rights Agreement substantially in the forms
attached as Exhibits A and B, respectively, and pursuant thereto, issue the
Rights in accordance with the terms and conditions of the Rights Agreement and
cause each TCI System Owner (as defined in the Contribution Agreement) to assign
and contribute to MusicCo the right to receive Net DMX Revenues (as defined in
the Contribution Agreement) of such TCI System Owner pursuant to the terms and
conditions of the Contribution Agreement. The foregoing transactions by TCI and
the TCI System Owners pursuant to the Contribution Agreement are referred to in
this Agreement as the "Contribution."
-11-
<PAGE>
Section 4.2 Consideration for Contribution. In consideration for
------------------------------
the Contribution, MusicCo will, concurrently with the Contribution, issue and
deliver to TCI, as designee of the TCI System Owners, 125,000,000 validly
issued, fully paid and nonassessable shares of MusicCo Series B Common Stock and
the Company Note (as defined in the Contribution Agreement).
ARTICLE V
---------
REPRESENTATIONS AND WARRANTIES OF TCI, MUSICCO AND MERGER SUB
TCI, MusicCo and Merger Sub jointly and severally represent and
warrant to the Company as follows:
Section 5.1 Organization and Qualification. Each of TCI, MusicCo
------------------------------
and Merger Sub is a corporation duly organized, validly existing and in good
standing under the laws of the State of Delaware and has all requisite corporate
power and authority to carry on its business as it is now being conducted. Each
of TCI, MusicCo and Merger 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.
Section 5.2 Capitalization.
--------------
(a) As of the date of this Agreement, the authorized capital stock of
MusicCo 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 none of which are issued and outstanding and
200,000,000 shares of common stock, designated as Series B Common Stock one
share of which is 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 MusicCo Series A Common 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) Merger Sub is a direct, wholly owned subsidiary of MusicCo.
MusicCo will own all the issued and outstanding stock of (i) Merger Sub
immediately prior to the Effective Time and (ii) Surviving Corporation
immediately after the Effective Time.
Section 5.3 Authority Relative to this Agreement. Each of TCI,
------------------------------------
MusicCo and Merger 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,
MusicCo and Merger Sub have been duly authorized by the Boards of Directors of
TCI, MusicCo
-12-
<PAGE>
and Merger Sub and by MusicCo as the sole stockholder of Merger Sub, and no
other corporate proceedings on the part of TCI, MusicCo or Merger 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, MusicCo and Merger 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 5.4 No Breach; Required Consents. The execution and
----------------------------
delivery of this Agreement by TCI, MusicCo and Merger Sub do not, and the
consummation of the transactions contemplated by this Agreement by TCI, MusicCo
and Merger Sub will not: (a) violate or conflict with the Certificate of
Incorporation or Bylaws of TCI, MusicCo or Merger Sub; (b) except as set forth
on Schedule 5.4, 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, MusicCo or Merger
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, MusicCo or Merger
Sub; or (c) subject to obtaining the approvals and making the filings described
in Section 5.5, constitute a violation of any applicable Legal Requirement,
except where such violation would not have a Material Adverse Effect on TCI,
MusicCo or Merger Sub.
Section 5.5 Governmental Consents and Approvals. Neither the
-----------------------------------
execution and delivery of this Agreement by TCI, MusicCo and Merger Sub nor the
consummation of the transactions contemplated by this Agreement by TCI, MusicCo
and Merger Sub will require any filing or registration with, or 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
Securities Act of 1933, as amended (the "Securities Act"), (iii) the Securities
Exchange Act of 1934, as amended (the "Exchange Act") and (iv) 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, MusicCo or Merger Sub or
prevent the consummation of the transactions contemplated by this Agreement.
Section 5.6 Operations of MusicCo and Merger Sub. As of the date
------------------------------------
of this Agreement, each of MusicCo and Merger 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 5.7 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
-13-
<PAGE>
contemplated by this Agreement based upon arrangements made by or on behalf of
TCI, MusicCo or Merger Sub.
ARTICLE VI
----------
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company represents and warrants to TCI, MusicCo and Merger Sub as
follows:
Section 6.1 Organization and Qualification. The Company is a
------------------------------
corporation duly organized, validly existing and in good standing under the laws
of the State of Delaware 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.
Section 6.2 Capitalization.
--------------
(a) The authorized capital stock of the Company consists of
100,000,000 shares of Company Common Stock. As of the date of this Agreement,
59,586,594 shares of Company Common Stock were issued and outstanding.
(b) Except as set forth on Schedule 6.2(b), there are no options,
warrants, calls, subscriptions or other rights, agreements or commitments of any
kind, 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.
(c) All issued and outstanding shares of Company Common 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 6.3 Subsidiaries. The only Persons in which the Company
------------
directly or through one or more of its Subsidiaries holds a 5% or greater equity
interest (each an "Equity Affiliate") are those listed on Schedule 6.3 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
-14-
<PAGE>
qualification necessary except where the failure to be so qualified will not
have a Material Adverse Effect on such Subsidiary. 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. 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 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 6.3, 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 6.4 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 Common 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, including at least a majority of the Disinterested
Directors (as defined in the Certificate of Incorporation of the Company).
Except for the approval of the holders of Company Common 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
stockholders is fair from a financial point of view. Subject to approval of the
stockholders of the Company in accordance with the DGCL, 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 6.5 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 Common Stock, violate or conflict
with the Certificate of Incorporation or Bylaws of the Company; (b) except as
set forth on Schedule 6.5, 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 6.6, constitute a violation of any Legal
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<PAGE>
Requirement, except where such violation would not have a Material Adverse
Effect on the Company.
Section 6.6 Consents and Approvals. 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 any
filing or registration with, or authorization, consent or approval of, any
Governmental Entity or any other Person, except those required in connection, or
in compliance, with the provisions of (i) the HSR Act, (ii) the Securities Act,
(iii) the Exchange Act and (iv) 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 6.7 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 October 1, 1994
(collectively, the "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 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, in the forms filed with the SEC,
all the SEC Reports.
(b) Financial Statements. The audited consolidated financial
--------------------
statements of the Company contained in the 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 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. Except as set forth on Schedule
--------------------------
6.7(c), since the date of the most recent balance sheet of the Company included
in the Company's Annual Report on
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<PAGE>
Form 10-K for the fiscal year ended September 30, 1996 (the "Most Recent 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 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 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. Except as disclosed on
----------------------------------
Schedule 6.7(d), the Company does not have any indebtedness, liability or
obligation required by GAAP to be reflect ed on a balance sheet that is not
reflected or reserved against in the Most Recent Balance Sheet other than
liabilities, obligations and contingencies that (i) were incurred after the date
of the Most Recent Balance Sheet in the ordinary course of business or (ii)
would not, in the aggregate, have a Material Adverse Effect on the Company.
Section 6.8 Compliance with Law; Litigation.
-------------------------------
(a) Except as disclosed on Schedule 6.8(a), the Company and its
Subsidiaries hold all permits, licenses, franchises, variances, exemptions,
concessions, leases, instruments, orders and approvals (the "Company 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 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
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 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) Except as set forth on Schedule 6.8(b) to this Agreement, 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.
-17-
<PAGE>
Section 6.9 Title to Assets. The Company has good and merchantable
---------------
title to all material assets reflected on the Most Recent 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 6.9; (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 the
Company's business.
Section 6.10 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 6.10 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 6.11(a).
Section 6.11 ERISA.
-----
(a) Schedule 6.11(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 trade or
business (whether or not incorporated) that is treated as a single employer with
the Company under Section 414(b), (c), (m) or (o) of the Code ("ERISA
Affiliate") maintains or has an obligation to make contributions (the "Company
Benefit Plans").
(b) Neither the Company nor any ERISA Affiliate 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
-18-
<PAGE>
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 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 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.
(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 6.11(g) and as may be required
under Section 4980B of the Code, neither the Company nor any ERISA Affiliate
maintains any Company Benefit Plan that provides medical or welfare benefits to
former employees.
Section 6.12 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
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<PAGE>
stockholders; (ii) approved the Merger and this Agreement and the transactions
contemplated by this Agreement in accordance with the provisions of Section 251
of the DGCL; (iii) recommended the approval of this Agreement and the Merger by
the holders of the Company Common Stock and directed that the Merger be
submitted for consideration by the Company's stockholders at the Meeting; and
(iv) adopted a resolution having the effect of causing the Company not to be
subject (A) to the super majority voting provisions of the Certificate of
Incorporation of the Company and (B) to the extent applicable, and if
applicable, to the extent permitted by applicable Legal Requirements, to Section
203 of the DGCL.
(b) The vote of a majority of the outstanding shares of Company Common
Stock is the vote required for the adoption and approval of this Agreement, the
Merger, and the other transactions contemplated by this Agreement.
Section 6.13 Financial Advisor. Except for Houlihan Lokey Howard &
-----------------
Zukin, 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 a true and complete
copy of the agreement pursuant to which Houlihan Lokey Howard & Zukin has been
retained to act as financial advisor to the Company in connection with the
Merger.
Section 6.14 Taxes. Except as set forth on Schedule 6.14, 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 the Company has paid on its
behalf) or have established an adequate reserve for the payment of, all Taxes
owed in respect of the periods covered by such returns. The information
contained in such Tax returns is complete and accurate in all material respects.
Except as set forth on Schedule 6.14, neither the Company nor any Subsidiary of
the Company is delinquent in the payment of any material Tax or other amount
owed to any Governmental Entity. Except as set forth on Schedule 6.14, there
are no claims or investigations pending or, to the Company's Knowledge,
threatened against the Company for past Taxes, except claims and investigations
that would not have a Material Adverse Effect on the Company, and adequate
provision for the claims or investigations set forth on Schedule 6.14 has been
made as reflected on the Most Recent Balance Sheet. Except as set forth on
Schedule 6.14, the Company has not waived or extended any applicable statute of
limitations relating to the assessment of any Taxes that would be payable by the
Company. 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 6.15 Environmental Laws. Except as described on Schedule
------------------
6.15:
(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
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<PAGE>
(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.
Section 6.16 Transactions with Affiliates. Except as set forth on
----------------------------
Schedule 6.16, 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 stockholder of the Company or any
"affiliate" or "associate" of any of them (as those terms are defined in the
Exchange Act), 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 pursuant to Company Benefit Plans.
ARTICLE VII
-----------
CONDUCT OF BUSINESS PENDING THE MERGER
Section 7.1 Conduct of Business of the Company. Prior to the
----------------------------------
Effective Time, except as set forth on Schedule 7.1 to this Agreement, without
the prior consent of TCI:
(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 Certificate or 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 stockholders 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
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<PAGE>
practice; (iii) create, assume or incur any additional indebtedness for borrowed
money or mortgage, pledge or subject to any Lien any of its assets or 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 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 9.3(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 9.1 or Section 9.3
of this Agreement not to be satisfied as of the Effective Time.
Section 7.2 Conduct of Business of TCI. Prior to the Effective Time,
--------------------------
except as contemplated or permitted by this Agreement TCI 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, MusicCo or
Merger Sub set forth in this Agreement untrue or incorrect so as to cause the
condition set forth in Section 9.2(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 9.1 or Section 9.2 of this Agreement not to be satisfied as of the
Effective Time.
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<PAGE>
Section 7.3 Remedies for Breach. The sole remedies (i) of TCI,
-------------------
MusicCo and Merger Sub for any breach by the Company of Section 7.1(e), and
(ii) of the Company for any breach by TCI of Section 7.2, will be injunctive
relief or termination of this agreement pursuant to Article X.
ARTICLE VIII
------------
ADDITIONAL AGREEMENTS
Section 8.1 Access and Information. Except as otherwise required
----------------------
pursuant to a contractual obligation that exists as of the date of this
Agreement, each of the Company and TCI 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. Each of the Company and TCI will hold, and will cause their
respective Subsidiaries to hold in confidence all such information in accordance
with the terms of the Confidentiality Agreement dated October 2, 1996 between
TCI and the Company.
Section 8.2 SEC Filings.
-----------
(a) The Company, MusicCo and TCI 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 MusicCo and TCI under the Securities
Act with respect to the MusicCo Series A Common Stock to be issued in the Merger
and the Rights to be granted pursuant to the Rights Agreement, 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 stockholders as promptly as practicable.
(b) As soon as reasonably practicable after the date hereof, the
Company, MusicCo and TCI 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, a registration statement on Form 8-A
under the Exchange Act with respect to the Rights and, in the case of MusicCo, a
registration statement on Form 8-B under the Exchange Act with respect to the
MusicCo Series A Common 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.
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<PAGE>
(c) The Company, on the one hand, and MusicCo and TCI, on the other,
will cooperate with each other and provide all information necessary in order 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 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 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
MusicCo 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, MusicCo and TCI 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 stockholders.
(e) TCI 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) Expenses. Each party will be responsible for all expenses
--------
incurred by it in complying with this Section 8.2, including all registration,
qualification and filing fees, printing expenses, fees and disbursements of
counsel, applicable blue-sky fees and expenses and the expense of any special
audit incident to or required by the registration or proxy solicitation
contemplated by this Agreement.
(h) Indemnification.
---------------
(i) TCI and MusicCo, jointly and severally, 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,
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<PAGE>
"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 or MusicCo in writing for inclusion in the SEC
Filings or was made in reliance upon and in conformity with such information.
TCI promptly will reimburse the Company and each such officer, director,
employee, agent 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).
(ii) If this Agreement is terminated prior to the consummation of the
Merger, the Company will indemnify, defend and hold harmless each of TCI,
MusicCo and Merger 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, MusicCo and Merger 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 8.2, (A) "Indemnifying Party" means
the Person having an obligation hereunder to indemnify any other Person pursuant
to this Section 8.2, (B) "Indemnified Party" means the Person having the right
to be indemnified pursuant to this Section 8.2 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 MusicCo or TCI 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 8.2, 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
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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 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
8.2(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 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 8.2(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
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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 8.3 Meeting of Stockholders of the Company. The Company
--------------------------------------
will take all action necessary, in accordance with the DGCL and the Certificate
of Incorporation and Bylaws of the Company, to duly call, give notice of,
convene and hold a meeting of its stockholders as promptly as practicable, to
consider and vote upon the adoption and approval of this Agreement (as a plan of
merger under Section 251 of the DGCL), the Merger and the other transactions
contemplated by this Agreement (the "Meeting"), to the extent such approval is
required by the DGCL and the Certificate of Incorporation of the Company.
Section 8.4 Compliance with the Securities Act. Prior to the
----------------------------------
Closing Date, the Company will cause to be delivered to TCI 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 may cause the MusicCo
Certificates evidencing MusicCo Series A Common 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 8.5 Listing. TCI will use its reasonable best efforts to
-------
cause the shares of MusicCo Series A Common Stock issued in connection with the
Merger to be quoted on NASDAQ, subject to official notice of issuance.
Section 8.6 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 8.7 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 8.8 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
-27-
<PAGE>
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 8.9 HSR Act Filings. TCI and the Company will each make an
---------------
appropriate filing of a Notification and Report Form pursuant to the HSR Act 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 each will use its reasonable best efforts to respond 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 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, TCI will
not be required to make any significant change in the operations or activities
of the business (or any material assets employed therein) of TCI or any of its
Affiliates if TCI 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 or any of its Affiliates.
Section 8.10 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 8.11 Employee Benefits.
-----------------
(a) To the extent permitted under TCI's employee 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
-28-
<PAGE>
disability plans, 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 8.12 No Solicitation. Subject to the fiduciary duties of
---------------
the Board of Directors of the Company, 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 any Person in connection with any
Acquisition Proposal. The Company will promptly communicate to TCI 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 8.12 shall be
construed as prohibiting the Board of Directors of the Company from (i) making
any disclosure to the Company's stockholders, or (ii) responding to any
unsolicited proposal or inquiry by advising the Person making such proposal or
inquiry of the terms of this Section 8.12. "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 50% or more of the voting power of the
Company Common Stock or (iv) transaction in which any Person acquires 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, 50% or more of the
outstanding Company Common Stock.
Section 8.13 Indemnification of Executives.
-----------------------------
(a) Indemnification. MusicCo will cause the Surviving Corporation to,
---------------
and, should the Surviving Corporation fail or be unable to do so, MusicCo 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 until the expiration of the
applicable statutes of limitation, to the fullest extent permitted under the
DGCL and the Certificate of Incorporation and Bylaws of the Company as in effect
on the date of this Agreement. MusicCo 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 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
-29-
<PAGE>
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 (including
actions relating to the Company's European operations) and (ii) MusicCo 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 MusicCo, it being agreed
that Irell & Manella LLP shall be acceptable to MusicCo. 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) MusicCo will pay or will cause the Surviving Corporation to pay all
reasonable fees and expenses of such counsel for the Executive. Neither MusicCo
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 MusicCo 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 MusicCo or the the Surviving Corporation
assume the obligations set forth in this Section 8.13.
ARTICLE IX
----------
CONDITIONS PRECEDENT
Section 9.1 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 Company
Common Stock.
(b) The waiting period applicable to the consummation of the Merger
under the HSR Act shall have expired or been earlier terminated and any other
notices or approvals or consents required by or of any Governmental Entity with
respect to the transactions contemplated by this Agreement noted with an
asterisk on Schedule 5.4 or Schedule 6.5 shall have been either filed or
obtained.
(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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<PAGE>
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 9.2 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, MusicCo and Merger 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, MusicCo and Merger 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,
MusicCo and Merger Sub executed on behalf of each such corporation by the
President or a Vice President of such corporation to that effect.
(b) MusicCo Series A Common Stock issued in connection with the Merger
shall have been authorized for quotation on NASDAQ upon official notice of
issuance.
(c) The Company shall have received the opinion of counsel to TCI,
MusicCo and Merger Sub (which counsel may be an employee of TCI) substantially
to the effect set forth in Exhibit C.
(d) The transactions contemplated by the Contribution Agreement shall
have been consummated on the terms and conditions set forth therein.
Section 9.3 Conditions to Obligations of TCI, MusicCo and Merger Sub
--------------------------------------------------------
to Effect the Merger. The obligations of TCI, MusicCo and Merger 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, MusicCo and Merger
Sub shall have received a certificate of the
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<PAGE>
Company executed on behalf of the Company by the President or an Executive Vice
President of the Company to that effect.
(b) Those consents of third parties noted with an asterisk on Schedule
5.4 or Schedule 6.5 shall have been obtained.
(c) The number of Dissenting Shares do not exceed 5% of the issued and
outstanding shares of Company Common 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 and MusicCo shall have received the opinion of Irell & Manella
LLP substantially to the effect set forth in Exhibit D.
ARTICLE X
----------
TERMINATION, AMENDMENT AND WAIVER
Section 10.1 Termination. This Agreement may be terminated at any
-----------
time prior to the Effective Time, whether before or after approval by the
stockholders of the Company:
(a) by mutual consent of the Board of Directors of TCI and the Board
of Directors of the Company;
(b) by either TCI 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) so long as the terminating party has
not breached its obligations hereunder in any material respect, after July 31,
1997 (the "Termination Date") if the Merger shall not have been consummated on
or before such date;
(c) by the Company, provided the Company has not breached any of its
obligations hereunder in any material respect, if any of the conditions
specified in Section 9.1 or Section 9.2 have not been satisfied or waived by the
Company (or, in the case of Section 9.1, waived by the Company, TCI, MusicCo and
Merger Sub) at such time as such condition is no longer capable of satisfaction;
or
(d) by TCI, provided that none of TCI, MusicCo or Merger Sub has
breached any of its obligations hereunder in any material respect, if any of the
conditions specified in Section 9.1 or Section 9.3 have not been met or waived
by TCI (or, in the case of Section 9.1, waived by TCI, MusicCo, Merger Sub and
the Company) at such time as such condition is no longer capable of
satisfaction.
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<PAGE>
Section 10.2 Effect of Termination. In the event of termination of
---------------------
this Agreement by either TCI 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, MusicCo or Merger Sub.
Section 10.3 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
stockholders of the Company and prior to the Effective Time, but, after such
approval, no amendment will be made that alters the indemnification provisions
of Section 8.2 or changes the ratio at which Company Common Stock is to be
converted into MusicCo Series A Common Stock as provided in Section 3.2 or that
in any way materially adversely affects the rights of such stockholders, without
the further approval of such stockholders. This Agreement may not be amended
except by an instrument in writing signed on behalf of each of the parties to
this Agreement.
Section 10.4 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 XI
----------
GENERAL PROVISIONS; DEFINITIONS
Section 11.1 Non-Survival of Representations, Warranties and
-----------------------------------------------
Agreements. No representations and warranties contained in this Agreement will
- ----------
survive beyond the Closing Date. This Section 11.1 will not limit any covenant
or agreement of the parties to this Agreement that by its terms requires
performance after the Closing Date.
Section 11.2 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: 11400 West Olympic Boulevard
Suite 1100
Los Angeles, California 90064-1501
Attention: President
Telecopy No.: (310) 444-1717
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<PAGE>
With a copy to: Irell & Manella LLP
1800 Avenue of the Stars
Suite 900
Los Angeles, California 90067-4276
Attention: Alvin G. Segel, Esq.
Telecopy No.: (310) 203-7199
If to TCI, MusicCo or
Merger Sub: Tele-Communications, Inc.
Terrace Tower II
5619 DTC Parkway
Englewood, Colorado 80111-3000
Attention: Legal Department
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 11.3 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. The Company's expenses relating to the transactions
contemplated by this Agreement, including fees of Irell & Manella LLP, counsel
to the Company, will be paid or accrued by the Company prior to the Effective
Time.
Section 11.4 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 11.5 Third Party Beneficiaries. The parties to this
-------------------------
Agreement agree that the Company's stockholders, 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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<PAGE>
Section 11.6 Entire Agreement. This Agreement will be of no force
----------------
or effect until executed and delivered by all of the parties to this Agreement.
Section 11.7 Miscellaneous. This Agreement (including the documents
-------------
and instruments referred to in this Agreement) (a) 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 (other than as provided in the
Confidentiality Agreement dated as of October 2, 1996, between the Company and
TCI as the same may be amended) and (b) will be governed in all respects,
including validity, interpretation and effect, by the laws of the State of
Delaware (without giving effect to the provisions thereof relating to conflicts
of law). 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.
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<PAGE>
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.
TELE-COMMUNICATIONS, INC.
By: /s/ Brendan R. Clouston
___________________________________
Name: Brendan R. Clouston
___________________________________
Title: Executive Vice President and Chief
Operating Officer
___________________________________
TCI MUSIC, INC.
By: /s/ John D. Reardon
___________________________________
Name: John D. Reardon
___________________________________
Title: President and CEO
___________________________________
TCI MERGER SUB, INC.
By: /s/ John D. Reardon
___________________________________
Name: John D. Reardon
___________________________________
Title: President and CEO
___________________________________
DMX INC.
By: /s/ Jerold H. Rubinstein
___________________________________
Name: Jerold H. Rubinstein
___________________________________
Title: Chairman of the Board and CEO
___________________________________
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<PAGE>
EXHIBIT A
CONTRIBUTION AGREEMENT
This Contribution Agreement (this "Agreement") is made on the ____ day
of __________________ 1997, by and between Tele-Communications, Inc., a Delaware
corporation ("TCI"), and TCI Music, Inc., a Delaware corporation (the
"Company").
RECITALS
TCI desires to cause various of its indirect wholly owned subsidiaries
to contribute to the Company the right to receive a substantial portion of the
revenues attributable to the distribution and sale by those subsidiaries of
digital music services of DMX Inc., a Delaware corporation ("DMX"), to
residential and commercial subscribers of such subsidiaries. In consideration
of such contribution and of the agreement of TCI to grant to stockholders of DMX
the right to require TCI to purchase shares of the Company issued to them
pursuant to the Agreement and Plan of Merger dated as of February 6, 1997, to
which TCI, the Company and DMX are parties, the Company desires to deliver to
TCI shares of the Company's Series B Common Stock and a promissory note in the
amount of $40,000,000.
In consideration of the mutual covenants set forth in this Agreement
and other good and valuable consideration, the receipt and sufficiency of which
are acknowledged, the parties agree as follows:
I. DEFINITIONS
As used in this Agreement, terms with initial capital letters will
have the meanings ascribed to them below, unless the context clearly requires
otherwise:
Affiliate means, with respect to any Person, any other Person
---------
Controlling, Controlled by, or under common Control with, such Person.
Business Day means any day other than a Saturday or Sunday or a day on
------------
which banks in New York, New York or Denver, Colorado are authorized to be
closed.
Closing has the meaning set forth in Section 2.1.
-------
Company has the meaning set forth in the preamble to this Agreement.
-------
Company Note means a promissory note in the principal amount of
------------
$40,000,000 payable to the order of TCI, which promissory note (i) will bear
interest at 10% per annum, payable (and, to the extent not paid, compounded)
semiannually, (ii) will provide for the payment of unpaid principal and accrued
interest not earlier than 180 days after the Closing and (iii) will include such
other terms and conditions as TCI and the Company may agree.
<PAGE>
Control means, with respect to any Person, the possession, directly or
-------
indirectly, of the power to direct or cause the direction of the management and
policies of the Controlled Person, whether by the ownership of voting
securities, by contract or otherwise.
DMX has the meaning set forth in the Recitals to this Agreement.
---
DMX Affiliation Agreement means an affiliation agreement between DMX
-------------------------
and Satellite Services, Inc., a Wholly Owned Subsidiary of TCI (including its
successors and assigns, "SSI"), pursuant to which TCI System Owners are granted
rights to distribute and sell DMX Services, as such agreement may from time to
time be in effect.
DMX Revenues means all revenues of a TCI System Owner, as determined
------------
in accordance with GAAP, that are attributable to the distribution and sale of
DMX Services, including charges for DMX Services and equipment rental,
installation and other charges payable by subscribers to DMX Services. In
calculating DMX Revenues, revenues attributable to the distribution and sale of
DMX Services on a tier or as part of a package that includes other audio or
video programming services and as to which there is no separate charge for DMX
Services will be deemed to be equal to the license fees payable to DMX on
account of such sales, as prescribed by the DMX Affiliation Agreement.
DMX Services means the digital music services offered for sale to the
------------
public by DMX.
Fiscal Year means a year beginning January 1 and ending December 31.
-----------
GAAP means generally accepted accounting principles as in effect from
----
time to time in the United States, applied on a basis consistent with that
applied by TCI in the preparation of its financial statements.
Merger means the merger of TCI Music Merger Sub, Inc. with and into
------
DMX pursuant to the Merger Agreement.
Merger Agreement means the Agreement and Plan of Merger, dated as of
----------------
February 6, 1997, among DMX, the Company, TCI and TCI Music Merger Sub, Inc.
Music Business means the business of acquiring, producing, packaging
--------------
or compiling audio or video programming the content of which is primarily music
or music-related, and the marketing and sale of such programming by any method
of distribution.
Net DMX Revenues means, for any period of determination, all DMX
----------------
Revenues of a TCI System Owner for such period, minus (i) the Retained
-----
Percentage for such period and (ii) license fees for such period that are
payable to DMX pursuant to the DMX Affiliation Agreement.
2
<PAGE>
Person means a human being or a corporation, general or limited
------
partnership, limited or unlimited liability company, trust, association,
unincorporated organization, governmental authority or other entity.
Residential DMX Revenues means, for any period of determination, that
------------------------
portion of DMX Revenues of a TCI System Owner for such period that is
attributable to the distribution and sale of DMX Services to residential
subscribers.
Retained Percentage means, for any period of determination, an amount
-------------------
equal to 10% of Residential DMX Revenues of a TCI System Owner for such period,
subject to adjustment as provided in Section 8.2.
Shares means 125,000,000 shares of Series B Common Stock, par value
------
$.01 per share, of the Company.
TCI System Owner means each Wholly Owned Subsidiary of TCI that offers
----------------
DMX Services to its subscribers.
Termination Date has the meaning set forth in Section 2.3.
----------------
Wholly Owned Subsidiary means, with respect to any Person, any other
-----------------------
Person in which all the outstanding stock or other ownership interests are
owned, directly or indirectly, by such Person, including with respect to such
Person any other Person that pursuant to the preceding clause would be a Wholly
Owned Subsidiary of any other Wholly Owned Subsidiary.
TCI has the meaning set forth in the preamble to this Agreement.
---
II. CONTRIBUTION OF NET DMX REVENUES; ISSUANCE OF SHARES
2.1 Rights Agreement; Assignment of Net DMX Revenues to the
-------------------------------------------------------
Company. At the closing of the transactions contemplated by this Agreement (the
- -------
"Closing"):
(a) TCI will execute and deliver a Rights Agreement, in the form
prescribed by the Merger Agreement, granting to stockholders of DMX who are
entitled to receive shares of stock of the Company pursuant to the Merger
Agreement the right to require TCI to purchase such shares, subject to the terms
and conditions of such Rights Agreement.
(b) TCI will cause each Person that is a TCI System Owner as of
the date of this Agreement to assign and contribute to the Company, effective as
of the Closing, the right to receive Net DMX Revenues of such TCI System Owner
for a period beginning on the effective date of such assignment and ending on
the Termination Date. Payments of Net DMX Revenues will be remitted to the
Company as provided in Section 8.3.
3
<PAGE>
(c) The Company will deliver to TCI, as the designee of the TCI
System Owners, (i) the Shares and (ii) the Company Note.
2.2 New TCI System Owners. Promptly after any Person becomes a TCI
---------------------
System Owner, TCI will cause such TCI System Owner to assign to the Company the
right to receive such TCI System Owner's Net DMX Revenues.
2.3 Effective Term of Assignment. Anything in this Agreement to the
----------------------------
contrary notwithstanding, the Company's right to receive Net DMX Revenues of any
TCI System Owner pursuant to this Agreement will continue in effect until the
first to occur of the following dates (the "Termination Date"): (i) the date
such TCI System Owner ceases to be a TCI System Owner and (ii) December 31,
2006.
III. REPRESENTATIONS AND WARRANTIES OF TCI
TCI represents and warrants to the Company that:
3.1 Organization, Good Standing and Authority. Each of TCI and the
-----------------------------------------
TCI System Owners is a corporation duly organized, validly existing and in good
standing under the laws of the jurisdiction of its incorporation and has all
requisite corporate power and authority to enter into and to perform its
obligations under this Agreement and the other agreements to be executed and
delivered by it pursuant to this Agreement.
3.2 Authorization and Validity; Consents; No Conflicts. The
--------------------------------------------------
execution and delivery by each of TCI and the TCI System Owners of, and the
performance by each of them of its obligations under, this Agreement and the
other agreements to be executed and delivered by it pursuant to this Agreement
have been duly authorized by all requisite corporate action of TCI or such TCI
System Owner. This Agreement constitutes, and when executed and delivered by it
pursuant to this Agreement, the other agreements to be executed and delivered by
it pursuant to this Agreement will constitute, the legal, valid and binding
obligations of each of TCI and the TCI System Owners, enforceable in accordance
with their terms, except as such enforceability may be affected by applicable
bankruptcy, reorganization, insolvency, moratorium or similar laws affecting
creditors' rights generally or by general equitable principles. No consent or
approval of, notice to, or filing with, any other Person is required in
connection with the execution, delivery and performance by TCI or any of the TCI
System Owners of this Agreement or any other agreement to be executed and
delivered by it pursuant to this Agreement, or the consummation by it of the
transactions contemplated hereby or thereby, the failure of which to be
obtained, given or made would have a material adverse effect on TCI and the TCI
System Owners, taken as a whole, or on their ability to perform their
obligations under this Agreement. The execution and delivery by TCI or any of
the TCI System Owners of, and the performance by each of them of its obligations
under, this Agreement and any other agreement to be executed and delivered by it
pursuant to this Agreement will not violate its certificate or articles of
incorporation or bylaws or any material agreement to which it is a party or by
which it is bound or affected.
4
<PAGE>
3.3 Investment Intent. TCI is acquiring the Shares for investment
-----------------
only and acknowledges that they may not be sold without registration under the
Securities Act of 1933, as amended, and applicable state securities laws, or
unless an exemption therefrom is available, and agrees that a legend to the
foregoing effect may be placed on the certificate representing the Shares.
IV. REPRESENTATIONS AND WARRANTIES OF THE COMPANY
4.1 Organization, Good Standing and Authority. The Company is a
-----------------------------------------
corporation duly organized, validly existing and in good standing under the laws
of the jurisdiction of its incorporation and has all requisite corporate power
and authority to enter into and to perform its obligations under this Agreement
and the other agreements to be executed and delivered by it pursuant to this
Agreement.
4.2 Authorization and Validity; Consents; No Conflicts. The
--------------------------------------------------
execution and delivery by the Company of, and the performance by it of its
obligations under, this Agreement and the other agreements to be executed and
delivered by it pursuant to this Agreement have been duly authorized by all
requisite corporate action of the Company. This Agreement constitutes, and when
executed and delivered by the Company pursuant to this Agreement, the other
agreements to be executed and delivered by it pursuant to this Agreement will
constitute, its legal, valid and binding obligations, enforceable in accordance
with their terms, except as such enforceability may be affected by applicable
bankruptcy, reorganization, insolvency, moratorium or similar laws affecting
creditors' rights generally or by general equitable principles. No consent or
approval of, notice to, or filing with, any other Person is required in
connection with the execution, delivery and performance by the Company of this
Agreement or any other agreement to be executed and delivered by the Company
pursuant to this Agreement, or the consummation by it of the transactions
contemplated hereby or thereby, the failure of which to be obtained, given or
made would have a material adverse effect on the Company or on its ability to
perform its obligations under this Agreement. The execution and delivery by the
Company of, and the performance by it of its obligations under, this Agreement
and any other agreement to be executed and delivered by it pursuant to this
Agreement will not violate its certificate of incorporation or bylaws or any
material agreement to which it is a party or by which it is bound or affected.
4.3 No Lien on Shares. When issued and delivered by it at the
-----------------
Closing, the Shares to be issued by the Company hereunder will be validly
issued, fully paid and nonassessable and will be owned by TCI (or, if
applicable, TCI 's designee) free and clear of any lien, charge, encumbrance,
security interest or any other similar right of any third party.
V. CONDITIONS TO OBLIGATIONS OF THE COMPANY
The obligations of the Company to consummate the transactions
contemplated by this Agreement to take place at the Closing are subject to
satisfaction or the waiver by it, at or prior to the Closing, of each of the
following conditions:
5
<PAGE>
5.1 Truth of Representations and Warranties. All representations
---------------------------------------
and warranties of TCI set forth in this Agreement, if qualified by a reference
to materiality, are true and, if not so qualified, are true in all material
respects, in each case at the time of the Closing with the same effect as if
made at that time, except for changes permitted or contemplated by this
Agreement.
5.2 Performance of Agreements. All agreements of TCI set forth in
-------------------------
this Agreement that are required to be performed by it at or before the Closing
have been performed in all material respects.
5.3 Merger Completed. The Merger is completed contemporaneously
----------------
with the Closing.
VI. CONDITIONS TO OBLIGATIONS OF TCI
The obligations of TCI to consummate the transactions contemplated by
this Agreement to take place at the Closing are subject to satisfaction or the
waiver by it, at or prior to the Closing, of each of the following conditions:
6.1 Truth of Representations and Warranties. All representations and
---------------------------------------
warranties of the Company set forth in this Agreement, if qualified by a
reference to materiality, are true and, if not so qualified, are true in all
material respects, in each case at the time of the Closing with the same effect
as if made at that time, except for changes permitted or contemplated by this
Agreement.
6.2 Performance of Agreements. All agreements of the Company set
-------------------------
forth in this Agreement that are required to be performed by it at or before the
Closing have been performed in all material respects.
6.3 Merger Completed. The Merger is completed contemporaneously
----------------
with the Closing.
VII. CLOSING
7.1 Closing. The Closing will take place on the date of this
-------
Agreement, contemporaneously with the Merger.
7.2 Items Delivered by TCI System Owners. At the Closing, TCI will
------------------------------------
cause each TCI System Owner to deliver to the Company (i) an assignment
transferring the rights of such TCI System Owner in and to its Net DMX Revenues
and (ii) such other assignments, bills of sale or other instruments as are
sufficient to transfer to the Company all the legal and beneficial interests in
such rights.
7.3 Items Delivered by the Company. At the Closing:
------------------------------
6
<PAGE>
(a) The Company will deliver to the TCI System Owners (or their
designee) immediately available funds in the amount prescribed by Section 2.1(c)
of this Agreement or, if so elected by TCI, the Company Note.
(b) The Company will deliver to TCI one or more duly executed
certificates representing the Shares.
VIII. COVENANTS
8.1 Right to Compete.
----------------
(a) TCI and any Affiliate of TCI may engage in or possess
interests in one or more other businesses or ventures of any nature of
description, without regard to whether any of such businesses or ventures are or
may be deemed to be competitive in any way with any business of the Company or
any person in which the Company has an interest. Without limiting the generality
of the foregoing, none of TCI or any of its Affiliates or any director, officer
or employee of TCI or any of its Affiliates (including any such director,
officer or employee who serves as a director, officer or employee of the
Company) will be obligated to present to the Company any particular investment
or business opportunity, regardless of whether such opportunity is of a
character that the Company could pursue it if it were presented to the Company,
but instead, TCI and its Affiliates will have the right to take such opportunity
for their own account or for the account of any other Person without any
obligation whatsoever to the Company.
(b) Although the Company and TCI agree to be bound by the
provisions of subsection (a) of this Section for purposes of defining their
respective legal rights and obligations, TCI acknowledges that, subject to such
provisions, TCI intends to use commercially reasonable efforts to expand the
involvement of the Company in the Music Business and to cause the Company to
pursue future business activities in the Music Business.
8.2 Adjustment of Retained Percentage. Beginning at least 60 days
---------------------------------
before the third anniversary of the Merger, and every third anniversary
thereafter, TCI, acting on behalf of the TCI System Owners, and the Company will
engage in good faith negotiations concerning the adjustment of the Retained
Percentage, taking into account, among other things, total sales of DMX Services
by TCI System Owners and the need to provide appropriate incentives to the TCI
System Owners and their personnel to maximize sales of DMX Services.
Notwithstanding the foregoing, the Retained Percentage prescribed by this
Agreement or as most recently adjusted by agreement of the parties will continue
to be applicable until a new agreement adjusting the Retained Percentage has
been reached.
8.3 Payment of Net DMX Revenues.
---------------------------
(a) Net DMX Revenues will be remitted to the Company monthly in
arrears for each calendar month. Each monthly payment will be made by the end of
the calendar
7
<PAGE>
month immediately following the calendar month for which Net DMX Revenues are
being remitted. At the time of each payment, the Company will be given a
statement setting forth in reasonable detail TCI's calculation of Net DMX
Revenues for the month in question.
(b) TCI will keep and maintain (or will cause to be kept and
maintained) books and records (the "System Books and Records") with respect to
revenues from the sale of DMX Services by TCI System Owners, which books and
records will be accurate and complete in all material respects. Upon at least
15 Business Days' prior notice and during TCI's normal business hours, the
Company (or its authorized employees, agents, accountants and representatives)
will have the right, at the expense of the Company, to examine and audit the
System Books and Records and such other evidence of the DMX Revenues of the TCI
System Owners as the Company may reasonably request to the extent reasonably
necessary to verify the accuracy of TCI's calculation of Net DMX Revenues. The
rights granted to the Company in this Section 8.3(b) may be exercised not more
frequently than once a year and the period as to which such right is exercised
will be limited to a period beginning not more than two years before the date
such notice is given and ending as of the end of the most recent calendar month
for which information regarding DMX Revenues is available.
(c) After receipt of a statement setting forth the calculation
of the Net DMX Proceeds in accordance with Section 8.3(b), the Company will have
two years within which to notify TCI of any disagreement with respect to TCI's
calculation of the Net DMX Revenues set forth in that statement, which notice
will specify in reasonable detail the basis for such disagreement.
(d) If the Company notifies TCI that it agrees with TCI's
calculation of Net DMX Revenues for any period, that calculation will be final
and conclusive as of the date of delivery of such notification. If the Company
fails to provide notice of disagreement with any calculation by TCI of Net DMX
Revenues within the two-year period prescribed by Section 8.3(c), TCI's
calculation will be final and conclusive as of the end of such period.
(e) If within such two-year period the Company provides notice of
disagreement with TCI's calculation of Net DMX Revenues for any month, the
Company and TCI will negotiate in good faith to resolve any such dispute for a
period of 30 days following receipt of such notice of disagreement. If the
dispute is not resolved within such period, the dispute will be referred to KPMG
Peat Marwick (or, if such accounting firm is for any reason unwilling or unable
to act in such capacity, such other nationally recognized accounting firm as may
be designated by KPMG Peat Marwick), which accounting firm will render its
decision (together with a reasonably detailed explanation therefor) as soon as
possible following submission of the dispute to it, which decision will be final
and conclusive. The fees and expenses of the accounting firm relating to
services rendered pursuant to this Section 8.3(e) will be paid by the Company
and TCI in equal shares.
IX. MISCELLANEOUS
8
<PAGE>
9.1 Notices. All notices, requests, demands and other
-------
communications called for or contemplated hereunder will be in writing and will
be deemed to have been duly given if delivered in person or by United States
certified or registered mail, prepaid, addressed to the parties, their permitted
successors in interest or assignees, or sent by courier or telecopier:
To TCI at :
Tele-Communications, Inc.
5619 DTC Parkway
Englewood, Colorado 80111
Attention: Brendan Clouston
Telecopy: (303) 488-3200
with a copy similarly addressed, Attention: Legal Department
and another copy to:
Sherman & Howard L.L.C.
3000 First Interstate Tower North
633 Seventeenth Street
Denver, Colorado 80202
Attention: Charles Y. Tanabe, Esq.
Telecopy: (303) 298-0940
To the Company at:
TCI Music, Inc.
c/o Tele-Communications, Inc.
5619 DTC Parkway
Englewood, Colorado 80111
Attention: President
Telecopy: (303) 267-5376
Any party may change the address to which notices are required to be sent by
giving notice of such change in the manner provided in this Section. All
notices will be deemed to have been received on the date of delivery or on the
third Business Day after the mailing thereof, except that any notice of a change
of address will be effective only upon actual receipt.
9.2 Expenses. Whether or not the transactions contemplated hereby
--------
are consummated, each of the parties will bear the fees and expenses relating to
its compliance with the various provisions of this Agreement, and each of the
parties will pay all of its own expenses (including all attorneys' fees and
expenses) incurred in connection with this Agreement, the
9
<PAGE>
transactions contemplated hereby, the negotiations leading to the same and the
preparation made for carrying the same into effect.
9.3 Modification; Waiver. This Agreement may be modified or
--------------------
terminated by mutual agreement only by a writing signed by each of the parties,
and no provision or condition herein may be waived other than by a writing
signed by the party waiving such provision or condition.
9.4 Headings. Article and Section headings in this Agreement are for
--------
the sole purpose of convenient reference and in no way define, limit or
prescribe the scope or intent of this Agreement or any part hereof, and such
headings will not be considered in interpreting or construing this Agreement.
9.5 Assignment. Neither party may assign any of its rights under
----------
this Agreement or delegate its duties hereunder unless it obtains the prior
written consent of the other party, which consent may be withheld at such
party's absolute discretion. Notwithstanding the preceding sentence, any party
may assign its rights under this Agreement to any Affiliate of such party
without the consent of any other party.
9.6 Counterparts. This Agreement may be executed in any number of
------------
counterparts, each of which may be deemed to be an original, and all of which
taken together will constitute one instrument.
9.7 Additional Documents. At the Closing and from time to time after
--------------------
Closing, at either party's request and without further consideration, the other
party will execute and deliver (or cause to be executed and delivered) such
other instruments of conveyance and transfer and will take such other actions as
may reasonably be required effectively to carry out the transactions
contemplated by this Agreement.
9.8 Other. This Agreement constitutes the entire agreement of the
-----
parties regarding the subject matter hereof, and all prior or contemporaneous
agreements, understandings, representations and statements, oral or written, are
merged into this Agreement. This Agreement will be binding upon and inure to
the benefit of the parties and, subject to the limitations set forth in Section
9.5, their respective successors and assigns. The provisions of this Agreement
are for the exclusive benefit of the parties and their permitted successors and
assigns, and no other Person is intended to be a third-party beneficiary or to
have any rights by virtue of this Agreement.
9.9 Governing Law. This Agreement will be governed by the laws of
-------------
the State of Colorado, without regard to the conflicts of laws rules thereof.
9.10 Interpretation. 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 variation) 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
10
<PAGE>
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, and if
the last day for the giving of any notice or the taking of any other action is a
day that is not a Business Day, the time for giving such notice or taking such
action will be deemed extended to the next Business Day.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
TELE-COMMUNICATIONS, INC.
By: _____________________________
Name: _____________________________
Title: _____________________________
TCI MUSIC, INC.
By: _____________________________
Name: _____________________________
Title: _____________________________
11
<PAGE>
EXHIBIT B
RIGHTS AGREEMENT
AGREEMENT, dated as of ______________________, 1997, among TELE-
COMMUNICATIONS, INC., a Delaware corporation ("TCI" or the "Company"), TCI
Music, Inc., a Delaware corporation ("MusicCo"), and
______________________________________, as Rights Agent for the Company's rights
issued pursuant hereto (the "Rights").
BACKGROUND
----------
Pursuant to the Agreement and Plan of Merger dated as of February 6,
1997 (the "Merger Agreement"), the outstanding shares of Common Stock of DMX
Inc., were converted on the date of this Agreement into shares of Class A Common
Stock of MusicCo upon effectiveness of the merger contemplated by the Merger
Agreement (the "Merger").
In connection with the Merger, TCI has agreed that if, during the one-
year period beginning on the date of the Merger, the price of MusicCo's Series A
Common Stock does not equal or exceed $4.00 per share for a period of at least
20 consecutive trading days, holders of MusicCo Series A Common Stock will have
the right, exercisable during the 30-day period beginning on the first
anniversary of the Merger, to require TCI to purchase such Common Stock at a
price of $4.00 per share, payable at TCI's election in cash or shares of Tele-
Communications, Inc. Series A TCI Group Common Stock (or a combination thereof).
Each Right will entitle the registered holder thereof (the "Holders") to sell
one share of MusicCo Series A Common Stock (subject to adjustment) to the
Company for the consideration described herein upon exercise thereof in
accordance with the terms and conditions of this Agreement.
The Company wishes the Rights Agent to act on behalf of the Company,
and the Rights Agent is willing so to act, in connection with the issuance,
division, transfer, exchange and exercise of the Rights.
AGREEMENT
---------
In consideration of the foregoing and for the purpose of defining the
terms and provisions of the Rights, the respective rights and obligations
thereunder of the Company and the holders and certain obligations of MusicCo,
the parties agree as follows:
ARTICLE I
DEFINITIONS
1.01 Certain Definitions. As used herein, the following terms have
-------------------
the meanings assigned to them in this Section 1.01 (or in the applicable Section
to which reference is made) and include the singular as well as the plural:
<PAGE>
"Aggregate Consideration Amount Per Distributed Entity Share": As of
-----------------------------------------------------------
any date of determination, the sum of the Consideration Amount Per Distributed
Entity Share for each Distributed Entity then existing.
"Applicable Entity": As the context may require, MusicCo and each
-----------------
Distributed Entity, as applicable.
"Bankruptcy Event": Pursuant to or within the meaning of any
----------------
Bankruptcy Law, the Company:
(a) commences a voluntary case;
(b) consents to the entry of an order for relief against it in an
involuntary case;
(c) consents to the appointment of a Custodian of it or for all or
substantially all of its property (other than for its subsidiaries or property
of its subsidiaries);
(d) makes a general assignment for the benefit of its creditors;
(e) admits in writing its inability to pay its debts generally as they
become due;
(f) a court of competent jurisdiction enters an order or decree under
any Bankruptcy Law that:
(i) is for relief against the Company in an involuntary case;
(ii) appoints a Custodian of the Company or for all or
substantially all of its property (other than its subsidiaries or property
of its subsidiaries);
(iii) orders the liquidation of the Company, and any such order or
decree remains unstayed and in effect for 90 days; or
(g) the Company takes any corporate action to authorize any of the
foregoing.
The term "Bankruptcy Law" means Title 11, U.S. Code or any similar
federal or state law for the relief of debtors. The term "Custodian" means any
receiver, trustee, assignee, liquidator or similar official under any Bankruptcy
Law.
"beneficial owner": A Person shall be deemed the "beneficial owner"
----------------
of, and shall be deemed to "beneficially own," any securities of which such
person has "beneficial ownership"
-2-
<PAGE>
within the meaning of Rule 13d-3 under the Securities Exchange Act of 1934 (or
any successor statute or rule). Any Person's percentage beneficial ownership of
any class of securities shall be determined in accordance with such rule.
"Business Day": Any day other than a Saturday, Sunday or other day on
------------
which commercial banks in New York, New York or Los Angeles, California are
authorized or required to close.
"Capital Stock": With respect to each Applicable Entity, any and all
-------------
shares (however designated) of capital stock or other equity interests of such
Applicable Entity, now or hereafter authorized, that, upon the liquidation of
such Applicable Entity, entitle the holder thereof to share, without limitation
as to amount, in the liquidating distribution of the assets of such Applicable
Entity to its stockholders. In determining the number and kind of shares of
Capital Stock of each Applicable Entity outstanding for purposes of the
definitions of "Per Share Value" and "Fair Market Value", any shares of capital
stock or of other equity interests of such Applicable Entity that, without
payment of additional consideration, are convertible into or exchangeable
("Convertible Shares") for shares of any other class or series of corporate
stock or of other equity interests of such Applicable Entity ("Conversion
Shares") shall be deemed to have been so converted or exchanged if the aggregate
amount that would be payable, if such Applicable Entity were then being
liquidated, to the holders of such Conversion Shares exceeds the aggregate
amount that would be payable (determined on a class by class basis), if such
Applicable Entity were then being liquidated, to the holders of the Convertible
Shares. The calculation of the aggregate amount payable upon liquidation of
such Applicable Entity to holders of Conversion Shares or Convertible Shares, as
the case may be, shall take into account any fixed amounts payable in
liquidation with respect to such shares and shall otherwise assume that
liquidating distributions will be made on the basis of the Fair Market Value of
such Applicable Entity (calculated, in the case of the Conversion Shares, on a
pro forma basis assuming the issuance of such Conversion Shares).
"Certificates": As defined in Section 2.02.
------------
"Change in Control Transaction": As defined in Section 4.17.
-----------------------------
"Component": Each of the MusicCo Component and each Distributed
---------
Entity Component, if any, of each Right.
"Consideration Amount Per Distributed Entity Share": The amount
-------------------------------------------------
determined in accordance with Section 4.16.
"Consideration Amount Per MusicCo Share": The amount determined in
--------------------------------------
accordance with Section 4.16.
"Current Market Price": As defined in Section 4.05.
--------------------
"Deposit Date": As defined in Section 4.14.
------------
-3-
<PAGE>
"disposition": Any sale, conveyance, transfer or other disposition by
-----------
the Company of beneficial ownership of any shares of Capital Stock of MusicCo
during the term of this Agreement, but excluding (i) a pledge of Capital Stock
of MusicCo as collateral security for bona fide indebtedness, (ii) a disposition
of Capital Stock of MusicCo after giving effect to which the Company continues
to be the beneficial owner of the Capital Stock so disposed of and (iii) a
disposition of Capital Stock of MusicCo in connection with a merger,
consolidation or combination of the Company with or into another corporation.
The term "dispose" means to make a disposition.
"Distributed Entity": Any entity the shares of Capital Stock of which
------------------
are distributed or sold in a Subject Distribution. The term "Distributed Entity
Stock" means the class or series of Capital Stock of each Distributed Entity
that is distributed or sold in a Subject Distribution.
"Distributed Entity Component": As defined in Section 6.04.
----------------------------
"Distribution Value": With respect to each distribution by an
------------------
Applicable Entity to all holders of shares of MusicCo Series A Common Stock or
Distributed Entity Stock, as the case may be, of shares of the Capital Stock of
any entity or of rights or warrants entitling such holders (for a period
expiring within 45 days after the effective date of such distribution) to
purchase shares of the Capital Stock of any entity, the positive difference, if
any, between (a) the Fair Market Value of such entity or, if the shares of
Capital Stock so distributed or sold pursuant to the distributed rights or
warrants represent less than 100% of the outstanding shares of Capital Stock of
such entity, then the portion of the Fair Market Value of such entity
represented by the shares so distributed or sold, and (b) the aggregate
consideration paid for the shares sold pursuant to the distributed rights or
warrants, if any.
"Early Expiration Event": With respect to MusicCo Series A Common
----------------------
Stock and the Capital Stock of each other Applicable Entity, when the sum of the
Fair Market Values of one share of MusicCo Series A Common Stock and one share
of the Capital Stock of each other Applicable Entity shall have equaled or
exceeded $4.00 for at least 20 consecutive trading days.
"Excluded Stock": With respect to each Applicable Entity, any and all
--------------
shares (however designated) of capital stock or of other equity interests of
such Applicable Entity now or hereafter authorized that, upon the liquidation of
such Applicable Entity, do not entitle the holder thereof to share, without
limitation as to amount, in the liquidating distribution of the assets of such
Applicable Entity to its equity holders, except that any of such shares that,
without payment of additional consideration, are convertible into or
exchangeable for shares of any other class or series of capital stock or of
other equity interests that are not so limited with respect to participation in
liquidating distributions shall not constitute Excluded Stock if such shares
would be deemed to have been so converted in accordance with the definition of
"Capital Stock".
"Exercise Period": As defined in Section 4.01, subject to Section
---------------
4.17.
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"Fair Market Value": With respect to each Applicable Entity as of any
-----------------
date of determination, the fair market value of such Applicable Entity on a
going concern basis (as if such Applicable Entity were being sold by a sale of
stock or, if applicable, of other equity interests) or on a liquidation basis
(whichever method would yield the highest valuation), (i) reduced by the
aggregate amount that would be payable, if such Applicable Entity were then
being liquidated, (x) on any Excluded Stock of the Applicable Entity and (y) on
any shares of its Capital Stock then outstanding (or deemed to be outstanding in
accordance with the definition of "Capital Stock") that entitle their holders to
payment of a fixed amount upon liquidation in addition to their participation in
liquidating distributions payable with respect to other shares of Capital Stock
(but the reduction pursuant to this clause (y) shall be limited to such fixed
amount) and (ii) increased by the aggregate exercise or conversion price payable
to such Applicable Entity upon the exercise or conversion of all warrants,
rights and options to purchase or acquire Capital Stock of such Applicable
Entity and convertible securities the exercise or conversion of which is taken
into account in determining the Per Share Value of such Applicable Entity. The
fair market value of an Applicable Entity on a going concern basis shall take
into account such considerations (including but not limited to tax
considerations which are specific to a sale of stock or, if applicable, of other
equity interests) as would customarily affect the price at which a willing
seller would sell and a willing buyer would buy a comparable business as a going
concern in an arm's length transaction. The fair market value of an Applicable
Entity on a liquidation basis shall take into account tax liabilities that would
be incurred in a liquidation assuming the most tax efficient and practical plan
of liquidation and all other liabilities that would be required to be paid or
reserved against before the making of liquidating distributions to equity
holders.
"Holders": As defined in the preamble.
-------
"MusicCo Series A Common Stock": Class A Common Stock, par value
-----------------------------
$.01 per share of MusicCo, and Capital Stock of any other class into which such
Class A Common Stock may thereafter have been changed. "MusicCo Series A
Shares" means shares of MusicCo Series A Common Stock.
"MusicCo Common Stock": Capital Stock of MusicCo including MusicCo
--------------------
Series A Common Stock.
"MusicCo Component": As defined in Section 6.04.
-----------------
"MusicCo Dividend": Any distribution of cash or property (other than
----------------
securities specified in Section 6.03) on MusicCo Series A Common Stock.
"Notice": As defined in Section 4.07.
------
"Per Share Value": With respect to each Applicable Entity, the
---------------
quotient of (x) the Fair Market Value of such Applicable Entity as of the
applicable date, divided by (y) the total number of shares of Capital Stock of
such Applicable Entity outstanding (or deemed to be
-5-
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outstanding in accordance with the definition of "Capital Stock") as of such
date (or shares equivalent to (i) in the case of MusicCo, MusicCo Common Stock,
or (ii) in the case of any Distributed Entity, Distributed Entity Stock, if any
shares of Capital Stock of such Applicable Entity then outstanding or deemed to
be outstanding entitle their holders to participate in liquidating distributions
on a basis different from that which is applicable to shares of MusicCo Common
Stock or Distributed Entity Stock, as the case may be) plus the number of such
shares or share equivalents (to the extent not already treated as outstanding
pursuant to the definition of "Capital Stock") issuable upon the exercise of
outstanding warrants, rights and options to purchase or acquire Capital Stock of
such Applicable Entity and the conversion of outstanding convertible securities
to the extent that any such exercise or conversion would result in a profit to
the holder of the related warrant, right, option or convertible security given
the Per Share Value so determined.
"Person": Any human being, corporation, partnership, limited
------
liability company, trust, association or other entity.
"Rights": As defined in the preamble.
------
"Significant Corporate Transaction": The occurrence of a Terminating
---------------------------------
Event with respect to an Applicable Entity the Fair Market Value of which
represents a greater percentage of the Undistributed Value of MusicCo than the
percentage thereof represented by the Fair Market Value of any other Applicable
Entity, as determined by the Board of Directors of MusicCo (whose good faith
determination will be conclusive) as of the date the agreement of merger or
consolidation is executed or the vote of the Board of Directors of such
Applicable Entity to dissolve or liquidate such Applicable Entity is taken.
"Subject Distribution": As defined in Section 6.03.
--------------------
"TCI Series A Common Stock": As defined in Section 4.04.
-------------------------
"TCI Series A Shares": As defined in Section 4.04.
-------------------
"Terminating Event": Each of the following events: (a) an Applicable
-----------------
Entity is a constituent party in any merger or consolidation (other than a
merger or consolidation in which such Applicable Entity is the surviving
corporation and that does not result in any reclassification or change in the
outstanding Capital Stock of such Applicable Entity, other than a change in par
value or a reclassification or other change to which Article VI is applicable
and other than a merger the sole purpose of which is to change such Applicable
Entity's domicile within the United States) or (b) such Applicable Entity is
dissolved or liquidated.
"Triggering Event": As defined in Section 4.18.
----------------
"Underlying Number": As defined in Section 6.04.
-----------------
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"Undistributed Value of MusicCo": As of any date as of which the
------------------------------
determination thereof is to be made pursuant to Section 6.03, the sum of the
respective Fair Market Values of MusicCo and of each Distributed Entity as of
such date.
"Valuation Date": The last day of the most recent quarter ended prior
--------------
to the Exercise Period or, with respect to any accelerated Exercise Period, the
applicable date determined in accordance with Section 4.17.
ARTICLE II
RIGHTS AGENT
2.01 Appointment of Rights Agent. The Company appoints the Rights
---------------------------
Agent to act as agent for the Company in accordance with the terms set forth in
this Agreement and the Rights Agent accepts such appointment.
2.02 No Rights Certificates. The rights will be evidenced only by
-----------------------
certificates for MusicCo Series A Shares registered in the names of holders of
MusicCo Series A Shares ("Certificates"), which Certificates will be deemed
also to be certificates for the Rights. As soon as practicable following the
Closing Date (as defined in the Merger Agreement), the Rights Agent will send a
summary of the terms of the Rights (the "Rights Summary") by first-class,
postage paid mail to each record Holder of MusicCo Series A Shares as of the
close of business on the Closing Date (as defined in the Merger Agreement), at
the address of the Holder as shown on the records of MusicCo. The Rights will
be evidenced by certificates for MusicCo Series A Shares together with the
Rights Summary and the registered Holders of MusicCo Series A Shares will also
be registered Holders of the associated Rights.
2.03 Registration. The Company and the Rights Agent shall be
------------
entitled to treat the registered Holders(s) of the certificates representing
MusicCo Series A Shares as the absolute owner(s) of the Rights represented
thereby (notwithstanding any notation of ownership or other writing on the
Certificates made by anyone or any other notice to the contrary) for all
purposes and shall not be bound to recognize any equitable or other claim to or
interest in such Rights on the part of any other Person.
ARTICLE III
TRANSFERS, EXCHANGES AND SUBSTITUTIONS
3.01 Transfers. The Rights will be transferable only in connection
---------
with the transfer of the associated MusicCo Series A Shares. The surrender for
transfer of any certificates evidencing MusicCo Series A Shares, even without a
copy of the Rights Summary attached thereto, will also constitute a transfer of
the Rights associated with the MusicCo Series A Common Stock represented
-7-
<PAGE>
by such certificate. Under no circumstances may any Right be separated from, or
transferred or assigned apart from, the associated MusicCo Series A Share.
3.02 Legend. Certificates issued for MusicCo Series A Shares on or
-------
after the date of this Agreement and before expiration of the Rights, which
MusicCo Series A Shares initially were issued pursuant to the Merger Agreement,
will be deemed also to be certificates for the Rights, and will have impressed,
printed or stamped on them the following legend:
This certificate also evidences and entitles the holder to certain
Rights as set forth in a Rights Agreement between TCI Music, Inc. (the
"Corporation"), Tele-Communications, Inc., and ______________
_______________________ (the "Rights Agent") dated as of
__________________, 1997 (the "Rights Agreement"), the terms of which
are hereby incorporated by reference and a copy of which is on file at
the principal offices of the Corporation. The Corporation will mail
to the holder of this certificate without charge a copy of the Rights
Agreement upon written request therefor.
ARTICLE IV
EXERCISE OF RIGHTS
4.01 Exercise Period. During the period commencing at the opening of
---------------
business on [date of first anniversary of closing] and ending at the close of
business, ___________ time, on the 30th day after such date or the succeeding
Business Day if such date is not a Business Day (the "Exercise Period"), and
during any accelerated Exercise Period required by Section 4.17, each Holder of
Rights may irrevocably exercise all or any number of his Rights in accordance
with Section 4.08. If the Rights have one or more Distributed Entity Components
at the time such Rights are exercisable, the Holder may, in accordance with
Section 4.08, irrevocably exercise such Right as to its MusicCo Component, any
or all of its Distributed Entity Components, or any combination thereof.
Notwithstanding anything to the contrary herein, the Exercise Period shall be
conducted in compliance with all applicable laws, including all federal and
state securities laws. The foregoing notwithstanding, if an Early Expiration
Event shall have occurred prior to the commencement of the Exercise Period, the
Rights shall expire as of the date of the Early Expiration Event without ever
becoming exercisable by the Holder.
4.02 Expiration. In the Exercise Period and, subject to Section
----------
4.20, any accelerated Exercise Period, the Company shall be obligated to honor
in accordance with Section 4.08 any and all exercises of the Rights then issued
and outstanding. All Rights (and fractions thereof) not theretofore exercised
shall expire and cease to be exercisable upon the expiration of the Exercise
Period (subject to earlier expiration pursuant to the last sentence of the
preceding Section and pursuant to Section 4.17). Upon the exercise of any Right
(or fraction thereof), in whole or in part, such Right (including any Component
thereof not exercised or not
-8-
<PAGE>
exercised in full) shall thereupon expire and cease to be exercisable. Upon the
consummation of a Terminating Event with respect to any Applicable Entity, that
Component of each Right (and fractional Right) that relates to the Capital Stock
of such Applicable Entity shall expire and cease to be exercisable.
4.03 Extension.
---------
(a) If the Company for any reason fails to give the Notice in
accordance with Section 4.07, the Exercise Period shall be extended for a period
of time equal to the delay in giving the Notice.
(b) If the record date for a Subject Distribution occurs prior
to the Exercise Period, or an accelerated Exercise Period, and the Distributed
Entity Stock with respect to such Subject Distribution is not delivered to
stockholders entitled thereto prior to the beginning of the applicable Exercise
Period, such Exercise Period shall be extended for a period of time equal to the
number of days from the beginning of such Exercise Period and the date such
Distributed Entity Stock is mailed to such stockholders.
4.04 Consideration To Be Received Upon Exercise of Rights. Subject
----------------------------------------------------
to Section 4.20, upon the valid exercise of Rights, the Holder shall be entitled
to receive from the Company, at the Company's sole option (subject only to
Section 4.05 and Section 4.15), cash or shares of the Company's TCI Group Series
A Common Stock, $1.00 par value per share ("TCI Series A Common Stock" or "TCI
Series A Shares"), or any combination of cash and TCI Series A Shares determined
in such proportions or on such other basis as the Company shall elect in the
Notice given pursuant to Section 4.07, in consideration of the sale to the
Company of:
(a) if the MusicCo Component of any or all of such exercised
Rights has been exercised, a number of whole shares of MusicCo Series A Common
Stock equal to the number of whole Rights of which the MusicCo Component has
been so exercised and honored; and
(b) if any Distributed Entity Component of any or all of such
exercised Rights has been exercised, a number of whole shares of the Distributed
Entity Stock to which such Distributed Entity Component relates not in excess of
the product of (i) the number of whole Rights of which such Distributed Entity
Component has been exercised and honored and (ii) the Underlying Number for such
Distributed Entity Component of a whole Right.
4.05 Consideration Amount. The amount of cash or the number of TCI
--------------------
Series A Shares to be paid or delivered by the Company shall be determined as
follows (subject to adjustments required by Section 4.11 in the determination of
the number of whole TCI Class A Shares to be delivered):
(a) for the number of such shares of MusicCo Series A Common
Stock that the Company has elected to purchase for cash, an aggregate amount in
cash equal to the product
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<PAGE>
of (i) the number of such shares and (ii) the Consideration Amount Per MusicCo
Series A Share for the applicable Exercise Period;
(b) for the number of such shares of MusicCo Series A Common
Stock that the Company has elected to purchase for TCI Series A Shares an
aggregate number of TCI Class A Shares equal to the product of (i) the number of
such shares of MusicCo Series A Common Stock and (ii) the quotient of (A) the
Consideration Amount Per MusicCo Series A Share for the applicable Exercise
Period, divided by (B) the Current Market Price of a TCI Series A Share;
(c) for the number of such shares of Distributed Entity Stock
that the Company has elected to purchase for cash, an aggregate amount in cash
equal to the product of (i) the number of such shares and (ii) the Consideration
Amount Per Distributed Entity Share for the applicable Exercise Period; and
(d) for the number of such shares of Distributed Entity Stock
that the Company has elected to purchase for TCI Series A Shares, an aggregate
number of TCI Series A Shares equal to the product of (i) the number of such
shares of Distributed Entity Stock and (ii) the quotient of (A) the
Consideration Amount Per Distributed Entity Share for the applicable Exercise
Period, divided by (B) the Current Market Price of a TCI Series A Share.
As used herein, the "Current Market Price" of a TCI Series A Share
shall be the average of the daily closing prices for a share of TCI Series A
Common Stock for 30 consecutive trading days commencing 45 trading days before
the date of determination. The closing price for a share of TCI Series A Common
Stock is the last reported sale price on the National Association of Securities
Dealers, Inc. Automated Quotation System (or the average of the quoted closing
bid and asked prices if no sale is reported) or if the TCI Series A Common Stock
is listed on an exchange, the closing sale price on the principal exchange on
which the TCI Series A Common Stock is listed (or the average of the reported
closing bid and asked prices if no sale is reported). In the absence of one or
more of such quotations, the Board of Directors of the Company shall in good
faith determine the Current Market Price on the basis of such quotation as it
considers appropriate.
4.06 Condition to Delivery of TCI Series A Shares. The Company shall
--------------------------------------------
deliver TCI Series A Shares in full or partial payment for the sale of shares of
MusicCo Series A Common Stock (or Distributed Entity Stock) only if such TCI
Class A Shares are then quoted on the National Association of Securities
Dealers, Inc. National Market System or listed on a national securities exchange
and have been registered with the Securities and Exchange Commission on an
appropriate form under the Securities Act of 1933 or an exemption from such
registration is available and such shares are freely tradable. The Company may
not elect to deliver any other security of the Company or any security of any
other issuer.
4.07 Notice to Rights Holders. The Company shall publish in The Wall
------------------------
Street Journal (national edition, or if The Wall Street Journal shall cease
publication, in another national financial publication), not less than 20 nor
more than 30 days prior to the commencement of an
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<PAGE>
Exercise Period, a notice (the "Notice") as to: the number of Rights
outstanding on the date of such Notice; the Consideration Amount Per MusicCo
Share for such Exercise Period, if applicable, as to each Distributed Entity
Component of the Rights; the number of shares of Distributed Entity Stock to
which such Distributed Entity Component relates and the applicable Consideration
Amount Per Distributed Entity Share for such Exercise Period; and the form of
consideration pursuant to Section 4.04 the Company has elected to deliver (and
if the Company has elected to deliver both such forms of consideration, the
relative proportions thereof or any other basis on which the relative amounts of
cash to be paid and numbers of TCI Series A Shares to be issued shall be
determined). The Notice shall contain such other information as may be required
by applicable federal or state securities laws or regulations. At, or
immediately prior to the time of the publication of the Notice, the Company will
deliver to the Rights Agent such number of copies as the Rights Agent may
request of the Notice, of a Letter of Transmittal to be used by Holders in
tendering stock certificates and of such other documents as the Company may then
be required to deliver to the Holders in accordance with applicable federal and
state securities laws and regulations. The Rights Agent shall promptly mail by
first class mail, postage prepaid to the registered Holders of the Certificates,
at their respective addresses as they appear on the register of Holders, a copy
of the Notice, such Letter of Transmittal and such other documents, if any. The
Company will also provide additional copies of the Letter of Transmittal to any
registered Holder requesting the same.
4.08 Exercise of Rights. Rights may be exercised (in whole or as to
------------------
any Component) upon surrender to the Rights Agent at its office of the
following, together with a duly completed and signed Letter of Transmittal: (i)
if the MusicCo Component of any of such Rights is being exercised, a stock
certificate or certificates representing a number of shares of MusicCo Series A
Common Stock equal to or greater than the number of Rights of which the MusicCo
Component is being exercised, duly endorsed and in proper form for transfer,
guaranteed by a bank or trust company or a broker who is a member of a national
securities exchange with such endorsements; (ii) if a Distributed Entity
Component of any of such Rights is being exercised, a stock certificate or
certificates representing a number of shares of the Distributed Entity Stock to
which the Distributed Entity Component relates equal to or greater than the
product of the number of whole Rights of which such Distributed Entity Component
is being exercised, multiplied by the Underlying Number for such Distributed
Entity Component of a whole Right; and (iii) payment in United States currency
of an amount equal to any stamp or other tax or governmental charge required to
be paid in connection with the transfer of such shares of MusicCo Series A
Common Stock or Distributed Entity Stock in connection with the exercise of the
Rights. The Rights Agent will hold such stock certificates in trust for the
Holder until payment shall have been made in accordance with Section 4.12 hereof
and, upon such payment, shall, subject to Section 4.09 and 4.10, deliver such
stock certificates to the Company.
4.09 MusicCo Certificates. Rights may be exercised only in integral
--------------------
amounts. If the MusicCo Component of a Right is being exercised and if the
Holder shall tender certificates for shares of MusicCo Common Class A Stock that
are, in the aggregate, greater than the number of Rights of which the MusicCo
Component is being exercised, the Holder shall also designate in the Letter of
Transmittal the stock certificates for the MusicCo Series A Common Stock
enclosed
-11-
<PAGE>
therewith and the number of whole shares being surrendered from each such stock
certificate. In such event, the Rights Agent shall, as agent for such Holder,
deliver the stock certificates to the transfer agent for the MusicCo Series A
Common Stock (the "Transfer Agent", which term shall include any subsequent
transfer agent for any shares of MusicCo's capital stock issued upon
reclassification of the MusicCo Series A Common Stock), with instructions to
issue a new stock certificate to the Company for the number of shares of MusicCo
Series A Common Stock surrendered to and accepted by the Company and to issue a
new stock certificate or certificates to or in accordance with the instructions
of such Holder for the balance of such shares of MusicCo Series A Common Stock.
MusicCo hereby irrevocably authorizes and directs its present and any future
Transfer Agent to issue such new certificates in accordance herewith. MusicCo
will keep a copy of this Agreement on file with the Transfer Agent.
4.10 Distributed Entity Certificates. If a Distributed Entity
-------------------------------
Component of a Right is being exercised, then for each Distributed Entity
Component so exercised the Holder shall designate in the Letter of Transmittal
tendered upon exercise thereof, the aggregate number of whole Shares of
Distributed Entity Stock to which such Distributed Entity Component relates that
are being surrendered upon the exercise of such Component of the Rights (not in
excess of the product of the number of whole Rights of which such Distributed
Entity Component is being exercised, multiplied by the Underlying Number for
such Distributed Entity Component of a whole Right). If a Holder shall tender
certificates for shares of Distributed Entity stock that are, in the aggregate,
greater than the number of shares of Distributed Entity Stock being so
surrendered, the Holder shall also designate in the Letter of Transmittal the
stock certificates for the Distributed Entity Stock enclosed therewith and the
number of whole shares of Distributed Entity Stock surrendered from each such
stock certificate. In such event, the Rights Agent shall, as agent for the
Holder, deliver the stock certificates to the transfer agent for the Distributed
Entity Stock, with instructions to issue a new stock certificate to the Company
for the number of shares of Distributed Entity Stock surrendered to and accepted
by the Company and to issue a new stock certificate or certificates to or in
accordance with the instructions of such Holder for the balance of such shares
of Distributed Entity Stock. Each Distributed Entity, by its execution of a
supplement to this Agreement as contemplated by Section 6.07, irrevocably
authorizes and directs the transfer agent for the Distributed Entity Stock to
issue such new certificates in accordance herewith, and covenants and agrees to
keep a copy of this Agreement (as so supplemented) on file with such transfer
agent.
4.11 Notices. No later than the fifth Business Day after the end of
-------
the Exercise Period, the Rights Agent will notify the Company and MusicCo of the
following (as to each Holder individually and as to all Holders in the
aggregate): (i) the number of Rights validly exercised in the Exercise Period;
(ii) the number of shares of MusicCo Series A Common Stock surrendered upon such
exercise; and (iii) as to each Distributed Entity Component of the Rights that
has been validly exercised, the number of shares of the applicable Distributed
Entity Stock surrendered upon such exercise. Subject to Sections 4.13 and 4.14,
on the later of (x) the tenth Business Day after the end of the Exercise Period
and (y) the fifth Business Day after receipt of such notice from the Rights
Agent, the Company shall deposit with the Rights Agent the amount of cash or
number of TCI Series A Shares required to make full payment of the purchase
price for the shares of MusicCo Series A
-12-
<PAGE>
Common Stock and Distributed Entity Stock being purchased by it pursuant to such
exercised Rights. In the case of payments in TCI Series A Shares, the
certificates evidencing the same shall be registered in the names and
denominations specified by the Rights Agent in its notice to the Company. The
Company shall not be required to issue fractional TCI Series A Shares to any
Holder after taking into account all Rights exercised by such Holder. In lieu
of fractional TCI Series A Shares, the Company shall make payments in cash for
the value, based upon the Current Market Price, of such fractional shares. The
Rights Agent will promptly mail to each Holder the purchase price for the shares
of MusicCo Series A Common Stock and Distributed Entity Stock sold by him.
Payment of any cash purchase price and any cash in lieu of fractional interests
shall be made by check.
4.12 Payment. If the Company has elected in accordance with Section
-------
4.04 to offer a combination of cash and TCI Series A Shares in consideration for
the sale of MusicCo Series A Common Stock upon the valid exercise of the
MusicCo Component of the Rights during the Exercise Period, the Rights Agent
shall pay or deliver such consideration to all Holders who have validly
exercised the MusicCo Component of the Rights during the Exercise Period pro
rata with respect to the respective aggregate numbers of Rights the MusicCo
Component of which has been so exercised by them (subject to rounding or other
adjustments made by the Rights Agent and the payment of cash as provided in
Section 4.11 in lieu of the issuance of fractional TCI Series A Shares).
Similarly, if the Company has elected in accordance with Section 4.04 to offer a
combination of cash and TCI Series A Shares in consideration for the sale of
shares of Distributed Entity Stock upon the valid exercise of a Distributed
Entity Component of the Rights during the Exercise Period, the Rights Agent
shall pay or deliver such consideration to all Holders who have validly
exercised such Distributed Entity Component during such Exercise Period pro rata
with respect to the respective aggregate numbers of shares of such Distributed
Entity Stock surrendered by them upon such exercise (subject to rounding or
other adjustments made by the Rights Agent and the payment of cash as provided
in Section 4.11 in lieu of the issuance of fractional TCI Series A Shares).
4.13 Payment Deferral. Notwithstanding Section 4.17, if the Exercise
----------------
Period for each Right is accelerated due to a proposed Significant Corporate
Transaction or Change in Control Transaction and such transaction has not been
consummated prior to the expiration of such accelerated Exercise Period, the
Company may defer depositing the cash or TCI Class A Shares required to effect
the purchase of the MusicCo Series A Common Stock and Distributed Entity Stock
surrendered upon exercise of the Rights, pending receipt of an officers'
certificate in accordance with this Section 4.13. Notwithstanding anything to
the contrary contained herein, any such deferral of the purchase of the
surrendered shares of MusicCo Series A Common Stock and Distributed Entity
Stock shall be conducted in compliance with all applicable laws, including
federal and state securities laws. Not less than 10 Business Days prior to the
effective date of the proposed Significant Corporate Transaction, unless a
shorter period is acceptable to the Company, the Applicable Entity shall deliver
an officers' certificate (an "Applicable Entity Officers' Certificate") signed
by its Chairman of the Board and its President to the Company and the Rights
Agent, certifying that all conditions precedent to the consummation of the
Significant Corporate Transaction
-13-
<PAGE>
have been satisfied or waived and setting forth the effective date of the
proposed Significant Corporate Transaction. Not less than 10 Business Days prior
to the effective date of the proposed Change in Control Transaction, the Company
shall deliver to the Rights Agent an officer's certificate (a "Company Officer's
Certificate") signed by its Chairman of the Board, President or a Vice
President, certifying that all conditions precedent to the consummation of the
Change in Control Transaction have been satisfied or waived and setting forth
the effective date of the proposed Change in Control Transaction. Promptly
following receipt by the Company of an Applicable Entity Officers' Certificate
or the delivery by the Company of a Company Officer's Certificate, as the case
may be, but in no event later than the effective date specified therein, the
Company shall make the deposit of cash or TCI Series A Shares with the Rights
Agent required by Section 4.11. Promptly following such deposit, the Rights
Agent shall distribute the cash or TCI Series A Shares so deposited to the
Persons entitled to the same as provided in Section 4.11, and deliver the
certificates for the MusicCo Common Stock and Distributed Entity Stock to the
Company as provided in Section 4.08. If the Board of Directors of the Applicable
Entity determines to terminate or abandon the proposed Significant Corporate
Transaction or that such transaction will otherwise not be consummated, the
Applicable Entity shall promptly following such determination deliver to the
Company and the Rights Agent an Applicable Entity Officers' Certificate to such
effect. If the proposed Change in Control Transaction is terminated or abandoned
or the Company otherwise determines that such proposed transaction will not be
consummated, then the Company shall promptly so notify the Rights Agent by
delivering to the Rights Agent a Company Officer's Certificate to such effect.
Promptly following receipt by the Rights Agent of such Applicable Entity
Officers' Certificate or Company Officer's Certificate, as the case may be, the
Rights Agent shall mail to each Holder by first class mail the certificates
evidencing the shares of MusicCo Series A Common Stock, the shares of
Distributed Entity Stock and the Rights surrendered by such Holder to the Rights
Agent in connection with such accelerated Exercise Period and, if the Company
has made a deposit of cash or TCI Series A Shares with the Rights Agent in
connection with such accelerated Exercise Period, the Rights Agent shall deliver
the cash or TCI Series A Shares so deposited to the Company.
4.14 Abandonment or Termination. Notwithstanding Section 4.11, if
--------------------------
the Exercise Period for each Right is accelerated and the proposed transaction
which resulted in the acceleration is abandoned or terminated on or before the
last day (the "Deposit Date") on which the Company is required to make the
deposit pursuant to Section 4.11 of cash or TCI Class A Shares to effect the
purchase of shares of MusicCo Series A Common Stock and Distributed Entity
Stock surrendered in connection with such accelerated Exercise Period, or the
Company otherwise determines in good faith on or before the Deposit Date that
such proposed transaction will not be consummated, then the Company shall so
notify the Rights Agent by delivering to the Rights Agent an officer's
certificate to such effect signed by its Chairman of the Board, President or a
Vice President promptly following the termination or abandonment of such
proposed transaction or such determination by the Company, but in no event later
than the fifth Business Day following the Deposit Date. Upon delivery of such
officer's certificate, the Company shall be relieved of its obligation to make
the deposit otherwise required by Section 4.11 or, if such deposit has
theretofore been made, shall be entitled to the return thereof. Promptly
following receipt of such officer's certificate, the Rights
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Agent shall mail to each Holder the certificates evidencing the shares of
MusicCo Series A Common Stock, the shares of Distributed Entity Stock and the
Rights surrendered by such Holder to the Rights Agent in connection with such
accelerated Exercise Period and, if the Company has made a deposit of cash or
TCI Series A Shares with the Rights Agent in connection with such accelerated
Exercise Period, the Rights Agent shall deliver the cash or TCI Series A Shares
so deposited to the Company.
4.15 Certain Covenants of the Company and Each Applicable Entity. If
-----------------------------------------------------------
the Company chooses to issue TCI Series A Shares upon the exercise of any
Component of the Rights, the Company will pay all documentary stamp and other
taxes, if any, attributable to the exercise of the Rights, other than any such
taxes payable by the Holder as provided in Section 4.08. Each of MusicCo and
each Distributed Entity shall cooperate with and assist the Company in the
preparation and filing of all applications, reports, statements, notices and
other documents or forms with, and use its reasonable best efforts to obtain and
to assist the Company in obtaining all consents and approvals of or waivers
from, all governmental and regulatory agencies and authorities having
jurisdiction (including, without limitation, the Securities and Exchange
Commission, Department of Justice and Federal Trade Commission) and shall take
such other actions, including supplying all information necessary for any
required filing, as the Company may reasonably request, all as and to the extent
necessary or advisable in order for the Company to comply with applicable laws,
rules, regulations, orders and decrees in connection with the performance of its
obligations under this Agreement and the Rights.
4.16 Consideration Amount. The Consideration Amount Per MusicCo
--------------------
Share shall be equal to the difference between (i) $4.00 and (ii) the sum of the
aggregate per share amount of any MusicCo Dividends and the Aggregate
Consideration Amount Per Distributed Entity Share. The Consideration Amount Per
Distributed Entity Share shall be equal to the Per Share Value of the applicable
Distributed Entity as of the Valuation Date. The Fair Market Value of each
Distributed Entity as of such date shall be determined in good faith by the
Board of Directors of MusicCo. Promptly following the determination of the Fair
Market Value of each Applicable Entity, MusicCo shall deliver to the Company,
with a copy to the Rights Agent, an officers' certificate signed by the Chairman
of the Board and the President of MusicCo, certifying the Per Share Value of
each Applicable Entity and setting forth, in reasonable detail, the computation
thereof. Each Distributed Entity, by its execution of a supplement to this
Agreement as contemplated by Section 6.07, covenants and agrees to provide
MusicCo with such information with respect to the Capital Stock of such
Distributed Entity as may be necessary to the computation of the Per Share Value
of such Distributed Entity. Anything in this Agreement to the contrary
notwithstanding, in no event will the sum of the Consideration Amount Per
MusicCo Share, the aggregate amount of any MusicCo Dividends, and the Aggregate
Consideration Amount Per Distributed Entity Share for each Distributed Entity,
exceed $4.00.
4.17 Acceleration of Exercise Period. Subject to the last sentence
-------------------------------
of Section 4.01, if prior to the [anniversary date of closing] (i) a Significant
Corporate Transaction is proposed, (ii) the Company proposes to make a
disposition of all or any number of the shares of Capital Stock
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of MusicCo beneficially owned by it and as a result of such disposition the
Company will cease to be the beneficial owner of at least 30% (in voting power)
of the shares of Capital Stock of MusicCo then outstanding (a "Change in Control
Transaction"), (iii) a Bankruptcy Event occurs or (iv) the Company is dissolved
or liquidated, then the Exercise Period for each Right shall be accelerated as
provided herein and the Company shall be obligated to honor all Rights validly
exercised in accordance with Section 4.08 prior to the expiration of such
accelerated Exercise Period.
4.18 Consideration on Acceleration. For purposes of determining the
-----------------------------
Consideration Amount Per MusicCo Share and the Consideration Amount Per
Distributed Entity Share payable in connection with the accelerated Exercise
Period, the applicable Valuation Date shall be the last day of the fiscal
quarter of MusicCo immediately preceding the fiscal quarter in which (i) in the
case of a Significant Corporate Transaction, the agreement of merger or
consolidation is executed, or the vote of the Board of Directors of the
Applicable Entity to dissolve or liquidate the Applicable Entity is taken or
(ii) in the case of a Change in Control Transaction, a binding agreement to make
the related disposition is entered into by the Company or, if such disposition
is to be effected pursuant to a dividend or distribution to the stockholders of
the Company or otherwise than pursuant to a binding agreement, the vote of the
Board of Directors of the Company approving the making of such dividend,
distribution or other disposition is taken, or (iii) in the case of a Bankruptcy
Event, the Bankruptcy Event occurs, or (iv) in the case of the dissolution or
liquidation of the Company, the vote of the Board of Directors of the Company to
dissolve or liquidate the Company is taken. (The execution of such agreement by
the Applicable Entity or the taking of such vote by the Board of Directors of
the Applicable Entity in connection with a Significant Corporate Transaction,
the giving to the Acceptance Notice by MusicCo in the case of a MusicCo Purchase
Transaction, the execution of such binding agreement Company or the taking of
such vote by the Board of the Company in connection with a Change in Control
Transaction, the occurrence of a Bankruptcy Event or the taking of such vote by
the Board of Directors of the Company to dissolve or liquidate the Company, are
each referred to as a "Triggering Event"). Promptly following the occurrence of
a Triggering Event, the applicable of MusicCo or the Company shall give written
notice thereof to the other (or in the case of a Triggering Event for a
Significant Corporate Transaction with respect to which a Distributed Entity is
the Applicable Entity, such Applicable Entity shall give such notice to the
Company and MusicCo), with a copy to the Rights Agent. Publication of the
Notice contemplated by Section 4.07 shall be made as promptly as practicable (in
light of applicable requirements of federal and state securities laws and
regulations) following the final determination of the Consideration Amount Per
MusicCo Share and the Consideration Amount Per Distributed Entity Share. In the
case of a Significant Corporate Transaction, the Applicable Entity shall furnish
the Rights Agent with such number of copies as the Rights Agent may request of
the proxy or information statement and other material to be delivered to the
Applicable Entity's stockholders in connection with the stockholders' meeting to
approve the Significant Corporate Transaction. The Rights Agent shall
distribute such material to the registered Holders of the Certificates by first
class mail, postage prepaid, at their respective addresses as they appear on the
Register of Holders prior to or contemporaneously with the publication of the
Notice, and such publication shall be delayed, if necessary, until such material
has been delivered to the Rights Agent.
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4.19 Exercise Period on Acceleration. The accelerated Exercise
-------------------------------
Period shall commence at the opening of business on not earlier than the 30th
day, nor later than the 60th day, following the publication of the Notice, and
shall expire at the close of business, ___________ time, on the 20th Business
Day after the commencement thereof (or such later date as may be required by
applicable Federal or state securities laws and regulations). Subject to
Section 4.20 below, all Rights (and fractions thereof) (including all Components
of such Rights (and of all fractional Rights)) not validly exercised prior to
the expiration of such accelerated Exercise Period shall thereupon expire and
cease to be exercisable thereafter.
4.20 Rescission. If a proposed Significant Corporate Transaction or
----------
Change in Control Transaction that causes an accelerated Exercise Period is
terminated or abandoned before consummation or the Company otherwise determines
in good faith on or before the Deposit Date that such proposed transaction will
not be consummated, then in any such event such acceleration of the Exercise
Period and all exercises of Rights during such accelerated Exercise Period
shall, without any requirement of action by any party, be deemed rescinded and
annulled, and any Rights that have expired by virtue of the failure of the
Holder to validly exercise the same prior to the expiration of such accelerated
Exercise Period (or by virtue of the partial exercise thereof during such
accelerated Exercise Period) shall thereupon be reinstated. The Rights Agent,
upon receipt of the officers' certificate contemplated by the applicable of
Section 4.13 or 4.14, shall make the distributions to the Holders and the
Company required by the last sentence of the applicable of such Sections.
ARTICLE V
PURCHASE AND CANCELLATION OF RIGHTS
5.01 Purchase of Rights by the Company. The Company shall have the
---------------------------------
right to purchase or otherwise acquire Rights by purchasing the associated
MusicCo Series A Common Stock or Distributed Entity Stock at such times, in
such manner and for such consideration as it may determine.
ARTICLE VI
ADJUSTMENT OF RIGHTS
6.01 Adjustment of Rights. The number of Rights represented by each
--------------------
Certificate shall be subject to adjustment from time to time upon the happening
of certain events as hereinafter provided.
6.02 Mechanical Adjustment. If MusicCo shall: (a) pay a dividend or
---------------------
make a distribution on the outstanding shares of MusicCo Series A Common Stock
in shares of MusicCo Common Stock, (b) subdivide the outstanding shares of
MusicCo Series A Common Stock into a larger number of shares, (c) combine the
outstanding shares of MusicCo Series A Common Stock
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into a smaller number of shares or (d) issue any shares of its Capital Stock by
reclassification of the outstanding shares of MusicCo Common Stock (including
any such reclassification in connection with a consolidation or merger in which
MusicCo is the surviving corporation), the number of Rights outstanding
immediately prior to the date such dividend or distribution is paid or made or
the effective date of such subdivision, combination or reclassification shall be
adjusted to the aggregate number of shares of MusicCo Series A Common Stock (or
shares of MusicCo's Capital Stock issued in such reclassification) outstanding
immediately after the taking of such action. Such adjustment shall be made
successively whenever any event listed above shall occur. If a reclassification
described in clause (d) above occurs, each reference in this Agreement and the
Certificates to a share of MusicCo Series A Common Stock shall be deemed to
refer to the number and kind of shares of MusicCo's Capital Stock that a Holder
of one share of MusicCo Series A Common Stock would hold immediately following
such reclassification. If MusicCo takes any action requiring an adjustment to
the number of Rights prior to payment in full of the Consideration Amount Per
MusicCo Share upon exercise thereof, such Consideration Amount Per MusicCo Share
shall be adjusted by multiplying such amount by a fraction the numerator of
which is the number of Rights outstanding immediately prior to such action and
the denominator of which is the number of Rights outstanding as a result of the
taking of such action.
6.03 Adjustment for Distributions of MusicCo Securities. If (i)
--------------------------------------------------
MusicCo makes a distribution to all Holders of shares of MusicCo Series A
Common Stock of shares of the Capital Stock of any entity or of rights or
warrants entitling them (for a period expiring within 45 days after the
effective date of such distribution) to purchase shares of the Capital Stock of
any entity and (ii) the Distribution Value of such distribution represents 10%
or more of the Undistributed Value of MusicCo immediately prior to such
distribution, then the provisions of this Section 6.03 shall apply to such
distribution (a "Subject Distribution"). The determination of whether a
distribution meets each of the criteria referred to in the immediately preceding
sentence and is therefore a Subject Distribution shall be made by the Board of
Directors of MusicCo (whose good faith determination will be conclusive). In
making any determination of Fair Market Value for purposes of determining the
Distribution Value of such distribution and the Undistributed Value of MusicCo,
the Board of Directors of MusicCo shall apply the same criteria as are
applicable to a determination of the Fair Market Value of MusicCo and each
Distributed Entity in accordance with Section 4.16.
6.04 Subject Distribution Adjustment. If MusicCo makes a Subject
-------------------------------
Distribution, then following the effective date referred to below, each whole
Right shall represent, in addition to the right to sell to the Company one share
of MusicCo Series A Common Stock (the "MusicCo Component"), the right (the
"Distributed Entity Component") to sell to the Company at the time, for the
consideration and subject to the terms and conditions set forth in this
Agreement, that number of shares of Distributed Entity Stock obtained by
multiplying one by a fraction, the numerator of which is the aggregate number of
shares of Distributed Entity Stock distributed in the Subject Distribution or
sold pursuant to the rights or warrants distributed in the Subject Distribution,
and the denominator of which is the aggregate number of shares of MusicCo Series
A Common Stock outstanding on the record date for such distribution. The number
of shares of Distributed Entity Stock (or fraction thereof) to which the
Distributed Entity Component of each whole Right applies
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<PAGE>
(the "Underlying Number") shall be determined as of and be effective
(retroactively in the case of a distribution that pursuant to Section 6.03 is
subsequently deemed to be a Subject Distribution) as of the effective date of
the distribution in the case of a distribution of shares of Distributed Entity
Stock, and shall be determined as of and be effective (retroactively in the case
of a distribution that pursuant to Section 6.03 is subsequently deemed to be a
Subject Distribution) as of the day following the distribution of rights or
warrants in the case of a distribution of rights or warrants to purchase
Distributed Entity Stock (the applicable of such dates herein referred to as the
"effective date"). In the case of fractional Rights, the Underlying Number for
the Distributed Entity Component of such fractional Right shall equal the same
fraction of the Underlying Number for the Distributed Entity Component of a
whole Right. The foregoing provisions shall apply to each Subject Distribution
and a new Distributed Component will be created with respect to the Distributed
Entity Stock distributed in each such Subject Distribution. No Component of a
Right shall be separable from the Components of such Right.
6.05 Adjustment to Underlying Number. If MusicCo takes any action
-------------------------------
requiring an adjustment to the number of Rights pursuant to Section 6.02 at a
time when each Right has one or more Distributed Entity Components, then the
Underlying Number for each Distributed Entity Component of each Right after
giving effect to such adjustment to the number of Rights shall equal the number
obtained by multiplying the Underlying Number for such Distributed Entity
Component immediately before giving effect to such adjustment by a fraction the
numerator of which is one and the denominator of which is the number (or
fraction) to which one whole Right is adjusted as a result of the taking of such
action by MusicCo.
6.06 Distributed Entity Adjustment. If a Distributed Entity shall
-----------------------------
(i) pay a dividend or make a distribution on the outstanding shares of
Distributed Entity Stock in shares of Distributed Entity Stock, (ii) subdivide
the outstanding shares of Distributed Entity Stock into a larger number of
shares, (iii) combine the outstanding shares of Distributed Entity Stock into a
smaller number of shares or (iv) issue any shares of its Capital Stock by
reclassification of the outstanding shares of Distributed Entity Stock
(including any such reclassification in connection with a merger or
consolidation in which the Distributed Entity is the surviving corporation),
then the Underlying Number for the applicable Distributed Entity Component of
each Right immediately prior to the date such dividend or distribution is paid
or made or the effective date of such subdivision, combination or
reclassification shall be adjusted (to the nearest one-hundredth of a share),
effective immediately after the applicable of such dates, by multiplying the
Underlying Number for such Distributed Entity Component immediately prior to
such adjustment by a fraction the numerator of which is the aggregate number of
shares of Distributed Entity Stock (or shares of the Distributed Entity's
Capital Stock issued in such reclassification) outstanding immediately after the
taking of such action, and the denominator of which is the aggregate number of
shares of Distributed Entity Stock outstanding immediately prior to the taking
of such action. Such adjustment to the Underlying Number shall be made
successively whenever any event listed above shall occur. If a reclassification
described in clause (iv) above occurs, each reference in this Agreement to a
share of Distributed Entity Stock shall be deemed to refer to the number and
kind of shares of the Capital Stock of the Distributed Entity that a holder of
one share of Distributed Entity Stock would hold immediately following such
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<PAGE>
reclassification. If a Distributed Entity takes any action requiring an
adjustment to the Underlying Number for the applicable Distributed Entity
Component of each Right prior to payment in full of the Consideration Amount Per
Distributed Entity Share upon exercise thereof, such Consideration Amount Per
Distributed Entity Share shall be adjusted by multiplying such amount by a
fraction the numerator of which is the Underlying Number for such Distributed
Entity Component immediately before giving effect to such adjustment and the
denominator of which is the Underlying Number for such Distributed Entity
Component immediately after giving effect to such adjustment.
6.07 Distributions by Distributed Entity. If (i) a Distributed
-----------------------------------
Entity makes a distribution to all holders of shares of Distributed Entity Stock
of shares of the Capital Stock of any entity or of rights or warrants entitling
them (for a period expiring within 45 days after the effective date of such
distribution) to purchase shares of the Capital Stock of any entity and (ii) the
Distribution Value of such distribution represents 10% or more of the
Undistributed Value of MusicCo immediately prior to such distribution, then such
distribution shall be a Subject Distribution, the entity the shares of Capital
Stock of which are distributed or sold in such Subject Distribution shall be a
Distributed Entity, and the class of Capital Stock of the Distributed Entity
that is distributed or sold in the Subject Distribution shall be Distributed
Entity Stock, with the same effect for all purposes of this Agreement as if
MusicCo had made such distribution, except that the Underlying Number for the
Distributed Entity Component of each whole Right created pursuant to Section
6.04 by virtue of such Subject Distribution shall be the number obtained by
multiplying one by a fraction the numerator of which is the aggregate number of
shares of Capital Stock of such entity distributed or sold in the Subject
Distribution and the denominator of which is the aggregate number of shares of
Distributed Entity Stock of the Distributed Entity making the Subject
Distribution outstanding on the record date for such distribution. The
determination of whether a distribution meets each of the criteria referred to
in the immediately preceding sentence and is therefore a Subject Distribution
shall be made by the Board of Directors of MusicCo (whose good faith
determination will be conclusive). The Distribution Value of any such
distribution shall be made in good faith by the Board of Directors of MusicCo.
If MusicCo or any Distributed Entity makes a distribution which individually is
not a Subject Distribution solely by virtue of clause (ii) of the first sentence
of Section 6.03 or this Section 6.07, but would be a Subject Distribution if
aggregated with any other distribution or distributions previously made by
MusicCo or any Distributed Entity that also were not Subject Distributions when
made solely by virtue of that clause (ii) (and were not thereafter deemed to be
Subject Distributions pursuant to this sentence), then upon the making of the
later of such distributions such distributions shall be deemed to be a single
Subject Distribution. The determination of whether any combination of
distributions would constitute a Subject Distribution pursuant to the
immediately preceding sentence shall be made by the Board of Directors of
MusicCo (whose good faith determination will be conclusive) on the basis of the
Distribution Values of such distributions and the Undistributed Value of MusicCo
calculated in each case immediately prior to the time the first of such
distributions was made.
6.08 MusicCo Covenants. MusicCo covenants and agrees with the
-----------------
Company and the Rights Agent and, in the case of clause (i) and clause (iv)
solely with respect to the obligations relating to clause (i), below, for the
benefit of the Holders, as follows:
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(i) neither it nor any Distributed Entity will distribute to all
Holders of MusicCo Series A Common Stock rights or warrants to purchase the
Capital Stock of any entity that would expire more than 45 days after the
effective date of such distribution;
(ii) neither it nor any Distributed Entity will make a
distribution to all Holders of any class of its Capital Stock of any entity
or of rights or warrants to purchase the Capital Stock of any entity at any
time during the period (or the record date or effective date of which is at
any time during the period) commencing with the Exercise Period and ending
with the date on which the Company (or its assignee) becomes the record
owner of the shares surrendered in such Exercise Period, nor will it or any
Distributed Entity, without the prior written consent of the Company, make,
pay or declare to all Holders of any class of its Capital Stock any other
dividend or distribution or take any other action at any time during the
period (or the record date or effective date of which is at any time during
the period) commencing with the Exercise Period and ending with the date on
which the Company (or its assignee) becomes the record owner of the shares
surrendered in such Exercise Period, the reasonably foreseeable effect of
which would be to reduce or otherwise adversely affect the Fair Market
Value or the Per Share Value of MusicCo or such Distributed Entity, other
than the actions specifically enumerated in Sections 6.02 through Section
6.06 for which an express adjustment to the Consideration Amount Per
MusicCo Share and Consideration Amount Per Distributed Entity Share payable
by the Company is provided;
(iii) without the prior written consent of the Company, neither
MusicCo nor any Distributed Entity will, at any time during the term of
this Agreement, take or recommend to their respective shareholders any
action the reasonably foreseeable effect of which would be to adversely
affect the relative rights, powers or preferences of the shares of MusicCo
Common Stock or Distributed Entity Stock to be acquired by the Company upon
the exercise of Rights or the exercise by the Company of such rights,
powers and preferences and of full rights of ownership of such shares; and
(iv) prior to making any distribution of the Capital Stock of
any entity or of rights or warrants to purchase the Capital Stock of any
entity, the Applicable Entity making such distribution will cause such
entity to execute and deliver a supplement to this Agreement pursuant to
which such entity shall accept and agree to be bound by and comply with the
provisions of this Agreement that relate to such entity (or will relate to
such entity if it is thereafter deemed to be a Distributed Entity pursuant
to this Article VI) and shall agree to cooperate with the Board of
Directors of MusicCo and provide such Board with such information as it may
from time to time reasonably request in connection with its determination
of the Distributed Value of any distribution and the Undistributed Value of
MusicCo from time to time in
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<PAGE>
accordance with this Article VI and the definition of Significant Corporate
Transaction.
6.09 Notice of Adjustment. Whenever MusicCo takes any action that
--------------------
would require an adjustment to the number of Rights represented by each
Certificate (and the consequent adjustment of the Underlying Number for each
Distributed Entity Component, if any) or the Consideration Amount Per MusicCo
Share, or that would require the creation of a Distributed Entity Component, and
whenever any Distributed Entity takes any action that would require an
adjustment to the Underlying Number of the applicable Distributed Entity
Component or the Consideration Amount Per Distributed Entity Share, or that
would require the creation of a Distributed Entity Component, the Applicable
Entity shall promptly notify the Company and MusicCo in writing (with a copy to
the Rights Agent) of the action taken and of all information relevant to the
computation pursuant to this Article VI of the required adjustments to the
number of Rights, the Underlying Number, the Consideration Amount Per MusicCo
Share or the Consideration Amount Per Distributed Entity Share, as the case may
be, and in the case of the creation of a Distributed Entity Component, all
information relevant to the computation of the Underlying Number of such
Distributed Entity Component. Promptly thereafter, the Company shall deliver to
the Rights Agent a certificate of a firm of independent public accountants (who
may be the regular accountants employed by MusicCo or the Company) setting
forth, as applicable:
(i) If an action requiring an adjustment to the number of Rights
is taken, the number of Rights represented by a Certificate before and
after such adjustment and, if applicable, the Consideration Amount Per
MusicCo Share and the Underlying Number for each Distributed Entity
Component of a Right, in each case before and after such adjustment.
(ii) If an action requiring the creation of a Distributed Entity
Component is taken, the Underlying Number for the Distributed Entity
Component of each Right so created.
(iii) If an action requiring an adjustment to the Underlying
Number of a Distributed Entity Component is taken, the Underlying Number of
such Distributed Entity Component before and after such adjustment and, if
applicable, the Consideration Amount Per Distributed Entity Share before
and after such adjustment. Such certificate shall also contain a brief
statement of the facts requiring such adjustment and the computation by
which such adjustment was made, or, if applicable, the facts requiring the
creation of such Distributed Entity Component and the computation of such
Underlying Number. The Company shall also cause the Rights Agent to send
promptly by first class mail, postage prepaid, to each Holder notice of
such adjustment or adjustments or of the creation of such Distributed
Entity Component. The certificate delivered to the Rights Agent pursuant to
this Section 6.09 shall be conclusive evidence of the correctness of the
matters set forth therein in the absence of manifest error. The Rights
Agent shall be entitled to rely on such certificate and shall be under no
duty or responsibility with respect to any
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such certificate, except to exhibit the same, from time to time, to any
Holder desiring an inspection thereof during regular business hours. The
Rights Agent shall not at any time be under any duty or responsibility to
any Holder to determine whether any facts exist that may require any
adjustment or the creation of any Distributed Entity Component hereunder,
or with respect to the nature or extent of any such adjustment when made or
of any such Distributed Entity Component when created, or with respect to
the method employed in making such adjustment or calculating the Underlying
Number of such Distributed Entity Component.
6.10 Statement on Certificates. Irrespective of any adjustments in
-------------------------
the number of Rights represented by each Certificate or the creation of any
Distributed Entity Component or any adjustments to the Underlying Number
thereof, Certificates theretofore or thereafter issued may continue to express
solely the number of Rights as are stated in the Certificates initially issuable
pursuant to this Agreement.
6.11 No Rights as Stockholders. Nothing contained in this Agreement
-------------------------
or in the Certificates shall be construed as conferring upon the Holders or
their transferees any rights whatsoever as stockholders of MusicCo or the
Company or any Distributed Entity.
ARTICLE VII
RIGHTS AGENT
7.01 Inspection of Rights Agreement. The Rights Agent shall keep
------------------------------
copies of this Agreement and any notices given or received hereunder available
for inspection by the Holders during normal business hours at its Office. The
Company shall supply the Rights Agent from time to time with such numbers of
copies of this Agreement as the Rights Agent may request.
7.02 Merger or Consolidation or Change of Name of Rights Agent. Any
---------------------------------------------------------
corporation into which the Rights Agent may be merged or with which it may be
consolidated, or any corporation resulting from any merger or consolidation to
which the Rights Agent shall be a party, or any corporation succeeding to the
corporate trust business of the Rights Agent, shall be the successor to the
Rights Agent hereunder without the execution, filing or delivery of any paper or
any further act on the part of any of the parties hereto, provided that such
corporation would be eligible for appointment as a successor Rights Agent under
the provision of Section 7.16 hereof. If at the time such successor to the
Rights Agent shall succeed to the agency created by this Agreement, any of the
Certificates shall have been countersigned but not delivered, any such successor
to the Rights Agent may adopt the countersignature of the original Rights Agent
and deliver such Certificates so countersigned, and if at any time any of the
Certificates shall not have been countersigned, any successor to the Rights
Agent may countersign such Certificates either in the name of the predecessor
Rights Agent or in the name of the successor Rights Agent; and in all such cases
such Certificates shall have the full force provided in such Certificates and in
this Agreement. If at any time the name of the Rights Agent shall be changed
and at such time any of the Certificates shall
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have been countersigned but not delivered, the Rights Agent may adopt the
countersignatures under its prior name and deliver such Certificates so
countersigned; and if at any time any of the Certificates shall not have been
countersigned, the Rights Agent may countersign such Certificates either in its
prior name or in its changed name; and in all such cases such Certificates shall
have the full force provided in the Certificates and in this Agreement.
7.03 Concerning the Rights Agent. The Rights Agent undertakes the
---------------------------
duties and obligations imposed by this Agreement upon the following terms and
conditions, by all of which the Company and the Holders, by their acceptance of
Certificates shall be bound.
7.04 Correctness of Statements. The statements contained herein and
-------------------------
in the Certificates shall be taken as statements, of the Company, and the Rights
Agent assumes no responsibility for the correctness of any of the same except
such as describe the Rights Agent or actions taken by it. The Rights Agent
assumes no responsibility with respect to the distribution of the Certificates
except as herein otherwise provided.
7.05 Breach of Covenants. The Rights Agent shall not be responsible
-------------------
for any failure of the Company, MusicCo or any Distributed Entity to comply with
any of the covenants or conditions contained in this Agreement or in the
Certificates to be complied with or satisfied by the Company, MusicCo or any
Distributed Entity.
7.06 Performance of Duties. The Rights Agent may execute and
---------------------
exercise any of the rights or powers hereby vested in it or perform any duty
hereunder either itself or by or through its attorneys, agents and employees.
7.07 Reliance on Counsel. The Rights Agent may consult at any time
-------------------
with legal counsel reasonably satisfactory to it (who may be counsel for the
Company) and the Rights Agent shall incur no liability or responsibility to the
Company or to any Holder in respect of any action taken, suffered or omitted by
it hereunder in good faith and in accordance with the opinion or the advice of
such counsel.
7.08 Proof of Actions Taken. Whenever in the performance of its
----------------------
duties under this Agreement the Rights Agent shall deem it necessary or
desirable that any fact or matter be proved or established by the Company prior
to taking or suffering any action hereunder, such fact or matter (unless other
evidence in respect thereof be herein specifically prescribed) may be deemed
conclusively to be proved and established by a certificate signed by the
Chairman of the Board, the President or a Vice President of the Company and
delivered to the Rights Agent; and such certificate shall be full authorization
to the Rights Agent for any action taken, suffered or omitted in good faith by
it under the provisions of this Agreement in reliance upon such certificate.
7.09 Compensation, Indemnity and Reimbursement. The Company agrees
-----------------------------------------
to pay the Rights Agent reasonable compensation for all services rendered by the
Rights Agent in the performance of its duties under this Agreement, to reimburse
the Rights Agent for all expenses, taxes
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and governmental charges and other charges of any kind and nature incurred by
the Rights Agent in the performance of its duties under this Agreement, and to
indemnify the Rights Agent and save it harmless against any and all claims and
liabilities, including judgments, costs and counsel fees, for anything done or
omitted by the Rights Agent in the performance of its duties under this
Agreement except as a result of the Rights Agent's negligence or bad faith.
7.10 Legal Proceedings. The Rights Agent shall be under no
-----------------
obligation to institute any action, suit or legal proceeding or to take any
other action likely to involve expense unless the Company shall furnish the
Rights Agent with reasonable security and indemnity for any costs and expenses
that may be incurred in taking such action, but this provision shall not affect
the power of the Rights Agent to take such action as the Rights Agent may
consider proper, whether with or without any such security or indemnity. All
rights of action under this Agreement or under any of the Rights may be enforced
by the Rights Agent without the possession of any of the Certificates or the
production thereof at any trial or other proceeding relative thereto, and any
such action, suit or proceeding instituted by the Rights Agent shall be brought
in its name as Rights Agent.
7.11 Other Transactions in Securities of Company. The Rights Agent
-------------------------------------------
in its individual and other capacities and any stockholder, director, officer or
employee of the Rights Agent may buy, sell or deal in any of the Rights, or
other securities of the Company, MusicCo or any Distributed Entity or become
pecuniarily interested in any transaction in which the Company, MusicCo or any
Distributed Entity may be interested or contract with or lend money to the
Company, MusicCo or any Distributed Entity or otherwise act as fully and freely
as though it were not Rights Agent under this Agreement. Nothing herein shall
preclude the Rights Agent from acting in any other capacity for the Company,
MusicCo or any Distributed Entity or for any other Person, including without
limitation, acting as transfer agent or registrar for other securities issued by
the Company, MusicCo or any Distributed Entity.
7.12 Liability of Rights Agent. The Rights Agent shall act hereunder
-------------------------
solely as agent, and its duties shall be determined solely by the provisions
hereof. The Rights Agent shall not be liable for anything that it may do or
refrain from doing in connection with this Agreement except for its own
negligence or bad faith.
7.13 Reliance on Documents. The Rights Agent will not incur any
---------------------
liability or responsibility to the Company or to any Holder for any action taken
in reliance on any notice, resolution, waiver, consent, order, certificate, or
other paper, document or instrument reasonably believed by it to be genuine and
to have been signed, sent or presented by the proper parties.
7.14 Validity of Agreement. The Rights Agent shall not be under any
---------------------
responsibility in respect of the validity of this Agreement or the execution and
delivery hereof (except the due execution and delivery hereof by the Rights
Agent) or in respect of the validity or execution of any Certificate (except its
countersignature thereof).
-25-
<PAGE>
7.15 Instructions from Company. The Rights Agent is hereby
-------------------------
authorized and directed to accept instructions with respect to the performance
of its duties hereunder from any two of the Chairman of the Board, the President
or a Vice President of the Company, and to apply to such officers for advice or
instructions in connection with its duties, and shall not be liable for any
action taken or suffered to be taken by it in good faith in accordance with
instructions of any such officer or officers.
7.16 Change of Rights Agent. The Rights Agent may resign and be
----------------------
discharged from its duties under this Agreement by giving to the Company 30
days' prior notice in writing. The Rights Agent may be removed by like notice
to the Rights Agent from the Company and by notice to the Holders. If the
Rights Agent shall resign or be removed or shall otherwise become incapable of
acting, the Company shall appoint a successor to the Rights Agent. If the
Company shall fail to make such appointment within a period of 30 days after
such removal or after it has been notified in writing of such resignation or
incapacity by the resigning or incapacitated Rights Agent or by any Holder (who
shall with such notice submit his Certificate for inspection by the Company),
then any Holder may apply to any court of competent jurisdiction for the
appointment of a successor to the Rights Agent. Pending appointment of a
successor to the Rights Agent, the duties of the Rights Agent shall be carried
out by the Company. Any successor Rights Agent, whether appointed by the
Company or such a court, shall be a bank or trust company, in good standing,
incorporated under the laws of the United States of America or any state thereof
and having at the time of its appointment as Rights Agent a combined capital and
surplus of at least $50,000,000. After appointment, the successor Rights Agent
shall be vested with the same powers, rights, duties and responsibilities as if
it had been originally named as Rights Agent without further act or deed; but
the former Rights Agent shall deliver and transfer to the successor Rights Agent
any property at the time held by it hereunder, and execute and deliver any
further assurance, conveyance, act or deed necessary for the purpose. Failure
to give any notice provided for in this Section 7.16, however, or any defect
therein, shall not affect the legality or validity of the resignation or removal
of the Rights Agent or the appointment of the successor Rights Agent, as the
case may be. In the event of such resignation or removal the successor Rights
Agent shall mail, by first class mail, postage prepaid, to each Holder, written
notice of such removal or resignation and the name and address of such successor
Rights Agent.
ARTICLE VIII
MISCELLANEOUS
8.01 Obtaining of Governmental Approvals. The Company will from time
-----------------------------------
to time take all action that may be necessary to obtain and keep effective any
and all permits, consents and approvals of governmental agencies and authorities
and securities acts filings under federal and state securities laws and
regulations that may be or become required in connection with the issuance,
sale, transfer and delivery of the Certificates, the exercise of the Rights and
the purchase of MusicCo Common Stock or Distributed Entity Stock upon exercise
of the Rights.
-26-
<PAGE>
8.02 Notices. Any notice or other communication required or
-------
permitted to be given pursuant to this Agreement to the Company, MusicCo or the
Rights Agent, shall be in writing and shall be deemed given and received on the
date delivered in person or by telecopy (answer back received) or 24 hours after
delivery to a courier service which guarantees overnight delivery or five days
after the date mailed by registered or certified mail, return receipt requested,
postage prepaid, to the intended recipient at the address specified below:
-27-
<PAGE>
If to the Company:
Tele-Communications, Inc.
Terrace Tower II
5619 DTC Parkway
Englewood, Colorado 80111
Telecopier No.: (303) 488-3217
Attention:
With a copy similarly addressed to the
attention of the Legal Department
If to MusicCo:
Telecopier No.: ________________________
Attention: President
With a copy similarly addressed to the
attention of the Legal Department
If to the Rights Agent:
Telecopier No.: ________________________
Attention:
Any party may from time to time change the address to which notices to
it are to be given or mailed hereunder by notice given to the other parties in
the manner provided above.
-28-
<PAGE>
Any notice or other communication pursuant to this Agreement to the
Holders shall be in writing and shall be mailed first class mail, postage
prepaid, or otherwise delivered, to such Holders at their respective addresses
on the Register of Holders of the Rights Agent.
8.03 Amendments Without Consent of Holders. The Company and the
-------------------------------------
Rights Agent may from time to time supplement or amend this Agreement without
the approval of any Holder, in order to cure any ambiguity or to correct or
supplement any provision contained herein that may be defective or inconsistent
with any other provision herein, or to make any other provisions in regard to
matters or questions arising hereunder that the Company and the Rights Agent may
deem necessary or desirable and that shall not be inconsistent with the
provisions of the Rights and that shall not adversely affect the interests of
the Holders.
8.04 Amendments With Consent of Holders. The Company and the Rights
----------------------------------
Agent may from time to time amend or supplement this Agreement without notice to
any Holder but with the written consent of the Holders (other than the Company
or its subsidiaries, or the officers, directors or affiliates of the Company or
any of its subsidiaries (other than MusicCo)) of a majority in number of the
outstanding Rights. The Holders of a majority of the outstanding Rights may
waive compliance by the Company with any provision of this Agreement without
notice to any Holder. Without the consent of each Holder affected, however, an
amendment, supplement or waiver may not:
(a) alter or modify the terms of the definition of Early
Expiration Event in Section 1.01, Sections 2.03, 4.01, 4.16, 4.17, 4.18, 4.19,
4.20, or Article VI hereof in any way that adversely affects the rights of any
Holder in any material respect; or
(b) waive a default in payment of the purchase price for the
MusicCo Common Stock and Distributed Entity Stock to be purchased upon exercise
of any Rights.
It shall not be necessary for the consent of the Holders under this
Section to approve the particular form of any proposed supplement, but it shall
be sufficient if such consent approves the substance thereof.
8.05 Successors. All covenants and provisions of this Agreement by
----------
or for the benefit of the Company or the Rights Agent shall bind and inure to
the benefit of their respective successors and assigns hereunder.
8.06 Applicable Law. This Agreement shall be governed by and
--------------
construed in accordance with the internal laws of the State of Delaware, without
giving effect to principles of conflict of laws.
8.07 Benefits of this Agreement; Limitation of Liability. Nothing in
---------------------------------------------------
this Agreement shall be construed to give to any Person other than the Company,
the Rights Agent and the Holders any legal or equitable right, remedy or claim
under this Agreement; but this Agreement
-29-
<PAGE>
shall be for the sole and exclusive benefit of the Company, the Rights Agent and
the Holders. Neither MusicCo nor any Distributed Entity, nor any director,
officer, employee or stockholder, as such, of the Company, MusicCo or any
Distributed Entity shall have any liability hereunder to the Holders for any
obligations of the Company under this Agreement and the Rights or for any claim
based on, in respect of or by reason of such obligations or their creation. Each
Holder by accepting a Certificate waives and releases such liability, such
waiver and release being part of the consideration for the issue of the Rights.
8.08 Counterparts. This Agreement may be executed in any number of
------------
counterparts and each of such counterpart shall for all purposes be deemed to be
an original, and all such counterparts shall together constitute but one and the
same instrument.
8.09 Captions. The captions of the Sections and subsections of this
--------
Agreement have been inserted for convenience only and shall have no substantive
effect.
8.10 Termination. This Agreement shall terminate at such time as the
-----------
outstanding Rights are no longer exercisable under the terms of this Agreement
and the parties to this Agreement shall have discharged all of their duties
hereunder.
8.11 Severability. In case any one or more of the provisions
------------
contained in this Agreement or in the Rights shall for any reason be held to be
invalid, illegal or unenforceable in any respect, such invalidity, illegality or
unenforceability shall not affect any other provisions of this Agreement or of
such Rights, but this Agreement and such Rights shall be construed as if such
invalid or illegal or unenforceable provision had never been contained herein or
therein.
8.12 Calculation of Time Periods. All periods of time referred to in
---------------------------
this Agreement (other than references to Business Days) shall include all
calendar days; provided that if the date or last date to perform the act or give
--------
any notice with respect to this Agreement shall fall on a day that is not a
Business Day, such act or notice may be timely performed or given if performed
or given on the next succeeding Business Day.
-30-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be duly executed, all as of the day and year first above written.
TELE-COMMUNICATIONS, INC.
By: _____________________________
Name: _____________________________
Title: _____________________________
TCI MUSIC, INC.
By: _____________________________
Name: _____________________________
Title: _____________________________
THE BANK OF NEW YORK, as Rights Agent
By: _____________________________
Name: _____________________________
Title: _____________________________
-31-
<PAGE>
EXHIBIT C
Form of Opinion of TCI Counsel
_____________, 1997
DMX Inc.
11400 West Olympic Boulevard, Suite 1100
Los Angeles, California 90064-1501
Gentlemen:
We have acted as special counsel to Tele-Communications, Inc., a
Delaware corporation ("TCI"), TCI Music, Inc., a Delaware corporation
("MusicCo"), and TCI Merger Sub, Inc., a Delaware corporation ("Merger Sub"), in
connection with the preparation, authorization, execution and delivery of (i)
the Agreement and Plan of Merger, dated as of February 6, 1997, between DMX Inc.
("DMX") and TCI, MusicCo and Merger Sub (the "Merger Agreement"), (ii) the
Contribution Agreement by and between TCI and MusicCo dated as of the date of
this opinion letter (the "Contribution Agreement") and (iii) the Rights
Agreement by and between TCI and [The Bank of New York], as Rights Agent, dated
as of the date of this opinion letter (the "Rights Agreement"). We have examined
the Merger Agreement, the Contribution Agreement and the Rights Agreement
(collectively, the "Documents") and we have made such investigations of law as
we have deemed necessary to enable us to state the opinions and make the
statements expressed below.
This opinion letter is delivered to DMX pursuant to Section 9.2(c) of
the Merger Agreement. Capitalized terms used but not specifically defined
herein shall have the meanings assigned to such terms in the Merger Agreement.
We have assumed (a) the genuineness of all signatures and documents
submitted to us as originals, (b) that all copies submitted to us conform to the
originals, (c) the authenticity of all documents submitted to us as originals,
(d) the legal capacity of all natural persons, and (e) as to the documents
executed by entities other than TCI, MusicCo and Merger Sub, that each such
entity has complied with any applicable enforceable laws and has the power to
enter into and perform its obligations under the Documents, and that such
documents have been duly authorized, executed and delivered by, and are binding
upon and enforceable against, such entities.
As to certain factual matters, in addition to the assumptions
expressed below, we have, with your permission, relied upon (i) written
statements of officers of TCI, MusicCo and Merger Sub, (ii) certificates of
public officials and written and oral confirmations rendered to us by
<PAGE>
DMX Inc.
___________, 1997
Page 2
[CSC United States Corporation Company] and (iii) the representations and
warranties of the parties contained in the Merger Agreement.
We assume that there are no agreements, understandings or negotiations
between the parties not set forth in the Merger Agreement that would modify the
terms or rights and obligations of the parties thereunder.
Subject to the last sentence of this paragraph, our opinions are
limited to matters governed by the federal law of the United States, the laws of
the State of Colorado and the Delaware General Corporation Law. For purposes of
this opinion letter, we have assumed that the Merger Agreement and the Rights
Agreement are governed by the laws of the State of Colorado notwithstanding the
fact that they provide by their respective terms that they are to be governed by
the laws of other jurisdictions. We express no opinions as to any other laws or
as to choice of law or conflicts of law rules.
For purposes of this opinion letter, the phrase "to our knowledge"
means our actual knowledge obtained as a direct result of our substantive
representation of TCI, MusicCo and Merger Sub no independent investigation in
order to give this opinion having been conducted, and is limited to the actual
knowledge of the attorneys in this firm who have rendered substantive services
in connection with this transaction.
We express no opinions with respect to any issue or matters pertaining
to any securities laws (except with respect to: (i) the filing of a registration
statement under the Securities Act, with respect to the opinions expressed in
paragraphs 7(iii), 9(iii), 10(i) and 12(i); and (ii) the opinion expressed in
paragraph 14), antitrust laws or federal, state or local tax laws relating to
taxes of any kind or nature or the need for any consents, approvals,
authorizations, and permits of, and filings with any Governmental Entity or any
other Person required to be obtained by DMX in connection with the execution and
delivery of the Merger Agreement and the consummation by DMX of the transactions
contemplated thereby.
We also express no opinions concerning the enforceability of (i)
waivers of any constitutional, statutory or common law rights, (ii) any
covenants or warranties regarding the exercise of rights without appropriate
notice and hearing and any nonjudicial sales rights, or (iii) any
indemnification provisions that may be deemed to be against public policy.
On the basis of our examination and subject to our stated
qualifications, assumptions and limitations, in our opinion:
1. TCI is a corporation duly organized, validly existing and in good
standing under the laws of the State of Delaware. TCI has the requisite
corporate power and authority to
<PAGE>
DMX Inc.
___________, 1997
Page 3
execute and deliver the Documents and to consummate the transactions
contemplated thereby. All corporate action required to have been taken by or on
behalf of TCI under its charter documents or the Delaware General Corporation
Law to authorize (i) the approval, execution and delivery by TCI of the
Documents and (ii) the performance of TCI of its obligations under the Documents
and the consummation of the transactions contemplated thereby, has been taken.
2. MusicCo is a corporation duly organized, validly existing and in
good standing under the laws of the State of Delaware. MusicCo has all
requisite corporate power and authority to execute and deliver the Merger
Agreement and the Contribution Agreement and to consummate the transactions
contemplated thereby. All corporate action required to have been taken by or on
behalf of MusicCo under its charter documents and the Delaware General
Corporation Law to authorize (i) the approval, execution and delivery by MusicCo
of the Merger Agreement and the Contribution Agreement and (ii) the performance
by MusicCo of its obligations under the Merger Agreement and the Contribution
Agreement and the consummation of the transactions contemplated thereby, has
been taken.
3. Merger Sub is a corporation duly organized, validly existing and
in good standing under the laws of the State of Delaware. Merger Sub has all
requisite corporate power and authority to execute and deliver the Merger
Agreement and to consummate the transactions contemplated thereby. All
corporate action required to have been taken by or on behalf of Merger Sub under
its charter documents and the Delaware General Corporation Law to authorize (i)
the approval, execution and delivery by Merger Sub of the Merger Agreement and
(ii) the performance by Merger Sub of its obligations under the Merger Agreement
and the consummation of the transactions contemplated thereby, has been taken.
4. The Merger Agreement constitutes the valid and binding agreements
of TCI, MusicCo and Merger Sub, enforceable against each of TCI, MusicCo and
Merger Sub in accordance with its terms, except (i) as the same may be limited
by applicable bankruptcy, insolvency, moratorium or similar laws of general
application relating to or affecting creditors' rights, including without
limitation, the effect of statutory or other laws regarding fraudulent
conveyances and preferential transfers and (ii) for the limitations imposed by
general principles of equity.
5. The Contribution Agreement constitutes the valid and binding
agreements of TCI and MusicCo, enforceable against each of TCI and MusicCo in
accordance with their terms, except (i) as the same may be limited by applicable
bankruptcy, insolvency, moratorium or similar laws or general application
relating to or affecting creditors' rights, including without limitation, the
effect of statutory or other laws regarding fraudulent conveyances and
preferential transfers and (ii) for the limitations imposed by general
principles of equity.
<PAGE>
DMX Inc.
___________, 1997
Page 4
6. The Rights Agreement constitutes the valid and binding agreements
of TCI, enforceable against it in accordance with their terms, except (i) as the
same may be limited by applicable bankruptcy, insolvency, moratorium or similar
laws or general application relating to or affecting creditors' rights,
including without limitation, the effect of statutory or other laws regarding
fraudulent conveyances and preferential transfers and (ii) for the limitations
imposed by general principles of equity. The Rights to be issued under the
Rights Agreement pursuant to Section 3.1(a) of the Merger Agreement have been
duly authorized, and, when issued in accordance with the terms and conditions of
the Merger Agreement, will be validly issued.
7. The execution and delivery of the Merger Agreement by TCI,
MusicCo and Merger Sub do not, and the consummation of the transactions
contemplated thereby by TCI, MusicCo and Merger Sub will not, (i) violate or
conflict with the Certificates of Incorporation or Bylaws of any of TCI, MusicCo
and Merger Sub or (ii) to our knowledge, 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, material modification or acceleration under any material
agreement, understanding or undertaking to which TCI, MusicCo or Merger Sub is a
party or by which any of TCI, MusicCo or Merger Sub is bound except where such
breach, default, Lien, third-party right, cancellation, modification or
acceleration would not have a Material Adverse Effect on TCI and its
subsidiaries taken as a whole, MusicCo or Merger Sub, or (iii) to our knowledge,
subject to obtaining the approvals and making the filings described in Section
5.5 of the Merger Agreement, constitute a violation of any applicable Legal
Requirement, except where such violations would not have a Material Adverse
Effect on TCI and its subsidiaries taken as a whole, MusicCo or Merger Sub.
8. The execution and delivery of the Contribution Agreement by TCI
and MusicCo do not, and the consummation of the transactions contemplated
thereby by TCI and MusicCo will not, (i) violate or conflict with the
Certificates of Incorporation or Bylaws of either TCI or MusicCo or (ii) to our
knowledge, 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, material modification or
acceleration under any material agreement, understanding or undertaking to which
TCI or MusicCo is a party or by which either TCI or MusicCo is bound, except
where such breach, default, Lien, third-party right, cancellation, modification
or acceleration would not have a Material Adverse Effect on TCI and its
subsidiaries taken as a whole or MusicCo, or (iii) to our knowledge, constitute
a violation of any applicable Legal Requirement, except where such violations
would not have a Material Adverse Effect on TCI and its subsidiaries taken as a
whole or MusicCo.
9. The execution and delivery by TCI of the Rights Agreement do
not, and the consummation of the transactions contemplated thereby by TCI will
not, (i) violate or conflict with the Certificate of Incorporation or Bylaws of
TCI or (ii) to our knowledge, constitute a breach or
<PAGE>
DMX Inc.
___________, 1997
Page 5
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, material modification or acceleration under any material
agreement, understanding or undertaking to which TCI is a party or by which it
is bound, except where such breach, default, Lien, third-party right,
cancellation, modification or acceleration would not have a Material Adverse
Effect on TCI and its subsidiaries taken as a whole, or (iii) to our knowledge,
knowledge, subject to obtaining the approvals and making the filings described
in Section 5.5(ii) of the Merger Agreement, constitute a violation of any
applicable Legal Requirement, except where such violations would not have a
Material Adverse Effect on TCI and its subsidiaries taken as a whole.
10. Neither the execution and delivery by TCI, MusicCo or Merger Sub
of the Merger Agreement nor the consummation by TCI, MusicCo or Merger Sub of
the transactions contemplated thereby will require any consent, approval,
authorization or permit of, or filing with or notification to, any Governmental
Entity on the part of TCI, MusicCo or Merger Sub, except (i) for such consents,
approvals, authorizations, permits, filings and notifications described in
Section 5.5 of the Merger Agreement and as have been obtained or made, (ii) for
the filing of the Certificate of Merger with the Delaware Secretary of State,
(iii) such filings as may first be required to be made after the date hereof, or
(iv) where the failure to obtain such consents, approvals, authorizations or
permits, or to make such filings would not have a Material Adverse Effect on TCI
and its subsidiaries taken as a whole, MusicCo or Merger Sub or prevent the
transactions contemplated by the Merger Agreement.
11. Neither the execution and delivery of the Contribution Agreement
by TCI or MusicCo nor the consummation by TCI or MusicCo of the transactions
contemplated thereby will require any filing with or authorization, consent or
approval of any Governmental Entity on the part of TCI or MusicCo, except (i)
for such consents, approvals, authorizations, permits, filings and notifications
as have been obtained or made, (ii) such filings as may first be required to be
made after the date hereof, or (iii) where the failure to obtain such consents,
approvals, authorizations, or to make such filings, would not have a Material
Adverse Effect on TCI and its subsidiaries taken as a whole or MusicCo or
prevent the consummation of the transactions contemplated by the Contribution
Agreement.
12. Neither the execution and delivery of the Rights Agreement nor
the consummation by TCI of the transactions contemplated thereby will require
any filing with or authorization, consent or approval of any Governmental Entity
on the part of TCI, except (i) for such consents, approvals, authorizations,
permits, filings and notifications described in Section 5.5 (ii) of the Merger
Agreement and as have been obtained or made, (ii) such filings as may first be
required to be made after the date hereof, or (iii) where the failure to obtain
such consents, approvals, authorizations, or to make such filings, would not
have a Material Adverse Effect on TCI and its
<PAGE>
DMX Inc.
___________, 1997
Page 6
subsidiaries taken as a whole or prevent the consummation of the transactions
contemplated by the Rights Agreement.
13. The shares of MusicCo Series A Common Stock to be issued pursuant
to Section 3.1(a) of the Merger Agreement have been duly authorized and, when
issued in accordance with the terms and conditions of the Merger Agreement, will
be validly issued, fully paid and nonassessable.
14. The registration statement containing the Joint Proxy
Statement/Prospectus (the "Registration Statement") has become effective under
the Securities Act and, to our knowledge, no stop order suspending the
effectiveness of the Registration Statement has been issued and no proceedings
for that purpose have been instituted or are pending or threatened under the
Securities Act.
The opinions expressed herein are rendered as of the date of this
opinion letter, and we assume no obligation to advise you of any change,
material or otherwise, occurring at any time after the date of this opinion
letter with respect to any matter addressed herein.
This opinion may not be quoted or furnished to any other person or
entity without the prior written consent of this firm. This opinion may not be
relied upon by any person other than the addressee or for any purpose unrelated
to the Merger, without the prior written consent of this firm.
Very truly yours,
SHERMAN & HOWARD L.L.C.
<PAGE>
EXHIBIT D
FORM OF I&M LEGAL OPINION
[LETTERHEAD]
_________, 1997
Tele-Communications, Inc.
TCI Music, Inc.
Terrace Tower II
5619 DTC Parkway
Englewood, Colorado 80111-3000
Re: DMX Inc.
--------
Dear Sirs:
We have acted as counsel to DMX Inc., a Delaware corporation (the
"Company"), in connection with the Agreement and Plan of Merger (the
"Agreement") dated as of _________, 1997 among Tele-Communications, Inc., a
Delaware corporation, TCI Music, Inc., a Delaware corporation, TCI Merger
Sub, Inc., a Delaware corporation, and the Company. We are delivering this
opinion to you pursuant to Section 9.3(e) of the Agreement. Capitalized
terms used and not otherwise defined herein shall have the meanings assigned
thereto in the Agreement.
We have made such investigations and examined such documents and records
as we have deemed necessary for the purpose of rendering this opinion. In
such investigations and examinations, we have assumed that the execution,
delivery and performance of any agreements or consents are within the powers
of each signatory and have been duly authorized and validly carried out,
except to the extent that we have expressly rendered an opinion on such
party's authority in this opinion. We have also assumed the genuineness of
all signatures on original or certified copies, the authenticity of documents
submitted to us as originals and the conformity to original or certified
copies of all copies submitted to us as certified or reproduction copies. In
addition, as to certain factual matters, with your permission we have
obtained from public officials and from officers of the Company such
certificates and assurances, and we have examined such questions of law, as
we have deemed necessary for the purposes of rendering this opinion.
We express no opinions with respect to the need for any consents,
approvals, authorizations and permits of, and filings with any Governmental
Entity or any other Person required to be obtained by TCI, MusicCo or Merger
Sub in connection with the
<PAGE>
Tele-Communications, Inc.
TCI Music, Inc.
__________, 1997
Page 2
execution and delivery of the Merger Agreement, the Rights Agreement and the
Contribution Agreement by any of them and the consummation by any of them of
the transactions contemplated thereby.
On the basis of the foregoing, and subject to the qualifications set
forth below, we are of the opinion that:
1. The Company is a corporation duly incorporated, validly existing
and in good standing under the laws of the State of Delaware. The Company
has the requisite corporate power and authority to carry on its business as
it is now being conducted. The Company is qualified as a foreign corporation
and is in good standing in each of the jurisdictions listed on Schedule 1
attached hereto (the "Jurisdictions").
2. The Company has the requisite corporate power and authority to
execute and deliver the Agreement and, subject to approval of the Agreement
by the holders of Company Common Stock, to consummate the transactions
contemplated thereby. The execution and delivery of the Agreement and the
consummation of the transactions contemplated thereby have been duly
authorized by the Company's Board of Directors, including at least a majority
of the Disinterested Directors (as defined in the Company's Amended and
Restated Certificate of Incorporation, as amended (the "Restated Certificate
of Incorporation")). Except for the approval of the holders of Company
Common Stock, no other corporate proceedings on the part of the Company are
necessary to authorize the execution and delivery of the Agreement and the
consummation of the transactions contemplated thereby. Subject to the
approval of the holders of Company Common Stock in accordance with the DGCL,
the Agreement constitutes a valid and binding obligation of the Company,
enforceable against the Company in accordance with its terms.
3. The execution and delivery of the Agreement by the Company does
not, and the consummation of the transactions contemplated thereby by the
Company will not: (a) subject to the approval by the holders of Company
Common Stock, violate or conflict with the Restated Certificate of
Incorporation or Bylaws of the Company; (b) except as set forth on Schedule 3
----------
hereto or where such breach or default would not have a Material Adverse Effect
on the Company, 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 of the Company listed on Schedule 3; or (c)
----------
subject to obtaining the approvals and making the filings described in Section
6.5 of the Merger Agreement,
<PAGE>
Tele-Communications, Inc.
TCI Music, Inc.
__________, 1997
Page 3
to our knowledge constitute a violation of any applicable Legal Requirement,
except where such violation would not have a Material Adverse Effect on the
Company.
4. Neither the supermajority voting requirement set forth in Article
VI, Section 2, of the Restated Certificate of Incorporation nor Section 203
of the DGCL are applicable to the Merger. Accordingly, the affirmative vote
of a majority of the outstanding shares of Company Common Stock shall be
required to approve the Merger Agreement.
5. Neither the execution and delivery of the Agreement by the Company
nor the consummation of the transactions contemplated thereby will require
any filing on the part of the Company with, or authorization, consent or
approval of, any Governmental Entity or any other Person with respect to the
Company, except those required in connection, or in compliance, with the
provisions of (i) the HSR Act, (ii) the Securities Act, (iii) the Exchange
Act and (iv) 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 the Agreement.
6. To our knowledge, except as set forth on Schedule 6.8(b) of the
---------------
Agreement, (i) there is no suit, action or proceeding threatened against or
pending against the Company or any of its Subsidiaries that has had or is
likely to have a Material Adverse Effect on the Company nor (ii) is there any
judgment, decree, injunction or order of any Governmental Entity or
arbitrator outstanding against the Company or any of its Subsidiaries that is
likely to have a Material Adverse Effect on the Company.
The opinion expressed in paragraph 1 with respect to good standing is
based solely upon the certificates of status and good standing issued by the
appropriate governmental agency of the State of Delaware and the appropriate
governmental agency of each of the Jurisdictions (copies of which are
attached hereto as Exhibit A), and no opinion is expressed herein with
respect to such matters beyond the dates as of which such certificates were
issued.
The opinions set forth above are subject to and limited by the
following:
<PAGE>
Tele-Communications, Inc.
TCI Music, Inc.
__________, 1997
Page 4
(a) The effect of bankruptcy, insolvency, reorganization, moratorium and
other laws and court decisions or other legal or equitable principles
relating to, limiting or affecting the enforcement of creditors' rights
generally, including, but not limited to, fraudulent transfers or
conveyances, preferences and equitable subordination.
(b) The discretion of any court of competent jurisdiction in awarding
equitable remedies, including but not limited to specific performance or
injunctive relief;
(c) The availability of indemnification and other remedies may be
limited by federal or state securities laws; and
(d) The effect of federal, state or local antitrust or similar laws
governing business acquisitions.
(e) Other than as set forth in paragraph 5, the effect of any securities
laws.
Whenever our opinion herein with respect to the existence or
nonexistence of facts is qualified by the phrase "to our knowledge", or any
similar phrase implying a limitation on the basis of knowledge, such phrase
means only that the individual attorneys in this firm who devoted substantive
attention to the transactions contemplated by the Agreement do not have
actual knowledge that the facts as stated herein are untrue. Unless
otherwise expressly stated herein, such persons have not undertaken any
investigation to determine the existence or nonexistence of such facts, and
no inference as to the extent of their knowledge should be drawn from the
fact of their representation of the Company in this or any other instance.
Our opinion is limited to the laws of the State of California, the
Delaware General Corporation Law and the federal laws of the United States of
America. For purposes of this opinion letter, we have assumed that the
Merger Agreement is governed by the laws of the State of California
notwithstanding the fact that it provides by its terms that it is to be
governed by the laws of the State of Delaware. We express no opinions as to
the laws of any other jurisdiction or as to choice of law or conflicts of law
rules.
<PAGE>
Tele-Communications, Inc.
TCI Music, Inc.
__________, 1997
Page 5
This opinion is intended solely for the benefit of TCI and MusicCo
pursuant to Section 9.3(e) of the Agreement, and is not to be made available
to or relied upon by any other person or entity or by TCI or MusicCo for any
other purpose or in any other context without our prior written consent.
Very truly yours,
Irell & Manella LLP
<PAGE>
Tele-Communications, Inc.
TCI Music, Inc.
__________, 1997
Page 6
EXHIBIT A
GOOD STANDING CERTIFICATES
[TO COME]
<PAGE>
Tele-Communications, Inc.
TCI Music, Inc.
__________, 1997
Page 7
SCHEDULE 3
CONTRACTS REVIEWED; CONFLICTS
A. Contracts Reviewed
------------------
1. Affiliation Agreement between the Company and Colony Communications
dated May 1, 1992
2. Affiliation Agreement between the Company and Crown Media, Inc., dated
July 1, 1992
3. Affiliation Agreement between the Company and Prime II Management, L.P.
4. Employment Agreement with W. Thomas Oliver
5. SSI Affiliation Agreement
6. Viacom Affiliation Agreement
7. KBLCOM Residential Affiliation Agreement
8. Western Tele-Communications ("WTCI") Security Agreement and Promissory
Note
9. Studio Facility and Uplinking Agreement between Tele-Communications,
Inc. and the Company
10. NACR License and Marketing Agreement
11. Manufacturing and Sales Agreement between the Company and Scientific-
Atlanta, Inc.
12. License and Technical Assistance Agreement between the Company and
Scientific-Atlanta, Inc.
13. FSL Development and Licensing Agreement, as amended
14. GE American Communication, Inc. Agreement Regarding Satellite Carriage
15. COMSTREAM Agreement between the Company and COMSTREAM Corporation, dated
July 22, 1993
16. Joint Venture Agreement with Galactic Radio, Partners, Inc.
17. Principal Executive Office Lease, California
18. C-3 Satellite Transponder Sub-Lease Agreement between WTCI and the
Company
19. Satellite Transponder Management Agreement between WTCI and the Company,
dated December 2, 1992
20. Satellite Transponder Management Agreement between WTCI and the Company,
dated January 27, 1993
21. Assignment Agreement between IDB and WTCI, dated January 21, 1993
22. Agreement between the Company and the American Society of Composers,
Authors & Publishers, dated December 20, 1991
<PAGE>
Tele-Communications, Inc.
TCI Music, Inc.
__________, 1997
Page 8
23. Agreement between the Company and Broadcast Music Inc., dated October
11, 1991, as supplemented and amended
24. Agreement between the Company and SESAC, dated December 26, 1991
25. Affiliation Agreement between the Company and Scripps Howard, Inc. dated
April 30, 1994
26. Employment Agreement between the Company and Lon Troxel, dated October
1, 1991, as amended
27. Addendum to KBLCOM Affiliation Agreement
28. Employment Agreement between the Company and DigiTempo, Inc., dated
October 17, 1994
29. Employment Agreement between the Company and Doug Talley, dated January
1, 1995
30. Affiliation Agreement between the Company and PrimeStar Partners, dated
January 25, 1995
31. Affiliation Agreement between the Company and AlphaStar Television
Network, Inc., November 29, 1995
32. Stock Purchase and Shareholders Agreement dated December 18, 1996
between the Company, DMX-Europe (UK) Limited, DMX-Europe N.V. and Jerold
H. Rubinstein
33. Subscription and Shareholders Agreement dated December 18, 1996 between
the Company, Jerold H. Rubinstein and Xtra Music Limited
34. 1991 Incentive Stock Option Plan
35. 1991 Non-Qualified Stock Option Plan
36. 1991 Non-Qualified Stock Option Plan for Non-Employee Directors
37. 1993 Stock Option Plan
38. Employee Stock Purchase Plan
39. International Cablecasting Technologies Inc. Savings Plan, as amended
Note: All contracts reviewed are identified in the same manner as in
the Company's filings with the Securities and Exchange
Commission and were reviewed in the form as so filed by the
Company.
B. Conflicts
---------
CONSENTS
--------
1. Executive Tower Office Building Lease (as amended) dated July 11,
1991 between Douglas Emmett Realty Fund, 1995, successor-in-interest to
Olympic Purdue Associates, as Landlord, and the Company.
<PAGE>
Tele-Communications, Inc.
TCI Music, Inc.
__________, 1997
Page 9
RIGHTS OF TERMINATION
---------------------
1. Employment Agreement between the Company and Lon Troxel dated
October 1, 1991, as amended.
<PAGE>
EXHIBIT 10.75
LOAN AND SECURITY AGREEMENT
BETWEEN
DMX INC.,
a Delaware corporation,
as Borrower
AND
TELE-COMMUNICATIONS, INC.,
a Delaware corporation,
as Lender
DATED AS OF FEBRUARY 6, 1997
$3,500,000
<PAGE>
LOAN AND SECURITY AGREEMENT
---------------------------
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
ARTICLE 1 Definitions.................................................... 1
ARTICLE 2 Loan and Note.................................................. 3
2.1 Loan........................................................... 3
2.2 Interest....................................................... 4
(a) Interest................................................. 4
(b) Computation of Interest.................................. 4
2.3 Payments....................................................... 4
(a) Payment of Loan.......................................... 4
(b) Optional Prepayment...................................... 4
(c) Payments................................................. 5
ARTICLE 3 Conditions Precedent........................................... 5
3.1 Note........................................................... 5
3.2 Reports, Certificates and Other Information.................... 5
3.3 No Existing Default............................................ 5
3.4 Representations and Warranties Correct;
Compliance with Covenants...................................... 5
3.5 No Material Adverse Effect..................................... 5
3.6 Affiliation Agreement.......................................... 5
3.7 Verification of Use of Proceeds................................ 6
ARTICLE 4 Representations and Warranties of Borrower..................... 6
4.1 Due Organization............................................... 6
4.2 Chief Executive Office......................................... 6
4.3 Corporate Power................................................ 6
4.4 Authorization.................................................. 6
4.5 Representative Authorization................................... 6
4.6 Binding Nature................................................. 6
4.7 Litigation and Contingent Liabilities.......................... 6
4.8 No Event of Default............................................ 7
4.9 Compliance With Laws........................................... 7
4.10 Absence of Conflicts........................................... 7
4.11 Accurate and Complete Disclosure............................... 7
4.12 Title and Authority............................................ 7
4.13 Filings........................................................ 7
4.14 No Other Names................................................. 7
4.15 Priority of Security Interest.................................. 7
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
ARTICLE 5 Affirmative Covenants.......................................... 8
5.1 Accounting Records............................................. 8
5.2 Corporate Existence............................................ 8
5.3 Qualifications To Do Business.................................. 8
5.4 Compliance With Laws........................................... 8
5.5 Taxes and Other Liabilities.................................... 8
5.6 Conduct of Business............................................ 8
5.7 Use of Proceeds................................................ 8
5.8 Records of Accounts Receivable................................. 9
5.9 Protection of Security......................................... 9
5.10 Continuing Obligations of Borrower............................. 9
5.11 Indemnification................................................ 9
ARTICLE 6 Negative Covenants............................................. 9
6.1 No Merger, etc................................................. 9
6.2 Type of Business............................................... 9
6.3 Indebtedness................................................... 9
6.4 Dividends...................................................... 10
6.5 Loans and Investments.......................................... 10
6.6 Sale of Assets................................................. 10
6.7 No Other Lien.................................................. 10
ARTICLE 7 Events of Default.............................................. 10
7.1 Events of Default.............................................. 10
(a) Payments................................................. 11
(b) Other Covenants.......................................... 11
(c) Warranties............................................... 11
(d) Bankruptcy............................................... 11
(e) Cross-Default............................................ 11
7.2 Acceleration................................................... 11
7.3 Other Remedies................................................. 11
ARTICLE 8 Security Interest.............................................. 12
8.1 Grant of Security Interest..................................... 12
8.2 Collections.................................................... 12
8.3 Remedies upon Default.......................................... 13
8.4 Application of Proceeds........................................ 14
8.5 Locations of Collateral; Place of Business..................... 15
ARTICLE 9 Miscellaneous.................................................. 15
9.1 Successors and Assigns......................................... 15
9.2 No Implied Waiver.............................................. 15
</TABLE>
ii
<PAGE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
9.3 Amendments; Waivers............................................ 16
9.4 Severability................................................... 16
9.5 Notices........................................................ 16
9.6 Interpretation................................................. 17
9.7 Governing Law.................................................. 17
9.8 Counterparts................................................... 17
9.9 Headings....................................................... 17
9.10 Terms.......................................................... 17
9.11 Additional Waivers............................................. 18
(a) Bankruptcy............................................... 18
(b) Statutes of Limitation................................... 18
(c) Demands for Performance.................................. 18
(d) No Set-off............................................... 18
9.12 Further Assurances............................................. 18
9.13 Expenses....................................................... 19
9.14 Jurisdiction and Venue......................................... 19
9.15 Waiver of Jury Trial........................................... 19
</TABLE>
iii
<PAGE>
LIST OF EXHIBITS
----------------
Exhibit Description
------- -----------
A Form of Promissory Note
LIST OF SCHEDULES
-----------------
Schedule Description
-------- -----------
8.5 Location of Collateral
iv
<PAGE>
LOAN AND SECURITY AGREEMENT
---------------------------
THIS LOAN AND SECURITY AGREEMENT is entered into as of February 6, 1997,
between DMX Inc., a Delaware corporation ("Borrower"), and TELE-COMMUNICATIONS,
INC., a Delaware corporation ("Lender").
RECITAL
Lender desires to lend to Borrower, and Borrower desires to borrow from
Lender, up to $3,500,000 on the terms and conditions set forth in this
Agreement.
NOW, THEREFORE, for good and valuable consideration, the receipt and
adequacy of which are hereby acknowledged, the parties agree as follows:
ARTICLE 1
---------
Definitions
-----------
In addition to any terms defined elsewhere in this Agreement, the following
terms have the meanings indicated for purposes of this Agreement:
1.1 "Acceleration" means that the Loan (i) shall not have been paid at the
Maturity Date or (ii) shall have become due and payable prior to the Maturity
Date pursuant to Section 7.2.
1.2 "Advance Date" has the meaning set forth in Section 2.1.
1.3 "Affiliate" means, with respect to any Person, any other Person
Controlling, Controlled by or under common Control with such Person; Control for
this purpose means the 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 or voting interests, by
contract or otherwise.
1.4 "Agreement" means this Loan and Security Agreement, as amended from
time to time.
1.5 "Business Day" means a day when banks in Los Angeles, California, New
York, New York and Denver, Colorado are open for business.
1.6 "Closing Date" means the date first above written.
1.7 "Collateral" has the meaning set forth in Section 8.1.
1.8 "Commitment Period" has the meaning set forth in Section 2.1(a).
<PAGE>
1.9 "Commitment Termination Date" means May 31, 1997.
1.10 "Event of Default" has the meaning set forth in Article 7.
1.11 "Exchange Act" means the Securities Exchange Act of 1934, as
amended.
1.12 "GAAP" means generally accepted accounting principles as in effect in
the United States, as set forth in the opinions and pronouncements of the
Accounting Principles Board and the American Institute of Certified Public
Accountants and statements and pronouncements of the Financial Accounting
Standards Board or in such other statements by such other entity as may be
approved by a significant segment of the accounting profession, which principles
are applicable to the circumstances as of the date of determination.
1.13 "Indebtedness" means, with respect to any Person, without
duplication, (a) all obligations of such Person for borrowed money, or with
respect to advances of any kind (including repurchase obligations), (b) all
obligations of such Person evidenced by bonds, debentures, notes or similar
instruments, (c) all obligations of such Person under conditional sale or other
title retention agreements relating to property purchased by such Person, (d)
all obligations of such Person incurred or assumed as the deferred purchase
price of property or services (other than accounts payable to suppliers incurred
in the ordinary course of business and paid in the ordinary course of business
of such Person), (e) all indebtedness of others secured by (or for which the
holder of such Indebtedness has an existing right, contingent or otherwise, to
be secured by) any Lien on property owned or acquired by such Person, whether or
not the obligations secured thereby have been assumed, (f) all capitalized lease
obligations of such Person, (g) all guaranties of such Person and (h) all
obligations of such Person as an account party in respect of letters of credit
and bankers acceptances.
1.14 "Legal Requirements" means all legal requirements in effect from time
to time including all laws, statutes, codes, acts, ordinances, orders,
judgments, decrees, injunctions, rules, regulations, permits, licenses,
authorizations, certificates, orders, franchises, determinations, approvals,
notices, demand letters, directions and requirements of all governments,
departments, commissions, boards, courts, authorities and agencies, foreseen or
unforeseen, ordinary or extraordinary, including any change in any law,
regulation or the interpretation thereof by any governmental authority (whether
or not having the force of law).
1.15 "Lien" means any lien, security interest, pledge, mortgage, deed of
trust, encumbrance, right of first refusal or other right to purchase or any
right or claim in the nature of any of the foregoing.
1.16 "Loan" means the loan by Lender to Borrower of the principal sum of
up to $3,500,000 as described in Section 2.1.
2
<PAGE>
1.17 "Material Adverse Effect" means a material adverse effect on (i) the
business, assets, operations, prospects or financial condition of Borrower, (ii)
the ability of Borrower to pay the Obligations in accordance with their terms or
(iii) the enforceability of Borrower's obligations under this Agreement.
1.18 "Maturity" means any date on which the Loan or any portion thereof,
or any interest, fee, expense or other payment becomes due and payable, whether
as stated or by virtue of mandatory prepayment, by Acceleration or otherwise.
1.19 "Maturity Date" means June 1, 2000, or such earlier date as all
Outstanding Principal and accrued but unpaid interest on the Note becomes due.
1.20 "Note" has the meaning set forth in Section 2.1.
1.21 "Obligations" means the Loan and any other loans, advances, debts,
interest, liabilities, obligations, fees, expenses, covenants and duties owing
to Lender by Borrower, of any kind or nature, present or future, whether or not
evidenced by any note, guaranty or other instrument, arising under this
Agreement.
1.22 "Outstanding Principal" means, as determined from time to time, the
unpaid principal amount of the Loan made by Lender to Borrower pursuant to this
Agreement.
1.23 "Person" means any human being or any corporation, partnership,
trust, association or other entity or organization, including any governmental
authority.
1.24 "Potential Default" means any event or condition which with notice,
passage of time or a determination by Lender, or any combination of the
foregoing, would constitute an Event of Default.
ARTICLE 2
---------
Loan and Note
-------------
2.1 Loan.
----
(a) Subject to the terms and conditions of this Agreement, at any
time and from time to time during the period (the "Commitment Period") beginning
on the Closing Date and ending on the Commitment Termination Date, Lender shall
make the Loan to Borrower in the principal amount of up to $3,500,000. Borrower
shall use the proceeds of the Loan solely for the purposes described in Section
5.7.
(b) Subject to satisfaction of the conditions set forth in Article 3,
during the Commitment Period Lender shall disburse proceeds of the Loan to
Borrower on each date (an
3
<PAGE>
"Advance Date") that is designated by Borrower by a notice requesting such
disbursement given to Lender at least three Business Days before such Advance
Date. Such notice shall state the principal amount requested to be disbursed
and must be accompanied by (i) a certificate of Borrower signed on its behalf by
its Chief Executive Officer or Chief Financial Officer certifying that the
conditions to the obligation of Lender to make such advance, as set forth in
Article 3, will be satisfied as of the Advance Date and (ii) the items
prescribed by Section 3.7 to the extent applicable to such advance.
(c) Borrower's obligation to repay the Loan shall be evidenced by a
promissory note of Borrower (the "Note") in the form attached as Exhibit A. On
the Closing Date, Borrower shall deliver to Lender the Note, executed by
Borrower.
2.2 Interest.
--------
(a) Interest. The Loan shall bear interest from the Closing Date on
--------
the Outstanding Principal until such amount is repaid at the rate of 12 1/2% per
annum. Borrower shall, on the Commitment Termination Date, pay Lender all
accrued interest on Outstanding Principal accrued through such date. Any
payment of principal, interest or any fee, expense or other payment payable by
Borrower hereunder that is not paid when due shall bear interest from the due
date thereof until the date such payment is made in full at the rate of 15% per
annum.
(b) Computation of Interest. Interest shall be computed for the
-----------------------
actual number of days elapsed on the basis of a 360-day year. If the amount of
interest payable on any interest payment date in respect of the immediately
preceding interest computation period would exceed the maximum amount permitted
by applicable Legal Requirements to be charged by Lender, the amount of interest
payable on such interest payment date shall automatically be reduced to such
maximum permissible amount. If the amount of interest payable in respect of any
interest computation period is reduced pursuant to the foregoing sentence and
the amount of interest payable for Lender's account in respect of any subsequent
interest computation period would be less than the maximum amount permitted by
applicable Legal Requirements to be charged by Lender, then the amount of
interest payable in respect of such subsequent interest computation period shall
be automatically increased to such maximum permissible amount; provided that at
no time shall the aggregate amount by which interest paid has been increased
exceed the aggregate amount by which interest paid has theretofore been reduced.
2.3 Payments.
--------
(a) Payment of Loan. Borrower (i) shall pay interest accrued on the
---------------
Loan as provided in Section 2.2(a) and (ii) shall pay the Outstanding Principal
as of the Commitment Termination Date and all interest thereon in 36 equal
monthly installments, commencing on July 1, 1997 and thereafter on the first day
of each month until the Maturity Date. All payments on the Loan shall be
applied first to the payment of unpaid interest and the balance, if any, to
Outstanding Principal. Amounts repaid by Borrower may not be reborrowed.
4
<PAGE>
(b) Optional Prepayment. Borrower may, at any time, prepay the Loan in
-------------------
whole or in part, without penalty or premium.
(c) Payments. All payments made to Lender under this Agreement,
--------
whether for interest, principal, fees, expenses or late charges shall be made in
immediately available funds by wire transfer to the account designated by Lender
or, if no such account is designated, by delivery to Lender at Lender's address
for notices as set forth in this Agreement and shall be made prior to noon
Colorado time on the date of the scheduled payment. All payments received after
noon Colorado time shall be considered to have been received on the next
Business Day. If the due date of any payment falls on a day that is not a
Business Day, such payment shall instead be due the next succeeding Business
Day.
ARTICLE 3
---------
Conditions Precedent
--------------------
The obligation of Lender to make the Loan (or any advance thereof) shall be
subject to the satisfaction, on the Closing Date and on each Advance Date, as
applicable, of each of the following conditions:
3.1 Note. Lender shall have received the Note duly executed and
----
delivered by Borrower.
3.2 Reports, Certificates and Other Information. Lender shall have
-------------------------------------------
received such instruments or documents as Lender may reasonably request relating
to the existence and good standing of Borrower, the authority for execution,
delivery and performance of this Agreement or the creation and perfection of the
security interest set forth in Article 8 hereof.
3.3 No Existing Default. No Event of Default or Potential Default shall
-------------------
exist.
3.4 Representations and Warranties Correct; Compliance with Covenants.
-----------------------------------------------------------------
The representations and warranties set forth in Article 4 shall be true and
correct in all material respects and Borrower shall have complied in all
material respects with its covenants and agreements in this Agreement.
3.5 No Material Adverse Effect. Since December 31, 1996, no event shall
--------------------------
have occurred that has had, or reasonably could be expected to have, a Material
Adverse Effect, other than with respect to, or as a result of, the disposition
of Borrower's European operations.
3.6 Affiliation Agreement. Borrower and Satellite Services, Inc. shall
---------------------
have entered into an affiliation agreement (or an amendment to the affiliation
agreement currently in effect) providing, among other things, for the inclusion
of Borrower's music services in the digital cable television services offered by
Lender's Affiliates.
5
<PAGE>
3.7 Verification of Use of Proceeds. Borrower shall have provided to
-------------------------------
Lender invoices, purchase orders or other evidence reasonably satisfactory to
Lender as to compliance by Borrower with its covenant in Section 5.7 as to each
advance of the Loan.
ARTICLE 4
---------
Representations and Warranties of Borrower
------------------------------------------
To induce Lender to enter into this Agreement and to make the Loan,
Borrower makes the following representations and warranties to Lender:
4.1 Due Organization. Borrower is a corporation duly organized, validly
----------------
existing and in good standing under the laws of Delaware.
4.2 Chief Executive Office. The chief executive office of Borrower is at
----------------------
11400 West Olympic Boulevard, Suite 1100, Los Angeles, California 90064-1507.
4.3 Corporate Power. Borrower has all corporate power necessary to own
---------------
and operate its properties and to carry on its business as now conducted and to
execute and deliver, and to perform its obligations under, this Agreement, the
Note and the other instruments and agreements to be executed and delivered by
Borrower pursuant to this Agreement.
4.4 Authorization. All corporate action on the part of Borrower
-------------
necessary for the execution, delivery and performance of this Agreement has been
duly taken and is in full force and effect.
4.5 Representative Authorization. The officer executing this Agreement
----------------------------
on behalf of Borrower is fully authorized to execute and deliver the same.
4.6 Binding Nature. This Agreement is a legal, valid and binding
--------------
obligation of Borrower, enforceable in accordance with its terms, except as
affected by bankruptcy, insolvency or similar laws and by general equitable
principles.
4.7 Litigation and Contingent Liabilities. There is no action, suit,
-------------------------------------
investigation or proceeding pending or, to the knowledge of Borrower, threatened
in writing against or affecting Borrower, or any of its property by or before
any court, arbitrator or administrative or governmental authority, the adverse
determination of which reasonably could be expected to have a Material Adverse
Effect, except for the purported class action lawsuit entitled Brickell Partners
-----------------
v. Jerold H. Rubinstein, Donne F. Fisher, Leo J. Hindery, Jr., James R. Shaw,
- -----------------------------------------------------------------------------
Sr., Kent Burkhart, J.C. Sparkman, Menon Bhaskar, DMX Inc., and Tele-
- --------------------------------------------------------------------
Communications, Inc. (Civil Action No. 15206) filed in the Delaware Chancery
- --------------------
Court.
6
<PAGE>
4.8 No Event of Default. No Event of Default has occurred and is
-------------------
continuing or would result from the execution, delivery and performance by
Borrower of this Agreement.
4.9 Compliance With Laws. Borrower is in compliance with all Legal
--------------------
Requirements applicable to its assets and business with only such exceptions as
in the aggregate would not be reasonably likely to have a Material Adverse
Effect. No approvals by, or filings with, any governmental authority are
required to be obtained or made in connection with the execution and delivery of
this Agreement or the Note, the consummation of the transactions herein or
therein contemplated or the performance of or compliance with the terms and
conditions hereof or thereof.
4.10 Absence of Conflicts. The execution, delivery or performance of
--------------------
this Agreement or the Note will not (a) violate any Legal Requirement, (b)
conflict with or result in a breach of or a default under any agreement or
instrument to which Borrower is a party or by which any of its properties is
bound or (c) result in the creation or imposition of a Lien upon any property
(now owned or hereafter acquired) of Borrower (except for the security interest
granted pursuant to Article 8).
4.11 Accurate and Complete Disclosure. No representation or warranty
--------------------------------
made by Borrower in this Agreement is false or misleading in any material
respect (including by omission of material information necessary to make such
representation, warranty or statement not misleading).
4.12 Title and Authority. Borrower has rights in and good title to the
-------------------
Collateral and has full power and authority to grant to Lender a security
interest in the Collateral pursuant to this Agreement and to execute, deliver
and perform its obligations in accordance with this Agreement, without the
consent or approval of any other Person other than any consent or approval which
has been obtained.
4.13 Filings. Fully executed Uniform Commercial Code financing
-------
statements containing a description of the Collateral have been filed of record
in every governmental office in which such filing is necessary to establish a
legal, valid and perfected security interest in favor of Lender in respect of
any Collateral (other than Collateral that is equipment located at premises
occupied by subscribers to Borrower's music services) in which a security
interest may be perfected by filing in the United States and its territories and
possessions, and no further or subsequent filing, refiling, recording,
rerecording, registration or reregistration is necessary in any such
jurisdiction, except as provided under applicable law with respect to the filing
of Uniform Commercial Code continuation statements.
4.14 No Other Names. Borrower uses no name other than "DMX Inc."
--------------
4.15 Priority of Security Interest. The Collateral is and will be owned
-----------------------------
by Borrower free and clear of any Lien other than the security interest granted
hereby. The security interest
7
<PAGE>
granted to Lender in Article 8 is a legal, valid and perfected first priority
security interest subject to no prior Lien of any nature.
ARTICLE 5
---------
Affirmative Covenants
---------------------
Unless Lender shall otherwise agree, Borrower shall comply with the
following provisions so long as any Obligation is outstanding:
5.1 Accounting Records. Borrower shall maintain adequate books and
------------------
accounts in accordance with GAAP. Within 45 days after the end of each of the
first three quarters of each fiscal year, Borrower shall deliver to Lender a
copy of consolidated financial statements for such quarter (consisting of at
least a balance sheet and related statements of operations, cash flows and
stockholders equity), and within 90 days after the end of each fiscal year
Borrower shall deliver a copy of audited consolidated financial statements for
such fiscal year (consisting of at least a balance sheet and related statements
of operations, cash flows and stockholders equity). All such financial
statements shall be prepared in accordance with GAAP applied on a basis
consistent with prior periods (except as otherwise noted therein) and, to the
extent applicable, Regulation S-X under the Exchange Act.
5.2 Corporate Existence. Borrower shall preserve and maintain its
-------------------
corporate existence and all its licenses, privileges and franchises and other
rights necessary or desirable in the normal course of its businesses, except to
the extent that the failure to preserve and maintain its corporate existence and
such rights would not be reasonably likely to have a Material Adverse Effect.
5.3 Qualifications To Do Business. Borrower shall qualify to do business
-----------------------------
and shall be and remain in good standing in each jurisdiction in which the
nature of its business requires it to be so qualified, or in which failure to be
so qualified and in good standing would be reasonably likely to have a Material
Adverse Effect.
5.4 Compliance With Laws. Borrower shall comply with all applicable
--------------------
Legal Requirements, except where the failure to do so would not have a Material
Adverse Effect.
5.5 Taxes and Other Liabilities. Borrower shall pay and discharge when
---------------------------
due (including any grace period) any and all Indebtedness and all taxes and
assessments except as may be subject to good faith contest or as to which a bona
fide dispute may arise.
5.6 Conduct of Business. Borrower shall conduct its business only in
-------------------
the ordinary course.
8
<PAGE>
5.7 Use of Proceeds. Borrower shall use the proceeds of the Loan only
---------------
(i) to purchase (or to reimburse the Company for its purchase, after September
30, 1996, of) tuners, including remote controls and related equipment, for use
by its commercial and residential customers in receiving Borrower's music
services and (ii) to pay commissions owed in connection with the obtaining of
commercial customers for Borrower's music services.
5.8 Records of Accounts Receivable. Borrower shall keep or cause to be
------------------------------
kept records of all accounts receivable included in the Collateral which are
accurate in all material respects. Borrower shall at all times keep all records
of such accounts receivable and the other Collateral at its chief executive
office located at 11400 West Olympic Boulevard, Suite 1100, Los Angeles,
California 90064-1507.
5.9 Protection of Security. Borrower shall, at its own cost and
----------------------
expense, take any and all actions necessary to defend title to the Collateral
against all Persons and to defend the security interest of Lender in the
Collateral and the priority thereof, against any adverse Lien of any nature
whatsoever.
5.10 Continuing Obligations of Borrower. Borrower shall observe and
----------------------------------
perform all the material conditions and obligations to be observed and performed
by it under each material contract, agreement, interest or obligation relating
to the Collateral, all in accordance with the terms and conditions thereof.
5.11 Indemnification. Borrower shall indemnify and hold Lender and
---------------
Lender's directors, officers, employees, affiliates, attorneys and agents
(collectively, the "Indemnitees") harmless from and against any and all
liabilities, obligations, losses, damages, penalties, actions, judgments, suits,
claims, costs, expenses and disbursements of any kind or nature whatsoever
(including, without limitation, the reasonable fees and disbursements of
counsel) which may be imposed on, incurred by or asserted against such
Indemnitees in any manner relating to or arising out of this Agreement or the
making of the Loan (collectively, the "Indemnified Matters"); provided, however,
that Borrower shall have no obligation to an Indemnitee under this Section 5.11
with respect to Indemnified Matters to the extent such Indemnified Matters were
caused by or resulted from the gross negligence or willful misconduct of an
Indemnitee.
ARTICLE 6
---------
Negative Covenants
------------------
Unless Lender shall otherwise agree, Borrower shall comply with the
following provisions so long as any Obligation is outstanding:
6.1 No Merger, etc. Borrower shall not effect or enter into any
--------------
agreement to effect, any merger, consolidation, reorganization, recapitalization
or similar transaction other than as contemplated by the proposal made by Lender
to the Company on August 30, 1996.
9
<PAGE>
6.2 Type of Business. Borrower shall not engage in any material respect
----------------
in any business other than the businesses in which it currently is engaged.
6.3 Indebtedness. Borrower shall not incur, assume or suffer to exist
------------
any Indebtedness, except (a) the Loan, (b) Indebtedness for borrowed money and
capital lease obligations outstanding as of the Closing Date and reflected in
the most recent balance sheet of Borrower delivered to Lender and (c)
Indebtedness for goods or services incurred in the ordinary course of business.
6.4 Dividends. Without the prior written consent of Lender, Borrower
---------
shall not make or pay, or become or remain liable to make or pay, any
distribution of any nature (whether in cash, property, securities or otherwise)
on account of or in respect of any equity interest in Borrower or on account of
the purchase, redemption, retirement or acquisition of any such equity interest.
6.5 Loans and Investments. Borrower shall not at any time make or have
---------------------
outstanding any loan or advance to, or purchase, acquire or own any stock,
bonds, notes or securities of, or any partnership or other ownership interest
in, or make any capital contribution to, any other Person, or purchase or
acquire any assets (whether with cash or in exchange for other assets) or make
any other investment in any Person or agree, become or remain liable to do any
of the foregoing, except:
(a) investments and loans described in any of its periodic reports
filed pursuant to the Exchange Act prior to the date of this Agreement;
(b) trade credit extended to subcontractors or suppliers, under usual
and customary terms in the ordinary course of business; and
(c) loans and advances on a short-term basis to employees and officers
of Borrower in the ordinary course of Borrower's business for expenses of such
businesses.
6.6 Sale of Assets. Borrower shall not at any time sell, lease, assign
--------------
or otherwise dispose of any of its assets to any Person, whether pursuant to a
sale, lease, assignment, transfer or other disposition of capital stock, assets
or other property, in one transaction or in any series of related transactions,
except for sales of inventory and equipment in the ordinary course of business
of Borrower or the leasing of equipment and other property in the ordinary
course of business of Borrower.
6.7 No Other Lien. Except for the security interest herein granted to
-------------
Lender, Borrower shall not create, incur, assume or suffer to exist any Lien of
any kind on the Collateral.
ARTICLE 7
---------
Events of Default
-----------------
10
<PAGE>
7.1 Events of Default. Each of the following shall constitute an Event
-----------------
of Default under this Agreement:
(a) Payments. Borrower shall fail to pay when due, whether at
--------
Maturity or otherwise, any principal, interest, fees, expenses or other payment
due under this Agreement or the Note, and such failure shall continue uncured
for two Business Days after the due date.
(b) Other Covenants. Borrower shall fail in any material respect to
---------------
perform any of its obligations under this Agreement other than any obligation to
pay money, and such failure shall continue uncured for a period of 30 days.
(c) Warranties. Any warranty or representation made by Borrower
----------
shall be untrue in any material respect.
(d) Bankruptcy. Borrower shall institute a voluntary case seeking
----------
liquidation or reorganization under Chapter 7 or Chapter 11 of the United States
Bankruptcy Code, or shall consent to the institution of an involuntary case
thereunder against it; Borrower shall file a petition initiating or shall
otherwise institute any similar proceeding under any other applicable federal or
state law, or shall consent thereto; or Borrower shall apply for, or by consent
or acquiescence there shall be an appointment with respect to Borrower of, a
receiver, liquidator, sequestrator, trustee or other officer with similar
powers, or Borrower shall make an assignment for the benefit of creditors; or
Borrower shall admit in writing its inability to pay its debts generally as they
become due; or, if an involuntary case shall be commenced seeking the
liquidation or reorganization of Borrower under Chapter 7 or Chapter 11 of the
United States Bankruptcy Code, or any similar proceeding shall be commenced
against Borrower under any other applicable law, and (i) the petition commencing
the involuntary case is not timely controverted, (ii) the petition commencing
the involuntary case is not dismissed within 45 days after its filing, (iii) an
interim trustee is appointed to take possession of all or a portion of the
property, to operate all or any part of the business of Borrower or (iv) an
order for relief or a decree or order of a court having jurisdiction in the
premises for the appointment of a receiver, liquidator, sequestrator, trustee or
other officer shall have been issued or entered therein.
(e) Cross-Default. Borrower shall be in default of any obligation
-------------
(other than the Obligations) under any agreement or instrument for the payment
of Indebtedness in excess of $100,000 and such Indebtedness shall continue
uncured for more than 10 days.
7.2 Acceleration. If any Event of Default described in Section 7.1(d)
------------
shall occur, all Obligations shall become immediately due and payable, all
without notice of any kind. If any other Event of Default shall occur, Lender
may declare all Obligations to be due and payable, whereupon all Obligations
shall immediately become due and payable, all as so declared by Lender and
without presentment, demand, protest or other notice of any kind. Any such
declaration made pursuant to this Section 7.2 may be rescinded by Lender.
11
<PAGE>
7.3 Other Remedies. If any Event of Default shall occur and be
--------------
continuing, Lender shall have, in addition to the remedies set forth in this
Agreement, all other remedies available at law or in equity.
ARTICLE 8
---------
Security Interest
-----------------
8.1 Grant of Security Interest. To secure the prompt payment and
--------------------------
performance of the Obligations, Borrower hereby grants to Lender a security
interest in all of Borrower's right, title and interest in the following
(collectively, the "Collateral"):
(a) all tuners, remote control devices and other equipment designed
for use by Borrower's customers in receiving Borrower's music services;
(b) all agreements with commercial subscribers to Borrower's music
services, including accounts receivable or other rights to payment arising from
goods sold or leased or services rendered under such agreements; and
(c) all proceeds from the sale, exchange, lease or other disposition
of any asset that constitutes Collateral.
8.2 Collections.
-----------
(a) So long as no Event of Default shall have occurred and be
continuing, Borrower shall have the right to collect all accounts receivable
included in the Collateral in the ordinary course of its business; provided that
Borrower shall, if Lender shall so request, (i) arrange for remittances on any
such accounts receivable to be made directly to lock boxes or blocked accounts
designated by Lender or in such other manner as Lender may direct, and (ii)
promptly deposit all payments received by Borrower on account of such accounts
receivable, whether in the form of cash, checks, notes, drafts, bills of
exchange, money orders or otherwise, in one or more accounts designated by
Lender in precisely the form received (but with any endorsements of Borrower
necessary for deposit or collection), subject to withdrawal by Lender only, as
hereinafter provided, and until they are deposited, such payments shall be
deemed to be held in trust by Borrower for and as Lender's property and shall
not be commingled with Borrower's other funds.
(b) Upon the occurrence and during the continuance of an Event of
Default, Lender shall have the right, as the agent of Borrower, with power of
substitution for Borrower and in Borrower's name, Lender's name or otherwise,
for the use and benefit of Lender (i) to receive, endorse, assign or deliver any
and all notes, acceptances, checks, drafts, money orders or other evidences of
payment relating to the Collateral or any part thereof; (ii) to demand, collect,
receive payment of, give receipt for and give discharges and releases of all or
any of the Collateral; (iii) to sign the name of Borrower on any invoice or bill
of lading relating to any of the Collateral;
12
<PAGE>
(iv) to send verifications of accounts receivable to any customer; (v) to
commence and prosecute any and all suits, actions or proceedings at law or in
equity in any court of competent jurisdiction to collect or otherwise realize on
all or any of the Collateral or to enforce any rights in respect of any
Collateral; (vi) to settle, compromise, adjust or defend any actions, suits or
proceedings relating to or pertaining to all or any of the Collateral; (vii) to
notify, or to require Borrower to notify, the account debtors obligated on any
accounts receivable to make payment thereof directly to Lender; and (viii) to
use, sell, assign, transfer, pledge, make any agreement with respect to or
otherwise deal with all or any of the Collateral, and to do all other acts and
things necessary to carry out the purposes of this Agreement, as fully and
completely as though Lender were the absolute owner of the Collateral for all
purposes; provided that nothing herein contained shall be construed as requiring
or obligating Lender to make any commitment or to make any inquiry as to the
nature or sufficiency of any payment received by Lender, or to present or file
any claim or notice, or to take any action with respect to the Collateral or any
part thereof or the moneys due or to become due in respect thereof or any
property covered thereby, and no action taken by Lender or omitted to be taken
with respect to the Collateral or any part thereof shall give rise to any
defense, counterclaim or offset in favor of Borrower or to any claim or action
against Lender in the absence of the gross negligence or wilful misconduct of
Lender. The appointment of Lender as the agent of Borrower for the purposes set
forth in this Section 8.2 is coupled with an interest and is irrevocable. The
provisions of this Section 8.2 shall in no event relieve Borrower of any of its
obligations under this Agreement with respect to the Collateral or any part
thereof or impose any obligation on Lender to proceed in any particular manner
with respect to the Collateral or any part thereof, or in any way limit the
exercise by Lender of any other or further right which it may have on the date
of this Agreement or hereafter, whether hereunder or by law or otherwise.
8.3 Remedies upon Default.
---------------------
(a) Upon the occurrence and during the continuance of an Event of
Default, Borrower shall deliver each item of Collateral to Lender on demand, and
it is agreed that Lender shall have the right to take any or all of the
following actions at the same or different times: (i) with or without legal
process and with or without previous notice or demand for performance, to take
possession of the Collateral and without liability for trespass (as to the
property of Borrower) to enter any premises where the Collateral may be located
for the purpose of taking possession of or removing the Collateral; and (ii)
generally, to exercise any and all rights afforded to a secured party under the
Uniform Commercial Code or other applicable Legal Requirements. Without
limiting the generality of the foregoing, Lender shall have the right, subject
to the applicable Legal Requirements, to sell or otherwise dispose of all or any
part of the Collateral, at public or private sale or at any broker's board or on
any securities exchange, for cash, upon credit or for future delivery as Lender
shall deem appropriate. As to any Collateral constituting a security, Lender
shall be authorized at any such sale (if it reasonably deems it advisable to do
so) to restrict the prospective bidders or purchasers to Persons who will
represent and agree that they are purchasing the Collateral for their own
account for investment and not with a view to the distribution or sale thereof.
Upon consummation of any sale Lender shall have the right to assign, transfer
and deliver to the purchaser or purchasers thereof the Collateral so sold. Each
purchaser at any sale of Collateral shall hold the
13
<PAGE>
property sold absolutely, free from any claim or right on the part of Borrower,
and Borrower hereby waives (to the extent permitted by applicable Legal
Requirements) all rights of redemption, stay and appraisal which Borrower now
has or may at any time in the future have under any Legal Requirement now
existing or hereafter enacted.
(b) Lender shall give Borrower at least 10 days' written notice
(which Borrower agrees is reasonable notice within the meaning of Section
9-504(3) of the Uniform Commercial Code) of Borrower's intention to make any
sale of Collateral. Such notice, in the case of a public sale, shall state the
time and place for such sale and, in the case of a sale at a broker's board or
on a securities exchange, shall state the board or exchange at which such sale
is to be made and the day on which the Collateral, or portion thereof, will
first be offered for sale at such board or exchange. Any such public sale shall
be held at such time or times within ordinary business hours and at such place
or places as Lender may fix and state in the notice (if any) of such sale. At
any such sale, the Collateral, or portion thereof, to be sold may be sold in one
lot as an entirety or in separate parcels, as Lender may determine. Lender shall
not be obligated to make any sale of any Collateral if it shall determine not to
do so, regardless of the fact that notice of sale of such Collateral shall have
been given. Lender may, without notice or publication, adjourn any public or
private sale or cause the same to be adjourned from time to time by announcement
at the time and place fixed for sale, and such sale may, without further notice,
be made at the time and place to which the same was so adjourned. In case any
sale of all or any part of the Collateral is made on credit or for future
delivery, the Collateral so sold may be retained by Lender until the sale price
is paid by the purchaser or purchasers thereof, but Lender shall not incur any
liability in case any such purchaser or purchasers shall fail to take up and pay
for the Collateral so sold and, in case of any such failure, such Collateral may
be sold again upon like notice. At any public sale, Lender may bid for or
purchase, free (to the extent permitted by applicable Legal Requirements) from
any right of redemption, stay or appraisal on the part of Borrower (all such
rights being also hereby waived and released to the extent permitted by
applicable Legal Requirements), the Collateral or any part thereof offered for
sale and may make payment on account thereof by using any claim then due and
payable to Lender from Borrower as a credit against the purchase price, and
Lender may, upon compliance with the terms of sale, hold, retain and dispose of
such property without further accountability to Borrower therefor. As an
alternative to exercising the power of sale herein conferred upon it, Lender may
proceed by a suit or suits at law or in equity to foreclose on and to sell the
Collateral or any portion thereof pursuant to a judgment or decree of a court or
courts having competent jurisdiction or pursuant to a proceeding by a court-
appointed receiver. In any event, Lender shall have the right to claim and
collect from Borrower any deficiency remaining after sale of any Collateral.
8.4 Application of Proceeds. Lender shall apply the proceeds of any
-----------------------
collection or sale of the Collateral as follows:
FIRST, to the payment of all reasonable costs and expenses incurred by
Lender in connection with such collection or sale or otherwise in connection
with this Agreement or any of the Obligations, including all court costs and
the reasonable fees and expenses of its agents and legal counsel, the
repayment of all advances made by Lender hereunder on behalf
14
<PAGE>
of Borrower and any other reasonable costs or expenses incurred by Lender in
connection with the exercise of any right or remedy hereunder;
SECOND, to the payment in full of the Obligations, in accordance with this
Agreement; and
THIRD, to Borrower, its successors or assigns, or as a court of competent
jurisdiction may otherwise direct.
Lender shall have absolute discretion as to the time of application of any such
proceeds, moneys or balances in accordance with this Agreement. Upon any sale
of the Collateral by Lender (including, pursuant to a power of sale granted by
statute or under a judicial proceeding), the receipt of Lender or of the officer
making the sale shall be a sufficient discharge to the purchaser or purchasers
of the Collateral so sold and such purchaser or purchasers shall not be
obligated to see to the application of any part of the purchase money paid over
to Lender or such officer or be answerable in any way for the misapplication
thereof.
8.5 Locations of Collateral; Place of Business.
------------------------------------------
(a) Borrower hereby represents and warrants that all the tangible
Collateral (other than Collateral that is equipment located at premises occupied
by subscribers to Borrower's music services) is located at the locations listed
on Schedule 8.5. Borrower shall not establish, or permit to be established, any
other location for Collateral unless all filings under the Uniform Commercial
Code or otherwise which are required by this Agreement to be made with respect
to the Collateral have been made and Lender has a valid, legal and perfected
first priority security interest in the Collateral.
(b) At such time or times as Lender may request, Borrower shall
promptly prepare and deliver to Lender a schedule or schedules in form
satisfactory to Lender, certified on behalf of Borrower by the president or a
vice president of Borrower, showing the identity, amount and location of any and
all Collateral.
(c) Borrower shall not change, or permit to be changed, the location
of its chief executive office unless all filings under the Uniform Commercial
Code or otherwise which are required by this Credit Agreement to be made have
been made and Lender has a valid, legal and perfected first priority security
interest.
ARTICLE 9
---------
Miscellaneous
-------------
9.1 Successors and Assigns. The terms and provisions of this
----------------------
Agreement shall be binding upon, and the benefits thereof shall inure to, the
parties hereto and their respective
15
<PAGE>
successors and assigns, except that Borrower may not assign or transfer any of
its rights or obligations hereunder without the prior written consent of Lender.
9.2 No Implied Waiver. No delay or omission to exercise any right,
-----------------
power or remedy accruing to Lender upon any breach or default of Borrower under
this Agreement shall impair any such right, power or remedy of Lender, nor shall
it be construed to be a waiver of any such breach or default, or an acquiescence
therein, or of or in any similar breach or default occurring thereafter, nor
shall any waiver of any single breach or default be deemed a waiver of any other
breach or default occurring theretofore or thereafter.
9.3 Amendments; Waivers. No amendment, modification or waiver of any
-------------------
provision of this Agreement shall be effective unless the same shall be in
writing and signed and delivered by each party to be bound thereby. Any
amendment, modification or waiver hereunder shall be effective only in the
specific instance and for the specific purpose for which given.
9.4 Severability. If any provision of this Agreement, or the
------------
application of such provision to any Person or circumstance, is found by a court
of competent jurisdiction to be unenforceable for any reason, such provision may
be modified or severed from this Agreement to the extent necessary to make such
provision enforceable against such Person or in such circumstance. Neither the
unenforceability of such provision nor the modification or severance of such
provision will affect (i) the enforceability of any other provision of this
Agreement or (ii) the enforceability of such provision against any Person or in
any circumstance other than those against or in which such provision is found to
be unenforceable.
9.5 Notices. Any notice which Borrower or Lender may be required or
-------
may desire to give to the other under any provision of this Agreement shall be
in writing, and shall be deemed to have been duly given if (a) personally
delivered (including delivery by Federal Express or other nationally recognized
overnight courier) or (b) sent by telecopy as follows:
To Borrower:
DMX Inc.
11400 West Olympic Boulevard
Suite 1100
Los Angeles, California 90064-1507
Attention: President
Telecopy No.: (310) 444-1717
With a copy to:
Irell & Manella LLP
1800 Avenue of the Stars
Suite 900
16
<PAGE>
Los Angeles, California 90067-7199
Attention: Alvin G. Segel, Esq.
Telecopy No.: (310) 203-7199
To Lender:
Tele-Communications, Inc.
5619 DTC Parkway
Englewood, Colorado 80111
Attention: General Counsel
Telecopy No.: (303) 488-3245
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
Any party may change the address to which all notices, requests and other
communications are to be sent to it by giving written notice of such address
change to the other parties in conformity with this paragraph, but such change
shall not be effective until notice of such change has been received by the
other parties.
9.6 Interpretation. This Agreement, together with the exhibits and
--------------
schedules to this Agreement, is the final expression of their agreement with
respect to the subject matter hereof and is intended as a complete statement of
the terms and conditions of such agreement.
9.7 GOVERNING LAW. THE VALIDITY, CONSTRUCTION AND EFFECT OF THIS
-------------
AGREEMENT SHALL BE GOVERNED BY THE LAWS OF THE STATE OF COLORADO, WITHOUT REGARD
TO ITS LAWS REGARDING CHOICE OF APPLICABLE LAW.
9.8 Counterparts. This Agreement may be executed in any number of
------------
counterparts each of which shall be an original with the same effect as if the
signatures thereto and hereto were upon the same instrument.
9.9 Headings. Captions, headings and the table of contents in this
--------
Agreement are for convenience only, and are not to be deemed part of this
Agreement.
9.10 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
17
<PAGE>
pronouns (and any variation) 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. The word year means a calendar year.
9.11 Additional Waivers.
------------------
(a) Bankruptcy. In the event that Borrower becomes insolvent or
----------
files a petition for reorganization, arrangement, composition, discharge or
similar relief under any present or future provision of the Bankruptcy Code, or
if such a petition be filed against Borrower, and in any such proceedings some
or all of the Obligations shall be terminated or rejected or any of the
Obligations of Borrower modified or abrogated, Borrower agrees that its
liability hereunder shall not thereby be affected or modified, and such
liability shall continue in full force and effect as if no such action or
proceeding had occurred and shall continue to be effective or reinstated, as the
case may be, if any payment of any of the Obligations must be returned by Lender
upon such insolvency, bankruptcy or reorganization, or otherwise, as though such
payment had not been made.
(b) Statutes of Limitation. Borrower waives the benefit of any
----------------------
statute of limitations affecting its liability hereunder or the enforcement
thereof, to the extent permitted by law. Borrower understands that Lender would
not make the Loan in the absence of the foregoing covenant by Borrower and the
other covenants of Borrower in this Agreement.
(c) Demands for Performance. Borrower acknowledges that repeated and
-----------------------
successive demands may be made and payments or performance made hereunder in
response to such demands as and when, from time to time, Borrower may default in
its performance of the Obligations. Notwithstanding any such performance
hereunder, this Agreement shall remain in full force and effect and shall apply
to any and all subsequent defaults by Borrower in payment or performance of the
Obligations.
(d) No Set-off. Borrower waives any defense arising by reason of any
----------
disability of Borrower. Borrower waives any setoff, defense or counterclaim
which Borrower may have or claim to have against Lender. Borrower shall not
have any right of subrogation, and hereby waives any right to enforce any remedy
which Lender now has or may hereafter have against Borrower, and waives any and
all statutory or other rights to participate in any security now or hereafter
held by Lender.
9.12 Further Assurances. Borrower, at its expense, shall execute,
------------------
acknowledge, deliver and cause to be duly filed all such further instruments and
documents and take all such actions as Lender may from time to time reasonably
request for the better assuring and preserving of the security interests and the
rights and remedies created hereby, including the payment of any fees and taxes
required in connection with the execution and delivery of this Agreement, the
granting of the security interests created hereby and the filing of any
financing statements or other documents in connection herewith. If any amount
payable under or in connection with any of the Collateral
18
<PAGE>
shall be or become evidenced by any promissory note or other instrument, such
note or instrument shall be immediately pledged and delivered to Lender, duly
endorsed in a manner satisfactory to Lender. Borrower shall notify Lender of any
change in its corporate name or in the location of its chief executive office,
its chief place of business or the office where it keeps its records relating to
the accounts receivable owned by it. Borrower shall promptly notify Lender if
any material portion of the Collateral is damaged or destroyed.
9.13 Expenses. Borrower shall pay all reasonable and documented out-
--------
of-pocket costs and expenses, including reasonable fees and documented
disbursements of Lender's counsel, in connection with an Event of Default or
Potential Default, the enforcement of this Agreement or the Note and collection
and other proceedings resulting therefrom. Borrower shall indemnify Lender
against any transfer taxes, documentary taxes, assessments or charges made by
any governmental authority by reason of the execution and delivery of this
Agreement or the Note.
9.14 Jurisdiction and Venue. The parties hereby irrevocably agree
----------------------
that any legal action or proceeding with respect to this Agreement may be
brought in (i) the Superior Court of Los Angeles County, California, (ii) the
United States District Court, Central District of California, (iii) any court of
the State of Colorado having jurisdiction over the subject matter of such action
or proceeding or (iv) the United States District Court, District of Colorado,
and by execution and delivery of this Agreement, each party hereby irrevocably
consents and submits to each such jurisdiction and hereby irrevocably waives any
and all objections which it may have as to venue in any of the above courts.
Borrower and Lender hereby waive personal service or any and all process, and
consent that all such services of process be made by registered or certified
mail directed to the addresses provided for in this Agreement and service so
made shall be deemed to be completed five Business Days after the same shall
have been deposited in the United States mail, postage prepaid.
9.15 Waiver of Jury Trial. EACH PARTY HEREBY WAIVES ITS RIGHTS TO
--------------------
A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF THIS
AGREEMENT, OR ANY DEALINGS BETWEEN BORROWER AND LENDER RELATING TO THE SUBJECT
MATTER OF THE TRANSACTIONS CONTEMPLATED BY THIS AGREEMENT. The scope of this
waiver is intended to be all encompassing of any and all disputes that may be
filed in any court and that relate to the subject matter of this transaction,
including contract claims, tort claims, breach of duty claims, and all other
common law and statutory claims. Each party acknowledges that this waiver is a
material inducement to enter into a business relationship, that Lender has
already relied on this waiver in entering into this Agreement, and that each
party will continue to rely on this waiver in any future dealings with the
other. Each party further warrants and represents that he or it has reviewed
this waiver with his or its legal counsel, and that he and or it knowingly and
voluntarily waives his or its jury trial rights following consultation with
legal counsel. THIS WAIVER IS IRREVOCABLE AND MAY BE MODIFIED ONLY IN WRITING,
AND THIS WAIVER SHALL APPLY TO ANY SUBSEQUENT AMENDMENT, RENEWAL, SUPPLEMENT OR
MODIFICATION OF OR TO THIS AGREEMENT. In the event of litigation, this
Agreement may be filed as a written consent to a trial by the court.
19
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date and year first above written.
DMX INC., a Delaware corporation
By: /s/ Jerold H. Rubinstein
_______________________________
Title: Chairman of the Board and
Chief Executive Officer
_______________________________
TELE-COMMUNICATIONS, INC., a Delaware
corporation
By: /s/ Stephen M. Brett
_______________________________
Title: Executive Vice President
_______________________________
20
<PAGE>
SCHEDULE 8.5
------------
LOCATION OF COLLATERAL
----------------------
<TABLE>
<CAPTION>
Location Type of Collateral
-------- ------------------
<S> <C>
11400 West Olympic Boulevard, Suite 1100 tuners, remote control devices
Los Angeles, California 90064-1507 and other equipment designed for
use by Borrower's customers in
receiving Borrower's music
services
15235 Alton Parkway, Suite 100, Building 18 same
Irvine, California 92714
</TABLE>
21
<PAGE>
EXHIBIT A
---------
NOTE
----
$3,500,000 ____________, 1997
Denver, Colorado
FOR VALUE RECEIVED, DMX Inc., a Delaware corporation ("Borrower"),
promises to pay to the order of Tele-Communications, Inc., a Delaware
corporation ("Lender"), at 5619 DTC Parkway, Englewood, Colorado 80111, in
lawful money of the United States of America and in immediately available funds,
the principal sum of up to Three Million Five Hundred Thousand Dollars
($3,500,000). This Note is made pursuant to the Loan and Security Agreement
(the "Loan Agreement") dated as of ____________, 1997, between Lender and
Borrower, and all terms defined in the Loan Agreement shall have the same
meanings when used herein. Interest shall accrue on the Outstanding Principal
at the rate prescribed by the Loan Agreement.
All interest on Outstanding Principal accrued from the date hereof
through and including May 31, 1997 shall be due and payable on May 31, 1997.
Thereafter, Outstanding Principal as of May 31, 1997 and accrued and unpaid
interest thereon shall be due and payable in 36 equal monthly installments on
the first day of each calendar month, beginning July 1, 1997. In any event, all
Outstanding Principal and all accrued and unpaid interest shall be due and
payable on the Maturity Date. All payments made on this Note shall be credited
first to accrued interest and second to the reduction of principal.
This Note is subject to the terms and conditions of the Loan
Agreement, to which reference is hereby made for a statement of such terms and
conditions, including the security provisions thereof, and those under which
this Note shall be paid prior to its due date or its due date accelerated.
This Note shall be deemed to be made under and shall be construed in
accordance with and governed by the laws of the State of Colorado.
DMX INC., a Delaware corporation
By: ______________________________
Title: ______________________________
A-1
<PAGE>
EXHIBIT 10.76
February 6, 1997
DMX, Inc.
11400 West Olympic Blvd., Suite 1100
Los Angeles, CA 90064-1507
Re: Amendment to Residential Deal
Gentlemen:
This letter is to confirm our agreement regarding a new rate card for the
delivery of DMX in digital homes. Capitalized terms not otherwise defined herein
shall have the meanings ascribed to such terms in the Affiliate Agreement dated
as of July 6, 1989 between Satellite Services, Inc. ("Affiliate") and
International Cablecasting Technologies, Inc., now known as DMX, Inc. ("DMX").
1. License fees for DMX premium customers who receive the Premium Service
through the stand-alone Scientific Atlanta DMX tuner remains at $2.50 per
month.
2. Affiliate has the right, but not the obligation, to compress, reconfigure,
and re-uplink any or all of the current or future DMX channels into a format
compatible with digital video receivers deployed by TCI, an affiliate of
TCI, or other third parties. Affiliate may downlink, sell, carry and package
all or less than all of the current or future DMX channels in any System in
accordance with paragraph 3 below, and shall have the right to deliver such
feeds to any third party.
3. Affiliate and affiliates of Affiliate shall have authority to determine
whether and in what packages DMX will be included as an a la carte or
package offering. Affiliate and DMX shall mutually agree upon the channels
which shall be included in any a la carte or package offering.
4. For each Service Subscriber who receives, via a digital receiver, a group of
DMX channels as part of a package with one or more other services (i.e.,
without payment of a separate a la carte fee for receipt of DMX channels),
Affiliate will pay a monthly license fee [*] per Service Subscriber.
For each Service Subscriber who receives, via a digital receiver, a group of
DMX channels on an a la carte basis, Affiliate shall pay license fees equal
to [*] per Service Subscriber per month.
<PAGE>
5. DMX, Inc., on behalf of itself and its parents, subsidiaries, officers,
directors, employees, agents and affiliates, hereby releases, acquits, and
forever discharges Affiliate and its affiliates, officers, directors,
agents, employees, parents, subsidiaries, and related corporations (the
"Released Parties"), from any and all causes of action, suits, liabilities,
debts, damages, controversies, demands and claims of any nature whatsoever,
whether in law or in equity, known or unknown, contingent or non-contingent,
accrued or unaccrued, and any and all rights, duties, liabilities and
obligations, whether or not presently enforceable, by reason or any matter,
event, conduct, fact, or cause whatsoever occurring or existing from the
beginning of time through the date hereof (the "Effective Date") and related
in any way, directly or indirectly, to license fees owned for the delivery
of DMX music services to commercial establishments. DMX shall indemnify and
hold harmless the Released Parties from and against any claim, loss or
expense brought by any third party in connection with any claim released in
this paragraph. Notwithstanding the foregoing, if the merger contemplated by
the Agreement and Plan of Merger by and among Tele-Communications, Inc., TCI
Music, Inc., TCI Music Merger Sub, Inc., and DMX is completed (the
"Completion Date"), the Effective Date shall be the Completion Date.
6. Effective upon the Completion Date (if the Completion Date occurs), the
obligation of DMX to pay Affiliate the sum of $400,000 as set forth in the
letter agreement dated as of December 7, 1994 between DMX and Affiliate
shall be forgiven.
If the foregoing accurately conveys our agreement, please sign below in the
space indicated and return a copy to me.
Very truly yours,
/s/ Madison E. Bond
Madison E. Bond
Senior Vice President, Programming
ACCEPTED AND AGREED TO:
By: /s/ Jerold H. Rubinstein
_____________________________
Name: Jerold H. Rubinstein
_____________________________
Title: Chairman of the Board and CEO
_____________________________
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 1996 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS
<FISCAL-YEAR-END> SEP-30-1997 SEP-30-1996
<PERIOD-START> OCT-01-1996 OCT-01-1995
<PERIOD-END> DEC-31-1996 DEC-31-1995
<CASH> 986,019 1,260,889
<SECURITIES> 0 165,000
<RECEIVABLES> 4,268,709 4,616,012
<ALLOWANCES> 467,786 856,802
<INVENTORY> 660,112 0
<CURRENT-ASSETS> 6,519,076 5,668,701
<PP&E> 12,903,857 8,025,879
<DEPRECIATION> 7,339,758 3,656,893
<TOTAL-ASSETS> 17,201,824 10,706,186
<CURRENT-LIABILITIES> 19,829,107 3,399,828
<BONDS> 0 0
0 0
0 0
<COMMON> 569,722 436,806
<OTHER-SE> (1,599,901) (11,935,360)
<TOTAL-LIABILITY-AND-EQUITY> 17,201,824 10,706,186
<SALES> 5,154,324 3,670,468
<TOTAL-REVENUES> 5,154,324 3,670,468
<CGS> 0 0
<TOTAL-COSTS> 9,558,045 6,589,288
<OTHER-EXPENSES> 943 4,507,501<F2>
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 92,724<F1> (16,609)<F1>
<INCOME-PRETAX> (4,332,590) (7,372,396)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (4,332,590) (7,372,396)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (4,332,590) (7,372,396)
<EPS-PRIMARY> (.07) (.17)
<EPS-DILUTED> (.07) (.17)
<FN>
<F1>NET OF INTEREST INCOME
<F2>EQUITY IN LOSS OF DMX-E, EQUITY ACCOUNTED IN 1995
</FN>
</TABLE>
