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As filed with the Securities and Exchange Commission on January 14, 1997.
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended September 30, 1996
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from ............... to .............
Commission file number 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, California 90064-1507
(Address of principal executive offices) Zip code
Registrant's telephone number, including area code: (310) 444-1744
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, $0.01
Par Value
Indicate by check mark whether 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 [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [_]
Unless otherwise specifically indicated, all monetary references in this filing
are in U.S. dollars.
As of December 31, 1996 the aggregate market value of the Common Stock held by
non-affiliates of the Registrant was approximately $23,080,987.
Number of shares of Common Stock of the Registrant outstanding as of December
31, 1996: 59,586,594 shares, including 85,630 shares held as Treasury Stock.
This report includes a total of 35 pages, excluding exhibits. The exhibit index
appears on page 36.
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TABLE OF CONTENTS
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Page
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PART I
Item 1. Business........................................... 3
Background......................................... 3
General............................................ 3
Goals and Strategies............................... 4
Domestic Business.................................. 5
International Business............................. 8
Ancillary Business Opportunities................... 10
The Superaudio Service............................. 10
Programming........................................ 12
Commercial Programming............................. 12
Residential Marketing.............................. 12
Commercial Marketing............................... 12
Technology......................................... 13
Research & Development............................. 14
Satellites......................................... 14
Music Rights....................................... 14
Competition........................................ 15
Regulation......................................... 15
Trademarks......................................... 16
Personnel.......................................... 17
Recent Developments................................ 17
Item 2. Properties......................................... 17
Item 3. Legal Proceedings.................................. 18
Item 4. Submission of Matters to a Vote of Security Holders 19
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters.............................. 19
Dividends.......................................... 19
Item 6. Selected Financial Data............................ 20
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations for the
fiscal year ended September 30, 1996 and
September 30, 1995............................... 21
Summary of Performance............................. 21
Results of Operations.............................. 21
Liquidity and Capital Resources.................... 26
Item 8. Financial Statements and Supplementary Data........ 26
Item 9. Changes In and Disagreements with Accountants on
Accounting and Financial Disclosure.............. 27
PART III
Item 10. Directors and Executive Officers of Registrant..... 27
Item 11. Executive Compensation............................. 30
Employment Agreements and Termination of
Employment Agreements............................ 31
Stock Options...................................... 32
Option Exercises and Holdings...................... 32
Compensation Committee Interlocks and Insider
Participation.................................... 32
Director Compensation.............................. 33
Item 12. Security Ownership of Certain Beneficial Owners
and Management................................... 33
Item 13. Certain Relationships and Related Transactions..... 34
PART IV
Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8K............................... 36
Index to Consolidated Financial Statements......... F-1
Notes to Consolidated Financial Statements......... F-7
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PART I
Item 1. BUSINESS.
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BACKGROUND.
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DMX Inc. (the "Company") was incorporated pursuant to the laws of the
State of Delaware in May 1990 under the name of International Cablecasting
Technologies Inc. ("ICT"), to accomplish a corporate reorganization which
effected a change of situs of its predecessor company of the same name ("ICT-
Canada"). ICT-Canada was incorporated pursuant to the laws of British Columbia
on April 26, 1979, under the name of Can-Am Entertainment Corporation and on
November 14, 1986, changed its name to International Cablecasting Technologies
Inc. On April 27, 1995, ICT changed its name to DMX Inc.
The Company's operations are comprised of those of DMX Inc. and its three
(3) wholly owned subsidiaries: a British Columbia corporation, 450714 B.C. Ltd.,
formed for the purpose of holding the Company's equity interest in its Canadian
joint venture with Shaw Communications Inc. ("Shaw"), the second largest cable
operator in Canada (see "International Development - Canada"); TEMPO Sound, Inc.
("TEMPO"), an Oklahoma corporation, which the Company acquired from Tele-
Communications, Inc. ("TCI") in April 1979, in exchange for approximately
224,000 shares of Common Stock of the Company. TEMPO is engaged in a joint
venture with Jones International, Inc. ("Jones"), the eighth largest cable
operator in the United States, to program and deliver Superaudio(R), a basic
analog cable music and information service (currently consisting of nine
formats) for a monthly license fee, to cable operators for distribution to cable
subscribers. TEMPO and Jones each own 50% of the joint venture (see "Domestic
Business - The Superaudio Service"); DMX-Europe ("DMX-E") of which the
remaining 49% interest was acquired from TCI in exchange for 10.8 Million shares
of DMX Inc.'s Common Stock on May 17, 1996, making it a wholly owned subsidiary
effective on this date. (See "International Business - Europe".)
The following description of the Company's business is premised upon its
operation as a stand-alone entity. On August 30, 1996, the Company received an
unsolicited proposal from TCI proposing the merger of the Company with a TCI
subsidiary. The Company is currently negotiating a definitive agreement with
TCI respecting the proposed merger. See "Business - Recent Developments."
Should the merger occur, TCI may choose to significantly change the business of
the Company from that described below.
GENERAL.
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DMX Inc. is primarily engaged in programming, distributing and marketing
a premium digital music service, Digital Music Express(R) ("DMX(R)"), which
provides continuous (24-hours per day), commercial free, CD quality music
programming. The DMX music formats are programmed within various music genres
which include: Classical, Jazz, Rock, Oldies, Country, Latin, Urban, Pop/Adult
Contemporary, Instrumental, International and Specialty. Within each music
genre, DMX offers a variety of format selections which are more unique and
narrowly defined than typically would be found on a commercial radio station.
Depending on the distribution method, cable or Ku-Band direct broadcast
satellite ("DBS"), DMX currently offers 30 or 91 formats, respectively. In
addition the Company currently has over 70 titles in its DMX-Disc library
catalogue for on-premise distribution. The Company expects to expand its DBS
channels to 100 in the near future and is continually adding titles to its on-
premise DMX-Disc library. The Company programs each DMX format to provide more
music within each music format than a consumer typically would find on a radio
station, without the high level of repetition commonly found in radio
programming. DMX also offers subscribers the ability to match a "mood" or social
environment with music at the touch of a button. As an example, a restaurant may
choose to play Chamber Music at breakfast, Lite Jazz at lunch, and Great Singers
at dinner. DMX is currently delivered using three different distribution
methods.
First, DMX is delivered, for a monthly per subscriber license fee, direct
to cable operators by C-Band satellite for distribution to residential and
commercial cable subscribers. The DMX signal is received by subscribers through
their existing coaxial cable wire which is connected through a proprietary DMX
tuner to their stereo systems. DMX is delivered in 30 different music formats
for cable distribution. The Company
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expects the existing analog technology used in this form of distribution to
gradually be replaced by digital compression technology using a wider bandwidth,
allowing for carriage of significantly more music formats. (See "Business -
Goals and Strategies".)
Second, since June 1994, the Company has delivered DMX to business
establishments, for a monthly per subscriber fee, by DBS direct to small
satellite dishes (approximately one meter or less in diameter) which connects
through a proprietary DMX receiver to a subscriber's sound system. Currently,
DMX is delivered in 91 different music formats for DBS distribution. The Company
expects to expand its formats to 100 in the near future. in October 1995, the
Company expanded the marketing of its DBS service to include residential
subscribers. This extends the residential distribution of DMX into: areas not
currently wired for cable; markets served by a cable operator affiliated with a
competitive digital audio service; and markets served by a cable operator not
affiliated with a digital audio provider. Additionally, the Company has
agreements with third party DBS distributors, Primestar and Alphastar, where DMX
programming is combined with video programming as part of a basic package. With
these DBS distributors, the technology incorporated into their satellite
receiver enables subscribers to receive the DMX signal without the use of a
separate receiver through their satellite provider and standard equipment
package.
Third, DMX is offered as an on-premise business music service via DMX-
Disc(R). The DMX-Disc service offers flexibility in situations where rooftop
satellite dish installations are not possible, or where another building might
block the signal path from the company's satellite, through the use of on-
premise equipment and custom DMX programmed CDs. DMX-Disc uses a compact disc
interactive ("CD-I") player and a custom programmed library of CDs. These CDs
are manufactured especially by the Company using a compression scheme which
allows for over four hours of pre-recorded music to be played from one CD.
Through the distribution and rotation of library CDs, a DMX-Disc customer is
ensured of always having a fresh DMX playlist, mirroring the playlist from the
DBS satellite feed.
To secure distribution of DMX in foreign markets, the Company has entered
into licensing and royalty arrangements with strategic partners in Canada,
Europe, Australia, Africa, Latin America and the Caribbean (see "Business -
International Business"), although the Company has entered into definitive
agreements to dispose of its European operations. (See "Business - Recent
Developments".)
The Company believes that DMX is differentiated from other sources of
audio programming currently available to residential and commercial consumers.
Subscribers currently receive up to 91 different formats of preprogrammed music
in CD quality fidelity with no commercials or disc jockey interruptions of any
kind. The playlists for most DMX formats include more music cuts than would
typically be heard on a radio broadcast or other competing preprogrammed music
service. (See "Business - Competition".)
The Company is a digital audio programming provider, which licenses to
third party distributors the right to redistribute its programming to
subscribers. To date, this has been accomplished principally through licensing
agreements with cable system operators who redistribute DMX over cable networks
to cable television subscribers. Currently, DMX is available in more than 940
cable systems in the United States representing over 17.6 million cable
households. With the introduction of its Ku-Band technology, the Company
expanded distribution of the DMX service via DBS, and immediately began offering
its DMX for Business(R) service to commercial subscribers not otherwise
accessible by cable. In October 1995, DMX Inc. began employing the DBS method of
delivery to expand the distribution of the DMX service to residential
subscribers. In the Fall of 1994, the Company began direct marketing to multiple
and national account establishments and in the Summer of 1995, began direct
marketing to commercial establishments in its first owned and operated territory
in Southern California. (See "Business - Domestic Business - Residential Service
and Commercial Service".)
GOALS AND STRATEGIES.
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DMX Inc.'s goal is to continue to build DMX as a brand name consumer and
business service and become the established standard for digital audio services.
Its primary strategies are: (1) to continue to acquire residential and
commercial subscribers in as many markets as possible via its available
distribution methods, (2) to establish and maintain relationships with third
party organizations in related industries which support and
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enhance the marketing, distribution and subscriber penetration levels of DMX,
and, (3) to maintain its market position as the brand leader in digital audio
through an emphasis on superior programming and technology.
The Company views the strategy of being the first entrant into a market and
quickly securing distribution commitments for DMX as a key factor during the
start-up and development phase of any marketplace. The Company has focused much
of its efforts during the start-up period on securing distribution agreements
with cable operators and satellite programming distributors. From 1989 to the
present the Company has: (i) entered into affiliation agreements with over 50
U.S. cable operators; (ii) entered into distribution agreements with two DBS
programming providers; (iii) entered into distribution agreements for DMX in
Canada, Australia, Latin America, Africa and the Caribbean; and (iv) obtained
distribution on Headend-in-the-Sky by TCI ("HITS"), a new distribution
technology utilizing digital compression. This focus, during the early
development phase of these markets, is intended to provide the Company with
greater distribution potential and limit the market development potential of its
competitors.
The telecommunications industry has seen many changes in recent years with the
entrance of satellite distribution into the marketplace and the continued
movement of cable operators towards digital compression technology. The Company
will continue to prioritize these areas in its strategic plan. Specifically,
DMX will be part of the programming package to be carried on TCI's HITS, TCI's
digital compression technology which is currently being tested in three markets,
and is expected to be rolled out on a nationwide basis in 1997.
In the satellite distribution area, the Company also recently announced that
Sky Entertainment Services in Latin America ("Sky-LA") and American Sky
Broadcasting ("ASkyB") have the right to carry various channels of music taken
from DMX's extensive menu on all Sky platforms in the Americas. Sky
Entertainment Services is the brand name for the direct-to-home service offered
by the strategic alliance formed by Organzacoes Globo, Brazil's leading
entertainment group; Mexico's Grupo Televisa S.A., the largest production and
media company in the Spanish-speaking world; The News Corporation, Limited, one
of the world's largest media companies; and Tele-Communications International,
Inc. This alliance will provide television service to Mexico, all of Central
and South America and parts of the Caribbean. ASkyB is a joint venture between
The News Corporation, Limited and MCI Communications Corporation, which expects
to provide direct-to-home satellite broadcasting services to U.S. consumers
commencing in the fall of 1997.
DMX Inc. will continue to pursue relationships in these areas to ensure
optimal distribution to new subscribers, and believes that its position as a
premier programmer of digital audio places it in a good position to compete in
these new markets.
DOMESTIC BUSINESS.
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Since its launch in September 1991, DMX has been distributed by C-Band
satellite to cable systems, which in turn deliver the service over existing
cable networks to cable subscribers. With the launch of DMX on the Ku-Band
satellite in June 1994, the Company has been able to expand the market access of
its commercial service, DMX for Business and its residential DBS service DMX
Direct. Ku-Band satellites transmit signals using a higher power than C-Band
satellites, which allows reception by substantially smaller satellite dishes.
The ability to distribute DMX directly to the end user gives the Company much
broader market access and the choice of delivering the DMX signal either by
existing cable or Ku-Band satellite. The DMX signal is distributed by the
Company from its studio and uplinking facility housed in TCI's National Digital
Television Center located in Littleton, Colorado. Additionally, the
implementation of the on-premise DMX-Disc program and the expansion of the Disc
catalogue has allowed the Company to market DMX in the commercial marketplace in
situations where cable and DBS distribution may not be an option (e.g., in
situations where roof-top rights or a cable signal may not be available).
RESIDENTIAL SERVICE.
Today, the cable television industry in the United States is comprised of more
than 11,220 cable systems which serve more than 61.7 million households,
according to the 1996 Television and Cable Fact Book. This represents
approximately 63% of all television households in the country. Of those
households subscribing to cable, nearly 70% subscribe to one or more premium
cable services. It is expected that cable systems will transition from analog
to digital technology in coming years, resulting in a wider selection of
programming and
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services available to subscribers due to increased band-width. This transition
will commence with the roll-out of TCI's HITS in 1997, with the carriage of up
to 40 DMX channels, in addition to a much larger selection of video channels
than are currently offered using analog technology. Additionally, with the wider
acceptance of direct broadcast satellite ("DBS") by consumers, it is expected
that residential subscribers may choose DBS over cable television due to the
wider choice of programming. The Company currently has distribution with two of
the four DBS providers servicing the United States, and with the advent of ASkyB
in late 1997, will have carriage on over 60% of the U.S. DBS providers.
CABLE AFFILIATE SALES The acquisition of subscribers is a joint effort
between the Company and the cable affiliate. To support its affiliates'
marketing efforts, the Company contributes marketing materials and/or
cooperative marketing funds. The retail price of DMX is established in each
local market by the cable operator. Many different pricing strategies such as
separate equipment rental charges, promotional discounts and special offers may
affect the ultimate retail price to the consumer. In the future, the Company
expects DMX to be offered as part of a basic package or as a tier programming
option, as cable affiliates migrate from analog to digital technology.
DMX was launched in the U.S. cable market in September 1991 to residential
subscribers. DMX Inc. currently has distribution commitments representing
approximately 50% of the U.S. cable marketplace. These distribution commitments
are represented by contracts, or "affiliation agreements" reached between the
Company and cable operators which give the operators the right to distribute DMX
to residential subscribers within their franchise territories in exchange for a
monthly per subscriber license fee. Commercial rights are granted under a
separate contract. The Company has reached affiliation agreements with more
than 50 multiple system operators ("MSO"). The term of the affiliation
agreements range from one to ten years and require monthly license fees be paid
to the Company for each DMX residential subscriber. Certain of the MSO's
affiliated with the Company have also made direct equity investments in the
common stock of DMX Inc. via equity participation agreements as well as direct
investment.
In 1989, TCI, the nation's largest MSO, and certain of its subsidiaries,
entered into a series of agreements with the Company which resulted in the
acquisition of approximately 2.0 million shares of the Company's Common Stock
and the right to earn up to approximately 1.4 million additional shares based on
distribution goals, all of which were earned during the fiscal year ended
September 30, 1992. Subsequently TCI has raised their stake through a series of
private placements, and through a transaction completed in May 1996 whereby 10.8
million shares of common stock in DMX Inc. was exchanged for TCI's 49% interest
in DMX-Europe N.V., a Netherlands company and its wholly owned subsidiary,
DMX-Europe (UK) Limited, a United Kingdom Company, collectively, ("DMX-E"). TCI
currently holds approximately 45% of the outstanding Common Stock of DMX Inc.,
and has made a tender offer to acquire the remaining 55%. (See "Business -
Recent Developments".) During fiscal years 1994, 1995, and 1996, TCI accounted
for approximately 65%, 61%, and 53% of the Company's residential cable revenues,
respectively.
DIRECT-TO-HOME ("DTH") SALES.
DIRECT SALES In October 1995, the Company launched its in-house direct sales
effort, DMX-Direct, a DBS service, commonly referred as direct-to-home ("DTH")
to the residential marketplace. DMX-Direct uses the Company's DBS technology
launched to commercial customers and offers the same programming availability.
Customers purchase the required equipment and subscribe to DMX-Direct for a
monthly or annual prepaid subscription.
The Company continues developing its nationwide retail dealer network.
Through licensing arrangements with high end audio/video retailers and design
and installation companies, such as those associated with the Consumer
Electronic Design Installation Association ("CEDIA"), these dealers will license
from DMX Inc. the rights to sell and install the Ku-Band receiver and satellite
dish antenna in subscriber's homes for reception of the DMX signal.
Subscriptions to DMX-Direct are then processed and billed by DMX Inc. The
Company currently has approximately 135 dealers. Dealers are promoted by the
Company through the Company's web-site (http://www.dmxmusic.com) as well as
through direct advertising.
Direct to home sales extend the distribution potential of DMX's residential
service to: areas not currently wired for cable; markets served by a cable
operator affiliated with a competitive digital audio service; and markets served
by cable operators not affiliated with any digital audio provider.
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THIRD PARTY DBS SALES In October 1995 PrimeStar Partners, L.P. ("PrimeStar"),
a leader in the DBS distribution of packaged programming to the residential
market, launched with carriage of DMX. The Company's agreement with PrimeStar
requires PrimeStar to pay a per subscriber license fee to the Company based on
the number of basic subscribers, or based on the number of basic and premium
subscribers when PrimeStar expands the DMX format offerings to include a premium
tier option. PrimeStar distribution gives the DMX brand name nationwide consumer
exposure through the marketing campaigns for PrimeStar. No additional equipment
is required over and above the standard satellite equipment in order for a
subscriber to receive the DMX signal. As of October 1996, there were
approximately 1,400,000 PrimeStar DMX subscribers.
In November 1995, the Company announced that it reached an agreement with
AlphaStar Television Network Inc. ("AlphaStar"), a direct-to-home satellite
service, owned by Tee-Comm Electronics, a digital satellite communications
leader. The agreement calls for AlphaStar to launch DMX in both a 120 channel
premium service and a 30 channel basic service, in exchange for a per subscriber
license fee. A unique part of the agreement calls for DMX Inc. and AlphaStar to
co-market their audio and video programming, as both services will be available
from the same satellite, AT&T Telstar 402R. No additional equipment is required
over and above the standard satellite equipment in order for a subscriber to
receive the DMX signal. As of September 1996, there were approximately 5,600
residential AlphaStar subscribers.
COMMERCIAL SERVICE.
The U.S. business marketplace has approximately 7.4 million business
establishments in the top 337 market statistical areas ("MSA"), according to
Equifax/National Data Systems. Approximately 60% of these businesses use some
form of background music, based on marketing research performed by the Company.
From its initial launch in September 1991, the Company's commercial service has
had limited cable access to business establishments which precluded the Company
from pursuing national chain account sales. With the launch of DMX on a Ku-Band
satellite in June 1994 allowing for DBS distribution and the launch of DMX-Disc
on-premise service in 1996, DMX has gained access to 100% of the business
marketplace and continues to expand its market distribution of DMX for Business.
DMX distributes its programming services to the commercial marketplace through
its commercial division under the brand name DMX for Business. The division
distributes DMX for Business through three sales departments: Affiliate Sales,
an indirect sales channel of both cable and non-cable franchised affiliates;
National Account Sales; and the Southern California Sales Offices, two direct
sales channels owned and operated by the Company.
AFFILIATE SALES The Affiliate Sales department was the first sales channel
developed by the Commercial Division. Distribution of DMX for Business began in
1992 through the Company's relationships with cable affiliates. Sales of DMX
for Business via cable distribution was limited by the access to businesses by
cable plant as well as cable distribution to major business markets throughout
the United States. When DMX/DBS became available via AT&T'S Telstar 402(R)
satellite, Affiliate Sales began immediate expansion of its distribution of DMX
for Business, both within the existing cable franchise network as well as to all
non-affiliated U.S. markets. DMX for Business has licensed many of its
residential cable affiliates, as well as independent, third party affiliates,
with the rights to sell DMX for Business on a non-exclusive basis, thus
expanding its network of licensed distributors to cover markets where it is not
affiliated with a cable operator, or where there is distribution of a
competitive service. Affiliates may be licensed to distribute DMX via all three
distribution methods: cable, DBS and DMX-Disc.
The Company's Commercial Division offers its affiliates the non-exclusive
right to sell DMX for Business and requires its affiliates to dedicate a minimum
level of resources and meet specified performance criteria to become a qualified
distributor and maintain a qualified status for distributing DMX for Business.
For cable affiliates, the typical commercial affiliation agreement runs
concurrently with the residential affiliation agreement. Non-cable affiliates
have a five year agreement to distribute DMX with a performance evaluation
annually. If the affiliate has not met the Company's performance standards, it
could lose its DMX affiliation. The Company requires its affiliates to pay a set
minimum monthly license fee per commercial subscriber, or a percentage of the
subscriber's monthly retail rate, whichever is greater. The typical contract
term with a commercial establishment is a 60 months at a retail rate of
approximately $55 per month. The retail pricing is determined by the affiliate
and depends upon many factors such as the square footage of the business, the
number of tuners or receivers used in the business and the contract length.
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NATIONAL ACCOUNTS The National Account Sales Department was launched
concurrently with the distribution of DMX for Business via DBS. The department
has been marketing DMX for approximately 2 years, selling DMX services to large
national chain accounts, such as retail and restaurant chains, that require or
demand centralized sales, installation, and customer services. The department
employs an in-house sales force specially trained for selling to national
accounts. DMX Inc.'s commercial non-exclusive affiliation agreements allow its
national accounts sales force to sell directly to commercial establishments
within existing affiliated franchise territories. Sales efforts are being
concentrated at the senior management level of these national account prospects.
National Account contracts generally provide for the DMX for Business service to
be delivered to all of the subscriber's locations for a monthly fee generally
ranging from $40 - $55 per location depending upon many factors such as the
number of locations and the number of receivers used within each location.
Contract terms generally range from 36 to 60 months. DMX Inc. has signed
multiple national account agreements with various nationwide and regional
business chains, primarily in the hospitality and retail industries.
The Company has established strategic sales alliances to create name branding
and establish DMX for Business as a viable and credible competitive service for
national chains. Alliances in the cross-branding of DMX include: Bose
Corporation for packaged sound systems; AT&T Tridom in VSAT data and video
network applications; and PrimeStar and AlphaStar for entertainment, news
information and sports TV video services. The DMX national account sales team
works in conjunction with these strategic sales alliances to cross-promote
services and to make joint sales presentations in selling packaged business
communication services and products.
OWNED AND OPERATED ACCOUNTS In May 1995, the Company launched its first
owned and operated sales group ("O&O") in the Southern California market,
covering a seven county area extending from Ventura to San Diego. The O&O sells
DMX and related business communication services and products direct to both
local and regional chain accounts located in its territory through its own
sales, installation and service team. The O&O also generates revenue from sound
system equipment sales and labor sales from installations and handles all
equipment set-up and follow-up service for new and existing accounts. The O&O's
customer contracts are for a monthly fee generally ranging from $55 to $150
depending on many factors such as number of locations and the number of
receivers installed in the business, and length of contract. The O&O's average
contract term is 48 to 60 months. The O&O continues to grow at a rapid pace as
it continues to increase its penetration of the Southern California commercial
marketplace.
NATIONAL CUSTOMER SERVICES CENTER The support services required by the
music subscribers of the national account and O&O Sales Departments are very
specialized and require a highly trained music consultant to support their music
needs, as well as general field installation and service requirements for music,
sound system and related communication equipment. With the growth of national
and O&O accounts and the addition of DMX-Disc to all sales channels, which
requires direct customer service center support, the Company is in the process
of establishing an internal Customer Services Center within the Commercial
Division. The National Customer Services Center will provide ongoing
professional management, training and support required to ensure that DMX for
Business subscribers receive the high quality service demanded by the
competitive commercial marketplace. The Company's existing National Contractor
Network will be utilized to provide field service to these subscribers as
required.
INTERNATIONAL BUSINESS.
- ----------------------
The Company actively seeks prospective strategic partners interested in
distributing DMX in foreign markets. The Company has entered into licensing and
royalty arrangements in Europe, Canada, Australia, Latin America, the Caribbean
and Sub-Saharan Africa and is currently in the process of evaluating other
possible joint relationships to enhance the international distribution of DMX.
EUROPE.
The Company has entered into definitive agreements providing for the
disposition of DMX-E to Jerold H. Rubinstein, its Chairman and Chief Executive
Officer of the Company. The Company will retain a ten percent equity interest in
DMX-E, which will have an exclusive five-year, royalty-free license to
distribute the DMX music service in Europe, the former Soviet Union, and in the
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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 (which guaranty will be
secured by a pledge of the Company's Common Stock owned by Mr. Rubinstein). The
Company had previously determined to cease financial support for its European
operations and, in the absence of some other arrangements to provide financial
support to those companies, to place them 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 the
operations under 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. (See "Business - Recent Developments".)
CANADA.
The Canadian cable market is comprised of approximately 7.6 million basic
cable subscribers which represents approximately 76% of households passed by
cable. Pay service penetration, including extended basic service penetration,
reached approximately 88% during 1995 according to Media STATS September 1995
data. In addition to the residential subscriber potential for DMX, the Canadian
market has approximately 920,000 businesses, according to Statistics Canada.
In 1992, Shaw Communications Inc. ("Shaw"), the second largest MSO in
Canada, entered into a licensing and royalty agreement with the Company which
provides for a monthly per subscriber royalty for both residential and
commercial distribution. The Company, through its subsidiary 450714 B.C. Ltd.
is a partner in the "The DMX-Canada Partnership" ("DMX-Canada"), a partnership
with DMX-Canada Ltd., an affiliate of Shaw. DMX-Canada is the operating entity
that distributes the DMX service in Canada and its territories.
The residential DBS direct-to-home market in Canada is regulated by the
Canadian Radio/Television and Telecommunications Commission ("CRTC"). During
1996 the CRTC issued a license to the Company to provide subscription-based
music service to homes in Canada. This came after a long review process
initiated after the original license was revoked by the CRTC. DMX will be
offered by DMX-Canada to residential subscribers once the Company has determined
the special programming requirements as mandated by the CRTC for the Canadian
residential market.
The CRTC does not regulate programming delivered to commercial
establishments by direct broadcast satellite. DMX-Canada launched DMX for
Business by DBS in November 1994, and has acquired over 2,000 commercial
subscribers in Canada since that date.
In addition to forming DMX-Canada, Shaw has invested in DMX Inc. by
purchasing stock in private placements and making open market purchases, and
currently holds approximately 14% of the outstanding Common Stock of the
company.
LATIN AMERICA AND THE CARIBBEAN.
Commencing in 1997, DMX will be carried on Sky-LA in Mexico, all of Central
and South America, and parts of the Caribbean. (See "Business - Goals and
Strategies".)
AFRICA.
During 1995, the Company reached an agreement with TML-Bluestar ("TML-B"),
a South African joint venture company, for distribution of the DMX service in
Sub-Saharan Africa. TML-B then entered into a licensing arrangement with
MultiChoice Africa ("MultiChoice"), for distribution of DMX to MultiChoice
subscribers by Ku-Band DBS. MultiChoice is the only subscriber management
services ("SMS") provider in South Africa, and offers SMS services to more than
2 million pay TV subscribers in Africa and Europe. In South Africa alone,
MultiChoice provides SMS to approximately 950,000 subscribers, according to data
provided by MultiChoice.
TML-B launched DMX in December 1995 and carries 40 music formats. DMX is
sold to both residential and commercial subscribers in exchange for per
subscriber license fees. DMX is being included as part of the MultiChoice basic
package of digital audio and video programs distributed via satellite to
9
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customers in South Africa. The Company does not incur any incremental costs in
providing the signal for distribution to this market, nor is it responsible for
the payment of music rights, pursuant to the terms of its agreement. TML-B
plans to expand its distribution throughout other territories in Sub-Saharan
Africa as these areas develop. Currently TML-B has over 50,000 subscribers.
ANCILLARY BUSINESS OPPORTUNITIES.
- --------------------------------
The Company is engaged in discussions with various potential strategic
partners to develop other ancillary business opportunities related to its core
DMX service. The ancillary businesses would represent an opportunity to take
advantage of the existing technology and programming infrastructure developed by
the Company for DMX.
The Company is currently testing a digital downloadable satellite messaging
system ("DMX Adnet") that will be made available for multiple location
commercial sales through the National Accounts, O&O and Affiliate sales
channels in 1997. The system is compatible with the DMX/DBS music system and
allows for scheduling and playing of pre-recorded messages, known as
"Storecasting" over the DBS system.
THE SUPERAUDIO SERVICE.
- ----------------------
In May 1990, the Company entered into a joint venture agreement with Jones
International, Inc. ("Jones"), the eighth largest MSO, for up to fifteen years
to distribute Superaudio, a basic cable audio service. Each company owns a 50%
interest in the joint venture. The joint venture began operation in July 1990
and combined the Company's basic cable audio service, TEMPO sound, with its only
direct competitor, Galactic Radio. In connection with the joint venture
arrangement, Jones provides both satellite space and uplinking service for
Superaudio.
Superaudio is a basic cable audio service which is distributed in analog
fidelity and currently provides nine formats of popular music and information
services, including news, children's programming and a reading service for the
visually impaired. The programming line-up includes the use of announcers and
some limited commercial announcements. The Superaudio service is distributed by
satellite from Jones' studio facilities in Englewood, Colorado to cable systems,
which deliver it to their cable subscribers.
The joint venture has entered into affiliation agreements with cable
operators which provide for a monthly license fee per basic subscriber to be
paid to Superaudio. The service is generally marketed as a basic cable audio
service at no additional charge to the subscriber. However, ultimate product
placement and retail pricing is left up to the individual cable operator.
PROGRAMMING.
- -----------
The Company believes that the primary consumer appeal of DMX is its
superior programming content. The Company has carefully researched and refined
each of its current 91 custom designed music formats. In contrast to radio, the
programming content of the DMX service is continuous music, without commercial
or other interruption, made available in distinct formats that are more narrowly
tailored to fit the music listener's specific taste. DMX is delivered in CD
standard fidelity.
DMX appeals to a wide variety of listeners by providing multiple music
formats within each music genre. By offering defined music formats, DMX
subscribers can easily select the formats that appeal to them most. For
example, a classical music enthusiast may enjoy symphonies and chamber music,
but may not have the same interest in opera. DMX allows listeners to make these
musical choices without compromising their listening experience. The following
table shows the current format offering by genre:
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<TABLE>
<S> <C> <C>
CLASSICAL LATIN U.S. OLDIES
Symphonic *Cumbia 50's Oldies
Chamber Music *Latin Contemporary 60's Oldies
*Opera Tejano *70's Oldies
*Lite Classical Salsa *80's Oldies
*Classical Guitar *Mariachi
*Flamenco Music INTERNATIONAL
JAZZ *Brazilian Music *German Oldies/Schlager
Lite Jazz *Rock en Espanol *German Folk Music
Classic Jazz *German Rock
*Dixieland URBAN *German Easy Listening
*Jazz Vocal Blends Urban Adult Contemporary *French Hits
*Acid Jazz Dance *Riviera
Reggae
ROCK *R&B/Rap Hits *U.K. Hits
Classic Rock Gospel *Euro Hits
Folk Rock *Motor City Sound *Euro Oldies
*Power Hits Rap *Dutch Hits
Album Rock Traditional Blues *Flemish Music
Heavy Metal *Caribbean Music
Alternative Rock SPECIALTY *Greek Music
*New Music New Age *Norwegian Music
*Contemporary Christian *Danish Music
POP/ADULT CONTEMPORARY *Contemporary Blues *Hebrew Hits
Adult Contemporary *Folk Music *Italian Hits
Love Songs Christian Inspirational *Traditional Italian Music
Great Singers *Children's *African Rhythms
Beautiful Instrumentals *Environmental Sounds *Japanese Music
Show Tunes *Holiday Music *Chinese Music
*Movie Sound Tracks *Beach Party *Canto Pop
*Soft Hits *The Mirage Channel** *Turkish Music
*Contemporary Instrumentals *Cajun *Indian Music
*Piano *Polka
*New Adult Contemporary COUNTRY *World Beat
Big Band/Swing Modern Country *Oriental/Eastern Mediterranean
Hottest Hits Traditional Country *Hawaiian Music
*Bluegrass
</TABLE>
*(triangle)Expanded formats available only on DBS service
**The Mirage Channel is for the exclusive use of Mirage Resorts
Incorporated
The Company seeks consumer feedback on DMX programming to help
determine when to add or change formats to meet the ever changing tastes of its
listeners. The Company uses an 800 number for DMX subscribers to call as a
means of gathering customer's suggestions, addressing technical problems or
complaints and at the same time providing the Company with demographic and
subscriber preference information.
The Company programs its music using an in-house programming staff.
This staff is responsible for music research, on-going acquisition of new music
material, programming, scheduling and interfacing with the Company's studio
operations where the DMX service is originated. The Company has developed a
sophisticated proprietary system of programming, originating and distributing
the DMX service. This process involves the use of proprietary software and
hardware for selecting songs and encoding the music information into a data
stream, which then is uplinked to the Company's satellites for delivery to its
cable affiliates and DBS customers. The same programming process is used in
developing DMX-Disc custom four hour CD's, which are maintained in a library
catalogue for replication and distribution to the Company's DMX-Disc customers.
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COMMERCIAL PROGRAMMING.
- ----------------------
The Company believes that the primary commercial appeal of DMX is its
superior programming and available choice of music. In contrast to radio, DMX
provides continuous music, without commercials or other interruptions, made
available in distinct formats that are tailored to fit the commercial account's
specific business atmosphere.
DMX appeals to a wide variety of businesses by providing multiple
music programs within each music format. To help DMX subscribers in selecting
the appropriate music for their business, DMX for Business utilizes its
proprietary music application program (MAP(TM)). MAP assists DMX subscribers in
analyzing their business image, demographics and desired energy level to create
a custom music program to enhance the business' atmosphere, making it simple to
tailor the audio atmosphere of any business.
In conjunction with the launch of DMX on a Ku-Band satellite, the
Company expanded its DMX programming from the 30 formats available by cable to a
120 channel capacity DBS system. There are currently 91 channels available for
commercial subscribers and the Company plans to continue expanding its music
line-up. The Company believes this will further enhance the appeal of DMX by
offering greater choice and flexibility to commercial subscribers. This will
increase the likelihood of a subscriber finding more DMX programs to match its
music needs, thereby choosing DMX over a competitive service. As part of the DMX
programming process, the programming staff constantly reviews and modifies the
programming line-up to meet the needs of its commercial subscribers.
RESIDENTIAL MARKETING.
- ----------------------
The Residential Division's primary marketing focus is to support cable
operators and other DMX distributors by providing creative and integrated
marketing campaigns and expert music consulting advice. DMX Inc. has developed
various marketing campaigns, in addition to ongoing special promotions, to
assist cable operators with the acquisition and retention of DMX subscribers.
A typical acquisition program's target marketing materials include
such items as newspaper and cable guide advertising; point of purchase
materials; demonstration units; direct mail inserts; 30 second commercial
television spots in addition to a 15 minute infomercial; training programs for
affiliate customer service representatives; specialty holiday promotion
materials; and press releases and assistance with public relations events.
Retention materials include: A listener's guide to promote product
understanding; a DMX.(triangle)DJ(R) program guide explaining the use of the
DMX.(triangle)DJ and format description.
In 1995, the Company launched a DMX web site on the Internet. The web
page is informational and provides the user with information such as: "What is
DMX", "Music Charts", "Contests", "Music Central" and more, which covers
programming, how to get DMX, cable distributors, DBS information, residential
and commercial information, as well as many other related topics, like DMX
merchandise. Access to the DMX web site also acts as a gateway to other related
music companies' web sites on the Internet. In 1996 "What's on DMX" was added
to the web site, allowing users to see information on the last five songs played
on any channel of DMX at any given time. The DMX web site will undergo
continued development to create cross promotional tie-ins, new product
development information, and many other ancillary topics to provide DMX
subscribers with a vast array of music and DMX related information. The DMX web
site can be accessed at http://www.dmxmusic.com.
COMMERCIAL MARKETING.
- --------------------
The Commercial Division's marketing strategy is to create and
implement marketing and promotional programs that establish DMX as the branded
name and recognizable leader in digital music services. This is being
accomplished through the development and deployment of one of the industry's
best sales training, sales management, and sales support programs; business-to-
business marketing programs; and the development of a unique multimedia network
of digital business communication services through strategic sales and marketing
alliances with some of the world's most recognized companies.
DMX for Business Affiliate marketing programs include: sales
literature, trade advertising, participation in local trade shows, and direct
mail. Within National Accounts and O&O, the Commercial
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Divisions' marketing programs include attendance at national trade shows, trade
advertising, and direct sales through presentations, demonstrations and trials
of DMX for business. DMX also has marketing relationships with: Bose
Corporation, one of the world's leading manufacturers of consumer and
professional packaged sound systems and loudspeaker products; AT&T Tridom for
VSAT data and video network applications; Audiocom, one of the nation's leading
providers of customized business messaging, for message production services; and
Philips Electronics, a co-developer and leading manufacturer of compact disc
technology, including the DMX-Disc CD-I players. All of these relationships form
a powerful alliance for the delivery of multimedia services to the commercial
marketplace and have validated DMX as a premiere digital music service in the
commercial market. In addition, the sales and marketing teams of each
organization have increased DMX's market presence and brand identification and
have added reciprocal value to each other through the distribution of these
packaged services.
In the summer of 1996, the Company was the official programmed music
supplier to the Olympic Games in Atlanta, Georgia. This opportunity provided
the Company with substantial brand name exposure and demonstration
opportunities. Many of the Olympic sites, including the athlete's villages,
sports arenas, hospitality areas, transportation centers and plaza areas were
equipped with DMX. The Company provided all of the 200 national anthems
required at the medal ceremonies by using its proprietary DMX-Disc technology.
As part of the Olympic Games cross-promotion, DMX developed the Olympic Channel,
appropriately located on channel 96. The Olympic Channel, designed specifically
for use at the Olympic Games, was made available to DMX subscribers in 1996 and
included inspirational regional and international songs and featured songs from
a special five CD set of Olympic music produced by the Atlanta Committee for the
Olympic Games, Inc.
TECHNOLOGY.
- ----------
The Company owns certain patents to its technology as well as to
jointly developed technology used in the origination, distribution and reception
of DMX via cable, DBS, and DMX-Disc. Affiliated cable operators use special
equipment designed to receive the DMX signal and then deliver it over the
existing cable network to cable subscribers in the affiliated operator's system.
Each subscriber must be equipped with a special DMX cable tuner (the "DM-2000"
tuner), which is designed to connect to the existing coaxial cable used for
other cable programming services and to any commercial stereo system using
industry standard audio jacks. Subscribers receiving DMX via direct broadcast
satellite must be equipped with a small satellite dish antenna and a DMX DBS
receiver (the "DR-200" receiver), which like the DM-2000 tuner connects directly
to any stereo system. Either tuner allows the subscriber to select any of the
available formats at any time. The tuner can be controlled manually, or by a
hand held remote control device. One such remote control device, the
DMX.(triangle)DJ(R), compatible with both tuners, provides the subscriber with
complete programming information about any song being heard on DMX. The
information is shown in a display window on the DMX.(triangle)DJ using a liquid
crystal display ("LCD"). Programming information provided includes: song title,
artist, composer, album title, record company label, DMX identification number
and chart position, if any. A basic remote control is also available which
controls the necessary functions on each tuner, but does not include the display
of programming information.
DMX is transmitted using multiple distribution technologies based on
various compression algorithms which allow the signal to be delivered to the
subscriber in CD quality fidelity. These compression technologies are known as
SuperSound, AC-3 and MUSICAM. The SuperSound scheme is currently used for U.S.
and European cable transmission. AC-3 is currently used for U.S. DBS
transmission. MUSICAM is used for European DTH transmission and will ultimately
replace SuperSound for European cable transmission. The Company expects to be
in a position to offer the U.S. Cable operators currently using SuperSound the
option of migrating to AC-3 or MUSICAM, based on the standard adopted for the
U.S. market as digital compression technology becomes widely-used.
ADVANCED SECURITY.
The digital audio signal is encrypted (scrambled) at the point of
origin and encoded using a proprietary algorithm. Decryption (descrambling)
takes place in the subscriber's reception equipment, using a custom circuit that
also decodes the audio signal and controls the unique addressing of each unit,
in addition to controlling features such as day-parting.
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RESEARCH & DEVELOPMENT.
- ----------------------
DMX Inc. views its research and development efforts as a key component
of maintaining its leadership position in digital audio. In order to keep its
technology at the forefront and to deliver DMX using multiple distribution
paths, the Company is continuing research and development activities which
include refinements to its residential and commercial DBS technology and the
development of AC-3 and MUSICAM compression compatible technology for use in
distribution of its cable delivered signal.
An example of recent Research and Development efforts was the design
and testing of the DMX Adnet Storecasting system as well as the development of
the "What's on DMX" addition to the Company's web page. In addition, the
Company will continue to develop enhancements to the DMX service and other
upgrades to its technology as may be required. The Company is currently testing
its audio encoding for compatibility with HITS, and has been through a series of
technology revisions since testing commenced in August 1996. The audio signal
is Dolby AC3 encoded under the M-Peg transmission technology, to be compatible
with the General Instrument digital boxes being used with HITS. There will be
40 DMX channels offered as part of the "All TV" HITS package. The current
DMX.(triangle)DJ is in the process of being redesigned as the existing remote
does not work with the new digital boxes.
SATELLITES.
- ----------
C-BAND TRANSMISSION The Company sub-leases space on a U.S. domestic
communications satellite known as Satcom C-3, Transponder 24. The sub-lease was
entered into in December 1992 with a subsidiary of TCI, Western Tele-
Communications, Inc. ("WTCI"), which in turn has leased the satellite
transponder from GE American Communications, Inc. ("GE"). The Company began
using the satellite in Spring 1993. This satellite is used by other cable
industry program providers and its signal can be received by most U.S. cable
operators. The satellite areas of coverage include Hawaii, Alaska, Mexico and
Central and Northern South America.
KU-BAND TRANSMISSION In March 1996 DMX completed the signal
migration from the AT&T Telstar 401 satellite to the AT&T 402R satellite. The
satellite sub-lease, was entered into in May 1994 with WTCI, which in turn has
leased the satellite transponder service operated by AT&T SKYNET.
EUROPEAN TRANSMISSION In 1994, the Company entered into an agreement
with WTCI for the sub-lease of satellite space on an international C-Band
satellite known as TDRS. The DMX signal is uplinked to the TDRS satellite
directly from the Company's studio and uplink facility in Littleton, Colorado.
MUSIC RIGHTS.
- ------------
The Company has entered into agreements with the American Society of
Composers, Authors and Publishers ("ASCAP"), Broadcast Music Inc. ("BMI"), and
SESAC. The agreements provide for performance royalties to be paid by the
Company for all music played on DMX in the United States.
The Company's agreement with ASCAP for commercial distribution was
previously governed by an interim industry wide agreement. A final form of
agreement covering commercial distribution was finalized in 1995. The Company
signed that agreement and thus, effected a new agreement term through May 1999.
The Residential Agreement is currently governed by an interim, industry wide
agreement which will remain in effect until such time as new industry rates are
determined. During 1995, the Company entered into a new residential agreement
with BMI, with a term extending through September 30, 1999. The Company's
agreement with BMI for commercial distribution has expired, and the Company is
currently operating under a month-to-month extension. DMX is part of an
industry-wide negotiating group currently discussing renewal terms, and expects
this to be finalized in the near future. The Company's agreements with SESAC
for residential and commercial distribution both expire in June 1997, and the
Company expects these agreements to be renewed on substantially the same terms.
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COMPETITION.
- -----------
Digital audio services compete for consumers' time and discretionary
income that is spent on other sources of entertainment, such as radio, other
pre-recorded music services, on-air television, basic and premium television
services, and in-home video and audio systems. Competition for cable system
relationships to increase distribution is based primarily on the relative
quality and quantity of programming, financial strength, quality of marketing to
attract and retain subscribers, technical reliability and performance and the
overall cost of the services to affiliated distributors taking into account the
purchase cost of the hardware, the operating cost of the technology and the
monthly license fees.
The Company currently has one main competitor in the residential
marketplace, Music Choice, formerly known as Digital Cable Radio, a digital
audio service similar to DMX. The Company principally competes for third party
cable and DBS affiliations with this competitor. Once a decision is made to
affiliate with a digital audio provider, a substantial capital investment must
be made in cable system headend receiving equipment and individual subscriber
tuners and remote controls which are unique to that digital audio provider's
service. In addition, the channel capacity of many cable systems might not
permit the systems to carry two digital audio services. In addition, most of
the Company's affiliation agreements prohibit a distributor from offering a
competitive music service. Therefore, the Company believes it is unlikely that
a cable operator or other affiliated distributor would introduce a competitive
digital audio service and, to date, none has done so. As a result, the Company
does not directly compete with Music Choice for subscribers once an affiliation
agreement is signed.
In the direct-to-home residential DBS marketplace, DMX is carried on
the PrimeStar and AlphaStar DBS networks. Music Choice is carried on DirecTV.
Muzak, one of the Company's competitors in the commercial marketplace, secured
DBS distribution with Echostar Communication Corporation's DISH Network. The
Company recently announced that Sky-LA and ASkyB will carry DMX. Sky-LA is
expected to be introduced in Latin America in April 1997. ASkyB is expected to
be introduced in the USA in late 1997. (See "Business - Goals and Strategies".)
The Company also has competition in the commercial marketplace from
other pre-programmed business music providers, such as Muzak and AEI. However,
the distribution technology and the quality and quantity of music programming is
significantly different. As an example, Muzak does not offer cable distribution
and only has 16 channels on its standard analog DBS system. Although Muzak
does have 30 channels on the Echostar Dish Network, that service does not
provide the management control functions required by the commercial marketplace.
AEI only offers 6 channels from its analog DBS service. Also, all other
competitors offer fewer music programming options, compared to DMX's 91 options
available on DBS. DMX for Business is competitively priced with other business
music services.
DMX-Disc, the Company's proprietary CD technology, provides an
additional distribution method to better compete in situations which require an
on-premise music service solution. This technology is vastly superior to the
tape programs offered by AEI and Muzak, and the only competitor to offer a
similar product is AEI which also offers an on-premise CD system.
As a result, the Company believes that it has a substantial advantage
over the competition due to more flexible distribution methods and the depth and
quality of music programming offered to business music users through DMX for
Business. These competitors, to date, have not presented the Company with
material problems in negotiating contracts with favorable financial terms.
REGULATION.
- ----------
DMX Inc.'s operations generally are not of a type subject to
regulation by any government agency other than the routine regulations
applicable to any business. As a programming provider, however, there are
certain related regulations that affect the Company.
Although programming providers, such as DMX Inc., are not directly
regulated by the Federal Communications Commission ("FCC"), the operations of
cable television and satellite distribution systems are subject to the
Telecommunications Act of 1996 (the "Telecommunications Act") which replaced the
Communications Act of 1934, as amended, including the Cable Communications
Policy Act of 1984, as amended (the "Cable Act"), and to regulation thereunder
by the FCC. Any laws or regulations that adversely affect satellite or
transmission services, copyright or royalty agreements, or which would have an
adverse effect on the growth of the cable television and satellite industries
may also have an adverse effect on the Company.
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The comprehensive overhaul of the Communications Act of 1934
undoubtedly will have an effect on cable television. The Telecommunications Act
removes regulatory restrictions which for years have kept the cable, telephone,
long distance and broadcast industries segregated. The reforms also provide for
removal of the price controls on cable television rates within three years of
enactment. It is still unclear if the changes made will significantly affect
programmers, such as DMX Inc.
PROGRAM ACCESS AND CARRIAGE AGREEMENTS.
Called "the most successful" provisions of The Cable Television
Consumer Protection and Competition Act of 1992 ("1992 Act"), program access and
carriage agreement provisions aimed at protecting programmers, and ultimately
consumers, from discriminatory practices by cable system operators, affect
programmers such as the Company. For example, cable operators are prohibited
from requiring or coercing programmers to give them exclusive carriage
agreements, unfair pricing or financial interests in the programming company in
exchange for carrying a particular programming services. While these provisions
generally benefit the Company by guaranteeing it access to a broader market, the
MSOs with which the Company has affiliation agreements, and which have ownership
interests in the Company, are also subject to these provisions and may not
discriminate against other programmers for the benefit of the Company.
In the 103rd and 104th Congress, legislation was introduced which
would repeal the program access requirements of the 1992 Act; however, those
efforts have been unsuccessful to date and any future action is uncertain.
COPYRIGHT AND ROYALTY PROVISIONS.
On November 1, 1995, President Clinton signed into law Senate Bill
227, the Digital Performance Right in Sound Recordings Act of 1995 ("1995 Act").
The law amends U.S. copyright law to provide sound recording owners with an
exclusive performance right in sound recordings that are performed by means of
subscription service digital transmissions. The legislation was drafted to
protect performers and copyright owners in sound recordings, who were
potentially disadvantaged by the birth of the digital subscription services.
The 1995 Act establishes a new right of owners of the performance
rights, such as the performers and record companies, to control digital
transmission of sound recordings. The 1995 Act provides a compulsory license
for non-interactive subscription services, but does not provide a compulsory
license for interactive services which allow the listener to select performance
of a musical piece based on a menu or schedule. As a general matter, the
digital performance right does not apply to traditional radio and TV broadcasts,
background music services such as MUZAK, or to music transmitted at restaurants,
department stores, hotels or amusement parks in the traditional manner.
The Company is currently in the process of negotiating the terms of
this new required royalty which will apply only to the Residential area of the
business and has made provisions using an estimated rate. The Company is not
aware of any new legislation that may be introduced in 1997 which would
adversely impact its business. Any other changes in U.S. law or regulations
which would impose new or higher royalty fees, or cause compliance with
copyright and royalty regulations to be more burdensome, could have a material
adverse effect on DMX Inc.
TRADEMARKS.
- ----------
The Company has filed for worldwide trademark registration (including
DMX, Digital Music Express, DMX for Business, DMX.(triangle)DJ, and through its
joint venture with Jones, Superaudio). The Company believes that its trademarks
are valuable properties and intends to defend them vigorously.
Under the Company's agreements for the disposition of DMX-E to Jerold
Rubinstein, the European company will have the right to use the Company's
trademarks for two years following the consummation of the transaction.
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PERSONNEL.
- ---------
As of December 15, 1996, the Company had 134 full-time employees, 29 of
whom were engaged in administration, 66 in sales and marketing, 32 in studio and
programming and 7 in engineering. The Company's employees are not covered by any
collective bargaining agreement, and the Company considers its relations with
its employees to be satisfactory.
RECENT DEVELOPMENTS.
- -------------------
TCI PROPOSAL TO ACQUIRE DMX INC.
On August 30, 1996, the Company received an unsolicited proposal from TCI
proposing the merger of the Company with a TCI subsidiary. Following receipt of
the proposal, the Company established a special committee of its Board of
Directors to consider the proposal and retained Houlihan Lokey Howard & Zukin to
act as its financial advisor. The Company is currently negotiating the terms of
a definitive merger agreement with TCI, which owns approximately 45% of DMX
Inc.'s outstanding stock. The merger agreement would provide for a merger in
which DMX Inc. would be acquired by a new corporation ("Music Co.") to be formed
by TCI pursuant to which the shareholders of DMX Inc. would receive Class A
Common Stock of Music Co. representing approximately 19.25% of the total
outstanding shares of Music Co.'s Class A Common Stock and Class B Common Stock.
The Class A Common Stock would be identical to the Class B Common Stock to be
held by TCI except that each share of Class B Common Stock would have ten votes
on all matters while shares of Class A Common Stock would have one vote. In
connection with the merger and the issuance of the Class B Common Stock to TCI,
TCI would cause certain affiliates to contribute and transfer to Music Co. all
of their respective rights, title and interest in certain specified assets. To
the extent that Music Co.'s Class A Common Stock does not trade at or above $2
per share for at least twenty consecutive trading days during the first year
following the merger, holders of the Class A Common Stock would have the right,
exercisable during the 30 day period beginning on the first anniversary of the
merger, to require TCI to purchase such Class A Common Stock at a price of $2.00
per share, payable at TCI's option either in cash or shares of TCI's TCI Group
Series A Common Stock. In connection with the merger negotiations, the Company
is negotiating with TCI for a $3.5 million loan to purchase, or reimburse the
Company for the purchase of, tuners and related equipment.
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 had 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 them 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.
At September 30, 1996 the estimated loss on disposal of DMX-E was accounted
for in the Company's consolidated financial statements.
Item 2. PROPERTIES.
-----------
The Company's corporate offices are located at 11400 West Olympic
Boulevard, Suite 1100 and Suite 1400, Los Angeles, California 90064-1507. The
five year lease agreement expires in September 2001 and contains a five year
renewal option. The premises are approximately 26,505 square feet and the
monthly rental rate is approximately $47,700, which is subject to certain cost
of living adjustments and pro rata property taxes.
17
<PAGE>
The Company maintains a regional sales and marketing office in New York City,
located at 342 Madison Avenue, Suite 902, New York, New York 10173-0002. The
New York regional office occupies approximately 2,500 square feet and the
monthly rental rate is approximately $4,500. The five year lease expires in
January 1998.
The Company leases studio facilities in Colorado for the origination and
uplinking of the DMX service. The studio is located in TCI's National Digital
Television Center at 4100 East Dry Creek Road, Littleton, Colorado 80122. The
six year lease agreement with WTCI, a subsidiary of TCI, is subject to the
Company's right to terminate the origination and uplinking services at any time
with 60 days prior notice and upon payment of early termination fees. WTCI
charges the Company approximately $78,000 per month, which includes
approximately $6,400 for space rental and $72,000 for satellite uplinking
services, of which, approximately $25,000 is related to DMX-E and is paid by
DMX-E (although the Company is obligated for these charges). In addition, WTCI
has provided, via a capital lease with interest at 9.5%, up to $2.2 million for
studio equipment at the facility, of which approximately $2.2 million had been
expended at September 30, 1996.
The Company leases engineering facilities in Southern California located at
3551 Voyager Street, Suites 104 D and F, Torrance, California 90503. These
facilities contain approximately 4,400 square feet and the monthly rental is
$3,400. The lease expires in January 1997. The Company is currently in
negotiations to extend the terms of its lease, but no definitive agreement has
been reached beyond a month-to-month term.
The Company maintains a regional sales office in Schaumberg, located at 2300
North Barrington Road, Suite 555, Schaumberg, Illinois 60195. The office is
approximately 1,062 square feet and the monthly rental rate is approximately
$1,600. The five year lease expires in January 2001.
The Company maintains a regional sales office in Seattle, located at 1417
Fourth Avenue, Suite 800, Seattle, Washington 98101. The Company also manages
its DMX-Disc operations from this location. The office is approximately 2,400
square feet and the monthly rental rate is approximately $2,700. The five year
lease expires in November 2001.
The Company maintains its Southern California O&O sales office in Irvine,
located at 15235 Alton Parkway, Suite 100, Irvine, California 92618. The office
is approximately 4,280 square feet and the monthly rental rate is approximately
$3,000. The four year lease expires in July 1999.
Item 3. LEGAL PROCEEDINGS.
------------------
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. Although
some of these actions could be expected to involve claims for substantial
amounts, except as set forth in the next paragraph, the Company does not believe
that any currently pending litigation to which it is a party will have a
materially adverse effect on its financial condition or results of operations.
On September 8, 1996, a purported class action lawsuit entitled Brickell
--------
Partners v. Jerold H. Rubinstein, Donne F. Fisher, Leo J. Hindery, Jr., James R.
- --------------------------------------------------------------------------------
Shaw, Sr., Kent Burkhart, J.C. Sparkman, 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.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
----------------------------------------------------
There were no matters submitted to a vote of the Company's security
holders during the fourth quarter of the Company's fiscal year ended September
30, 1996.
18
<PAGE>
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
----------------------------------------------------------------------
The Company's Common Stock currently trades on the Nasdaq National Market
System under the symbol "TUNE".
The following table sets forth the range of high and low sales prices
during each quarter presented of the Common Stock as reported by Nasdaq.
<TABLE>
<CAPTION>
Quarter Ended High Low
------------- ---- ---
<S> <C> <C>
December, 1994 3.000 1.500
March, 1995 4.000 2.438
June, 1995 3.375 2.000
September, 1995 3.313 2.125
December, 1995 3.000 2.125
March, 1996 2.875 1.750
June, 1996 2.250 0.813
September, 1996 1.938 0.563
</TABLE>
On December 31, 1996, the closing price reported by Nasdaq was $1.031.
Stockholders are urged to obtain current market quotations for the Common Stock.
As of December 31, 1996 there were 434 Stockholders of record of the Company
with approximately 55% of the shares held in "street name."
Dividends.
- ---------
No dividends have been paid to date by the Company. Management of the
Company does not intend to pay any cash dividends in the foreseeable future;
rather, it is expected that the Company will retain any earnings to finance its
operations and growth.
19
<PAGE>
Item 6. SELECTED FINANCIAL DATA.
------------------------
The following is a summary of selected financial data. See the financial
statements included herein for more detailed information.
<TABLE>
<CAPTION>
Fiscal Year Ended September 30,
- ------------------------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA
Revenue $ 17,326,603 12,773,384 9,377,059 4,792,527 773,861
Operating, selling, general and
administrative expenses 30,460,622 22,166,898 20,558,849 17,726,103 27,306,904
Depreciation and amortization 1,883,415 1,341,775 1,065,666 790,229 565,694
Loss on disposal of DMX-Europe N.V. 7,153,278 -- -- -- --
--------------------------------------------------------------------------
Net operating loss (22,170,712) (10,735,289) (12,247,456) (13,723,805) (27,098,737)
Equity earnings in Galactic/TEMPO 197,227 306,640 223,852 143,622 283,889
Equity loss in DMX-Europe N.V. (11,852,650) (13,271,599) (4,746,239) (3,553,932) --
Interest income (expense), net (188,507) 73,540 38,168 85,943 482,974
Other income (expense), net 159,865 547,179 226,461 640,197 (108,530)
--------------------------------------------------------------------------
Net loss $ (33,854,777) (23,079,529) (16,505,214) (16,407,975) (26,440,404)
==========================================================================
Loss per share $ (0.68) (0.60) (0.48) (0.52) (0.90)
==========================================================================
BALANCE SHEET DATA (AT END OF YEAR)
Current assets $ 7,719,069 12,122,658 9,650,493 3,102,741 10,972,178
Investments in Galactic/ TEMPO Sound
Partnership 504,156 456,929 450,289 476,448 332,826
Goodwill, net of accumulated
amortization 4,500,658 -- -- 15,459 41,960
Other assets, net of accumulated
depreciation 99,148 166,419 55,169 54,000 219,141
Property and equipment, net of
accumulated depreciation 5,893,988 4,336,378 4,443,995 3,225,093 2,388,227
--------------------------------------------------------------------------
Total assets $ 18,717,019 17,082,384 14,599,946 6,873,741 13,954,332
==========================================================================
Current liabilities $ 16,636,107 3,250,042 3,405,082 3,714,835 3,198,719
Royalty payable 1,773,275 1,251,983 713,421 267,770 37,162
Deferred revenue 295,461 376,395 418,540 -- --
Capital lease obligation 1,401,426 1,446,085 1,502,990 -- --
Notes payable -- -- 201,090 382,545 --
Investment in DMX-Europe N.V. -- 15,886,116 8,175,171 3,428,932 --
--------------------------------------------------------------------------
Total liabilities 20,106,269 22,210,621 14,416,294 7,794,082 3,235,881
Net stockholders' (deficit) equity (1,354,250) (5,128,237) 183,652 (920,341) 10,718,451
--------------------------------------------------------------------------
Total liabilities and stockholders'
equity $ 18,752,019 17,082,384 14,599,946 6,873,741 13,954,332
==========================================================================
</TABLE>
20
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
-----------------------------------------------------------------------
OF OPERATIONS.
--------------
SUMMARY OF PERFORMANCE.
The net loss for the fiscal year ended September 30, 1996 was $33.8
million or $0.68 per share compared to $23.1 million or $0.60 per share for the
fiscal year ended September 30, 1995. The increase in the net loss of $10.7
million primarily resulted from the Company's accrual for estimated loss on
disposal of DMX-E of $7.2 million and the increased net loss resulting from DMX-
E's operations of $3.5 million. The Company has entered into agreements which
provide for the disposition of DMX-E to Mr. Jerold H. Rubinstein, its Chairman
and Chief Executive Officer. 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.
Accordingly, the Company has estimated the loss on the disposal of DMX-E in the
accompanying consolidated statements of operations.
The increase in revenues of $4.5 million or 35.6% was primarily
attributed to the growth in commercial subscribers and growth in residential
subscribers resulting from the launch of DMX on PrimeStar in the first quarter
of the fiscal year.
The Company continues to focus on expanding its market share in the
commercial arena and continues to develop third party distribution
relationships. In the first quarter of the 1996 fiscal year, DMX was launched
by two third party distributors: PrimeStar and TML-Bluestar. PrimeStar
initially offered eight DMX formats as a basic service to all PrimeStar
subscribers for a per subscriber fee, and will be expanding the DMX format
offerings to include both basic and premium tier options. TML-Bluestar is
offering 40 music formats to all MultiChoice basic subscribers in Sub-Saharan
Africa for a per subscriber license fee. The Company does not incur any
incremental costs in providing the signal to TML-Bluestar for distribution, nor
is it responsible for the payment of music rights. Additionally, DMX was
launched on AlphaStar Television Network Inc. as a basic service for a per
subscriber license fee in the latter part of the 1996 fiscal year.
RESULTS OF OPERATIONS.
REVENUE--DMX INC.
- ----------------
The Company's revenues were generated from affiliated cable system
subscriber fees for cable distribution of DMX to residential and commercial
subscribers; affiliated cable system subscribers fees for DBS distribution to
commercial subscribers; subscriber fees from third party DBS distributors;
subscriber fees from the Company's DBS distribution through its DMX for
Business, commercial national account sales program and owned and operated sales
program; subscriber fees from the Company's launch of a DTH service through its
DMX-Direct sales program; fees from the Company's recent launch of on-premise
business music service, DMX-Disc; and fees earned from licensing and royalty
arrangements in foreign markets.
Total revenues for the fiscal year increased to $16.5 million in 1996
from $12.8 million in 1995. The $3.7 million or 29.1% increase was primarily
attributed to: (i) increased residential subscriber fees resulting from the
launch of DMX on PrimeStar in the first fiscal quarter of 1996 (this added
source of revenue did not exist in the prior year); (ii) continued growth in
commercial subscriber fee revenue as a result of increased sales and marketing
activity in the affiliate sales, national accounts, and O&O groups; and (iii)
increased other revenue representing equipment sales and lease revenue related
to the growth and increased sales and marketing activity of the commercial sales
group. In June, 1994, the Company launched on the Ku-Band satellite which
enabled DMX for Business to gain access to nearly 100% of the business
marketplace in the United States. Concurrent with this launch, the Company's
commercial division implemented its national
21
<PAGE>
accounts sales program, and in May 1995 launched its first owned and operated
sales group ("O&O") in the Southern California business market.
Commercial subscriber fees represented approximately 36.0% as compared to
30.7% of total subscriber fee revenue for the fiscal years ended September 30,
1996 and 1995, respectively. Residential subscriber fees represented
approximately 64.0% and 69.3% of total subscriber fee revenue for the fiscal
years ended September 30, 1996 and 1995, respectively. Subscriber fee revenue
from TCI and its affiliates represented approximately 55% and 61% of total
subscriber fees, for the years ended September 30, 1996 and 1995, respectively.
Total revenues for the 1995 fiscal year increased to $12.8 million from
$9.4 million in 1994. The $3.4 million or 36.2% increase was primarily
attributed to increased commercial subscriber fees of 103% and an increase in
residential subscriber fees of approximately 16.9%. Commercial subscriber fees
represented approximately 31% and 20% of total subscriber fee revenue for the
fiscal years ended September 30, 1995 and 1994, respectively. Residential
subscriber fees represented approximately 69% and 80% of total subscriber fee
revenue for the fiscal years ended September 30, 1995 and 1994, respectively.
Subscriber fee revenue from TCI and its affiliates represented approximately 61%
and 65% of total subscriber fees for the years ended September 30, 1995 and
1994, respectively.
REVENUE--DMX-E.
- --------------
The Company has not previously consolidated the operations of DMX-E and
as such amounts for 1996 represent the activities from acquisition date of
May 17, 1996 through September 30, 1996. As discussed below, the Company has
decided to dispose of or cease the operations of DMX-E.
OPERATING EXPENSES DMX INC.
- --------------------------
Total operating expenses increased to $39.5 million for the fiscal year
ended September 30, 1996 from $23.5 million for 1995. The $16.0 million or
68.0% increase was primarily attributed to the inclusion of operating expenses
and estimated loss on disposal of DMX-E. Additionally, the increase was
attributed to increased sales and marketing expense of $1.1 million resulting
from the expansion of the national accounts sales program and the O&O sales
group; increased studio and programming expense of $1.2 million resulting from
an increase in music rights commensurate with the growth in Subscribers and fee
revenue, the increased number of music formats from 69 to over 90 channels, and
increased satellite and uplink costs due to double illumination in December 1995
through February 1996, while the Company migrated from the AT&T Telstar 401 Ku-
Band satellite to the AT&T Telstar 402R Ku-Band satellite.
Total operating expenses increased to $23.5 million for the fiscal year
ended September 30, 1995 from $21.6 million for 1994. The $1.9 million or 8.8%
increase was primarily attributed to increased studio and programming expense of
$2.3 million, reflecting the transponder and uplinking expenses due to the Ku-
Band satellite launch in June 1994 and increased music rights expense
corresponding to subscriber fee revenue growth; increased sales and marketing
expense of $969,000, due to new commercial sales programs; and an increased
general and administrative expense of $614,000 primarily due to an increase in
the provision for doubtful accounts. These increases were partially offset by
the decrease in stock bonus expense of $2.0 million.
GENERAL AND ADMINISTRATIVE EXPENSES.
General and administrative expenses include costs incurred to operate the
Company's corporate office facilities, such as rent and insurance, personnel
costs associated with the general corporate and finance staff, as well as
outside professional fees for legal, audit and tax services.
General and administrative expenses increased to $5.8 million for the
fiscal year ended September 30, 1996 from $5.5 million for 1995. The $291,000
net increase was primarily attributed to net increases in personnel cost of
$290,000 which included an increased performance bonus paid to the Chairman, a
reclassification of a certain executive's compensation from sales and marketing
to general and administrative, and increases due to additional staff which all
occurred in the first half of the fiscal year and was partially offset by
decreases in salaries because of an executive officer and other staff leaving
the Company in the second half of the fiscal year. Other net changes in general
and administrative expenses included increased legal fees of $161,000 and
increased printing and investor materials of $100,000 due to the DMX-E merger
and special shareholders meeting regarding such merger and other business
development activities; partially offset by a reduction in occupancy expense of
$77,000 which resulted from the negotiation of more favorable lease terms;
decreased consultant fee expense of $74,000; decreased other shareholder
relations expense of $63,000 and decreased public relations expense of $26,000.
22
<PAGE>
General and administrative expenses increased to $5.5 million for the
fiscal year ended September 30, 1995 from $4.9 million for 1994. This $614,000
or 12.5% net increase was primarily attributed to the increase in provision for
doubtful accounts of $543,000; an increase in personnel costs of $286,000, due
to the use of temporary consultants and addition and replacement of staff, a
performance bonus paid to the Chairman and normal salary adjustments; increase
in rent of $49,000; less reductions in legal expense of $164,000 and public
relations expense of $75,000 as the Company relied less on outside firms and
established a public relations department internally.
SALES AND MARKETING EXPENSES.
Sales and marketing expenses include costs incurred for both the
residential and commercial sales divisions in connection with new cable system
launches of DMX; the related cooperative funding provided to systems to assist
their marketing efforts; the costs related to the marketing of DMX for Business;
the accrual of the Scientific-Atlanta royalties; the sales and support staff and
related expenses; and the development of marketing campaigns and materials.
Sales and marketing expense increased to $8.6 million for the fiscal year
ended September 30, 1996 from $7.4 million for 1995. The $1.1 million or 14.9%
increase represented an increase of $477,000 in salaries and commissions
resulting from increased sales and marketing activities of the Company's
commercial division, which added sales and support staff for the national
account sales program and the O&O group. Other sales and marketing expense
increases primarily represented increased office, rent and telephone of $221,000
related to the commercial division expansion; increased travel and entertainment
and convention and conferences totaling $363,000, reflecting growth in the sales
force and direct marketing activities for both the residential and commercial
divisions, including the Company's contribution and marketing activities related
to the 1996 Summer Olympics.
Sales and marketing expense increased to $7.4 million for the fiscal year
ended September 30, 1995 from $6.5 million for 1994. The increase of $969,000
or 15.0% primarily represented increased salaries and commissions of $930,000
from the launch of the Company's DMX-Direct sales program during the year and
the reallocation of the related executive's salary in charge of that program
from general and administrative expense in the prior year and the building of
the sales and support staff for the national account sales program and owned and
operated sales program.
Other fluctuations in sales and marketing expense during the fiscal year
ended September 30, 1995 included an increase in installation costs of $100,000
related to commercial sales; an increase in the Scientific-Atlanta royalty
accrual of $93,000 commensurate with the growth in cable subscriber revenue;
increases in travel & entertainment expense of $100,000, postage and shipping of
$96,000 and other miscellaneous office expense of $67,000, as the sales force
grew and direct marketing for both residential and commercial divisions played a
more significant role as compared to expenses incurred for new cable system
launches and related cooperative funding provided to the cable systems in prior
years. Marketing expenses related to new cable system launches and related
cooperative funding provided to the systems decreased by $470,000.
STUDIO AND PROGRAMMING EXPENSES.
Studio and programming expenses include costs incurred for music
performance royalties, music research and programming of DMX formats, studio
facility overhead, satellite transponder and uplinking expenses.
Studio and programming expense increased to $9.0 million for the fiscal
year ended September 30, 1996 from $7.8 million for 1995. The $1.2 million or
15.4% increase represented increased music rights expense of $776,000
commensurate with the growth in subscribers and fee revenue; increased uplink
and satellite cost of $156,000, representing the cost of double illumination as
the Company migrated from the AT&T Telstar 401 Ku-Band satellite to the AT&T
Telstar 402R Ku-Band satellite in the second quarter of the fiscal year. The
remainder of the net increase of $231,000 represented increased salaries,
program consultant expenses and the direct costs related to the Company's
increase in music formats from approximately 69 to
23
<PAGE>
over 90 over the last year and DMX-Disc production cost incurred to establish
the new on-premise DMX-Disc product line.
Studio and programming expense increased to $7.8 million for the fiscal
year ended September 30, 1995 from $5.5 million for 1994. The increase of $2.3
million or 41.8% primarily represented an increase in satellite transponder and
uplinking expense of $1.4 million attributed to the Ku-Band satellite launch in
June 1994; an increase in music rights expense of $616,000 commensurate with the
growth in subscribers and fee revenue; and an increase in salaries of $243,000
reflecting added studio and programming personnel to manage the expansion to
over 90 channels by the end of the year.
International Development Expenses.
International development expenses include costs incurred for the
continued development of DMX distribution opportunities outside of the United
States.
International development expense decreased to $2,000 for the fiscal year
ended September 30, 1996 from $168,000 for 1995 as the Company did not focus on
new development of DMX distribution in foreign countries, outside of Europe, as
it had in previous years.
International development expense increased to $168,000 for the fiscal
year ended September 30, 1995 from $61,000 for 1994. The increase was primarily
due to consulting fees and increased travel expenses related to business
development, and the demonstration of DMX to potential foreign partners.
Research and Development Expenses.
Research and development expenses include costs incurred for the ongoing
development of new technologies and refinements of existing technology used in
the distribution of DMX both in the U.S. and in Europe including the DTH
technology developed for DMX-E's launch on the ASTRA satellite in 1995.
Overhead and project development costs of the engineering department are
allocated on a shared benefit basis with DMX-E.
Research and development expense of $778,000 for the fiscal year ended
September 30, 1996 remained comparable with the prior year's expense of $725,000
as the infrastructure for both the Company and DMX-E has been established and
new development of major projects was curtailed.
Research and development expense decreased to $725,000 for the fiscal
year ended September 30, 1995 from $990,000 for 1994. The decrease was
primarily attributed to the research and development department dedicating
resources to the development of DTH technology for DMX-E which was charged to
DMX-E.
Stock Bonus and Options Compensation.
Stock bonus and option compensation expense for the fiscal years ended
September 30, 1996 and 1995 was $550,000 and related to the extension of the
exercise date to December 31, 1996 on options to purchase 350,000 shares of
common stock granted to the Chairman in October 1990. The decrease in stock
bonus and option compensation expense of $2.1 million to $500,000 for the fiscal
year ended September 30, 1995 from $2.6 million for 1994 represented the
compensation related to a stock bonus granted the Chairman in 1991.
Operating Expenses--DMX-E.
- -------------------------
The Company has not previously consolidated the operations of DMX-E and
such amounts for 1996 represent the activities from acquisition date May 17,
1996 through September 30, 1996. As discussed below, the Company has decided to
dispose or cease the operations of DMX-E.
Other Income (Expense).
- ----------------------
Other income (expense) includes the Company's earnings or losses from its
investment activities as well as miscellaneous other income and expense.
24
<PAGE>
Other Income.
Other income decreased to $172,000 for the fiscal year ended September
30, 1996 from $780,000 and represents lease income from DMX-E for the equipment
lease.
Other income increased to $780,000 for the fiscal year ended September
30, 1995 from $332,000 for 1994. The increase was primarily attributed to the
reversal of an accrued liability of $300,000 which was recorded as an estimated
liability in 1990 related to pre-manufacturing prototype testing and
enhancements to the digital audio tuner which the Company no longer has an
obligation to pay.
Other Expense.
Other expense for the fiscal year ended September 30, 1996 totaled
$12,000 as compared to $233,000 for 1995. The decrease related to an accrual
for music performance royalties of $220,000 in the fiscal year 1995 as
settlement of a contract negotiation.
Other expense for the fiscal year ended September 30, 1995 totaled
$233,000 as compared to $106,000 for the fiscal year ended September 30, 1994.
This increase relates to an accrual related to music performance royalties of
$220,000 as settlement of a contract negotiation.
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 them in receivership. Mr. Rubinstein will seek to reorganize the
operations of DMX-E and will seek new equity investors. If the existing
companies cannot be reorganized, then Mr. Rubinstein intends to organize a new
company to distribute the music service on essentially the same terms.
At September 30, 1996 the estimated loss on disposal of DMX-E was
accounted for in the Company's consolidated financial statements. The estimated
loss on the disposal of DMX-E includes the Company's net investment in these
subsidiaries of $5.7 million and other obligations guaranteed by the Company of
$1.4 million.
The net loss from DMX-E's operations increased to $16.8 million for the
fiscal year ended September 30, 1996 from $13.3 million for 1995. The increase
of $3.5 million was attributed to the Company recording 100% of DMX-E net loss
for the fiscal year ended September 30, 1996 as compared to recording 100% of
DMX-E loss for the fourth quarter of the fiscal year ended September 30, 1995
and 51% for the first three quarters of the fiscal year 1995. In the fiscal year
ended September 30, 1995, DMX-E fully utilized all funds available under the
TCI-E credit facility. In the fourth quarter of the fiscal year ended
September 30, 1995, the Company funded operating losses of DMX-E and accordingly
the equity in loss of DMX-E included operating losses funded by the Company in
excess of its guaranteed portion of the debt.
The equity in loss of DMX-E increased to $13.3 million for the fiscal
year ended September 30, 1995 from $4.7 million for 1994. The increase of $8.6
million was attributed to DMX-E's increased net loss due to increased technical,
legal and administrative expenses incurred to develop the necessary
infrastructure to provide 83 DMX channels for the DTH launch on the ASTRA
satellite system. DMX was launched in August 1995 in Germany, Austria and
Switzerland and marked the beginning of the Pan European launch of DMX
distribution.
25
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES.
The Company has historically funded its operations primarily through the
sale of its common stock. During the fiscal year ended September 30, 1996, the
Company generated funds through financing activities that included proceeds of
$10.3 million resulting from the sale of $1.0 million of its Common Stock to a
former director-shareholder, the sale of $9.0 million of Common Stock to TCI and
$293,000 from the exercise of options by the Chief Executive Officer to purchase
150,000 shares of Common Stock at $1.95 per share. The decrease in cash of $7.5
million for the year was the net result of $10.3 million of cash raised in
financing activities less cash used in investing activities of $8.5 million,
relating primarily to the funding of DMX-E losses, and cash used in operating
activities of $8.9 million.
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 the U.S.
operation's 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. The Company is negotiating with TCI for a $3.5
million loan to fund past and future tuner purchases. However, the Company is
not seeking additional financing at this time to fund its other operational
requirements and its obligations related to the discontinuance of the operations
of DMX-E due to the pendency of the TCI acquisition proposal and management's
belief that with the closure of the Company's European operations, its domestic
cash flow should be sufficient to meet the Company's cash requirements. 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
available cash resources 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 2 and 9 to the Company's
consolidated financial statements and in Discontinued Operations of DMX-E above,
the Company has ceased funding the operations of DMX-E and Company 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. Such adjustments could have a material adverse effect upon the
financial position and results of operations of the Company.
Inflation.
- ---------
Management believes that the effect of inflation has not been material to
the Company. However, inflation in the costs of personnel, marketing,
programming or certain other operating expenses could significantly affect the
Company's future operations. Current economic conditions indicate a relatively
low inflationary period and as a result, inflation is not expected to materially
affect the Company in fiscal 1997.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
-------------------------------------------
See Item 14. Exhibits, Financial Statement Schedules and Reports on Form
8-K for the Company's Consolidated Financial Statements, the notes thereto, the
Consolidated Financial Statements of DMX-Europe N.V. and subsidiary, the notes
thereto and Schedules filed as part of this report.
26
<PAGE>
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
---------------------------------------------------------------
FINANCIAL DISCLOSURE.
---------------------
None.
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT.
-----------------------------------------------
The Company's Certificate of Incorporation and Bylaws provide that the
number of directors shall be determined from time to time by the Board of
Directors but may not be less than three. The Board of Directors is currently
composed of seven members. The Bylaws further provide for the division of the
directors into three classes of approximately equal size, with directors in each
class elected for a three-year term and approximately one-third of the directors
elected each year.
None of the directors or executive officers were selected pursuant to any
arrangement or understanding, other than with the directors and executive
officers of the Company acting within their capacity as such. There are no
family relationships among directors or executive officers of the Company as of
the date hereof.
27
<PAGE>
The following table sets forth biographical information of the directors
of the Company.
<TABLE>
<CAPTION>
Year First
Principal Occupation or Became
Employment and Occupation Director/
Directors Age for the Past Five Years Term Expires
- ----------------------------- --- -------------------------- ------------
<S> <C> <C> <C>
Kent Burkhart 62 Chairman of 1990/1998
Burkhart/Douglas and
Associates since 1973.
He is also President and
a Director of Degree
Communications./1/
Donne F. Fisher 58 Director of TCI 1996/1996
Communications, Inc.
since 1980 and of
Tele-Communications, Inc.
since June of 1994. Mr.
Fisher is also a director
of General Communication,
Inc. and United Video
Satellite Group Inc.
Leo J. Hindery, Jr. 49 Founder, Managing General 1996/1997
Partner and Chief
Executive Officer of
InterMedia Partners since
1988. Mr. Hindery is a
Director of InterMedia
Partners and Home
Shopping Network, Inc.
Bhaskar Menon 62 Formerly Chairman and 1991/1997
Chief Executive Officer
of EMI Music Worldwide
from 1979 through July
1990; President and
Chairman of the
International Federation
of the Phonographic
Industry (IFPI) from 1989
through June 1991;
private businessman since
June 1991; Chairman of
I.M.I. Incorporated since
1995.
Jerold H. Rubinstein 58 Chairman of the Board and 1986/1996
Chief Executive Officer
of the Company since May
1986; Director of United
Services Advisors, Inc.
since 1989; Director of
Spatializer Audio
Laboratories, Inc. since
1992; Chairman of the
Board of DMX-Europe since
May 1993.
James R. Shaw, Sr. 62 Founder, President and 1993/1998
Chief Executive Officer
of Shaw Communications
Inc. since 1970.
J.C. Sparkman 64 Director of Tele- 1989/1996
Communications, Inc.
since January 1997.
Retired. Formerly
Executive Vice President
of Tele-Communications,
Inc. for more than five
years. A director of
Shaw Communications Inc.,
TSX - Texscan Inc. and
United Video Satellite
Group Inc.
</TABLE>
- --------------------
/1/ A radio venture, which Mr. Burkhart was involved with through Degree
Communications, defaulted on its loan obligation in the amount of
$6,000,000. The secured lender asserted its rights to have a receiver
appointed in August 1991. The receivership closed September 29, 1992.
28
<PAGE>
The following table sets forth biographical information of the executive
officers of the Company. For a discussion of the biographical information of
Mr. Rubinstein, see "Directors" immediately above.
<TABLE>
<CAPTION>
Principal Occupation or Employment
Executive Officers Age and Occupation for the Past Five Years
- ----------------------------- --- --------------------------------------
<S> <C> <C>
J. Wendy Kim 41 Corporate Secretary and Chief Financial
Officer since 1995. Formerly Senior Vice
President, Chief Financial Officer of Bank
of San Pedro from 1992 to 1994. Formerly
Senior Manager at KPMG Peat Marwick LLP
from 1981 to 1992.
Otis Smith 55 Executive Vice President, Programming and
Residential Division since June 1995,
Executive Vice President, Programming of
the Company since December 1992. Formerly
a record industry executive.
Douglas G. Talley 49 Executive Vice President and Chief
Technical Officer of the Company since
January 1995. Formerly Vice President and
Chief Technical Officer from October 1992
to January 1995. Formerly Chairman and
founder of Digital Radio Labs from 1988 to
1992.
Lon A. Troxel 49 Executive Vice President, Commercial
Division of the Company since April 1994;
formerly Vice President, U.S./Canada
Dealer Sales at AEI Music Networks, Inc.
during 1991; and Chief Executive Officer
and President of Protection One Alarm
Services from May 1988 to October 1990.
</TABLE>
Compliance with Section 16(a) of the Exchange Act.
- -------------------------------------------------
Under Section 16(a) of the Exchange Act, the Company's directors,
executive officers and any persons holding ten percent or more of the Common
Stock are required to report their ownership of Company Stock and any changes in
that ownership to the Securities and Exchange Commission (the "SEC") and to
furnish the Company with copies of such reports. Specific due dates for these
reports have been established and the Company is required to report in its Proxy
Statement any failure to file on a timely basis by such persons. Based solely
upon a review of copies of reports filed with the SEC during the fiscal year
ended September 30, 1996, all persons subject to the reporting requirements of
Section 16(a) filed all required reports on a timely basis.
29
<PAGE>
Item 11. EXECUTIVE COMPENSATION.
----------------------
Summary of Cash and Certain Other Compensation.
The following table sets forth certain summary information concerning
compensation paid or accrued by the Company to or on behalf of the Company's
Chief Executive Officer and for the four most highly compensated executive
officers of the Company (the "Named Executives") (determined as of the end of
the last fiscal year) for each of the fiscal years ended September 30, 1996,
1995 and 1994:
<TABLE>
<CAPTION>
Summary Compensation Table.
- --------------------------
Long Term Compensation
-----------------------------------------
Annual Compensation Awards Payout
----------------------------------- ------------------------------- ------
Other Securities
Annual Restricted Underlying LTIP All Other
Name and Principal/Position Year Salary/(1)/ Bonus Comp Stock Awards Options/SARs(#) Payout Comp/(2)/
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
JEROLD H. 1996 $509,600 $250,000 - - - - $ 579
RUBINSTEIN
Chairman of the Board 1995 509,615 200,000 - - 1,000,000 - 924
Chief Executive
Officer 1994 513,576 - - - 350,000 - 1,000
ROBERT M. 1996 291,965 - - - - - -
MANNING
Executive Vice 1995 251,923 - - - 25,000 - -
President/(3)/
1994 228,937 - - - - - -
OTIS 1996 280,289 - - - - - -
SMITH
Executive Vice 1995 263,200 - - - 50,000 - -
President, Programming
and Residential 1994 210,335 - - - - - -
DOUGLAS G. 1996 248,077 - - - - - -
TALLEY
Executive Vice 1995 223,077 - - - 75,000 - -
President,
Chief Technical Officer 1994 203,846 - - - - - -
LON A. 1996 256,377 - - - - - -
TROXEL
Executive Vice 1995 241,673 - - - 25,000 - -
President,
Commercial 1994 223,905 - - - 75,000 - -
</TABLE>
/(1)/ Includes salary, accrued vacation and amounts deferred by the named
executive pursuant to the DMX Inc. Savings Plan.
/(2)/ Amounts contributed by the Company to the Savings Plan on behalf of the
Named Executives.
/(3)/ Mr. Manning resigned from the Company effective September 30, 1996.
30
<PAGE>
Employment Agreements and Termination of Employment Arrangements.
- ----------------------------------------------------------------
Jerold H. Rubinstein is employed on an at-will basis. The Company and Mr.
Rubinstein entered into a Deferred Compensation Agreement as of October 15, 1991
(the "Rubinstein Agreement"), the terms of which were ratified by the
stockholders at the 1992 Annual Meeting. Under the Rubinstein Agreement, the
Company accrued, for the benefit of Mr. Rubinstein, $200,000 per year plus
annual interest at the rate of 1% over prime, compounded quarterly, on December
31 of each year from 1992 through 1996. In December 1993, the Compensation
Committee rescinded the Rubinstein Agreement, effective October 1, 1993, and
accelerated the payment of the outstanding compensation at September 30, 1993,
with interest through November 30, 1993. In addition, Mr. Rubinstein's annual
salary was adjusted to $500,000 through September 30, 1996, coinciding with the
original term of the Rubinstein Agreement.
The Company and Mr. Rubinstein also entered into a Stock Bonus Agreement
(the "Stock Bonus Agreement") as of October 15, 1991. Under the Stock Bonus
Agreement, Mr. Rubinstein was granted a stock bonus in the aggregate amount of
1,027,520 shares of Common Stock (the "Restricted Shares"). Pursuant to the
Stock Bonus Agreement, Mr. Rubinstein's rights in the Restricted Shares
originally vested over a period of three years, beginning September 15, 1992. In
August 1993, the Stock Bonus Agreement was amended to change the vesting
schedule to provide that no shares would vest in fiscal 1993 and 685,013 shares
would vest in fiscal 1994. In consideration of Mr. Rubinstein's agreement for
the deferral in the vesting of the shares, the Company granted Mr. Rubinstein a
non-qualified option, pursuant to the 1993 Stock Option Plan, to purchase 70,000
shares of Company Stock at an exercise price of $5.00 per share, the fair market
value of the stock on the date of the grant.
The Company and Robert M. Manning entered into an Employment Agreement
dated October 18, 1991, amended effective October 1, 1993 (the "Manning
Agreement"), pursuant to which Mr. Manning was entitled to receive an annual
base salary of $150,000 for the period from November 1, 1991 through October 31,
1994. Pursuant to the Manning Agreement, Mr. Manning received a grant of an
employee stock option to purchase 50,000 shares of Common Stock. Based on
contributions to the Company and its management, Mr. Manning's annual salary was
increased to $185,000 in July 1992, and effective October 1, 1993, the Manning
Agreement was extended to September 30, 1996, and his annual salary was adjusted
to $225,000 for fiscal 1994, $250,000 for fiscal 1995 and $275,000 for fiscal
1996. Mr. Manning resigned September 30, 1996.
The Company and DigiTempo, Inc., a California corporation, entered into an
Employment Agreement dated October 17, 1994, whereby DigiTempo, Inc. furnishes
the services of Otis Smith, in the capacity of Executive Vice President, to the
Company, and DigiTempo, Inc. receives annual compensation of $275,000 for the
period from October 17, 1994 to October 16, 1997. Mr. Smith receives basic and
extended benefits commensurate with other senior management level employees such
as vacation pay and other fringe benefits. If Mr. Smith becomes disabled during
the term of the agreement, DigiTempo, Inc. shall receive the same compensation
it is entitled to under the agreement for a time period not exceeding six
months.
The Company and Lon A. Troxel entered into an Employment Agreement dated
October 1, 1991 (the "Troxel Agreement"), pursuant to which Mr. Troxel is
entitled to receive an annual base salary of $175,000 for the period from
October 1, 1991 to September 30, 1995. Pursuant to the Troxel Agreement, Mr.
Troxel was reimbursed $18,000 for moving expenses and was granted an employee
stock option to purchase 50,000 shares of Stock. Based on contributions to the
Company and its management, effective December 1, 1993, the Troxel Agreement was
extended to December 31, 1996, and his annual salary was adjusted to $225,000
for 1994, $240,000 for 1995, and $255,000 for 1996. In addition, Mr. Troxel was
granted an employee stock option to purchase 75,000 shares of Common Stock. On
September 16, 1996, a second amendment to the Troxel Agreement was entered into
which adjusted his annual salary to $275,000 effective December 1, 1996 and
extended the Troxel Agreement to November 30, 1999. Mr. Troxel has agreed not to
acquire more than a 10% direct or indirect ownership in any cable company, other
than the Company, without the prior written consent of the Company. If Mr.
Troxel becomes disabled during the term of the agreement, he shall receive the
same compensation he is entitled to under the agreement for a time period not
exceeding six months.
The Company and Douglas G. Talley entered into an Employment Agreement
dated January 1, 1995 (the "Talley Agreement"), pursuant to which Mr. Talley is
entitled to receive an annual base salary of $225,000 for the period from
January 1, 1995 through December 31, 1995; $250,000 for 1996; and $275,000 for
1997. Pursuant to the Talley Agreement, Mr. Talley received a grant of an
employee stock option to purchase up to 75,000 shares of Common Stock. Mr.
Talley receives basic and extended benefits commensurate with other senior
management employees such as vacation pay and other fringe benefits. If Mr.
Talley becomes disabled during the term of the agreement, he shall receive the
same compensation he is entitled to under the agreement for a time period not
exceeding six months.
31
<PAGE>
Stock Options.
- -------------
No stock option grants issued to Named Executives for the 1996 fiscal year.
Option Exercises and Holdings.
- -----------------------------
The following table provides information with respect to the Named
Executives concerning the exercise of options during the fiscal year ended
September 30, 1996 and unexercised options held by the Named Executives as of
September 30, 1996:
Aggregated Option Exercises in Fiscal Year 1996
and Fiscal Year-End Option Values
<TABLE>
<CAPTION>
Value of Unexercised
Number of Securities Underlying In-the-Money Options at
Options at 9/30/96 9/30/96 ($)(1)
-------------------------------------------------------------------
Shares
Acquired on Value
Name Exercise (#) Realized ($) Exercisable Unexercisable Exercisable Unexercisable
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Jerold H. Rubinstein 150,000 292,500 1,586,667 783,333 - -
Robert M. Manning N/A N/A 239,583 16,667 - -
Otis Smith N/A N/A 66,667 33,333 - -
Douglas G. Talley N/A N/A 133,333 50,000 - -
Lon A. Troxel N/A N/A 108,333 41,667 - -
</TABLE>
(1) Value of unexercised "in-the-money" options is the difference between the
market price of the Common Stock on September 30, 1996 ($1.8125 per share)
and the exercise price of the option, multiplied by the number of shares
subject to the option. At September 30, 1996 no options were "in-the-
money."
Compensation Committee Interlocks and Insider Participation.
- -----------------------------------------------------------
Jerold H. Rubinstein, Chairman of the Board and Chief Executive Officer of
the Company, was appointed to the Compensation Committee for the 1996 fiscal
year. Mr. Rubinstein beneficially owns 5.17% of the outstanding shares of Common
Stock. (See Part III for a discussion of the compensation Mr. Rubinstein
receives.)
J.C. Sparkman, a Director and Chairman of the Compensation Committee,
retired in the last fiscal year as a senior executive officer and Director of
TCI. Mr. Sparkman is currently a director of Shaw Communications Inc. Mr.
Sparkman beneficially owns less than 1% of the outstanding Common Stock of the
Company, which includes 100,000 shares acquired at $2.50 per share in a private
placement on September 21, 1995. TCI directly through its subsidiaries
beneficially owns 43.54% of the outstanding shares of Common Stock.
The Company and a subsidiary of TCI entered into a ten year network
affiliation agreement in 1989 under which the Company's basic audio and Digital
Music Express services are made available to TCI cable television subscribers.
The Company continues to pursue commercial applications of its DMX service for
businesses, stores, restaurants, hotels and other establishments through its
existing affiliation agreements both in areas wired for cable and by direct
broadcast satellite. TCI and its various subsidiaries' payments of license fees
to the Company accounted for approximately 55% of the Company's consolidated
gross revenues during the fiscal year ended September 30, 1996.
The Company leases studio facilities in Colorado for the origination and
uplinking of the DMX service. The studio is located in TCI's National Digital
Television Center at 4100 East Dry Creek Road, Littleton, Colorado 80122. The
six year lease agreement with WTCI, a subsidiary of TCI, is subject to the
Company's right to terminate the origination and uplinking services at any time,
with 60 days prior notice and upon payment of early termination fees. WTCI
charges the Company approximately $78,000 per month, which includes
approximately $6,400 for space rental and $72,000 for satellite uplinking
services, of which, approximately $25,000 is related to DMX-E and is paid by
DMX-E (although the Company is obligated for these payments). In addition, WTCI
provided, via a capital lease with interest at 9.5%, up to $2.2 million of
32
<PAGE>
funding for studio equipment at the facility, of which approximately $2.2
million had been expended at September 30, 1996.
The Company sub-leases space on a U.S. domestic communications satellite
known as C-3 Transponder 24. The sub-lease was entered into in December 1992
with WTCI, which in turn leases the satellite transponder from GE American
Communications, Inc. WTCI's monthly charge for the satellite, uplink and
management fee is approximately $204,000.
The Company sub-leases space on a Ku-Band satellite known as AT&T TELSTAR
402R. The sub-lease was entered into in March 4, 1994 with WTCI, which in turn
leases the transponder from AT&T Corp. Monthly sub-lease charges for the
transponder and uplink is approximately $166,000.
Director Compensation.
- ---------------------
The Company does not pay fees to its directors for their service on the
Board of Directors or for attendance at meetings of the Board or committees.
Directors who were not full-time salaried employees of the Company or its
subsidiaries received a grant of options to acquire 50,000 shares of Common
Stock under the DMX Inc. 1993 Stock Option Plan upon their effective date of
service as a director and after each twelve month period of continuous service
as director of the Company thereafter, received an additional option to acquire
50,000 shares up to a maximum of two such periods.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
--------------------------------------------------------------
The following table sets forth the beneficial ownership of Common Stock
as of December 31, 1996 by each person known to the Company to be the beneficial
owner of more than five percent of the outstanding shares of Common Stock by
each executive officer and director of the Company, and by all directors and
executive officers as a group.
<TABLE>
<CAPTION>
Amount and Nature
of Beneficial Percent
Name Ownership(1) of Class(2)
- ------------------------------------- ----------------- -----------
<S> <C> <C>
Tele-Communications, Inc. 27,100,687(3) 43.54%
Shaw Communications Inc. 7,600,000(4) 12.21%
Jerold H. Rubinstein, Chairman of the
Board and Chief Executive Officer 3,217,184(5) 5.17%
Kent Burkhart, Director 200,000(6) *
V. Bhaskar Menon, Director 200,000(7) *
James R. Shaw, Sr., Director 8,418,400(8) 13.61%
J.C. Sparkman, Director 350,000(9) *
Otis Smith, Executive Vice President 66,667(10) *
Douglas G. Talley, Executive Vice 133,333(11) *
President
Lon Troxel, Executive Vice President 108,333(12) *
Directors and Executive Officers 12,750,584(13) 20.49%
(a group of 9 persons)
</TABLE>
* Less than 1%
(1) Each named person has sole voting and investment power with respect to the
shares listed, except as noted below and provided by community property
laws, where applicable.
(2) Shares which the person (or group) has the right to acquire within 60 days
after December 31, 1996, are deemed to be outstanding in calculating the
percentage ownership of the person (or group) but are not deemed to be
outstanding as to any other person (or group).
33
<PAGE>
(3) Shares held by Tele-Communications, Inc. and its subsidiaries and
affiliates were based upon a Schedule 13D, Amendment No. 3, filed on June
6, 1996. The business address of Tele-Communications, Inc. is 5619 DTC
Parkway, Englewood, Colorado 80111.
(4) Based upon a Schedule 13D, filed on March 15, 1995, and a Form 4 filed on
January 9, 1996. Does not include 276,080 shares held by James R. Shaw
Securities Limited, 110,580 shares held by Brasha Holdings Ltd., 110,580
shares held by Jay-Shaw Holdings Ltd., 110,580 shares held by Julmar
Holdings Ltd., and 110,580 shares held by Shawnee Estates Ltd., which
entities are affiliates of Shaw Communications Inc. Shaw Communications
Inc. is a public company whose non-voting securities are listed on the
Toronto Stock Exchange and the Alberta Stock Exchange. Mr. Shaw, Sr. and
members of his family and members of Leslie E. Shaw's (Mr. Shaw, Sr.'s
brother) family hold directly and indirectly, a majority of the voting
shares of Shaw Communications Inc. and such shares are governed by the
terms of a voting trust. Mr. Shaw, Sr. and members of his family do not,
directly or indirectly, hold a majority of the publicly traded non-voting
shares. The business address of Shaw Communications Inc. is 630-3rd Avenue,
Suite 900, Calgary, Alberta T2P4L4.
(5) Includes 9,000 shares owned of record by Mr. Rubinstein's wife and minor
child and 1,586,667 shares which Mr. Rubinstein has the right to acquire
within 60 days of December 31, 1996, by the exercise of vested stock
options. Mr. Rubinstein's business address is 11400 West Olympic Boulevard,
Suite 1100, Los Angeles, California 90064-1507.
(6) Represents 200,000 shares which Mr. Burkhart has the right to acquire
within 60 days of December 31, 1996, by the exercise of vested stock
options.
(7) Represents 200,000 shares which Mr. Menon has the right to acquire within
60 days of December 31, 1996, by the exercise of vested stock options.
(8) Includes the following shares, to which Mr. Shaw, Sr. disclaims beneficial
ownership: 7,600,000 shares held by Shaw Communications Inc., 276,080
shares held by James R. Shaw Securities Limited, 110,580 shares held by
Brasha Holdings Ltd., 110,580 shares held by Julmar Holdings Ltd., 110,580
shares held by Shawana Estates Ltd., and 110,580 shares held by Jay-Shaw
Holdings Ltd. Mr. Shaw, Sr. holds a majority of the shares of Jay-Shaw
Holdings Ltd., Brasha Holdings Ltd. and Shawana Estates Ltd. The remaining
shares of each such entities, other than certain preferred shares held by
Julmar Holdings Ltd., a corporation wholly owned by Mr. Shaw, Sr., are held
by children of Mr. Shaw, Sr. Each of the children has reached the age of
majority. Mr. Shaw, Sr. holds 48% of the voting shares of James R. Shaw
Securities Limited. The balance of voting shares are held by and for the
benefit of Mr. Shaw, Sr.'s family members. Includes 100,000 shares which
Mr. Shaw, Sr. has the right to acquire within 60 days of December 31, 1996,
by the exercise of vested stock options. Mr. Shaw, Sr.'s business address
630-3rd Avenue, Suite 900, Calgary, Alberta T2P4L4.
(9) Includes 200,000 shares which Mr. Sparkman has the right to acquire within
60 days of December 31, 1996, by the exercise of vested stock options.
(10) Includes 66,666 shares which Mr. Smith has the right to acquire within 60
days of December 31, 1996, by the exercise of vested stock options.
(11) Includes 133,333 shares which Mr. Talley has the right to acquire within 60
days of December 31, 1996 by the exercise of vested stock options.
(12) Includes 108,333 shares which Mr. Troxel has the right to acquire within 60
days of December 31, 1996, by the exercise of vested stock options.
(13) Includes 2,651,667 shares which members of the group have the right to
acquire within 60 days of December 31, 1996, by the exercise of vested
stock options. Includes those shares described in note 10, to which Mr.
Shaw, Sr. has disclaimed beneficial ownership.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
-----------------------------------------------
Tele-Communications, Inc. ("TCI"), beneficially owns 43.54% of the
outstanding shares of Common Stock which includes 2,000,000 shares acquired at
$2.50 per share in a private placement on August 29, 1995 and 4,500,000 shares
acquired at $2.00 per share in a private placement on May 17, 1996. As a result
of the merger in 1996 of TCI-E into the Company upon the terms set forth in the
Agreement and Plan of Merger among TCI-E, United Artists Programming
International, Inc. ("UAPI") and the Company, UAPI, an affiliate of TCI, was
issued 10,841,624 shares of Common Stock.
34
<PAGE>
The Company under an agreement with Western Tele-Communications, Inc.
("WTCI"), a subsidiary of TCI, has a capital lease to lease equipment for its
studio and uplinking facility in Littleton, Colorado. The obligation under the
capital lease at September 30, 1996 was $1,492,550 with terms which extend to
2000 at an interest rate of 9.5%. The Company is also obligated to WTCI under
various operating leases for uplinking and satellite services. The total
expense under those leases for the fiscal year ended September 30, 1996 and 1995
were $4,831,000 and $4,489,000, respectively.
Total subscriber fee revenue from TCI and its affiliates represented
approximately 56% and 61% of total subscriber fee revenue for the fiscal years
ended September 30, 1996 and 1995, respectively, with accounts receivable due
from TCI and its affiliates at September 30, 1996 and 1995 totaling
approximately $1,829,000 and $1,876,000, respectively.
Shaw Communications Inc. ("Shaw"), beneficially owns 12.21% of the
outstanding shares of Common Stock of the Company, which includes shares
acquired through various stock purchase agreements, including 1,100,000 shares
acquired at $2.13 per share in a private placement on March 9, 1995, and
2,000,000 shares acquired at $2.50 per share in a private placement on August
25, 1995. James R. Shaw, Sr., President and Chief Executive Officer of Shaw
Communications Inc., is a director of the Company. Mr. Sparkman, a director of
the Company, is a director of Shaw Communications Inc. In March 1992, Shaw, the
second largest cable operator in Canada, entered into a licensing and royalty
agreement with the Company which provides the Company with a monthly, per
subscriber programming royalty for both residential and commercial distribution.
In addition, Shaw formed a Canadian company, DMX-Canada Ltd. which is a partner
in "The DMX-Canada Partnership", a partnership with 450714 B.C. Ltd., a
subsidiary of the Company.
During 1995, the Company and Shaw entered into a series of agreements to
accomplish a reorganization by which Shaw could take full advantage of the
Canadian tax losses incurred in Canada, during the market development period and
based on Shaw's commitment to fund such development costs. This was
accomplished through the transfer of each company's respective equity interests,
and the formation of a new Canadian partnership (also referred to herein as DMX-
Canada). DMX Inc. continues to hold an equity interest in the new partnership
through its wholly owned subsidiary, a British Columbia corporation, 450714 B.C.
Ltd. There is no impact from the reorganization on the operations of DMX-
Canada, other than to accomplish the tax structure as outlined above. After
Shaw recoups its initial funding, each company will share in the profits based
on their respective equity interests.
In August 1994, the CRTC, which regulates the broadcast industry in
Canada, revoked the license previously granted to DMX-Canada for Canadian
distribution of DMX. DMX-Canada reapplied to the CRTC during 1995 for a license
to distribute DMX to Canadian residential cable subscribers. The CRTC issued a
favorable ruling in December 1995. DMX-Canada is currently reviewing the
economic terms of the ruling and the feasibility of developing DMX distribution
to cable subscribers. There is no date currently set for a launch. The CRTC
does not regulate programming delivered to commercial establishments by direct
broadcast satellite. DMX-Canada launched its DMX for Business service in Shaw's
affiliated territories in Vancouver and Edmonton in November 1994. DMX-Canada
expanded the distribution of DMX in 1995.
Stephen A. Wynn, Chairman of the Board, President and Chief Executive
Officer, Mirage Resorts, Incorporated, resigned as a director of the Company in
May 1996 concurrently with his sale of 5,700,000 shares of Common Stock to TCI
at $2.00 per share, which included 2,200,000 shares acquired by him at $2.13 per
share in a private placement on February 21, 1995 and 500,000 shares acquired at
$2.00 per share in a private placement on March 15, 1996. In April 1995, the
Company entered into a five year commercial music service agreement with Mirage
Resorts, Inc. where the Company provides its DMX for Business music service for
a monthly fee.
The Company has entered into definitive agreements with Jerold H.
Rubinstein, Chairman of the Board and Chief Executive Officer, of the Company,
which provide for Mr. Rubinstein to either purchase a 90% interest in DMX-E in a
transaction reference to as the "Reorganization Plan", or if agreement cannot be
reached with the creditors of DMX-E, then Mr. Rubinstein will organize a new
company ("NewCo") that will distribute DMX service in Europe. In that event, DMX
Inc. will receive a 10 percent interest in NewCo and DMX-E will be placed in the
hands of a receiver. See "Business - Recent Developments."
35
<PAGE>
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8K.
---------------------------------------------------------------
(a) Consolidated Financial Statements and Schedules. Reference is made to the
-----------------------------------------------
Index to Consolidated Financial Statements of DMX Inc. and Subsidiaries
and Schedules for the period ended September 30, 1996, for a list of
financial statements and schedules filed as part of this report at page
F-1.
The Consolidated Financial Statements of its subsidiary, DMX-Europe (N.V.)
as of and for the period ended September 30, 1996, filed as part of this
report at page F-16.
(b) Reports on Form 8-K. The Company filed no reports on Form 8-K during the
-------------------
quarter ended September 30, 1996.
(c) Exhibits. Following is a list of Exhibits filed with this report.
--------
Exhibit
- -------
Number Description
- ------ -----------
2.1(1) Form of Arrangement Agreement [2.1]*
2.2(2) Certificate of Discontinuance issued by Department of Consumer and
Corporate Affairs, Canada[2.2]*
2.3(2) Certificates of Domestication, Merger, Name Change and Correction
filed in Delaware by ICT-Canada and ICT-Delaware to implement the
Reorganization as of September 28, 1990 [2.3]*
3.1(12) Amended and Restated Certificate of Incorporation of the Registrant
3.2(1) Bylaws of the Registrant [3.2]*
4.1(3) Articles IV, VI, VII, VIII, XI, XII of the Certificate of
Incorporation of the Registrant (filed as part of Exhibit 3.1)
4.2(1) Articles II, III, VII and XI of the Bylaws of the Registrant (filed
as part of Exhibit 3.2)
4.3(4) Form of Agent's Warrant to Cruttenden & Company and Robert S. London
[4.3]*
4.4(1) Broker's Warrant to Merit Investment Corporation [4.4]*
4.5(1) Form of Option Agreement for Director, Officer and Employee Options
[4.5]*
4.6(5) TCI Equity Participation Agreement [4.6]*
4.7(1) Viacom Equity Participation Agreement [4.7]*
4.8(1) KBL Services Equity Participation Agreement [4.8]*
4.9**(11) Loan Agreement between ICT-Europe and TCI-Euromusic ("TCI-E"),
(without exhibits) dated May 19, 1993
4.10(11) Contribution Agreement between TCI-Euromusic and the Registrant
dated May 19, 1993
10.1(5) TCI Equity Participation Agreement (filed as Exhibit 4.6)
10.2(1) Viacom Equity Participation Agreement (filed as Exhibit 4.7)
10.3(1) KBL Services Equity Participation Agreement (filed as Exhibit 4.8)
10.4**(11) Affiliation Agreement between the Registrant and Colony
Communications dated May 1, 1992 [10.4]*
10.5**(11) Affiliation Agreement between the Registrant and Crown Media, Inc.,
dated July 1, 1992 [10.5]*
10.6**(11) Affiliation Agreement between the Registrant and Prime II
Management, L.P. [10.6]*
10.7(11) Stock Purchase Agreement between the Registrant and various private
parties, dated August 2, 1991 [10.7]*
10.8(11) Stock Purchase Agreement between the Registrant and Scudder
Development Fund, dated August 23, 1993 [10.8]*
10.9(11) Stock Purchase Agreement between the Registrant and Crown Media,
Inc. dated July 22, 1992 [10.9]*
10.10(11) Stock Purchase Agreement between the Registrant and Crown Media,
Inc. dated August 30, 1993 [10.10]*
10.11(11) Stock Purchase Agreement between the Registrant and Brahman
Partners, II, L.P. dated September 15, 1993 [10.11]*
10.12(11) Stock Purchase Agreement between the Registrant and Quota Fund,
N.V.-Brahman, dated September 15, 1993 [10.12]*
10.13(11) Stock Purchase Agreement between the Registrant and Genesis Capital
Fund, dated September 15, 1993 [10.13]*
36
<PAGE>
Exhibit
- -------
Number Description
- ------ -----------
10.14(11) Stock Purchase Agreement between the Registrant and Shaw
Cablesystems, dated March 9, 1992 [10.14]*
10.15(11) Stock Purchase Agreement between the Registrant and Shaw
Communications, Inc., dated September 30, 1993 [10.15]*
10.16(6) Stock Bonus Agreement with Jerold H. Rubinstein**** [10.15]*
10.17(11) Amendment to Stock Bonus Agreement****
10.18(6) Deferred Compensation Agreement with Jerold H. Rubinstein****
[10.16]*
10.19(1) Employment Agreement with W. Thomas Oliver***[10.11]*
10.20(11) Employment Agreement with Robert M. Manning***
10.21(5) SSI Affiliation Agreement [10.2]*
10.22(5) Viacom Affiliation Agreement [10.3]*
10.23(5) KBLCOM Residential Affiliation Agreement [10.4]*
10.24(2) Western Tele-Communications ("WTCI") Security Agreement and
Promissory Note [10.14]*
10.25(7) Studio Facility and Uplinking Agreement between Western Tele-
Communications, Inc. and the Registrant [10.15]*
10.26**(11) Agreement for Acquisition of Capital Stock and for the Governance of
ICT-Europe N.V. ("ICT-E") (without exhibits), dated May 19, 1993
10.27**(11) ICT-Europe Technology License and Services Agreement (without
exhibits), dated May 19, 1993
10.28**(11) ICT-Europe Trademark Agreement (without exhibits), dated May 19,
1993
10.29**(11) ICT-Europe Loan Agreement, dated May 19, 1993 (filed as Exhibit 4.9)
10.30(11) Contribution Agreement between TCI-Euromusic and ICT, dated May 19,
1993 (filed as Exhibit 4.10)
10.31(11) ICT-Europe Equipment Lease, dated May 18, 1993 (without exhibits)
10.32(11) Registrant Promissory Note in favor of TCI-E, dated May 19, 1993
10.33(11) Registrant Security Agreement in favor of TCI-E, (without exhibits)
dated May 19, 1993
10.34**(11) License and Distribution Agreement between ICT-Europe and Broadcom
International Holdings, as amended, dated March 31, 1992
10.35**(11) License and Distribution Agreement between the Registrant and DMX-
Canada, dated March 9, 1992
10.36(4) NACR License and Marketing Agreement [10.10]*
10.37(2) Manufacturing and Sales Agreement between the Registrant and
Scientific-Atlanta, Inc. [10.12]*
10.38(2) License and Technical Assistance Agreement between the Registrant
and Scientific-Atlanta [10.13]*
10.39(1) FSL Development and Licensing Agreement, as amended [10.8]*
10.40(1) GE American Communication, Inc. Agreement Regarding Satellite
Carriage [10.9]*
10.41**(11) COMSTREAM Agreement between the Registrant and COMSTREAM
Corporation, dated July 22, 1993
10.42**(11) COMSTREAM Option Agreement between the Registrant and COMSTREAM
Corporation, dated July 22, 1993
10.43(1) Joint Venture Agreement with Galactic Radio, Partners, Inc. [10.7]*
10.44**(11) Sky Subscribers Management and Access Agreement between ICT-Europe
and Sky Subscribers Services Limited, 1993
10.45**(11) NDC Technology License Agreement between News Datacom Limited, ICT-
Europe and ICT-Europe UK, dated July 26, 1993
10.46(6) Employee Stock Purchase Plan**** [10.17]*
10.47(6) 1991 Incentive Stock Option Plan**** [10.18]*
10.48(8) 1991 Non-Qualified Stock Option Plan**** [4.10]*
10.49(8) 1991 Non-Qualified Stock Option Plan for Non-Employee Directors****
[4.11]
10.50(9) 1993 Stock Option Plan**** [28.1]*
10.51(9) Form of ICT Non-Qualified Stock Option Agreement**** (Non-Employee
Director) [28.2]*
10.52(9) Form of ICT Non-Qualified Stock Option Agreement**** (Employee and
Employee-Director) [28.3]*
10.53(9) Form of ICT Incentive Stock Option Agreement**** [28.4]*
10.54(11) Principal Executive Office Lease, California
10.55(11) C-3 Satellite Transponder Sub-Lease Agreement between WTCI and the
Registrant
37
<PAGE>
Exhibit
- -------
Number Description
- ------ -----------
10.56(10) Satellite Transponder Management Agreement between WTCI and the
Registrant, dated December 2, 1992
10.57(10) Satellite Transponder Management Agreement between WTCI and the
Registrant, dated January 27, 1993
10.58(10) Assignment and Assumption Agreement between WTCI and ICT-Europe
(without exhibits)
10.59**(10) Assignment Agreement between IDB and WTCI, dated January 21, 1993
10.60(10) Agreement between the Registrant and the American Society of
Composers, Authors & Publishers, dated December 20, 1991
10.61**(10) Agreement between the Registrant and Broadcast Music Inc., dated
October 11, 1991, as supplemented and amended
10.62**(10) Agreement between the Registrant and SESAC, dated December 26,
1991
10.63**(11) Affiliation Agreement between the Registrant and Scripps Howard,
Inc. dated April 30, 1994
10.64***(11) Employment Agreement between the Registrant and Lon Troxel, dated
October 1, 1991, as amended.
10.65***(11) Employment Agreement between the Registrant and Keno Thomas, dated
January 24, 1994
10.66(11) International Cablecasting Technologies Inc. Savings Plan, as
amended
10.67(11) Addendum to KBLCOM Affiliation Agreement
10.68***(12) Employment Agreement between the Registrant and DigiTempo, Inc.,
dated October 17, 1994
10.69***(12) Employment Agreement between the Registrant and Doug Talley, dated
January 1, 1995
10.70*** Employment Agreement between the Registrant and Lon Troxel, dated
October 1, 1991, as amended September 16, 1996
10.71***** Affiliation Agreement between the Registrant and PrimeStar
Partners, dated January 25, 1995
10.72***** Affiliation Agreement between the Registrant and AlphaStar
Television Network, Inc., dated November 29, 1995
10.73***** Stock Purchase and Shareholders Agreement between DMX Inc., DMX-
Europe (UK) Limited, DMX-Europe N.V. and Jerold H. Rubinstein
10.74 Subscription and Shareholders Agreement between DMX Inc., Jerold
H. Rubinstein and Xtra Music Limited
11.1 Statement Regarding Computation of Per Share Earnings (included in
the Registrant's Financial Statements)
21.1 Listing of All Subsidiaries of the Registrant
23.1 Consent of KPMG Peat Marwick LLP
23.2 Consent of KPMG Peat Marwick Chartered Accountants
27 Financial Data Schedule
- ----------------------------
(1) Incorporated by Reference to the Registrant's Registration Statement on
Form S-1, July 10, 1990, file #33-35690
(2) Incorporated by Reference to the Registrant's Post-Effective Amendment No.
2 to Registration Statement on Form S-1, May 24, 1991, file #33-35690
(3) Incorporated by reference to the Registrant's Post-Effective Amendment No.
1 to Registration Statement on Form S-1, filed on October 15, 1990, file
#33-35690
(4) Incorporated by Reference to the Registrant's Amendment No. 2 to
Registration Statement on Form S-1, September 28, 1990, file #33-35690
(5) Incorporated by Reference to the Registrant's Amendment No. 1 to
Registration Statement on Form S-1, August 31, 1990, file #33-35690
(6) Incorporated by Reference to the Registrant's Registration Statement on
Form S-1, February 24, 1992, file #33-35690
(7) Incorporated by Reference to the Registrant's Post-Effective Amendment No.
3 to Registration Statement on Form S-1, August 15, 1991, file #33-35690
(8) Incorporated by Reference to the Registrant's 1992 10-K, December 13, 1992
(9) Incorporated by Reference to the Registrant's 1993 Registration Statement
on Form S-8, May 3, 1993
(10) Incorporated by reference to the Registrant's 1993 10-K, December 23, 1993
(11) Incorporated by Reference to the Registrant's 1994 10-K, December 29, 1994
(12) Incorporated by Reference to the Registrant's 1995 10-K, January 9, 1996
* Indicates exhibit number of document in original filing
** Registrant has received confidential treatment for a portion of the
referenced exhibit
*** Indicates Management Contract
**** Indicates Compensatory Plan
***** Registrant has requested confidential treatment for a portion of the
referenced exhibit
38
<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. Rubenstein Date: January 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.
<TABLE>
<CAPTION>
Signature Date Title
--------- ---- -----
<S> <C> <C>
/s/ Jerold H. Rubinstein January 14, 1997 Chairman of the Board and
Chief Executive Officer
/s/ J. Wendy Kim January 14, 1997 Chief Financial Officer
and Corporate Secretary
/s/ Kent Burkhart January 8, 1997 Director
/s/ Donne F. Fisher January 14, 1997 Director
/s/ Leo J. Hindery, Jr. January 14, 1997 Director
/s/ Bhaskar Menon January 10, 1997 Director
/s/ James R. Shaw, Sr. January 10, 1997 Director
/s/ J.C. Sparkman January 9, 1997 Director
</TABLE>
39
<PAGE>
DMX INC.
AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996 AND 1995
(WITH INDEPENDENT AUDITORS' REPORT THEREON)
<PAGE>
DMX INC.
AND SUBSIDIARIES
Index to Consolidated Financial Statements
<TABLE>
<CAPTION>
Page
----
<S> <C>
Independent Auditors' Report on Consolidated Financial Statements
and Financial Statement Schedules (to be filed by amendment)........ F-2
Consolidated Financial Statements of DMX Inc.:
Consolidated Balance Sheets - September 30, 1996
(Unaudited) and 1995......................................... F-3
Consolidated Statements of Operations -
Years ended September 30, 1996 (Unaudited), 1995 and 1994.... F-4
Consolidated Statements of Stockholders' Deficit -
Years ended September 30, 1996 (Unaudited), 1995 and 1994.... F-5
Consolidated Statements of Cash Flows -
Years ended September 30, 1996 (Unaudited), 1995 and 1994.... F-6
Notes to Consolidated Financial Statements.................... F-7
Financial Statement Schedules have not been provided as any
information has been included in the financial statements
and notes thereto:
Consolidated Financial Statements of DMX-Europe N.V.................. F-19
Independent Auditors' Report......................................... F-20
Consolidated Balance Sheets - Assets................................. F-21
Consolidated Balance Sheets - Liabilities and Stockholders' Equity... F-22
Consolidated Statements of Operations................................ F-23
Consolidated Statement of Stockholders' Equity....................... F-24
Consolidated Statements of Cash Flows................................ F-25
Notes to Consolidated Financial Statements........................... F-26-30
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
(TO BE FILED BY AMENDMENT)
F-2
<PAGE>
DMX INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1996 AND 1995
<TABLE>
<CAPTION>
ASSETS 1996 1995
------------------------------
<S> <C> <C>
(Unaudited)
Current assets:
Cash and cash equivalents $ 928,399 $ 8,622,119
Securities held to maturity - 165,000
Prepaid expenses 464,545 112,281
Equipment inventory 438,163 264,895
Accounts receivable:
Trade related party 1,828,973 1,876,453
Other trade 2,732,018 1,893,020
Other - 45,692
Allowance for doubtful accounts (251,247) (856,802)
------------- -------------
Total current assets 6,140,851 2,958,363
Current assets DMX-Europe N.V.:
Cash 192,635 -
Prepaid expenses 851,586 -
Equipment inventory 98,517 -
Accounts receivable (net) 435,480 -
------------- -------------
Total current assets DMX-Europe N.V. 1,578,218 -
------------------------------
Total current assets 7,719,069 12,122,658
Investment in Galactic/TEMPO Sound (note 3) 504,156 456,929
Property and equipment, net (note 5) 4,418,799 4,336,378
Property and equipment DMX-Europe N.V., net (note 5) 1,475,189 -
Goodwill, net 4,535,658 -
Other assets 99,148 166,419
------------------------------
TOTAL ASSETS $ 18,752,019 $ 17,082,384
==============================
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable $ 1,097,476 $ 1,182,878
Accrued liabilities 4,886,837 1,449,938
Accrued liabilities - loss on disposal DMX-Europe N.V. (note 4) 1,468,530 -
Short-term note payable to bank (note 6) - 45,000
Note payable (note 6) - 201,090
Current portion of capital lease obligation (note 9) 410,108 371,136
------------ -------------
Total current liabilities 7,862,951 3,250,042
Current liabilities DMX-Europe N.V.:
Accounts payable 7,284,664 -
Accrued liabilities 1,488,492 -
------------- -------------
Total current liabilities DMX-Europe N.V.: 8,773,156 -
------------------------------
Total current liabilities 16,636,107 3,250,042
Deferred revenue 295,461 376,395
Royalty payable (note 9) 1,773,275 1,251,983
Investment in DMX-Europe N.V. (note 4) - 15,886,116
Capital lease obligation (note 9) 1,401,426 1,446,085
Stockholders' deficit (note 7):
Common Stock, $.01 par value. Authorized 100,000,000 shares; issued 59,672,224 shares in 1996 and
43,680,600 shares in 1995 596,722 436,806
Paid-in capital 136,758,259 99,210,706
Accumulated deficit (138,078,913) (104,224,136)
Foreign currency translation reserve (52,315) 26,390
Treasury stock, 85,630 shares, at cost (578,003) (578,003)
------------------------------
Net stockholders' deficit (1,354,250) (5,128,237)
Commitments and contingencies (note 9) - -
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 18,752,019 $ 17,082,384
==============================
</TABLE>
See accompanying notes to consolidated financial statements
F-3
<PAGE>
DMX INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED SEPTEMBER 30, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
------------------------------------------
<S> <C> <C> <C>
(Unaudited)
Subscriber fee revenues - related party $ 9,086,434 7,695,978 6,095,088
Subscriber fee revenues - other 6,972,671 4,920,380 3,281,971
Other revenue, net 431,060 157,026 -
Revenue--DMX-Europe N.V. (note 4) 836,438 - -
-----------------------------------------
17,326,603 12,773,384 9,377,059
Operating expenses:
General and administrative 5,803,043 5,511,615 4,897,948
Sales and marketing 8,570,141 7,438,023 6,468,848
Studio and programming 9,016,760 7,773,759 5,455,766
International development 1,598 168,629 61,251
Research and development 778,047 725,164 990,445
Compensation to affiliates - - 122,654
Stock bonus and option compensation 549,708 549,708 2,561,937
Depreciation and amortization 1,883,415 1,341,775 1,065,666
Operating expenses--DMX-Europe N.V. (note 4) 5,741,325 - -
Loss on disposal of DMX-Europe N.V. (note 4) 7,153,278 - -
-----------------------------------------
39,497,315 23,508,673 21,624,515
Net operating loss (22,170,712) (10,735,289) (12,247,456)
Other income (expense):
Galactic/TEMPO Sound 197,227 306,640 223,852
Equity in loss of DMX-Europe N.V. (note 4) (11,852,650) (13,271,599) (4,746,239)
Interest income 111,610 282,234 190,899
Interest expense (246,181) (208,694) (152,731)
Interest expense--DMX-Europe N.V. (note 4) (53,936) - -
Other income 172,270 779,866 332,368
Other expense (12,405) (232,687) (105,907)
-----------------------------------------
(11,684,065) (12,344,240) (4,257,758)
-----------------------------------------
Net loss $(33,854,777) (23,079,529) (16,505,214)
=========================================
Loss per share $ (.68) (.60) (.48)
=========================================
Weighted average number of shares 49,675,569 38,505,107 34,436,464
=========================================
</TABLE>
See accompanying notes to consolidated financial statements
F-4
<PAGE>
DMX INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
YEARS ENDED SEPTEMBER 30, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
Common Stock Foreign
--------------------- currency
Number of Paid in Accumulated Treasury Translation
shares Amount capital deficit stock reserve Total
--------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at September 30, 1993 32,031,480 $320,315 $ 63,976,740 $ (64,639,393) $(578,003) $ - $ (920,341)
Issuance of common stock 3,530,000 35,300 14,951,725 - - - 14,987,025
Cost of issuance - - (62,409) - - - (62,409)
Issuance of common stock as
compensation to affiliates 34,107 341 122,313 - - - 122,654
Issuance of common stock as
compensation 685,013 6,850 2,005,379 - - - 2,012,229
Accrued compensation (note 7) - - 549,708 - - - 549,708
Net loss - - - (16,505,214) - - (16,505,214)
--------------------------------------------------------------------------------------------------
Balance at September 30, 1994 36,280,600 362,806 81,543,456 (81,144,607) (578,003) - 183,652
Issuance of common stock 7,400,000 74,000 17,188,500 - - - 17,262,500
Cost of issuance - - (70,958) - - - (70,958)
Accrued compensation (note 7) - - 549,708 - - - 549,708
Foreign currency translation
reserve - - - - - 26,390 26,390
Net loss - - - (23,079,529) - - (23,079,529)
--------------------------------------------------------------------------------------------------
Balance at September 30, 1995 43,680,600 436,806 99,210,706 (104,224,136) (578,003) 26,390 (5,128,237)
Issuance of common stock
(unaudited) 15,991,624 159,916 37,237,643 - - - 37,397,559
Cost of issuance (unaudited) - - (239,798) - - - (239,798)
Accrued compensation (note 7)
(unaudited) - - 549,708 - - - 549,708
Foreign currency translation
reserve (unaudited) - - - - - (78,705) (78,705)
Net loss (unaudited) - - - (33,854,777) - - (33,854,777)
--------------------------------------------------------------------------------------------------
Balance at September 30, 1996
(unaudited) 59,672,224 $596,722 $136,758,259 $(138,078,913) $(578,003) $(52,315) $ (1,354,250)
==================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements
F-5
<PAGE>
DMX INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED SEPTEMBER 30, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
-----------------------------------------
<S> <C> <C> <C>
(Unaudited)
Cash flows from operating activities:
Net loss $(33,854,777) (23,079,529) (16,505,214)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 2,229,646 1,341,775 1,065,666
Loss on retirement of property and equipment - - 107,806
Dividend from Galactic/TEMPO Sound 150,000 300,000 250,011
Equity in earnings of Galactic/TEMPO Sound (197,227) (306,640) (223,852)
Equity in loss of DMX-Europe N.V. 11,853,686 13,271,599 4,746,239
Loss on disposal of DMX-Europe N.V. 7,153,278 - -
Compensation expense for stock issued to affiliates - - 122,654
Compensation expense for stock bonus and options 549,708 549,708 2,561,937
Provision for doubtful accounts 643,148 700,000 156,802
Decrease in deferred compensation - - (370,095)
(Increase) decrease in prepaid and other current assets (947,596) 76,315 (427,852)
Decrease in advances to DMX-Europe N.V. - 490,296 161,387
(Increase) in receivables (1,077,525) (715,015) (1,283,119)
Decrease (increase) in other assets 93,157 (111,250) (1,169)
(Decrease) increase in deferred revenue (80,934) (42,145) 418,540
Increase in royalty payable 521,292 538,562 445,651
Increase (decrease) in accounts payable and accrued liabilities 4,035,653 (33,365) 37,941
-----------------------------------------
Net cash used in operating activities (8,928,491) (7,019,689) (8,736,667)
Cash flows from investing activities:
Purchase of property and equipment, net (1,519,444) (954,101) (540,105)
Advances to DMX-Europe N.V., net (681,846) (2,044,311) -
Investment in preferred stock of DMX-Europe (UK) Limited (6,440,000) (3,500,000) -
Purchase of securities held to maturity - (165,000) (2,244,781)
Proceeds from matured securities held to maturity 165,000 2,279,738 490,043
-----------------------------------------
Net cash used in investing activities (8,476,290) (4,383,674) (2,294,843)
Cash flows from financing activities:
Issuance of common stock, net 10,346,094 17,191,542 14,924,616
Repayment of note payable to bank (45,000) (240,000) (240,000)
Repayment of note payable - (181,455) (181,455)
Repayment of principal portion of capital lease obligation (397,398) (228,225) (71,419)
-----------------------------------------
Net cash provided by financing activities 9,903,696 16,541,862 14,431,742
-----------------------------------------
Net (decrease) increase in cash and cash equivalents (7,501,085) 5,138,499 3,400,232
Cash and cash equivalents, beginning of year 8,622,119 3,483,620 83,388
-----------------------------------------
Cash and cash equivalents, end of year $ 1,121,034 8,622,119 3,483,620
=========================================
</TABLE>
See accompanying notes to consolidated financial statements
F-6
<PAGE>
DMX INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996 AND 1995
(1) INCORPORATION AND NATURE OF BUSINESS.
------------------------------------
DMX Inc. (the "Company"), formerly International Cablecasting Technologies
Inc. ("ICT"), was incorporated under the laws of the state of Delaware in
May 1990, to accomplish a corporate reorganization which effected a change
of situs of its predecessor company of the same name (ICT-Canada). ICT-
Canada was incorporated pursuant to the Company Act (British Columbia) on
April 26, 1979, by registration of its Memorandum and Articles under the
name Can-Am Entertainment Corporation. On November 14, 1986, its name was
changed to International Cablecasting Technologies Inc. On April 27, 1995,
the Company changed its name to DMX Inc.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES.
------------------------------------------
ACCOUNTING PRINCIPLES AND CONSOLIDATION.
---------------------------------------
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries, TEMPO Sound, 450714 B.C. Ltd. and DMX-
Europe N.V. and subsidiary ("DMX-E"). All material intercompany balances
and transactions have been eliminated.
GOODWILL.
--------
Goodwill was calculated as the purchase price of DMX-E less the fair value
of net assets acquired and is being amortized over 20 years. Goodwill will
be eliminated upon the ultimate disposition of DMX-E pursuant to 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 to
the impairment of its value.
REVENUE RECOGNITION AND ALLOWANCE FOR DOUBTFUL ACCOUNTS.
-------------------------------------------------------
The Company recognizes revenue based upon subscriber levels for affiliate
sales and the contract terms for its direct sales. The calculation of
subscriber levels for affiliate sales is based on billing and sales
information provided by its affiliates. Direct sales revenue is recognized
at inception of service in accordance with the contract terms. The Company
analyzes subsequent cash receipts and other data to determine the adequacy
of its allowance for doubtful accounts.
Accounts receivable and subscriber fee revenue from related party consists
of receivables and revenues due from Tele-Communications, Inc. ("TCI"), and
its affiliates. At September 30, 1996, TCI held 45.42% of the outstanding
common stock of the Company. Total subscriber fee revenue from TCI for the
fiscal years ended September 30, 1996, 1995 and 1994 represented
approximately 56%, 61% and 65%, respectively, of total subscriber fee
revenue.
INVESTMENT IN GALACTIC/TEMPO SOUND PARTNERSHIP.
----------------------------------------------
The Company's 50% investment in Galactic/TEMPO Sound, a partnership with
Galactic Radio Partners, Inc., is accounted for using the equity method.
The 50-50 joint venture commenced July 16, 1990, providing basic cable
audio programming to cable television system operators.
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.
F-7
<PAGE>
DMX INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
DISPOSITION OF DMX-EUROPE N.V. AND SUBSIDIARY, CONTINUED.
--------------------------------------------------------
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.
The Company has accounted for the effects of this disposal and accordingly
has estimated the loss on the disposal of DMX-E in the accompanying
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 may be payable at the option of the Company, in the
Company's Common Stock.
On May 17, 1996, DMX Inc. consummated the merger of TCI-Euromusic, Inc.
("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.
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>
F-8
<PAGE>
DMX INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
DISPOSITION OF DMX-EUROPE N.V. AND SUBSIDIARY, CONTINUED.
--------------------------------------------------------
The accompanying consolidated balance sheet of the Company at 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 period from May 18, 1996
through September 30, 1996. Prior to May 18, 1996, the Company accounted
for its investment in DMX -E using the equity method of accounting.
PROPERTY AND EQUIPMENT.
----------------------
Property and equipment is carried at cost and is depreciated over three to
six years using the straight-line method. Leasehold improvements are
carried at cost and are depreciated over the shorter of the estimated five-
year useful life of the related asset or the term of the lease.
INCOME TAXES.
------------
Effective October 1, 1993, the Company adopted the provisions of Statement
of Financial Accounting Standards (SFAS") No. 109. SFAS No. 109 requires
the "asset and liability" method of accounting for income taxes. The
adoption of SFAS No. 109 did not have any effect on the results of
operations for 1994.
FOREIGN CURRENCY TRANSLATION RESERVE.
------------------------------------
Unrealized gains and losses resulting from the translation of financial
statements are reflected as a separate component of stockholders' equity.
LOSS PER SHARE.
--------------
The loss per share has been calculated by dividing the loss for the year by
the weighted average number of common shares issued and outstanding during
the period. Outstanding share options, warrants, awards and shares
contingently issuable under equity participation agreements have not been
considered in the computation as their impact on the net loss per common
share would be antidilutive.
CASH EQUIVALENTS.
----------------
Cash equivalents include highly liquid investments with an original
maturity of three months or less.
CASH FLOW INFORMATION.
---------------------
Cash payments for interest in fiscal 1996, 1995 and 1994 were
$246,200, $236,500 and $152,700, respectively.
USE OF ESTIMATES.
----------------
In preparing financial statements in conformity with generally accepted
accounting principles, management is required to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
the disclosures of contingent assets and liabilities at the date of the
financial statements and revenues and expenses during the reporting period.
Actual results could differ from those estimates.
CONCENTRATION OF CREDIT RISK.
----------------------------
The Company's accounts receivable balance is comprised primarily of amounts
due from cable system operators, with the majority due from its largest
customer, TCI.
F-9
<PAGE>
DMX INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
RECLASSIFICATIONS.
-----------------
Certain reclassifications of prior period amounts have been made to conform
to the current year's reporting format.
(3) INVESTMENT IN GALACTIC/TEMPO SOUND PARTNERSHIP.
----------------------------------------------
The summarized balance sheet and operating data for the twelve month
periods ended September 30, 1996 and 1995 of the Galactic/TEMPO Sound
partnership follows:
<TABLE>
<CAPTION>
1996 1995
(Unaudited) (Unaudited)
-------------------------
<S> <C> <C>
Current assets $ 890,383 828,804
Non-current assets 143,797 186,747
Current liabilities 26,021 101,694
Partners' capital 1,008,159 913,857
Partners' draws for the period (300,000) (600,000)
Revenues 2,226,753 1,903,178
Operating expenses (1,832,299) (1,289,898)
Net income $ 394,454 613,280
=========================
</TABLE>
F-10
<PAGE>
DMX INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(4) INVESTMENT IN DMX-EUROPE N.V. AND SUBSIDIARY.
--------------------------------------------
The summarized operating data for the years ended September 30, 1996 ,1995
and 1994, of DMX-Europe N.V. and subsidiary follows:
<TABLE>
<CAPTION>
For the year ended September 30,
STATEMENTS OF OPERATIONS DATA: 1996 1995 1994
---------------------------------------------
<S> <C> <C> <C>
Revenue $ 1,559,262 151,176 51,274
Operating, selling, general and administrative expenses 15,594,979 16,500,784 8,057,052
Depreciation and amortization 909,022 541,678 125,697
---------------------------------------------
Operating loss (14,944,739) (16,891,286) (8,131,475)
Interest expense (3,115,621) (2,876,252) (1,217,452)
Other 22,851 54,519 22,892
---------------------------------------------
Net loss $(18,037,509) (19,713,019) (9,326,035)
=============================================
</TABLE>
The summarized balance sheet date of DMX-E as of May 17, 1996 follows:
<TABLE>
At May 17, 1996
BALANCE SHEET DATA: (Unaudited)
---------------
<S> <C>
Current assets $ 2,146,889
Property and equipment net of accumulated depreciation 1,668,368
---------------
Total assets $ 3,815,257
===============
Trade accounts payable and accrued expenses $ 7,940,963
Intercompany - payables due parent 2,726,157
Long-term debt 30,792,911
---------------
Total liabilities 41,460,031
Net stockholders' deficit (37,644,774)
---------------
Total liabilities and stockholders' deficit $ 3,815,257
===============
</TABLE>
Long-term debt at September 30, 1996 of $34,393,318 represents intercompany
debt which included the original principal amount of the TCI-E note of
$24,436,000, the intercompany payables at May 17, 1996 of $2,726,157 and
related accrual interest of $7,231,161 thereon. Amounts were eliminated in
the accompanying consolidated balance sheets.
For the period from October 1, 1995 through May 17, 1996 and for the year
ended September 30, 1995, the Company charged DMX-E for certain expenses
totaling $682,000 and $3,816,000, respectively, related to salaries,
programming, marketing, equipment lease and research and development
expenses incurred by the Company on DMX-E's behalf. Amounts are included in
the accompanying consolidated statements of operations.
For the period from May 17, 1996 through September 30, 1996, the Company
charged DMX-E for certain expenses totaling $269,000, related to salaries,
programming, marketing, equipment lease and research and development
expenses incurred by the Company on DMX-E's behalf; $51,000 for royalties
and $874,000 for interest on intercompany debt. These amounts along with
the intercompany balances were eliminated in consolidation in the
accompanying consolidated balance sheet and statement of operations.
F-11
<PAGE>
DMX INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
DISCONTINUED OPERATIONS AND INVESTMENT IN AND ADVANCE TO DMX-EUROPE
-------------------------------------------------------------------
N.V. AND SUBSIDIARY, CONTINUED.
------------------------------
In 1996, the Company was issued 10,000,000 shares of redeemable non-
cumulative, convertible, preferred stock by DMX-Europe (UK) Limited and had
advanced $3,377,000 for subscriptions to additional shares. These funds
were used to fund the operations of DMX-E.
(5) PROPERTY AND EQUIPMENT.
-----------------------
Property and equipment as of September 30, 1996 and 1995 consist of the
following:
<TABLE>
<CAPTION>
1996 1995
------------------------
<S> <C> <C>
Furniture and equipment $ 3,957,369 2,041,147
Leasehold improvements 181,348 186,573
Studio equipment 6,144,707 4,041,594
Music library 918,126 845,218
Computer system 1,251,460 498,411
-------------------------
12,453,010 7,612,943
-------------------------
Less accumulated depreciation and amortization (6,559,022) (3,276,565)
-------------------------
$ 5,893,988 4,336,378
=========================
</TABLE>
At September 30, 1996, studio equipment included approximately $245,000 in
equipment, net of accumulated depreciation of $475,000, that is being
leased to DMX-E for a monthly fee of approximately $23,000. Lease income
related to leased equipment to DMX-E for the period from October 1, 1995
through May 17, 1996, and the fiscal years ended September 30, 1995 and
1994 was approximately $172,000, $245,000 and $215,000, respectively, and
is included in other income. For the period from May 18, 1996 through
September 30, 1996, the lease income of approximately $103,000 was
eliminated in consolidation.
Studio equipment of $1,247,000, net of accumulated depreciation of
$919,000, at September 30, 1996 was financed under the capital lease
obligation.
During the fiscal year ended September 30, 1994, the Company moved its
studio and uplinking facility from Douglasville, Georgia to Littleton,
Colorado. As a result, the Company retired equipment that would not be
used in operations at its new location. The Company retired equipment with
a net book value of $107,806, resulting in a loss recorded during the
fiscal year ended September 30, 1994 included in other expense in the
accompanying consolidated statements of operations.
(6) NOTES PAYABLE.
-------------
At September 30, 1995, note payable to bank of $45,000 was secured by a
certificate of deposit included in securities held to maturity. The note
bore interest at one percent (1%) over the interest earned on the
certificate of deposit, or 6.2%. The note was repaid in the first quarter
of 1996.
At September 30, 1995, note payable of $201,090 was payable to TCI-
Euromusic, Inc. and bore interest at the rate of nine percent (9%) per
annum. The studio equipment purchased with the original proceeds of
$564,000 from this loan, is leased to DMX-E. The note was repaid in
connection with the merger with TCI-Euromusic, Inc. on May 17, 1996.
F-12
<PAGE>
DMX INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(7) 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, 1993 2,401,667 $1.95 - $8.875 per share, expiring on various dates,
December 31, 1995 to July 1, 2006.
Options issued 825,000 $3.50 - $5.375 per share
Options exercised (30,000) $4.59 - $4.18 per share
Options expired and terminated (100,834) $4.18 - $8.875 per share
---------
Outstanding options at
September 30, 1994 3,095,833 $1.95 - $6.25 per share, expiring on various dates,
December 31, 1996 to July 1, 2006.
Options issued 1,631,250 $2.00 - $3.25 per share
Options expired and terminated (331,250) $3.25 - $5.625 per share
---------
Outstanding options at
September 30, 1995 4,395,833 $1.95 - $6.25 per share, expiring on various dates,
December 31, 1996 to July 1, 2006
Options issued 100,000 $2.563 per share
Option expired and canceled (230,000) $2.563 - $4.180 per share
Option exercised (150,000) $1.95 per share
---------
Outstanding options at
September 30, 1996 4,115,833 $1.95 - $6.25 per share, expiring on various dates,
December 31, 1996 to July 1, 2006
</TABLE>
At September 30, 1996, options to purchase 3,157,500 shares were
exercisable at prices ranging from $1.95 to $6.25 per share. 2,891,250 of
the exercisable options were held by officers and directors of the Company.
EQUITY PARTICIPATION AGREEMENTS WITH AFFILIATES.
-----------------------------------------------
The Company entered into equity participation agreements with certain
affiliated cable companies during the fiscal years ended September 30, 1989
through 1992. Pursuant to the terms of those agreements, the Company issues
shares of Common Stock in exchange for the distribution of DMX, based on
distribution goals. Compensation to affiliates expense is calculated at the
fair market value of the Common Stock issued at the date the affiliated
cable company complied with the terms of the agreement. For the fiscal
years ended September 30, 1996 and 1995, no shares of Common Stock were
earned by the affiliated cable companies. In 1994, a total of 34,107
shares, were earned and issued.
F-13
<PAGE>
DMX INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
STOCK BONUS AND OPTION COMPENSATION.
-----------------------------------
Stock bonus expense included $549,708 of compensation for each of the years
in the three-year period ended September 30, 1996, related to the 1992
extension of the exercise date of an option issued in October 1990. The
exercise date was extended from 1993 to December 31, 1996 and is an option
to purchase 350,000 shares of common stock granted to Jerold H. Rubinstein,
Chairman and Chief Executive Officer ("Chairman and CEO"). During the
fiscal year ended September 30, 1996, options to purchase 150,000 shares
were exercised.
Stock bonus expenses included $2,012,229 of compensation for the year ended
September 30, 1994, related to a stock bonus granted the Chairman and CEO
in 1991. The grant was for 1,027,520 shares of Common Stock at $5.875 per
share with original vesting at one-third per year. During the fiscal year
ended September 30, 1993, the Stock Bonus Agreement was amended to change
the vesting schedule, whereby two-thirds or 685,013 of the 1,027,520 shares
granted would all vest in 1994. As consideration for the Chairman and
CEO's agreement to defer the vesting of the shares, the Company granted the
Chairman and CEO a non-qualified option, pursuant to the 1993 Option Plan,
to purchase 70,000 shares of Common Stock at $5.00 per share (the fair
market value of the Common Stock on the date of grant).
COMMON STOCK.
------------
During 1996, the Company completed private placements with certain related
parties. Stephen A. Wynn, a director of the Company, acquired 500,000
shares at 2.00 per share on March 15, 1996. TCI acquired 4,500,000 shares
at 2.00 per share on May 17, 1996 and was issued 10,841,624 shares valued
at $2.50 per share in the Company merger with TCI-E. In addition, TCI
bought Stephen A. Wynn's 5,200,000 shares in the Company for 2.00 per
share.
During 1995, the Company completed private placements with certain related
parties. Tele-Communications, Inc. acquired 2,000,000 shares, at $2.50 per
share on August 29, 1995. Shaw Communications Inc. acquired 1,100,000
shares, at $2.13 per share on March 9, 1995, and acquired 2,000,000 shares
at $2.50 per share on August 25, 1995. J.C. Sparkman, a director of the
Company, acquired 100,000 shares at $2.50 per share on September 21, 1995.
Stephen A. Wynn, a director of the Company, acquired 2,200,000 shares at
$2.13 per share on February 21, 1995.
(8) INCOME TAXES.
------------
At September 30, 1996, the Company had approximately $82,900,000 of net
operating loss carryforwards for U.S. Federal income tax reporting
purposes, expiring in years 2002 through 2011. The net operating loss
carryforward for U.S. Federal income tax purposes does not include
deductions for the following: equity in loss of DMX-E and option
compensation, offset partially by a deduction of executive compensation
resulting from the exercise of stock options for U.S. Federal income tax
purposes. The amount of U.S. income tax loss carryforwards available to
offset U.S. taxable income in any year may be limited under Section 382 of
the Internal Revenue Code of 1986 ("Code"), as amended, which limits the
amount of loss carryforwards that may be utilized in any particular tax
period when a "change of control" of the Company has occurred for U.S. tax
purposes.
Any deferred tax amount relating to the net operating loss carryforwards,
or any other deferred tax asset, has been fully offset by a valuation
allowance. Accordingly, no income tax benefit has been recorded.
F-14
<PAGE>
DMX INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(9) COMMITMENTS AND CONTINGENCIES.
-----------------------------
CAPITAL LEASE WITH RELATED PARTY.
--------------------------------
During fiscal 1995 the Company entered into an Agreement (the "Agreement")
with Western Tele-Communications, Inc. ("WTCI"), a subsidiary of TCI, to
lease up to $2.2 million of equipment on a draw-down basis. As of September
30, 1996, the Company had drawn $2,166,000 to finance equipment for its
studio and uplinking facility in Littleton, Colorado. This amount is
included in Property and Equipment in the accompanying consolidated balance
sheets. The Agreement term extends through the year 2000, at an interest
rate of 9.5%.
OPERATING LEASE COMMITMENTS.
---------------------------
The Company is obligated under various operating leases for office space,
uplinking and satellite services. Certain leases are cancelable subject to
penalties. Total expenses under these leases were approximately $5,324,000
in 1996, $5,097,900 in 1995 and $4,185,000 in 1994 and are included in
general and administrative, sales and marketing and studio expenses in the
accompanying consolidated statements of operations.
Minimum lease payments under the capital and operating leases at September
30, 1996 follows:
<TABLE>
<CAPTION>
Operating Operating
Fiscal year ending Capital Leases with Leases with
September 30: Lease Related Parties Others
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1997 $ 622,173 $ 4,516,200 $ 607,900
1998 622,173 4,516,200 727,200
1999 610,550 4,516,200 703,500
2000 407,906 3,316,800 679,300
2001 73,778 2,258,400 666,900
Thereafter - 7,904,400 -
----------------------------------------------
Total minimum lease payments $2,336,580 $27,028,200 $3,384,800
==============================================
Less amounts representing interest (525,046)
----------
Present value of net minimum lease payments $1,811,534
==========
</TABLE>
The operating leases with related parties include the lease of studio
facilities in Colorado and uplinking and satellite services from WTCI.
Total expenses under leases with related party were $4,831,000 in 1996,
$4,489,000 in 1995 and $3,678,000 in 1994.
MANUFACTURING COMMITMENTS AND ROYALTY PAYABLE.
---------------------------------------------
The Company and Scientific-Atlanta, Inc. ("S-A"), had an agreement with
respect to the manufacture, distribution and servicing of the DM-2000
tuners and DMXsDJ's. The Company was not obligated to purchase or
guarantee the purchase of any minimum number of tuners or DMXsDJ's, but
S-A was the exclusive tuner manufacturer in the U.S. and Canada and
earned a royalty of approximately five percent (5%) of the Company's
premium audio service revenues until August 1996. No payments are
required until the Company achieves "operating breakeven", as defined in
the agreement.
The Company and Comstream Corporation ("Comstream"), have an agreement with
respect to the manufacture, distribution and servicing of the DR-200
Digital Satellite Receiver. The Company has guaranteed the purchase of
50,000 digital satellite receivers by it, its approved customers and/or
affiliates within 42 months after commencement of the agreement.
F-15
<PAGE>
DMX INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
401(k) SAVINGS PLAN.
-------------------
The Company maintains a qualified defined contribution 401(k) savings plan.
Prior to January 1, 1995 eligible participants vested 100% in employer
matching contributions of 10% of the participants pretax deferrals invested
in the Company's common stock. Subsequent to January 1, 1995, eligible
participants vest in employer matching contributions of 10% of the
participants pretax deferrals invested in the Company's common stock in
accordance with the vesting schedule as defined in the agreement. The
discretionary employer matching contribution was 10 percent of the
participants pretax deferrals invested in the Company's common stock. For
the fiscal year ended September 30, 1996, the Company's employee benefit
expense for matching contributions totaled $5,160.
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 2, "Discontinued Operations of 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.
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,
except as set forth in the next paragraph, disposition of such matters are
not expected to have a material adverse effect upon the financial position,
results of operations or liquidity of 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.
F-16
<PAGE>
DMX INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(10) LIQUIDITY AND CAPITAL RESOURCES.
-------------------------------
The Company has historically funded its operations primarily through the
sale of its common stock. During the fiscal year ended September 30, 1996,
the Company generated funds through financing activities that included
proceeds of $10.3 million resulting from the sale of $1.0 million of its
Common Stock to a former director-shareholder, the sale of $9.0 million of
Common Stock to TCI and $293,000 from the exercise of options by the Chief
Executive Officer to purchase 150,000 shares of Common Stock at $1.95 per
share. The decrease in cash of $7.5 million for the year was the net result
of $10.3 million of cash raised in financing activities less cash used in
investing activities of $8.5 million, relating primarily to the funding of
DMX-E losses, and cash used in operating activities of $8.9 million.
With the discontinuation of the operations of DMX-E, management believes
that the Company will begin to generate cash from it's operating activities
on a prospective basis, and has reduced its operating expenses to extend
the U.S. operation's 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. The Company
is negotiating with TCI for a $3.5 million loan to fund past and future
tuner purchases. However, the Company is not seeking additional financing
at this time to fund its other operational requirements and its obligations
related to the discontinuance of the operations of DMX-E due to the
pendency of the TCI acquisition proposal and management's belief that with
the closure of the Company's European operations, its domestic cash flow
should be sufficient to meet the Company's cash requirements. 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 available cash resources 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 2 and 9 to
the Company's consolidated financial statements and in "Disposal of
DMX-E" above, the Company has ceased funding the operations of DMX-E and
the Company 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. Such
adjustments could have a material adverse effect upon the financial
position and results of operations of the Company.
F-17
<PAGE>
DMX INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(11) RECENT DEVELOPMENTS.
-------------------
On August 30, 1996, the Company received an unsolicited proposal from TCI
proposing the merger of the Company with a TCI subsidiary. Following
receipt of the proposal, the Company established a special committee of its
Board of Directors to consider the proposal and retained Houlihan Lokey
Howard & Zukin to act as its financial advisor. The Company is currently
negotiating the terms of a definitive merger agreement with TCI, which owns
approximately 45% of DMX Inc.'s outstanding stock. The merger agreement
would provide for a merger in which DMX Inc. would be acquired by a new
corporation ("Music Co.") to be formed by TCI pursuant to which the
shareholders of DMX Inc. would receive Class A Common Stock of Music Co.
representing approximately 19.25% of the total outstanding shares of Music
Co.'s Class A Common Stock and Class B Common Stock The Class A Common
Stock would be identical to the Class B Common Stock to be held by TCI
except that each share of Class B Common Stock would have ten votes on all
matters while shares of Class A Common Stock would have one vote. In
connection with the merger and the issuance of the Class B Common Stock to
TCI, TCI would cause certain affiliates to contribute and transfer to Music
Co. all of their respective rights, title and interest in certain specified
assets. To the extent that Music Co.'s Class A Common Stock does not trade
at or above $2 per share, for at least twenty consecutive trading days
during the first year following the merger, holders of the Class A Common
Stock would have the right, exercisable during the 30 day period beginning
on the first anniversary of the merger, to require TCI to purchase such
Class A Common Stock at a price of $2.00 per share, payable at TCI's option
either in cash or shares of TCI's TCI Group Series A Common Stock. In
connection with the merger negotiations, the Company is negotiating with
TCI for a $3.5 million loan to purchase, or reimburse the Company for the
purchase of, tuners and related equipment.
F-18
<PAGE>
DMX-EUROPE N.V.
CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1996, 1995 and 1994
With Independent Auditors' Report
F-19
<PAGE>
PO Box 695
8 Salisbury Square
London EC4Y 8BB
Independent auditors' report
To the Board of directors and stockholders of DMX-Europe N.V.
We have audited the accompanying consolidated balance sheets of DMX-Europe
N.V. and subsidiary as of September 30, 1996 and 1995 and the related
consolidated statements of operations, stockholders' equity, and cash flows
for each of the years in the three year period ended 30 September 1996. These
consolidated financial statements are the responsibility of the company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards in the United States. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide
a reasonable basis for our opinion.
The accompanying financial statements have been prepared assuming that the
company will continue as a going concern. As discussed in Note 8 to the
financial statements, the company has suffered recurring losses from
operations and has a net capital deficiency that raise substantial doubt about
its ability to continue as a going concern. In addition, during 1996, DMX
Inc. stated that it would no longer financially support DMX-Europe. In
December 1996, DMX Inc.'s board of directors approved the disposal of DMX-
Europe N.V. and subsidiary to Mr Jerold Rubinstein, its Chairman and Chief
Executive Officer. Mr Rubinstein's plans in regard to these matters are also
described in note 8. The financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
Because of the significance of the uncertainty discussed in the preceding
paragraph, we are unable to express, and we do not express, an opinion on the
accompanying financial statements.
KPMG
Chartered Accountants
Registered Auditors London, England
1997
F-20
<PAGE>
DMX-Europe N.V.
Consolidated Balance Sheets
as of September 30, 1996 and 1995
Assets
<TABLE>
<CAPTION>
1996 1995
$ $
<S> <C> <C>
Current assets
Cash and cash equivalents 192,635 694,079
Prepaid expenses 851,586 971,998
Trade accounts receivable 435,480 96,712
Inventories 98,517 226,525
---------- ---------
Total current assets 1,578,218 1,989,314
---------- ---------
Fixed assets
Equipment 3,080,294 2,806,647
Less accumulated depreciation and amortization (1,605,105) (697,413)
---------- ---------
1,475,189 2,109,234
---------- ---------
Total assets 3,053,407 4,098,548
========== =========
</TABLE>
See accompanying notes to the consolidated financial statements.
F-21
<PAGE>
DMX-Europe N.V.
Consolidated Balance Sheets
as of September 30, 1996 and 1995
Liabilities and Stockholders' Equity
<TABLE>
<CAPTION>
1996 1995
$ $
<S> <C> <C>
Current liabilities
Trade accounts payable 7,284,664 3,761,246
Due to parent company 355,152 2,044,311
Accrued expenses 1,495,546 1,899,710
----------- -----------
Total current liabilities 9,135,362 7,705,267
Long term debt (note 3) 34,393,318 28,664,046
----------- -----------
Total liabilities 43,528,680 36,369,313
----------- -----------
Stockholders' equity/(deficit)
Common stock 10 Dutch Florins par value,
authorised 100,000 shares, issued 39,216 shares 245,100 245,100
Minority interests - non-cumulative, non-voting,
convertible, redeemable 5% preference shares of
$1 each of DMX-Europe (UK) Limited owned by DMX
Inc., authorised 10,000,000 shares:
- - subscribed and issued 10,000,000 -
- - subscribed and unissued 3,377,000 3,500,000
Accumulated deficit (54,045,058) (36,007,549)
Cumulative translation adjustment (52,315) (8,316)
----------- -----------
Net stockholders' deficit (40,475,273) (32,270,765)
----------- -----------
Total liabilities and stockholders' equity 3,053,407 4,098,548
=========== ===========
</TABLE>
See accompanying notes to the consolidated financial statements.
F-22
<PAGE>
DMX-Europe N.V.
Consolidated Statements of Operations
for the years ended September 30, 1996, 1995 and 1994
<TABLE>
<CAPTION>
1996 1995 1994
$ $ $
<S> <C> <C> <C>
Revenues
Subscriber fees 1,357,733 151,176 51,274
Other revenue 201,529 - -
----------- ----------- ----------
1,559,262 151,176 51,274
Operating expenses
General and administrative 3,386,993 3,117,943 1,979,256
Sales and marketing 3,109,790 3,259,442 1,125,124
Studio and programming 8,766,981 8,148,891 4,135,345
Research and development 331,215 1,974,508 817,327
Depreciation and amortization 909,022 541,678 125,697
----------- ----------- ----------
16,504,001 17,042,462 8,182,749
----------- ----------- ----------
Loss from operations (14,944,739) (16,891,286) (8,131,475)
Other income/(expenses)
Interest income 22,851 54,519 22,892
Interest expense (3,115,621) (2,876,252) (1,217,452)
----------- ----------- ----------
Net loss (18,037,509) (19,713,019) (9,326,035)
=========== =========== ==========
</TABLE>
See accompanying notes to the consolidated financial statements.
F-23
<PAGE>
DMX-Europe N.V.
Consolidated Statement of Stockholders' Equity
for the years ended September 30, 1996, 1995 and 1994
<TABLE>
<CAPTION>
Common Preference Accumulated Translation Total
Stock Stock Deficit Adjustment Stockholders'
Equity
$ $ $ $ $
<S> <C> <C> <C> <C> <C>
Balance October 1, 1993 245,100 - (6,968,495) 32,312 (6,691,083)
Movement year ended
September 30, 1994 - - - (12,630) (12,630)
Net loss for the year ended
September 30, 1994 - - (9,326,035) - (9,326,035)
------- ---------- ----------- ------- -----------
Balance October 1, 1994 245,100 - (16,294,530) 19,682 (16,029,748)
Movement year ended
September 30, 1995 - - - (27,998) (27,998)
Subscribed and unissued
preference shares - 3,500,000 - - 3,500,000
Net loss for the year ended
September 30,1995 - - (19,713,019) - (19,713,019)
------- ---------- ----------- ------- -----------
Balance October 1, 1995 245,100 3,500,000 (36,007,549) (8,316) (32,270,765)
Movement year ended
September 30, 1996 - - - (43,999) (43,999)
Authorised and subscribed
preference shares - 10,000,000 - - 10,000,000
Conversion of unissued to
issued preference shares - (3,500,000) - - (3,500,000)
Subscribed and unissued
preference shares - 3,377,000 - - 3,377,000
Net loss for the year
September 30, 1996 - - (18,037,509) - (18,037,509)
------- ---------- ----------- ------- -----------
Balance September 30, 1996 245,100 13,377,000 (54,045,058) (52,315) (40,475,273)
======= ========== =========== ======= ===========
</TABLE>
F-24
<PAGE>
DMX-Europe N.V.
Consolidated Statements of Cash Flows
for the years ended September 30, 1996, 1995 and 1994
<TABLE>
<CAPTION>
1996 1995 1994
$ $ $
<S> <C> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES
Net loss (18,037,509) (19,713,019) (9,326,035)
ADJUSTMENTS TO RECONCILE NET LOSS TO NET
CASH USED IN OPERATING ACTIVITIES:
Depreciation and amortization 909,022 541,678 125,697
Change in prepaid expenses 133,140 (520,647) (54,974)
Change in accounts receivable (364,432) (67,496) (6,885)
Change in inventories 123,943 (227,292) -
Change in accounts payable 3,539,707 3,510,898 (276,604)
Change in accrued liabilities (379,443) 1,073,850 206,877
Change in intercompany liability with DMX Inc. (1,689,159) 1,554,015 (161,386)
Change in accrued interest liability with TCI - Euromusic (4,228,046) 2,849,368 1,217,425
Change in accrued interest liability with DMX Inc. 874,250 - -
----------- ----------- ----------
NET CASH USED IN OPERATING ACTIVITIES (19,118,527) (10,998,645) (8,275,885)
----------- ----------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of equipment (288,174) (2,277,906) (246,180)
----------- ----------- ----------
NET CASH USED IN INVESTING ACTIVITIES (288,174) (2,277,906) (246,180)
----------- ----------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Note payable DMX Inc. 33,519,068 - -
Loan principal (assignments)/drawdowns (24,436,000) 9,436,000 9,500,000
Subscribed preference stock 9,877,000 3,500,000 -
----------- ----------- ----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 18,960,068 12,936,000 9,500,000
----------- ----------- ----------
Effect of exchange rate changes on cash (54,811) (29,004) 5,337
NET CHANGE IN CASH AND CASH EQUIVALENTS (501,444) (369,555) 983,272
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 694,079 1,063,634 80,362
----------- ----------- ----------
CASH AND CASH EQUIVALENTS, END OF YEAR 192,635 694,079 1,063,634
=========== =========== ==========
</TABLE>
No interest or tax was paid in any of the periods presented.
F-25
<PAGE>
DMX-Europe N.V.
Notes to consolidated financial statements
(forming part of the consolidated financial statements)
1 INCORPORATION AND NATURE OF BUSINESS
DMX-Europe N.V. was incorporated under the laws of the Netherlands on
February 17, 1992. DMX-Europe N.V.'s primary business is to market premium
digital audio channels of music programming, known as Digital Music
Express(R) ("DMX(R)"), throughout Europe to cable, and direct-to-home
subscribers.
DMX-Europe N.V. owns 100% of the outstanding share capital of DMX-Europe (UK)
Limited, a United Kingdom company.
DMX Inc., a Delaware corporation, owns 100% of the outstanding common stock
having acquired the 49% shareholding previously held by TCI-Euromusic Inc.,
("TCI-E"), a Colorado corporation and a subsidiary of Tele-Communications
Inc., ("TCI"), as part of the merger transaction on May 17, 1996 whereby DMX
Inc. acquired all the outstanding equity of TCI-E.
2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PREPARATION
The company and its subsidiary, DMX-Europe (UK) Limited have suffered
recurring losses from operations, have negative working capital and a net
stockholders' deficit. In addition, during 1996, DMX Inc. stated that it
would no longer financially support DMX-Europe. In December 1996, DMX Inc.'s
board of directors approved the disposal of DMX-Europe N.V. and subsidiary,
DMX-Europe (UK) Limited ("DMX-E") to Mr Jerold Rubinstein, its 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 use DMX Inc.'s music in Europe, the former Soviet Union, and in
the Middle East. It is Mr Rubinstein's intention to seek to reorganize the
operation of DMX-E and seek new equity investors. However, there can be no
assurances that the proposed reorganization will take place or that new
equity investors will be found. Accordingly there is significant doubt as to
the company's ability to continue as a going concern. The financial
statements do not include any adjustment that might result from the outcome
of this uncertainty.
ACCOUNTING PRINCIPLES AND CONSOLIDATION
These consolidated financial statements are prepared in accordance with
generally accepted accounting principles in the United States. The
consolidated financial statements include the accounts of the company and its
wholly owned subsidiary, DMX-Europe (UK) Limited. All material intercompany
transactions have been eliminated.
F-26
<PAGE>
DMX-Europe N.V.
Notes (continued)
2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
CASH EQUIVALENTS
Cash equivalents of approximately $193,000 at September 30, 1996, (1995:
$694,000) consist of balances held by banks.
The company considers short-term, highly liquid investments with original
maturities of three months or less to be cash equivalents.
RESEARCH AND DEVELOPMENT
Research and development costs are expensed as incurred and amounted to
$334,000 during 1996 (1995: $1,988,000).
EQUIPMENT
Equipment is stated at cost and depreciated over 3 to 5 years using the
straight line method.
INVENTORIES
Inventories are stated at the lower of cost and net realisable value.
FOREIGN CURRENCY
The financial statements of DMX-Europe N.V. and its subsidiary are maintained
in their functional currencies, US Dollars and British Pound Sterling,
respectively. Translation gains have been recorded in a separate section of
stockholders' equity. Exchange gains resulting from foreign currency
transactions, amounting to $69,042 (1995: $13,930), have been included in the
consolidated statement of operations.
INCOME TAXES
These financial statements adopt the provisions of Statement of Financial
Accounting Standards ("SFAS") No. 109. SFAS No. 109 requires the "asset and
liability" method of accounting for income taxes.
F-27
<PAGE>
DMX-Europe N.V.
Notes (continued)
3 LONG TERM DEBT
Long term debt at September 30, 1996, and September 30, 1995 consists of
the following:
<TABLE>
<CAPTION>
1996 1995
$ $
<S> <C> <C>
Loan draw-downs from TCI-Euromusic Inc. - 24,436,000
Interest on the above loan - 4,228,046
Note payable DMX Inc. 33,519,068 -
Accrued interest on the above 874,250 -
---------- ----------
34,393,318 28,664,046
========== ==========
</TABLE>
On May 19, 1993, the company entered into a financing agreement with its then
49% shareholder, TCI-E. Under the terms of this agreement, TCI-E agreed to
provide a maximum loan facility of $24,436,000 to the company. As at
September 30, 1995, DMX-Europe N.V. had drawn down the maximum amount,
$24,436,000, available under this facility.
On May 17, 1996 TCI-E was fully merged with and into DMX Inc. the parent
company of DMX-Europe NV. As a result of this merger the loan principal of
$24,436,000 together with the related accrued interest outstanding as at May
17, 1996 of $6,356,911 was assigned to DMX Inc.
These assigned loan and accrued interest amounts, together with the
intercompany liability of $2,726,157 due to DMX Inc. as at May 17, 1996, were
converted into a note payable totalling $33,519,068 in favour of DMX Inc. The
terms and conditions attaching to this note payable have yet to be finalised
and incorporated into a formal loan agreement. In the interim, an interest
charge of 7% per annum is being accrued on the total amount of the note
payable outstanding.
As at September 30, 1996 accrued interest of $874,250 was due and payable to
DMX Inc. as part of this interim arrangement.
F-28
<PAGE>
DMX-Europe N.V.
Notes (continued)
4 COMMITMENTS
The company is obligated under various operating leases for office space,
uplinking and satellite services, which include sub leases for Astra digital
subcarriers and associated advertising and marketing commitments. Certain
leases are cancellable subject to penalties. The company is also obligated
under various agreements for the provision of subscriber management services.
Total expenses under these leases and agreements were approximately
$8,937,000 in 1996 (1995: $8,263,000) and are included in general and
administrative, studio and programming, and sales and marketing costs in the
accompanying consolidated statements of operations. As of September 30, 1996,
minimum annual lease commitments were as follows:
Fiscal year ending 30 September:
<TABLE>
<CAPTION>
$
<S> <C>
1997 9,902,000
1998 6,567,000
1999 5,950,000
2000 6,252,000
2001 6,094,000
Thereafter 6,157,000
----------
Total minimum lease commitments 40,922,000
==========
</TABLE>
5 RELATED PARTY TRANSACTIONS
DMX-Europe N.V. has incurred expenses of approximately $1,036,997 (1994:
$2,392,181) for salaries, programming, marketing and research and development
costs recharged from DMX Inc. These are included in the consolidated
financial statements as part of operating expenses.
6 INCOME TAXES
As at September 30, 1996 the company and its subsidiary have net operating
losses carried forward for Dutch and UK tax authority purposes. These have
still to be quantified with the relevant fiscal authority. However any
deferred tax asset relating to net operating losses carried forward, or any
other deferred tax asset, will be fully offset by a valuation allowance.
Accordingly, no income tax benefit has been recorded.
F-29
<PAGE>
DMX-Europe N.V.
Notes (continued)
7 SEGMENTAL ANALYSIS
<TABLE>
<CAPTION>
1996 1995 1994
$ $ $
<S> <C> <C> <C>
UK and Eire 229,114 18,125 8,503
Germany, Austria and Switzerland 1,087,378 - -
Scandinavia 59,797 78,250 42,458
Rest of Europe 162,973 54,801 313
Asia Pacific rim 20,000 - -
--------- ------- ------
1,559,262 151,176 51,274
========== ======= ======
</TABLE>
8 LIQUIDITY AND CAPITAL RESERVES
The company and its subsidiary, DMX-Europe (UK) Limited have suffered
recurring losses from operations, have negative working capital and a net
stockholders' deficit. In addition, during 1996, DMX Inc. stated that it
would no longer financially support DMX-Europe. In December 1996, DMX Inc.'s
board of directors approved the disposal of DMX-Europe N.V. and subsidiary,
DMX-Europe (UK) Limited ("DMX-E") to Mr Jerold Rubinstein, its 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 use DMX Inc.'s music in Europe, the former Soviet Union, and in
the Middle East. It is Mr Rubinstein's intention to seek to reorganize the
operation of DMX-E and seek new equity investors. However, there can be no
assurances that the proposed reorganization will take place or that new
equity investors will be found. Accordingly there is significant doubt as to
the company's ability to continue as a going concern. The financial
statements do not include any adjustment that might result from the outcome
of this uncertainty.
F-30
<PAGE>
EXHIBIT 10.70
SECOND AMENDMENT TO AGREEMENT
This SECOND AMENDMENT TO AGREEMENT (this "Second Amendment") is made as of
September 16, 1996 by and between DMX INC. (hereinafter referred to as "DMX")
and LON TROXEL (hereinafter referred to as "Employee") with reference to the
following facts:
WHEREAS, DMX (formerly known as International Cablecasting Technologies
Inc.) and Employee entered into that certain Employment Agreement dated as of
October 1, 1991 (the "Original Agreement");
WHEREAS, DMX and Employee entered into that certain First Amendment to
Agreement dated as of January 10, 1994 and effective as of December 1, 1993 (the
"First Amendment") which amended the Original Agreement (the Original Agreement
as modified by the First Amendment shall be hereinafter referred to as the
"Agreement");
WHEREAS, DMX is considering entering into a transaction with
Tele-Communications Inc. ("TCI") whereby DMX would be acquired by a new
corporation ("Music Co.") to be formed by TCI;
WHEREAS, unless otherwise defined herein, all capitalized terms used
herein shall have the same meanings provided for such terms in the Agreement;
WHEREAS, the parties hereto desire to amend the Agreement on the terms and
conditions herein provided;
NOW, THEREFORE, in consideration of the mutual promises and covenants
herein contained and for other good and valuable consideration, the parties
hereto agree as follows:
1. Amendment of Agreement. The Agreement is hereby amended as follows:
----------------------
(a) Paragraph 2.4 of the Agreement is hereby amended by adding the
following sentence at the end of the existing provision: "In the event
that Music Co. acquires DMX and that Music Co. requires that Employee
permanently relocate to a location outside of the Los Angeles area,
Employee shall have the right within 30 days of notification of such
requirement to terminate the term of the Agreement by delivering
written notice to Music Co. of Employee's desire to so terminate. Such
termination notice shall be effective 30 days after the receipt of
such notice by Music Co."
(b) Paragraph 3.0 of the Agreement is hereby amended to
<PAGE>
grant taking into account Employee's position in Music Co. Music Co.
and Employee shall use reasonable good faith efforts to complete such
negotiation prior to the date that is three months after the Music Co.
Acquisition Date."
2. Agreement In Full Force and Effect. Except as hereinabove expressly
----------------------------------
provided, the Agreement shall remain the same and shall continue in full force
and effect between the parties.
IN WITNESS WHEREOF, the parties hereto have caused this Second Amendment to
be executed upon the day and year first above written.
/s/ Lon Troxel
------------------------
LON TROXEL 9/23/96
DMX INC.
By: [SIGNATURE ILLEGIBLE]
--------------------
Its:____________________
<PAGE>
FIRST AMENDMENT TO AGREEMENT
----------------------------
THIS FIRST AMENDMENT TO AGREEMENT is made this 10th day of January,
1994, effective as December 1, 1993, by and between INTERNATIONAL CABLECASTING
TECHNOLOGIES INC., a Delaware corporation ("Employer") and LON TROXEL
("Employee") with reference to the following facts:
A. Employer and Employee entered into an Employment Agreement dated as of
October 1, 1991 ("Agreement").
B. The parties now desire to amend the Agreement in accordance with the
following provisions.
IN CONSIDERATION of the mutual promises of the parties herein
contained, the parties hereby agree as follows:
1. Paragraph 3.0 of the Agreement is hereby amended to provide that the
term of the Agreement is extended to November 30, 1996. In addition, commencing
with the effective date hereof, each contract year shall commence on December 1,
and end on November 30.
2. Paragraph 4.1 of the Agreement is hereby amended by providing for the
following salary increases, effective on the dates indicated below: for the
twelve (12) month period commencing on December 1, 1993, Employee shall receive
a salary of Two Hundred Twenty-Five Thousand Dollars ($225,000); for the twelve
(12) month period commencing on December 1, 1994, Employee shall receive a
salary of Two Hundred Forty Thousand Dollars ($240,000); and for the twelve (12)
month period commencing on December 1, 1995, Employee shall receive a salary of
Two Hundred Fifty-Five Thousand Dollars ($255,000).
3. Paragraph 11.1 is hereby amended by adding the following sentence at
the end of the existing provision:
"Employer hereby grants to Employee the right and option to
purchase 75,000 shares of Employer's Common Stock at a price
of $3.25 per share pursuant to the terms of the 1993 Stock
Option Plan."
4. Except as hereinabove expressly provided, the Agreement shall continue
in full force and effect between the parties.
IN WITNESS WHEREOF, the parties hereto have caused this First
Amendment to the Agreement to be executed as of the date first indicated above.
INTERNATIONAL CABLECASTING
TECHNOLOGIES INC.
By: /s/ Jerold H. Rubinstein /s/ Lon Troxel
------------------------- ----------------
Jerold H. Rubinstein, Chairman LON TROXEL
<PAGE>
EMPLOYMENT AGREEMENT
This Employment Agreement (the "Agreement") is made as of the 1st day of
October, 1991, between International Cablecasting Technologies Inc., a Delaware
corporation (the "Employer"), and LON TROXEL (the "Employee").
RECITALS
--------
A. Employer desires to employ Employee as the President of its Commercial
Division in order to have the benefit of Employee's special knowledge,
experience, reputation and abilities in the field of music and broadcasting
industry for the benefit of Employer, and its stockholders.
B. Employee has advised Employer of his willingness to act as the
President of the Commercial Division and to utilize his special knowledge,
experience, reputation and abilities for the benefit of Employer and its
stockholders for the term provided herein.
NOW, THEREFORE, in consideration of the foregoing recitals, and the
terms, conditions and covenants contained herein, the parties agree as follows:
1.0 Employment. Employer hereby employs Employee and Employee hereby
----------
accepts his employment and agrees to exercise and perform faithfully,
exclusively (subject to Section 2.1(c) hereof), and to the best of his ability
on behalf of Employer the powers and duties of the President of the Commercial
Division on the terms and conditions set forth herein.
2.0 Employee's Services and Duties.
------------------------------
2.1 During the term hereof Employee shall:
(a) Observe and conform to the policies and directions
promulgated from time to time by Employer's Board of Directors;
(b) Exercise competently and perform effectively such
powers and duties of management usually vested in the president of an commercial
division of a corporation, including general office duties and other powers and
duties pertaining by law, or otherwise imposed by the policies or Bylaws of
Employer, including hiring or firing employees reporting directly to him;
(c) Devote his full time, ability and attention to the
business of Employer or such other affiliated company as may be directed by the
Board of Directors of Employer during the term of this Agreement so long as such
company engages in businesses similar to those engaged in by the Employer. This
provision shall not prevent Employee from serving as a director of any company
which is not competing in the business areas of Employer or any affiliated
company and shall not prohibit Employee from engaging in charitable or
<PAGE>
community activities which do not materially conflict with the business of
Employer.
2.2. The services to be performed by Employee may be extended or
adjusted from time to time at the discretion of the Board of Directors of
Employer, provided such services shall at all times be of the nature customarily
performed by the President of the Commercial Division of a corporation.
2.3. Nothing contained herein shall be construed to prevent
Employee from investing his assets in any form or manner which does not conflict
with the business of Employer or such business which Employer plans to enter and
which does not materially interfere with his performance of services on behalf
of Employer. Without the prior written approval of Employer, Employee shall not
acquire more than ten percent (10%) direct or indirect ownership in any cable
company, whether radio, television or any other form of media, other than
Employer.
2.4. During the term of this Agreement, Employee shall perform
the services contemplated under this Agreement at Employer's Corporate
Headquarters in Los Angeles, California or other such location as mutually
agreed upon by the Employer and Employee. Employer may from time to time require
Employee to travel temporarily to other locations on Employer's business.
3.0. Term. The term of Employee's employment by Employer pursuant to
----
this Agreement shall be for four (4) years commencing on October 1, 1991 and
ending on September 30, 1995.
3.1 Six months prior to the expiration of this Agreement,
Employer and Employee may enter into negotiations for the extension of this
Agreement.
4.0 Compensation and Other Benefits. As compensation in full for the
-------------------------------
services to be rendered by Employee hereunder, Employer shall pay and the
Employee shall accept the following compensation:
4.1. Employer shall pay to Employee a salary $175,000.00 each
year of this Agreement commencing with the Effective Date, payable in equal
semi-monthly installments during the term hereof. All compensation payable
hereunder shall be subject to all applicable Federal and State of California
withholding requirements.
4.2. Additional compensation and/or bonus compensation for
subsequent years shall be at the sole discretion of the Board of Directors.
4.3. Employer shall reimburse Employee for $12,000 relocation
expenses from Seattle to California including, but not limited to, actual moving
company expenses, airfares, hotels, etc.
5.0. Expenses. Employee is authorized to incur reasonable expenses
--------
for promoting the business of Employer, including expenses for entertainment,
travel and similar
<PAGE>
items. Employer will reimburse Employee for all such reasonable expenses paid by
Employee on behalf of Employer upon the prompt presentation by Employee of an
itemized request for reimbursement of expenditures supported by adequate
documentation of the expenditure and its purpose. For purposes of this paragraph
5.0, "prompt" shall mean not more than thirty days following the month the
expense was incurred (excluding expenses incurred for European travel, in which
case "prompt" shall mean not more than 90 days from the date such expense was
incurred).
6.0. Confidential Information. Employee agrees that he will not make
------------------------
known, divulge, furnish, make available or use (otherwise than in the regular
course of employment with the Employer) during the term of his employment with
the Employer any confidential information of the Employer, including but not
limited to, business methods, processes, operating techniques and "know how,"
customer and supplier information, and short-term and long-term sales and
product plans, whether compiled or prepared by Employee or Employer or both
(hereinafter collectively referred to as "Confidential Information"). Such
Confidential Information and all copies thereof shall be the exclusive property
of Employer. Upon any termination of his employment with Employer, Employee will
promptly return, or cause to be returned to the Employer all of Employee's
property and products used by Employee for purposes of carrying out his
employment with Employer. Employee further agrees that the foregoing
restrictions on the use and disclosure of Company's Confidential Information
shall survive termination of his employment with Employer.
7.0. Employee Representation and Warranty. Employee warrants and
------------------------------------
represents to and covenants with Employer that the execution, delivery and
performance of the Agreement by Employee does not conflict with or violate any
provision of or constitute a default under any agreement, judgment, award or
decree to which Employee is a party or by which Employee is bound.
8.0. Executive Benefits. Employer shall provide to Employee, at the
------------------
sole cost of Employer, such basic and extended benefits group insurance program,
vacation and such other Employee fringe benefits as Employer provides for its
other employees at the management level.
9.0. Termination Prior to Expiration of Term.
---------------------------------------
9.1. If Employee shall be guilty (as principal, accomplice or
accessory) of a crime involving moral turpitude, or the commission of fraud,
embezzlement or other similar dishonest act, breach of fiduciary duty involving
personal profit, intentional failure to perform stated duties, willful violating
any law, rule, or regulation (other than traffic violations or similar offenses)
which harms the Employer or adversely affects the Employer's reputation or
credibility, Employer may at its option immediately terminate this Agreement by
giving written notice to Employee. If Employee is terminated under this
subparagraph, he shall no longer be entitled to any compensation or other
benefits under this Agreement after such termination for cause.
<PAGE>
9.2. If Employee commits any material breach or habitually and
grossly neglects the duties or obligations required of him under this Agreement,
Employer may as its option terminate this Agreement by giving written notice to
Employee. If Employee is terminated under this subparagraph, he shall no longer
be entitled to any compensation or other benefits under this Agreement after
such termination for cause.
9.3. If Employee becomes disabled during the term of this
Agreement and such disability continues for a period of six (6) months, Employer
may at its option after the expiration of such six-month period terminate this
Agreement by giving written notice to Employee. While Employee is disabled,
Employer shall pay to Employee the semi-monthly salary installments as provided
in Paragraph 4.1, but such installments shall be reduced by all amounts paid to
Employee on account of disability insurance, worker's compensation, social
security, or other payments made to Employee arising out of his disability;
provided, however, that such payments by Employer shall cease upon the earlier
of (a) the expiration of the term of this Agreement, (b) the earlier termination
of this Agreement pursuant to this Paragraph 9, or (c) the continuation of
Employee's disability for a period of six (6) months. For the purposes of this
Agreement, the term "disabled" shall be defined as Employee's inability, through
physical or mental illness or other cause, to perform all of the duties which he
is required to perform under this Agreement.
9.5. In the event Employee is terminated under Section 9.1 or
9.2 hereof, following the date of termination, Employee shall not be entitled to
exercise any stock option previously granted to Employee under this Agreement.
In the event Employee is terminated for any other reason under this Agreement,
Employee shall be entitled to exercise any stock options vested in Employee for
a period of six (6) months from the date of termination and to any bonus
compensation vested in Employee on said date, but all other benefits provided
for under this Agreement shall cease on the date of termination.
9.6. In the event of a change of control of Employer's Employee
shall have the right to terminate this Agreement.
9.7. The subparagraphs in this Agreement providing for
Employer's right to terminate this Agreement shall be interpreted wholly
independent from and without reference to one another.
9.8. Any written notice to be given to Employee by Employer
pursuant to this Paragraph 9 may be effected either by personal delivery to
Employee, or by mail, registered or certified, postage prepaid with return
receipt requested, shown in the books and records of Employer.
10.0. Death During Employment. If Employee dies during the term of this
-----------------------
employment, Employer shall pay to the estate of Employee the compensation which
would otherwise be payable to Employee up to the end of the month in which his
death occurs, and such other benefits to which Employee is entitled and Employer
shall have no further obligations under this Agreement.
<PAGE>
11.0. Stock Option.
------------
11.1. Employer hereby grants to Employee the right and option to
purchase 50,000 shares of the Company's common stock, $.01 par value (the
"Common Stock"), of Employer at a price of $5.75 per share. Such option may be
issued as an Incentive Stock Option under Section 422 of the Internal Revenue
Code or as a non-statutory option (i.e., an option not qualified as an ISO under
Section 422) pursuant to a Stock Option Plan proposed to be adopted by the
Company. Issuance of the option pursuant the Stock Option Plan is subject,
however, to adoption of the Stock Option Plan by both the Board of Directors and
shareholders of Employer. In the event the option is issued other than pursuant
to the Stock Option Plan, the option shall be issued as a nonstatutory option
not qualified under Section 422. The terms and conditions of the option to be
granted, including whether the option shall qualify as an incentive stock option
or shall be issued under any Stock Option Plan of the Employer, shall be at the
sole discretion of Employer. Such option to purchase shares of Common Stock
shall be subject to the rules and regulations of the Vancouver Stock Exchange
("VSE"), the U.S. Securities and Exchange Commission ("SEC"), particularly
Section 16 of the Securities Exchange Act of 1934, as amended, and the rules of
any other Exchange where Employer's common stock may be traded.
11.2. Each exercise of the Option shall be by written notice of
exercise delivered to the Employer at its principal place of business specifying
the number of shares to be purchased, and accompanied by payment in cash or by
certified or bank cashier's check payable to the order of Employer for the full
purchase price of the shares to be purchased.
12.0. Assignment. This Agreement shall be binding upon and inure to
----------
the benefit of Employer, its successors and assigns. Employee may not assign all
or any part of his interest under this Agreement without the prior written
consent of Employer.
13.0. Receipt of Agreement. Each of the parties hereto acknowledges
--------------------
that he or it has read this Agreement in its entirety and does hereby
acknowledge receipt of a fully executed copy thereof. A fully executed copy
shall be an original for all purposes, and is a duplicate original.
14.0. California Law. This Agreement is to be governed by and construed
--------------
under the laws of the State of California, regardless of choice of law
provisions.
15.0. Captions and Paragraph Headings. Captions and paragraph
-------------------------------
headings used herein are for convenience only and are not a part of this
Agreement and shall not be used in construing it.
16.0. Invalid Provision. Should any part of this Agreement for any
-----------------
reason be declared invalid, the validity and binding effect of any remaining
portion shall not be affected, and the remaining portion of this Agreement shall
remain in full force and effect as if this agreement had been executed with the
invalid provision eliminated.
<PAGE>
17.0. Entire Agreement. This Agreement contains the entire agreement
----------------
between the parties with respect to the employment of Employee by Employer and
supersedes all prior and contemporaneous agreements, representations and
understandings of the parties. No modification, amendment or waiver of any of
the provisions of this Agreement shall be effective unless in writing
specifically referring hereto and signed by both parties.
18.0. Waiver of Breach. The failure to enforce at any time any of the
----------------
provisions of this Agreement, or to require at any time performance by the other
party of any of the provisions hereof, shall in no way be construed to be a
waiver of such provisions or to affect either the validity of this Agreement or
any part hereof or the right of either party thereafter to enforce each and
every provision in accordance with the terms of this Agreement.
19.0. Conditions and Obligations of Employer. The obligations of Employer,
---------------------------------------
hereunder, are expressly subject to prior approval of this Agreement by
Employer's Board of Directors.
Executed at Los Angeles, California as of the date first set forth above.
INTERNATIONAL CABLECASTING TECHNOLOGIES INC.
By:/s/ Jerold H. Rubinstein
----------------------------------
Jerold H. Rubinstein, Chairman
/s/ Lon Troxel
- -------------------------------------
Lon Troxel
<PAGE>
EXHIBIT 10.71
DIGITAL MUSIC EXPRESS AFFILIATION AGREEMENT
Between
INTERNATIONAL CABLECASTING TECHNOLOGIES INC.
And
PRIMESTAR(R) PARTNERS
Dated as of
January 25, 1996
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
HEADING PAGE NO.
------- --------
<S> <C>
1. DEFINITIONS............................................................. 1
2. TERM.................................................................... 1
3. RIGHTS.................................................................. 1
4. CONTENT OF THE SERVICE.................................................. 1
(a) Channels........................................................... 1
(b) Simulcast Option................................................... 2
(c) Other Content...................................................... 2
(d) [*]................................................................ 2
5. DELIVERY OF THE SERVICE BY ICT.......................................... 2
(a) ICT's Transmission of Service...................................... 2
(b) Technical Information to Be Provided............................... 2
6. DISTRIBUTION OF THE SERVICE BY AFFILIATE................................ 3
(a) The DBS Distribution System........................................ 3
(b) Quality of Transmissions........................................... 3
(c) Equipment and Maintenance.......................................... 3
(d) Security Measures.................................................. 3
(e) No Alteration, Editing or Delay.................................... 3
7. AFFILIATE DISTRIBUTION OPTIONS.......................................... 3
8. LICENSE FEES FOR PRIVATE RESIDENCES..................................... 4
(a) Basic Service...................................................... 4
(b) Premium Tier Service............................................... 4
(c) Premium Only Service............................................... 4
(d) Performance Rights Increase........................................ 4
(e) Accounting Periods................................................. 4
(f) Late Payments...................................................... 4
(g) No Gratis Distribution............................................. 4
9. REPORTS AND AUDITS...................................................... 5
(a) Accounting Report Forms............................................ 5
(b) Books and Records.................................................. 5
(c) Music Performance Reports.......................................... 5
(d) Re-sale Certificates............................................... 5
10. LAUNCH, MARKETING AND CARRIAGE OF SERVICE............................... 5
11. RESEARCH................................................................ 6
12. PROPRIETARY MARKS....................................................... 7
(a) Rights in Proprietary Marks........................................ 7
(b) Use of Proprietary Marks........................................... 7
(c) No Adverse Use by Affiliate........................................ 7
</TABLE>
- ------------
* Indicates that material has been ommitted and confidential treatment has been
requested therefore. All such omitted material has been filed separately with
the Commission pursuant to Rule 24b-2.
i
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
HEADING PAGE NO.
------- --------
<S> <C>
13. LIMITATIONS ON RIGHTS AND RESERVATION OF RIGHTS.................. 7
(a) Limitations on Rights....................................... 7
(b) Reservations of Rights...................................... 8
14. TERMINATION...................................................... 8
15. WARRANTIES AND INDEMNITIES....................................... 8
(a) ICT's Warranties............................................ 8
(b) Affiliate's Warranties...................................... 9
(c) Mutual Indemnification...................................... 9
(d) Intellectual Property Indemnification....................... 9
(e) Notice of Claims............................................ 9
(f) Survival.................................................... 10
16. FORCE MAJEURE.................................................... 10
17. NOTICES.......................................................... 10
18. CONFIDENTIALITY.................................................. 11
19. ASSIGNMENT AND INSOLVENCY........................................ 11
(a) Assignment; Binding Effect; Reorganization.................. 11
(b) Insolvency of Affiliate..................................... 12
20. MISCELLANEOUS.................................................... 12
(a) Entire Agreement; Amendments; Waivers....................... 12
(b) Governing Law............................................... 12
(c) Relationship................................................ 12
(d) Severability................................................ 12
(e) No Inference Against Author................................. 12
(f) Headings.................................................... 13
(g) No Third-Party Beneficiaries................................ 13
(h) Counterparts................................................ 13
(i) Schedules................................................... 13
[*]
SCHEDULE A - Glossary of Terms........................................ 15
1. Service.......................................................... 15
2. Private Residence................................................ 15
3. Commercial Establishment......................................... 15
4. Distribution Area................................................ 15
5. Affiliate Subscribers............................................ 15
6. Distributors..................................................... 15
</TABLE>
- -----------
* Indicates that material has been omitted and confidential treatment has been
requested therefore. All such omitted material has been filed separately
with the Commission pursuant to Rule 24b-2.
ii
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
HEADING PAGE NO.
------- --------
<S> <C>
SCHEDULE B - Commercial Establishments.................................... 16
1. Service to Commercial Establishments................................. 16
2. License Fees For Commercial Establishments........................... 16
3. Calculation of Fees When Service is Packaged......................... 16
4. Support Services..................................................... 16
</TABLE>
iii
<PAGE>
AFFILIATION AGREEMENT
THIS AGREEMENT ("Agreement"), dated as of January 25, 1995, is by and
between INTERNATIONAL CABLECASTING TECHNOLOGIES INC., a Delaware corporation,
with offices at 11400 West Olympic Boulevard, Suite 1100, Los Angeles,
California 90064-1507 ("ICT") and PRIMESTAR PARTNERS, L.P., with offices at 3
Bala Plaza West, Bala Cynwyd, Pennsylvania, 19004 ("Affiliate").
WHEREAS:
A. Affiliate has established or is in the process of establishing a
direct broadcast service satellite-based television system in North America
("DBS Distribution System"); and
B. Affiliate desires to obtain the right to distribute the "Service" (as
defined herein), known as "Digital Music Express", via the DBS Distribution
System.
NOW, THEREFORE, IT IS MUTUALLY AGREED AS FOLLOWS:
1. DEFINITIONS.
-----------
Attached hereto as Schedule "A" is a glossary containing the
definitions of capitalized terms used in this Agreement.
2. TERM.
----
The term of this Agreement shall be for five (5) years commencing as of the
date hereof.
3. RIGHTS.
------
ICT hereby grants to Affiliate, and Affiliate hereby accepts, the
right and the obligation during the term hereof to launch and distribute the
Service throughout the Distribution Area by means of the DBS Distribution System
for reception at Private Residences and Commercial Establishments, and to
authorize Affiliate's Distributors (pursuant to terms and conditions, including
fees, determined by Affiliate) to market and sell the Service to Affiliate
Subscribers. The provisions regarding the distribution of the Service for
reception at Commercial Establishments are set forth on Schedule "B" attached
hereto.
4. CONTENT OF THE SERVICE.
----------------------
(a) Channels. The Service as provided by ICT shall consist of at least
--------
sixty (60), but no more than One Hundred and Twenty (120) channels of audio
music transmitted without commercial interruption, 24 hours a day, 7 days a
week, in digital format. The channels will each be comprised of a different
format of music, including, for example, but without limitation, jazz,
classical, adult contemporary, rock, country, urban, "oldies" and Latin music.
ICT may, upon reasonable notice to Affiliate, make changes in the channels or in
the genre of music. Channels may be added or deleted by ICT from time to time,
provided that the rights and obligations of ICT and Affiliate shall remain
unaffected thereby, except as otherwise set forth herein; and, provided further,
in the event that (a) ICT adds channels to the total number of channels of the
Service as of the launch date of the Service by Affiliate, Affiliate shall have
the right, but not the obligation,
1
<PAGE>
to carry such additional channels, and (b) the Service consists of fewer than
sixty (60) channels, Affiliate shall have the right to terminate this Agreement
upon thirty (30) days notice thereof to ICT. There are currently seventy-two
(72) channels fully programmed, and one hundred twenty (120) channels shall be
available by the end of 1995. ICT shall use reasonable efforts to provide that
the content of the Service is generally consistent with national broadcast
standards applicable to musical programming.
(b) Simulcast Option. Affiliate may, at its option, and at its sole cost
----------------
and expense, add channels ("Simulcast Channels") to be transmitted along with
the Service for the simulcast of other programming. Simulcast Channels may only
be transmitted and received by utilizing the proprietary technology referred to
in Paragraph 6, below. In no event shall Affiliate's carriage of Simulcast
Channels (i) affect ICT's right to receive license fees pursuant to Paragraph 8
below, which shall remain unaffected by such carriage; or (ii) cause ICT to
incur any liability, cost or expense whatsoever.
(c) Other Content. The Service shall also include such data, transmission
-------------
formats and other content as may be, in the reasonable judgment of ICT,
necessary or appropriate to the transmission, reception and processing of the
signal carring the Service, provided, however, that if ICT changes such data,
transmission formats or other content after Affiliate launches the Service, and
such change results in any additional costs to Affiliate or its Distributors to
receive the Service and/or to provide the Service to Affiliate Subscribers,
then, Affiliate shall have the right to immediately terminate this Agreement
unless ICT promptly pays such costs.
(d) *
5. DELIVERY OF THE SERVICE BY ICT.
------------------------------
(a) ICT's Transmission of Service. Throughout the term hereof, ICT shall
-----------------------------
transmit the Service's signal in such a manner that it is able to be received
using Affiliate's then current technology.
(b) Technical Information To Be Provided. ICT shall provide to Affiliate in
------------------------------------
a timely manner all Information as may be necessary or appropriate concerning
the following matters: (i) the technical specifications of the manner in which
the Service will be provided to Affiliate, (ii) the technical specifications of
all land-based equipment which Affiliate will be required to provide hereunder
for reception and further transmission of the audio signals; and (iii) the
technical information necessary for the deciphering or unscrambling of ICT's
encrypted code. It is
- ---------------
* Indicates that material has been omitted and confidential treatment has
been requested therefore. All such omitted material has been filed
separately with the Commission pursuant to Rule 24b-2.
2
<PAGE>
specifically understood, however, that nothing in the foregoing provisions shall
be deemed either to give Affiliate any right in ICT's proprietary technology or
to require ICT to provide any information with respect thereto not required by
Affiliate in order to fulfill its obligations under this Agreement.
6. DISTRIBUTION OF THE SERVICE BY AFFILIATE.
----------------------------------------
(a) The DBS Distribution System. Throughout the term hereof Affiliate shall
---------------------------
distribute the Service only via the DBS Distribution System. The term "DBS
Distribution System" shall mean the distribution system for television
programming services whereby the Service's signal is received at Affiliate's
uplink facility and then is up-linked to a DBS communications satellite for
transmission to Affiliate Subscribers.
(b) Quality of Transmissions. Affiliate shall monitor the quality of the
------------------------
transmission of the Service to Service Subscribers, and shall promptly take all
commercially reasonable steps necessary to maintain the high digital quality of
the transmission, and to correct any problems with the transmission of the
Service which are within Affiliate's ability to control.
(c) Equipment and Maintenance. Affiliate and/or its Distributors shall
-------------------------
supply, install, service and maintain or shall arrange for the supply,
installation, servicing and maintenance, at its and/or their own cost and
expense, all such facilities, equipment and hardware, including, without
limitation, equipment necessary to receive the Service from the satellite,
wiring and tuner/receivers as may be necessary and appropriate for the
transmission of the Service to each Affiliate Subscriber. The tuner/receivers to
be utilized for the reception of the Service by Affiliate Subscribers shall be
either (i) the equipment provided by Affiliate and/or its Distributors for the
reception of other television programming services, (ii) equipment provided by
Affiliate and/or its Distributors for audio only reception, or (iii) equipment
manufactured by a manufacturer authorized by ICT for audio only reception. The
specifications for the tuner/receivers to be installed at the premises of
Affiliate Subscribers shall be such that they shall be compatible with standard
stereophonic equipment requiring left and right audio jacks; and such that shall
be addressable on a receiver-by-receiver and channel-by-channel basis.
(d) Security Measures. Affiliate shall take commercially reasonable and
-----------------
practical security measures to prevent the reception of the Service by any
person or at any location which is not at the time in question a Affiliate
Subscriber.
(e) No Alternation, Editing or Delay. Affiliate will distribute the Service
--------------------------------
during the hours it is provided by ICT, without alteration, editing or delay of
any kind, except as otherwise specifically permitted by ICT.
7. AFFILIATE DISTRIBUTION OPTIONS.
------------------------------
Affiliate and Affiliate's Distributors shall have the option to
distribute the Service to Affiliate Subscribers (a) as a Basic Service with a
Premium Tier, or (b) as a Premium Only Service. Basic Service shall be defined
as the delivery of at least fourteen (14) but not more than thirty (30) channels
of the Service to all Affiliate Subscribers as part of Affiliate's basic
service and for which no separate charge is made; provided, however, that ICT
acknowledges that until such time as Affiliate converts its DBS Distribution
System to a successor, high power satellite, Affiliate will not transmit to
Affiliate Subscribers more than ten (10) channels of the Service. Premium Tier
shall be defined as the delivery of at least thirty (30) channels more than the
number of channels
3
<PAGE>
delivered in Basic Service to an Affiliate Subscriber at a time when all other
Affiliate Subscribers are receiving Basic Service. Premium Only Service shall be
defined as the delivery of the Service to an Affiliate Subscriber at a time when
no Affiliate Subscribers are receiving Basic Service. Notwithstanding the
foregoing, until Affiliate converts its DBS Distribution System to a successor,
high power satellite, Affiliate and Affiliate's Distributors shall have the
right to deliver only Basic Service to Affiliate Subscribers. Following such
conversion, a total of no less than forty-five (45) channels of the Service
shall be offered to Affiliate Subscribers. Affiliate shall have the right, with
ICT's advice and counsel, to select which of the Service's channels to provide
to Affiliate Subscribers.
8. LICENSE FEES FOR PRIVATE RESIDENCES.
-----------------------------------
(a) Basic Service. The monthly license fee for Basic Service shall be
-------------
[*] per Affiliate Subscriber. This license fee may be increased annually by the
percentage amount of any increase in the United States Consumer Price Index (All
Urban Index) over the prior calendar year, with 1995 being the base year (the
"CPI Increase").
(b) Premium Tier Service. The monthly license fee for the Premium Tier
--------------------
Service shall be an additional charge (i.e., in addition to the fee for the
Basic Service) of [*] for each Affiliate Subscriber receiving the Premium Tier
Service.
(c) Premium Only Service. The monthly license fee for Premium Only Service
--------------------
shall be [*] for each Affiliate Subscriber receiving Premium Only Service.
Notwithstanding the foregoing, in the event that Affiliate achieves a
penetration rate such that 15% or more of Affiliate Subscribers receive the
Service on a Premium Only Service basis, the license fee shall be reduced to [*]
only for those subscribers constituting the group of Affiliate Subscribers above
fifteen percent (15%) penetration.
(d) Performance Rights Increase. The license fees set forth in this
---------------------------
paragraph 8 may be increased by ICT by the amount of any increase at the time in
question of the license fees payable by ICT in the aggregate to American Society
of Composers and Publishers, Inc. ("ASCAP"), Broadcast Music Inc. ("BMI") and
SESAC ("SESAC") (or their respective successors) and to any other entity,
government authority or other person in connection with the performance rights
or other copyrights necessary for the production, transmission and performance
of the Service for Affiliate Subscribers at Private Residences as contemplated
by this Agreement and paid or to be paid by ICT; [*]
(e) Accounting Periods. The license fees payable with respect to a given
------------------
calendar month shall be due and payable thirty (30) days after the end of that
calendar month.
(f) Late Payments. Any license fee that is unpaid after it is due shall
-------------
accrue interest at one and one-half percent per month or the highest lawful
rate, whichever is less, from the due date until payment is received by ICT.
(g) No Gratis Distribution. Affiliate shall pay to ICT the license fees
----------------------
set forth in this paragraph 8 with respect to each Affiliate Subscriber
receiving the Service for each month during the term hereof. [*]
- ---------------
* Indicates that material has been omitted and confidential treatment has
been requested therefore. All such material has been filed separately with
the Commission pursuant to Rule 24b-2.
4
<PAGE>
9. REPORTS AND AUDITS.
------------------
(a) Accounting Report Forms. Affiliate shall deliver to ICT, not later
-----------------------
than thirty days after the end of each calendar month, a statement, with respect
to license fees payable for the month reported, including license fees for both
Private Residences and Commercial Establishments, on a form provided by ICT, or
on a form provided by Affiliate which will be subject to ICT's reasonable
approval and which contains all reporting information required by ICT.
(b) Books and Records. Affiliate agrees to keep and maintain accurate
-----------------
books and records of all matters directly relating to the payment of all license
fees under this Agreement in accordance with generally accepted accounting
principles. During the term and until two (2) years after the last license fee
is required to be paid hereunder, such books and records shall be reasonably
available for inspection and audit by ICT, its employees or agents, at the
expense of ICT, at Affiliate's offices, upon reasonable notice to Affiliate.
Notwithstanding the foregoing, in the event an audit of Affiliate's books and
records results in a deficiency variance in Affiliate's accounting payments
which is 5% or more, then Affiliate shall pay or reimburse ICT for all
reasonable expenses incurred by ICT in connection with the audit. The right of
ICT to perform such inspection and audit shall be limited to once in any twelve
(12) month period and shall be limited to an inspection and audit with respect
to amounts payable in the current and prior two (2) calendar years only.
(c) Music Performance Reports. Affiliate shall provide ICT with accurate
-------------------------
and timely reports as may be required by ASCAP, BMI, SESAC, or any other music
performance licensing entity. Such reports shall be made on the forms prescribed
by the licensing entity, which forms shall be provided to Affiliate by ICT. ICT
may, by notice, change such forms from time to time to reflect reporting
requirements to ASCAP, BMI and/or SESAC.
(d) Re-sale Certificates. Affiliate shall provide ICT with such tax
--------------------
exemption/resale certificates and other similar documents as may be required by
ICT in each state or other jurisdiction in which Affiliate distributes the
Service hereunder.
10. LAUNCH, MARKETING AND CARRIAGE OF SERVICE.
-----------------------------------------
Affiliate shall use reasonable efforts to promptly launch the Service
throughout the Distribution Area and to actively market the Service to Affiliate
Subscribers throughout the term
5
<PAGE>
hereof. Upon request by Affiliate ICT shall provide Affiliate with ICT's
promotional, marketing and sales materials, provided that Affiliate shall
reimburse ICT for ICT's cost of providing such materials. As an incentive to
Affiliate to promptly launch the Service to Private Residences and Commercial
Establishments as Basic Service with a Premium Tier following Affiliate's
conversion of its DBS Distribution System to a successor, high power satellite,
Affiliate shall have the right, in its sole discretion, to choose one of the
following: [*]
11. RESEARCH.
--------
ICT may, from time to time, undertake marketing tests, surveys, rating
polls or other research in connection with the Service. Affiliate shall use its
reasonable efforts to
- ---------------
* Indicates that material has been omitted and confidential treatment has
been requested therefore. All such omitted material has been filed
separately with the Commission pursuant to Rule 24b-2.
6
<PAGE>
cooperate with ICT and to provide ICT with data in connection with research
conducted by ICT, subject to any applicable federal, state or local laws or
regulations and Affiliate policies, and further provided that ICT shall pay or
promptly reimburse Affiliate for any out-of-pocket expenses incurred by
Affiliate at ICT's request, and shall provide Affiliate with a copy of the
results of such tests, survey, poll or other research.
12. PROPRIETARY MARKS.
-----------------
(a) Rights in Proprietary Marks. ICT hereby grants to Affiliate and
---------------------------
Distributors the right and obligation to use, in connection with its rights and
obligations hereunder, the trade names trademarks, service marks and logos
("Proprietary Marks") designated, from time to time, by ICT as the Proprietary
Marks of the Service, including, without limitation, the names "Digital Music
Express", "DMX" and "DMX For Business". Affiliate and Distributors shall use
the Proprietary Marks only in the form and manner (including color and style of
type) and with appropriate legends prescribed from time to time by ICT, and
shall not use or authorize the use of any other trademark or service mark in
combination with the Proprietary Marks without prior written approval of ICT.
Affiliate and Distributors may use their own trade names, trademarks, service
marks or logos in identifying themselves as authorized distributors of the
Service, provided that such trade names, trademarks, service marks or logos
shall not be commingled with or used in juxtaposition with the Proprietary Marks
in such manner as to represent directly or indirectly that Affiliate or
Distributor is involved with the production or ownership of the Service.
Affiliate and Distributors shall not use, or cause the use of, the Proprietary
Marks in any unlawful or deceptive manner or in any way that shall directly or
indirectly tend to impair or lessen the value of the Proprietary Marks.
(b) Use of Proprietary Marks. Affiliate and Distributors shall use the
------------------------
Proprietary Marks and no others, to designate the Service and shall in no event
present the Service as any other service or as being from any programming source
other than ICT. Notwithstanding the foregoing, Affiliate and Distributors shall
have the right to market, promote and sell the Service with other audio services
in a package called "PRIME AUDIO(R).", provided, however, that such marketing
and promotion shall, in all instances, include one or more of the Proprietary
Marks. In using the Proprietary Marks, Affiliate and Distributors shall fully
comply with all requirements of which it has notice relating to such use as ICT,
from time to time, may institute in its reasonable judgement, provided that such
requirements are not inconsistent with the rights granted by this Agreement to
Affiliate and Distributors as of the date hereof.
(c) No Adverse Use by Affiliate. Nothing contained in this Agreement
---------------------------
shall give Affiliate or Distributors any interest in the Proprietary Marks,
other than the right to use the Proprietary Marks to identify the Service.
Without limiting the generality of the foregoing, nothing contained in this
Agreement shall give Affiliate or Distributors any rights as a licensee to use
the Proprietary Marks to identify services or products provided or produced by
Affiliate or Distributors. Affiliate and Distributors shall not use or cause the
use of the Proprietary Marks in any manner inconsistent with the terms of this
paragraph 12.
13. LIMITATIONS ON RIGHTS AND RESERVATION OF RIGHTS.
-----------------------------------------------
(a) Limitations on Rights. The rights granted herein do not include any
---------------------
right of Affiliate or any other person or entity to:
7
<PAGE>
(i) Record, or make or manufacture any recordings or other
reproductions of the Service or any part thereof, except as otherwise permitted
by law;
(ii) Transmit, re-transmit, or authorize the transmission of, or to
otherwise in any manner deliver the Service or any part thereof to any location
which is not an Affiliate Subscriber; or
(iii) Insert any commercial announcements into the Service or
interrupt any performance of the Service for the making of any commercial
announcements except as otherwise provided in sub-paragraph 4(d) hereof.
(b) Reservation of Rights. Except as expressly set forth in this
---------------------
Agreement, Affiliate shall have no interest in the Service (including the
accompanying program data), the Proprietary Marks (as herein defined), or any
other rights or property of ICT, all of which are expressly reserved and shall
remain the rights and property of ICT.
14. TERMINATION.
-----------
If either party has made any material misrepresentations herein or
breaches any of the material terms or conditions of this Agreement and fails to
cure such breach within sixty (60) days after receipt of written notice of the
breach from the other party, then the party giving such notice shall have the
right to terminate the term of this Agreement. In the event of any such
termination, or upon the expiration or other termination of the term hereof,
Affiliate shall have the continuing obligation to pay accrued license fees
hereunder, and ICT shall have a like obligation to redeem any accrued credit
hereunder. License fees payable hereunder after termination shall include with
respect to Private Residences, amounts due up to and including the month during
which the termination occurs, and with respect to Commercial Establishments
amounts due pursuant to Paragraph 2 of Schedule B of this Agreement. Further,
upon any such termination or expiration Affiliate shall (a) permanently cease
using the Proprietary Marks, (b) permanently cease using any marks or symbols
similar to the Proprietary Marks, (c) make all alterations necessary to
distinguish its business from any identity with ICT, and (d) immediately return
to ICT all technical, research and marketing materials or materials provided by
ICT or developed from materials provided by ICT.
15. WARRANTIES AND INDEMNITIES.
--------------------------
(a) ICT's Warranties. ICT represents and warrants to Affiliate as follows:
(i) ICT is a corporation duly organized and validly existing under the laws of
the State of Delaware; (ii) ICT has the power and authority to enter into this
Agreement and to fully perform its obligation hereunder; (iii) ICT is under no
contractual or other legal obligation which shall in any way interfere with its
full, prompt and complete performance hereunder; (iv) the individual executing
this Agreement on behalf of ICT has the authority to do so; (v) ICT is in
material compliance with all laws to which it is subject, including, without
limitation, all applicable rules and regulations, if any, of the Federal
Communications Commission; (vi) ICT has, or will have acquired at the pertinent
time all or part of the Service is made available to Affiliate, good title to,
and/or each and every property right (whether relative to tangible or intangible
property), or license, usage or other right necessary or appropriate whatsoever
to effectuate the acts or performances contemplated by, or satisfy the
obligations imposed on it pursuant to this Agreement, including, without
8
<PAGE>
limitation, all permits, rights, licenses and approvals necessary, required or
appropriate for any and all performances through to the premises and to the
listeners frequenting the premises of Service Subscribers; (vii) neither the
Service, any program related thereto, or any component thereof is subject to, or
the subject of, any lien, encumbrance, charge, lis pendens, administrative
proceeding, governmental investigation, or litigation pending or threatened;
(viii) the use and exhibition of the Service by Affiliate, as contemplated by
this Agreement, will not cause Affiliate to violate any law, rule, regulation or
court or administrative decree; and (ix) the obligations created by this
Agreement, insofar as they purport to be binding on ICT constitute valid and
binding obligations of ICT in accordance with their terms.
(b) Affiliate's Warranties. Affiliate represents and warrants to ICT as
----------------------
follows: (i) Affiliate is a limited partnership duly organized and validly
existing under the laws of Delaware; (ii) Affiliate has the power and authority
to enter into this Agreement and to fully perform its obligation hereunder;
(iii) Affiliate is under no contractual or other legal obligation which shall in
any way interfere with its full, prompt and complete performance hereunder; (iv)
the individual executing this Agreement on behalf of Affiliate has the authority
to do so; (v) Affiliate is in material compliance with all laws to which it is
subject, including, without limitation, all applicable rules and regulations, if
any, of the Federal Communications Commission; and (vi) the obligations created
by this Agreement, insofar as they purport to be binding on Affiliate constitute
valid and binding obligations of Affiliate in accordance with their terms.
(c) Mutual Indemnification. Affiliate and ICT shall each indemnify and
----------------------
forever hold harmless the other, the other's affiliate companies and their
respective partners, officers directors, employees and agents from and against
any and all claims, liabilities, costs, damages and expenses (including, without
limitation, reasonable counsel fees of counsel of the other party's choice)
arising out of any breach or claimed breach of any representation or any of its
obligations pursuant to this Agreement.
(d) Intellectual Property Indemnification. ICT shall indemnify Affiliate
-------------------------------------
from and against any and all claims, liabilities costs, damages and expenses
(including, without limitation, reasonable counsel fees of counsel of the other
party's choice) arising out of the content or distribution of the Service
pursuant to (and as permitted by) this Agreement, to the extent that such
claims, liabilities, costs, damages and expenses are: (i) based upon alleged
libel, slander defamation, or invasion of the right of privacy; (ii) based upon
alleged violation or infringement of copyright, literary, dramatic music
synchronization or music performance rights; (iii) based upon the distribution
of the Service as furnished by ICT without any deletions or additions by
Affiliate or any other person except as permitted hereby; and (iv) not based on
any material added to the Service by Affiliate or any other person (as to which
deletions or added material, to the extent effected by Affiliate, Affiliate
shall, to the like extent, indemnify ICT).
(e) Notice of Claims. In connection with any indemnification provided for
----------------
in this Agreement, each party shall so indemnify the other only if such other
party claiming indemnity shall give the indemnifying party prompt notice of any
claim or litigation to which its indemnity applies; it being agreed that the
indemnifying party shall have the right to assume the defense of any or all
claims or litigation to which its indemnity applies and that the indemnified
party will cooperate fully (at the cost of the indemnifying party) with the
indemnifying party in such defense and in the settlement of such claim or
litigation.
9
<PAGE>
(f) Survival. The representations, warranties and indemnities contained
--------
in this paragraph 15 shall continue throughout the term of this Agreement, and
the indemnities shall survive the expiration or termination of this Agreement,
regardless of the reason for such expiration or termination.
16. FORCE MAJEURE.
-------------
Except as herein provided to the contrary, neither Affiliate nor ICT
shall have any rights against the other party hereto for the non-operation of
facilities (including general satellite or transponder failure) or the non-
furnishing of the Service if such non-operation or non-furnishing is due to an
act of God; inevitable accident; fire; lockout; strike, or other labor dispute;
riot or civil commotion; act of government or governmental instrumentality
(whether federal, state or local); failure in whole or in part of transmission
facilities; or any other cause beyond such party's reasonable control. The
foregoing notwithstanding, if during any month, as a result of any cause outside
of ICT's reasonable control, the satellite transmission of the Service to
Affiliate is interrupted, whether as a result of satellite failure or other
failure of a function or facility to be provided by ICT hereunder, Affiliate's
sole and exclusive remedy with respect to ICT shall be that, if Affiliate
reduces the fees payable for the Service by Affiliate Subscribers with respect
to such failure, the fees otherwise payable to ICT pursuant to this Agreement
with respect to such month, such Service Subscribers and such Service, shall be
reduced by the same proportion as the reduction bears to the amount such Service
Subscribers would have otherwise been required to pay to Affiliate.
17. NOTICES.
-------
Any notice or report given or required to be given under this
Agreement shall be in writing, shall be sent postage prepaid by registered or
certified mail, return receipt requested or by hand or messenger delivery, or by
Federal Express or similar overnight delivery service, or by facsimile
transmission, to the other party, at the following address (unless either party
at any time or times designates another address for itself by notifying the
other party thereof by certified mail, in which case all notices to such party
thereafter shall be given at its most recently so designated address):
To Affiliate: PrimeStar Partners, L.P.
Three Bala Plaza West
Seventh Floor
Bala Cynwyd, Pennsylvania 19004
Attn: Vice President, Marketing
Tel: (610) 617-5300
Fax: (610) 617-5312
With a courtesy copy to:
PrimeStar Partners, L.P.
Three Bala Plaza West
Seventh Floor
Bala Cynwyd, Pennsylvania 19004
Attn: Legal Department
10
<PAGE>
To ICT: International Cablecasting Technologies Inc.
11400 West Olympic Boulevard, Suite 1100
Los Angeles, California 90064-1507
Attn: Chairman
Tel: (310) 444-1744
Fax: (310) 444-1717
With a courtesy copy to:
Peter Laird, Esq.
Edelstein & Laird
9225 Sunset Boulevard, Suite 800
Los Angeles, California 90069
Tel: (310) 274-6184
Fax: (310) 271-2664
Any notice or report given by personal delivery shall be deemed given on
delivery. Any notice or report given by mail shall be deemed given on the
earlier to occur of actual receipt thereof or on the fifth day following mailing
thereof. Any notice or report given by Federal Express or similar overnight
delivery service shall be deemed given on the next business day following
delivery of the notice or report to such service with instructions for overnight
delivery. Any notice or report given by facsimile transmission shall be deemed
given when a separate written and personally signed acknowledgment of receipt
thereof is received (by facsimile transmission or otherwise) from the recipient.
18. CONFIDENTIALITY.
---------------
Without the prior consent of the other, neither Affiliate nor ICT
shall disclose to any third party (other than its respective employees, in their
capacity as such, who have a need to know in the performance of their ordinary
employee functions, or parties with which Affiliate or ICT is participating in a
joint venture, which need to know as part of such joint venture, provided in
either case, such employees and parties agree to be bound by the provisions of
this paragraph) including, without limitation, any municipality or other
governmental entity, any information with respect to the terms and provisions of
this Agreement, or any information obtained in any inspection or audit of the
other party's books and records, except: (i) to the extent necessary to comply
with law or the valid order of a court of competent jurisdiction, in which
event the party making such disclosure shall so notify the other as promptly as
practicable (and, if possible, prior to making such disclosure) and shall seek
confidential treatment of such information; (ii) as part of its normal reporting
or review procedure to its partners, its auditors, its attorneys or to
performing rights societies; or (iii) in order to enforce its rights pursuant to
this Agreement.
19. ASSIGNMENT AND INSOLVENCY.
-------------------------
(a) Assignment; Binding Effect; Reorganization. This Agreement, including
------------------------------------------
both its obligations and benefits, shall inure to the benefit of, and be binding
on, the respective transferees and successors of the parties, except that
neither this Agreement nor either party's rights or obligations hereunder shall
be assigned or transferred by either party without the prior written consent of
the other party such consent not to be unreasonably withheld; provided,
11
<PAGE>
however no consent shall be necessary in the event of any assignment to a
successor entity resulting from a merger, acquisition or consolidation by either
party or assignment to any entity under common control, controlled by or in
control of either party.
(b) Insolvency. If either party hereto makes an assignment for the
----------
benefit of its creditors, or commences bankruptcy, receivership, insolvency,
reorganization, dissolution or liquidation proceedings, then such party shall be
deemed to be in default of its obligations under this Agreement, and the other
party shall be entitled to exercise any and all remedies provided at law or in
equity or otherwise provided in this Agreement.
20. MISCELLANEOUS.
-------------
(a) Entire Agreement; Amendments; Waivers. This Agreement contains the
-------------------------------------
entire under-standing of the parties, and supersedes all prior understandings of
the parties relating to the distribution of the Service. This Agreement may not
be modified except in writing executed by both parties hereto. Any waiver must
be in writing and signed by the party whose rights are being waived, and no
waiver by either Affiliate or ICT of any breach of any provision hereof shall be
or be deemed to be a waiver of any subsequent breach of the same or any other
provision of this Agreement.
(b) Governing Law. The obligations of Affiliate and ICT under this
------------
Agreement are subject to all applicable federal, state and local laws, rules and
regulations (including but not limited to the Communications Act of 1934, the
Cable Communications Policy Act of 1984 and the Cable TV Consumer Protection and
Competitor Act of 1992, each as amended and the rules and regulations of the
Federal Communications Commission), and this Agreement and all matters or issues
collateral thereto shall be governed by the laws of the State of California,
without regard to conflicts of law rules.
(c) Relationship. Neither Affiliate nor ICT shall be or hold itself out
------------
as, the agent of the other under this Agreement. No subscriber of Affiliate
shall be deemed to have any privity of contract or direct contractual or other
relationship with ICT by virtue of this Agreement or ICT's delivery of the
Service to Affiliate hereunder. Nothing contained herein shall be deemed to
create, and the parties do not intend to create herein, any relationship of
partners, joint venturers or agents, as between Affiliate and ICT, and neither
party is authorized to or shall act toward third parties or the public in any
manner which would indicate any such relationship with the other. ICT disclaims
any present or future right, interest or estate in or to the transmission
facilities of Affiliate on which the programming signals delivered by Affiliate
are transmitted, such disclaimer being to acknowledge that neither Affiliate nor
the transmission facilities are common carriers.
(d) Severability. The invalidity under applicable law of any provision of
------------
this Agreement shall not affect the validity of any other provision of this
Agreement, and in the event that any provision hereof would be determined to be
invalid or otherwise illegal, this Agreement shall remain effective and shall be
construed in accordance with its terms as if the Invalid or illegal provision
were not contained herein; provided, however, that both parties shall negotiate
in good faith with respect to any equitable modification of the provisions, or
application thereof, held to be invalid.
(e) No Inference Against Author. ICT and Affiliate each acknowledge that
---------------------------
this
12
<PAGE>
Agreement was fully negotiated by the parties and, therefore, no provision of
this Agreement shall be interpreted against any party because such party or its
legal representative drafted such provision.
(f) Headings. Paragraph headings contained in this Agreement are for
--------
convenience only, and are not to be deemed to be part of the substantive
provisions hereof, and are not to be considered in the construction or
interpretation of this Agreement.
(g) No Third-Party Beneficiaries. The provisions of this Agreement are
----------------------------
for the exclusive benefit of the parties hereto and their permitted assigns, and
no third party shall be a beneficiary of, or have any rights by virtue of, this
Agreement.
(h) Counterparts. This Agreement may be executed in one or more
------------
counterparts, each of which shall be deemed an original and all of which shall
constitute one and the same Agreement, and shall become effective when each
party has received an original counterpart which has been executed by the other
party.
(i) Schedules. The schedules referred to herein and attached hereto are a
---------
part of this Agreement and are incorporated herein by reference.
[*]
- ---------------
* Indicates that material has been omitted and confidential treatment has
been requested therefore. All such omitted material has been filed
separately with the Commission pursuant to Rule 24b-2.
13
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first above written.
AFFILIATE: ICT:
BY: /s/ John Cussick BY: /s/ Robert M. Manning
------------------------------ ---------------------------------
PRINT NAME: JOHN CUSSICK PRINT NAME: ROBERT M. MANNING
---------------------- -------------------------
Its: President Its: Executive Vice President
----------------------------- --------------------------------
14
<PAGE>
SCHEDULE A DMX AFFILIATION AGREEMENT
GLOSSARY OF TERMS
1. Service. The term "Service" shall mean ICT's premium digital audio
-------
service, known as "Digital Music Express".
2. Private Residence. The term "Private Residence" shall mean any
-----------------
single-dwelling-unit private residence or any multiple-dwelling unit private
residence (such as an apartment building or residential hotel, but not a
transient or temporary residence establishment and not a nursing or rest home)
in which the Service is, or is to be, performed only in private residential
areas thereof and not in any public or common areas thereof.
3. Commercial Establishment. The term "Commercial Establishment" shall
------------------------
mean any premises whatsoever (including, without limitation, any restaurant,
bar, office, work-place, place of business, school, park, place frequented by
the public, hotel, motel, club, nursing or rest home, or showroom), whether or
not business is conducted at such premises, except for a premises which is A
Private Residence; it being understood that in the case of a shopping center,
mall or other multiple-business facility, each separate business occupying a
distinct space within such facility shall be deemed to constitute a separate
Commercial Establishment.
4. Distribution Area. The term "Distribution Area", shall mean that
-----------------
geographic area in North America where, at the time in question, Affiliate is
distributing any programming service.
5. Affiliate Subscribers. The term "Affiliate Subscribers" shall mean
---------------------
any subscribers who receive any programming service from Affiliate, whether or
not such subscriber is paying for the Service.
6. Distributor. "Distributor" shall mean any entity authorized by
-----------
Affiliate to market, promote and sell the Service to Affiliate Subscribers.
15
<PAGE>
SCHEDULE B DMX AFFILIATION AGREEMENT
COMMERCIAL ESTABLISHMENTS
1. Service to Commercial Establishments. Affiliate may only distribute
------------------------------------
the Service to Commercial Establishments pursuant to this Schedule B.
2. License Fees For Commercial Establishments. Affiliate shall pay to ICT
------------------------------------------
as a monthly license fee for each Affiliate Subscriber which is a Commerical
Establishment and which receives the Service hereunder, a sum equal to the
greater of (i) 33% of the Commercial Establishment's Music Service Payments (as
defined below) for such month; (ii) Nine Dollars ($9.00), plus the Music Rights
Payments (as defined below) if such Commercial Establishment is responsible for
Music Rights Payments; or (iii) Fifteen Dollars ($15.00) if ICT is responsible
for Music Rights Payments. If a Commercial Establishment begins or terminates
receiving the Service on a day other than the first of the month, Affiliate will
owe the monthly license fee for the full month prorated by the number of days in
the month that Service was received by such Commercial Establishment.
"Music Service Payments," with respect to a Commercial Establishment shall
mean the total of all amounts billed to or on account of such Commercial
Establishment by Affiliate in connection with the Service, for the month in
question, after deducting therefrom any such amounts, if any, as are paid by ICT
as Music Rights Payments with respect to such Commercial Establishment.
"Music Rights Payments" shall mean the amount which at the time in question
is the sum of the monthly average license fees per Commercial Establishment
payable by ICT in the aggregate to American Society of Composers and Publishers,
Inc. ("ASCAP"), Broadcast Music Inc. ("BMI") and SESAC, INC. ("SESAC") (or their
respective successors) and to any other entity, government authority or other
person in connection with the performance rights or other copyrights necessary
for the production, transmission and performance of the Service as contemplated
by this Agreement. The license fees set forth in this paragraph 2 may be
increased by ICT by the percentage amount of any increase at the time in
question of the Music Rights Payments; *
3. Calculation of Fees When Service is Packaged. When the Service is
--------------------------------------------
provided to a Commercial Establishment by a Distributor for a package charge,
the Gross Music Payments attributable to the Service shall be deemed to be the
average Gross Music Payments for the other Commercial Establishments in the area
served by such Distributor received the Service during such month on an a la
carte basis, or if there are no such other Commercial Establishments, the
average Gross Music Payments during the prior six months of all Commercial
Establishments who received the Service on an a la carte basis.
4. Support Services. ICT shall provide Affiliate with sales personnel
----------------
training, and sales materials in connection with the offering of the Service to
Commercial Establishments, in accordance with the practices and procedures of
ICT's commercial division.
- ---------------
* Indicates that material has been omitted and confidential treatment has
been requested therefore. All such omitted material has been filed
separately with the Commission pursuant to Rule 24b-2.
16
<PAGE>
EXHIBIT 10.72
AFFILIATION AGREEMENT
THIS AGREEMENT ("Agreement"), dated as of November 29, 1995, is by and
-----------
between DMX INC., a Delaware corporation, with offices at 11400 West Olympic
Boulevard, Suite 1100, Los Angeles, California 90064-1507 ("DMX") and AlphaStar
Television Network, Inc., a Delaware corporation, with offices at 208 Harbor
Drive, Building One, 1st Floor, Stamford, Connecticut 06904 ("Affiliate").
WHEREAS:
A. Affiliate has established or is in the process of establishing a
direct broadcast service satellite-based television system in North America
("DBS Distribution System"); and
B. Affiliate desires to obtain the right to distribute the "Service" (as
defined herein) via the DBS Distribution System.
NOW, THEREFORE, IT IS MUTUALLY AGREED AS FOLLOWS:
1. DEFINITIONS.
-----------
Attached hereto as Schedule "A" is a glossary containing the
definitions of capitalized terms used in this Agreement.
2. TERM.
----
The term of this Agreement shall be for five (5) years commencing as
of the date hereof with one (1) automatic renewal for an additional five-year
period unless either party notifies the other in writing at least six (6) months
prior to the expiration of the initial five-year period of its desire not to
renew. In the event this Agreement expires or terminates for any reason other
than a termination by DMX as a result of Affiliate's breach or
misrepresentation, DMX shall continue to license Affiliate to distribute the
Services to Subscribers pursuant to the terms and conditions of this Agreement
for a period of time that is the shorter of twelve (12) months or that number of
months necessary for Affiliate to continue to serve Subscribers who purchased
subscriptions to the Services that have not expired prior to said expiration or
termination.
3. RIGHTS.
------
DMX hereby grants to Affiliate, and Affiliate hereby accepts, the
right and obligation during the term hereof to launch and distribute the Service
throughout the Distribution Area by means of the DBS Distribution System for
reception at Private Residences and Commerical Establishments. The provisions
regarding the distribution of the Service for reception at Commercial
Establishments are set forth on Schedule "B" attached hereto.
1
<PAGE>
4. CONTENT OF THE SERVICE.
----------------------
(a) Channels. The Service as provided by DMX shall consist of at least
--------
sixty (60), but no more than One Hundred and Twenty (120), channels of audio
music transmitted without commercial interruption, 24 hours a day, 7 days a
week, in digital format. The channels will each be comprised of a different
format of music, including, for example, but without limitation, jazz,
classical, adult contemporary, rock, country, urban, "oldies" and latin music.
DMX may, upon reasonable notice to Affiliate, make changes in the channels or in
the genre of music. Channels may be added or deleted by DMX from time to time,
provided that the rights and obligations of DMX and Affiliate Shall remain
unaffected thereby. DMX shall use reasonable efforts to provide that the content
of the Service is generally consistent with national broadcast standards
applicable to musical programming.
(b) Affiliate may, at its option, and at its sole cost and expense, add
channels ("Simulcast Channels") to be transmitted along with the Service for the
simulcast of other programming. Simulcast Channels may only be transmitted and
received by utilizing the proprietary technology referred to in Paragraph 6,
below. In no event shall Affiliate's carriage of Simulcast Channels (i) affect
DMX's right to receive license fees pursuant to Paragraph 8 below, which shall
remain unaffected by such carriage; or (ii) cause DMX to incur any liability,
cost or expense whatsoever.
(c) Other Content. The Service shall also include such data, transmission
-------------
formats and other content as may be, in the judgment of DMX, necessary or
appropriate to the transmission, reception and processing of the signal carrying
the Service.
5. DELIVERY OF THE SERVICE BY DMX.
------------------------------
(a) DMX's Transmission of Service. Throughout the term hereof, DMX
-----------------------------
shall transmit the Service's signal in such a manner that the Basic Service (as
hereinafter defined) is able to be received using Affiliate's technology.
(b) Technical Information To Be Provided. DMX shall provide to Affiliate
------------------------------------
in a timely manner all information as may be necessary or appropriate concerning
the following matters: (i) the technical specifications of the manner in which
the Service will be provided to Affiliate, (ii) the technical specifications of
all land-based equipment which Affiliate will be required to provide hereunder
for reception and further transmission of the audio signals; and (iii) the
technical information necessary for the deciphering or unscrambling of DMX's
encrypted code. It is specifically understood, however, that nothing in the
foregoing provisions shall be deemed either to give Affiliate any right in DMX's
proprietary technology or to require DMX to provide any information with respect
thereto not required by Affiliate in order to fulfill its obligations under this
Agreement.
6. DISTRIBUTION OF THE SERVICE BY AFFILIATE.
----------------------------------------
(a) The DBS Distribution System. Throughout the term hereof Affiliate
---------------------------
shall distribute the Service via the DBS Distribution System. The term "DBS
Distribution System" shall mean the distribution system for television
programming services whereby the Service's signal is received at Affiliate's
uplink facility and then is up-linked to a DBS communications satellite for
transmission to Affiliate Subscribers.
2
<PAGE>
(b) Quality of Transmissions. Affiliate shall monitor the quality of the
------------------------
transmission of the Service to Service Subscribers, and shall promptly take all
commercially reasonable steps necessary to maintain the high digital quality of
the transmission and to correct any problems with the transmission of the
Service which are within Affiliate's ability to control.
(c) Equipment and Maintenance. Affiliate and/or its Distributors shall
-------------------------
supply, install, service and maintain or shall arrange for the supply,
installation, servicing and maintenance, at its and/or their own cost and
expense, all such facilities, equipment and hardware, including, without
limitation, equipment necessary to receive the Service from the satellite,
wiring and tuner/receivers as may be necessary and appropriate for the
transmission of the Service to each Affiliate Subscriber. The tuner/receivers to
be utilized for the reception of the Service by Affiliate Subscribers shall (i)
with respect to the Basic Service be the equipment provided by Affiliate and/or
its Distributors for the reception of other television programming services
("AlphaStar Box"), and (ii) with respect to the Premium Tier be equipment
manufactured by a manufacturer authorized by DMX for audio only reception ("DMX
Box"). The specifications for both the AlphaStar Box and the DMX Box shall be
such that they shall be compatible with standard stereophonic equipment
requiring left and right audio jacks; and such that they shall be addressable on
a receiver-by-receiver channel-by-channel basis.
(d) Security Measures. Affiliate shall take commercially reasonable and
-----------------
practical security measures to prevent the reception of the Service by any
person or at any location which is not at the time in question an Affiliate
Subscriber.
(e) No Alteration Editing or Delay; Selection of Channels. Affiliate will
-----------------------------------------------------
distribute the Service during the hours it is provided by DMX, without
alteration, editing or delay of any kind, except as otherwise specifically
permitted by DMX. However, Affiliate shall have the right, in consultation with
DMX, to select the channels it wishes to distribute (consistent with the level
of service selected pursuant to Paragraph 7, below).
7. AFFILIATE DISTRIBUTION.
----------------------
Affiliate shall distribute the Service to Affiliate Subscribers as a
Basic Service with a Premium Tier. Basic Service shall be defined as the
delivery of thirty (30) or fewer channels of the Service, to be selected by
Affiliate in consultation with DMX, by means of an AlphaStar Box which is made
available to Affiliate Subscribers as part of Affiliate's basic service and for
which no separate charge is made. Premium Tier shall be defined as the delivery
of at least thirty (30) channels more than the number of channels delivered in
Basic Service up to a total of One Hundred Twenty (120) channels of the Service
to an Affiliate Subscriber by means of a DMX Box which is made available to
Affiliate Subscribers for a separate charge.
8. LICENSE FEES FOR PRIVATE RESIDENCES.
-----------------------------------
(a) Basic Service. The monthly license fee for the Basic Service shall be
-------------
[*] per Affiliate Subscriber per month. This license fee may be increased by the
percentage amount of any increase ("CPI Increase") in the United States Consumer
Price Index (All Urban Index) over the prior calendar year, with 1995 being the
base year.
(b) Premium Tier Service. The monthly license fee for the Premium Tier
--------------------
Service shall [*]
- --------------
* Indicates that material has been omitted and confidential treatment has
been requested therefore. All such omitted material has been filed
separately with the Commission pursuant to Rule 24b-2.
3
<PAGE>
The Minimum Fee may be increased by DMX no more than once each calendar year,
upon at least ninety (90) days prior written notice to Affiliate, by a
percentage no greater than the percentage increase in the Consumer Price Index
for such calendar year compared to the immediately preceding calendar year.
(c) Performance Rights. The Minimum Fee may be increased by DMX in a
------------------
pro-rated amount to reflect any increase at the time in question of the license
fees payable by DMX in the aggregate to American Society of Composers and
Publishers, Inc. ("ASCAP"), Broadcast Music Inc. ("BMI") and SESAC ("SESAC") (or
their respective successors) and to any other entity, government authority or
other person in connection with performance rights or other copyrights necessary
for the production, transmission and performance of the Service for Affiliate
Subscribers at Private Residences as contemplated by this Agreement and paid or
to be paid by DMX. [*]
(d) Accounting Periods. The license fees payable with respect to a given
------------------
calendar month shall be due and payable thirty days after the end of that
calendar month.
(e) Late Payments. Any license fee that is unpaid after it is due shall
-------------
accrue interest at one and one-half percent per month or the highest lawful
rate, whichever is less, from the due date until payment is received by DMX.
(f) Gratis Distribution. Affiliate shall pay to DMX the license fees set
-------------------
forth in this paragraph 8, with respect to each Affiliate Subscriber for each
month during the term hereof. [*]
- ---------------
* Indicates that material has been omitted and confidential treatment has
been requested therefore. All such omitted material has been filed
separately with the Commission pursuant to Rule 24b-2.
4
<PAGE>
9. REPORTS AND AUDITS.
------------------
(a) Accounting Report Forms. Affiliate shall deliver to DMX, not later
-----------------------
than thirty days after the end of each calender month, a statement, with respect
to license fees payable for the month reported, including license fees for both
Private Residences and Commercial Establishments, on a form provided by DMX, or
on a form provided by Affiliate which will be subject to DMX's reasonable
approval and which contains all reporting information reasonably required by
DMX.
(b) Books and Records. Affiliate agrees to keep and maintain accurate
-----------------
books and records of all matters directly relating to the payment of all
license fees under this Agreement in accordance with generally accepted
accounting principles. During the term and until two years after the last
license fee is required to be paid hereunder, such books and records shall be
available for inspection and audit by DMX, its employees or agents, at the
expense of DMX, at Affiliate's offices, upon reasonable notice to Affiliate.
Notwithstanding the foregoing, in the event an audit of Affiliate's books and
records results in a deficiency variance in Affiliate's accounting payments
which is [*] or more, then Affiliate shall pay or reimburse DMX for all third
party expenses incurred by DMX in connection with the audit. The right of DMX to
perform such inspection and audit shall be limited to once in any twelve-month
period and shall be limited to an inspection and audit with respect to amounts
payable in the current and prior two (2) calendar years only. [*]
(c) Music Performance Reports. Affiliate shall provide DMX with
-------------------------
accurate and timely reports as may be required by ASCAP, BMI, SESAC, or any
other music performance licensing entity. Such reports shall be made on the
forms prescribed by the licensing entity, which forms shall be provided to
Affiliate by DMX. DMX may, by notice, change such forms from time to time to
reflect reporting requirements to ASCAP, BMI and/or SESAC.
(d) Re-sale Certificates. Affiliate shall provide DMX with such tax
--------------------
exemption/resale certificates and other similar documents as may be required by
DMX in each state or other jurisdiction in which Affiliate distributes the
Service hereunder.
10. LAUNCH, MARKETING AND CARRIAGE OF SERVICE.
-----------------------------------------
Affiliate shall use its best commercial efforts to promptly launch the
Service throughout the Distribution Area and to actively market the Service to
Affiliate Subscribers throughout the term hereof. The parties will work together
on cooperative marketing and staff training efforts.
11. RESEARCH.
--------
DMX may, from time to time, undertake marketing tests, surveys, rating
polls or other research in connection with the Service. Affiliate shall use its
reasonable efforts to
- ---------------
* Indicates that material has been omitted and confidential treatment has
been requested therefore. All such omitted material has been filed
separately with the Commission pursuant to Rule 24b-2.
5
<PAGE>
cooperate with DMX and to provide DMX with data in connection with research
conducted by DMX, subject to any applicable federal, state or local laws or
regulations and further provided that DMX shall pay or promptly reimburse
Affiliate for any out-of-pocket expenses incurred by Affiliate at DMX's request.
12. PROPRIETARY MARKS.
----------- -----
(a) Rights in Proprietary Marks. DMX hereby grants to Affiliate the right
---------------------------
and obligation to use, in connection with its rights and obligations hereunder,
the trade names trademarks, service marks and logos ("Proprietary Marks")
designated, from time to time, by DMX as the Proprietary Marks of the Service,
including, without limitation, the names "Digital Music Express", "DMX" and "DMX
For Business". Affiliate shall use the Proprietary Marks only in the form and
manner (including color and style of type) and with appropriate legends
prescribed from time to time by DMX, and shall not use or authorize the use of
any other trademark or service mark in combination with the Proprietary Marks
without prior written approval of DMX. Affiliate may use its own trade name,
trademark, service mark or logo in identifying itself as an authorized
distributor of the Service, provided that Affiliate's trade name, trademark,
service mark or logo shall not be commingled with or used in juxtaposition with
the Proprietary Marks in such manner as to represent directly or indirectly that
Affiliate is involved with the production or ownership of the Service. Affiliate
shall not use, or cause the use of, the Proprietary Marks in any unlawful or
deceptive manner or in any way that shall directly or indirectly tend to impair
or lessen the value of the Proprietary Marks.
(b) Use of Proprietary Marks. Affiliate shall use the Proprietary Marks
------------------------
and no others, to designate the Service and shall in no event present the
Service as any other service or as being from any programming source other than
DMX. In using the Proprietary Marks, Affiliate shall fully comply with all
requirements of which it has notice relating to such use as DMX, from time to
time, may institute in its reasonable judgment.
(c) No Adverse Use by Affiliate. Nothing contained in this Agreement
---------------------------
shall give Affiliate any interest in the Proprietary Marks, other than the right
to use the Proprietary Marks to identify the Service. Without limiting the
generality of the foregoing, nothing contained in this Agreement shall give
Affiliate any rights as a licensee to use the Proprietary Marks to identify
services or products provided or produced by Affiliate. Affiliate shall not use
or cause the use of the Proprietary Marks in any manner inconsistent with the
terms of this paragraph 12.
13. LIMITATIONS ON RIGHTS AND RESERVATIONS OF RIGHTS.
-------------------------------------- -- ------
(a) Limitations on Rights. The rights granted herein do not include any
-------------- ------
right of Affiliate or any other person or entity to:
(i) Record, or make or manufacture any recordings or other
reproductions of the Service or any part thereof, except as otherwise permitted
by law;
(ii) Transmit, re-transmit, or authorize the transmission of, or to
otherwise in any manner deliver the Service or any part thereof to any location
which is not an Affiliate Subscriber; or
(iii) Insert any commercial announcements into the Service or
interrupt any
6
<PAGE>
performance of the Service for the making of any commercial announcements.
(b) Reservation of Rights. Except as expressly set forth in this
---------------------
Agreement, Affiliate shall have no interest in the Service (including the
accompanying program data), the Proprietary Marks (as herein defined), or any
other rights or property of DMX, all of which are expressly reserved and shall
remain the rights and property of DMX.
14. TERMINATION.
-----------
If either party has made any material misrepresentations herein or
breaches any of the material terms or conditions of this Agreement and fails to
cure such breach within sixty (60) days after receipt of written notice of the
breach from the other party, then the party giving such notice shall have the
right to terminate the term of this Agreement. In the event of any such
termination, or upon the expiration or other termination of the term hereof,
Affiliate shall have the continuing obligation to pay license fees hereunder and
for any sums due under paragraph 10, hereunder. License fees payable hereunder
after termination shall include with respect to Private Residences, amounts due
up to and including the month during which the termination occurs, and with
respect to Commercial Establishments amounts due pursuant to Paragraph 8 of
Schedule B of this Agreement. Further, upon any such termination or expiration
Affiliate shall (a) permanently cease using the Proprietary Marks, (b)
permanently cease using any marks or symbols similar to the Proprietary
Marks, (c) make all alterations necessary to distinguish its business from any
identity with DMX, and (d) immediately return to DMX all technical, research and
marketing materials or materials provided by DMX or developed from materials
provided by DMX.
15. WARRANTIES AND INDEMNITIES.
---------- --- -----------
(a) DMX's Warranties. DMX represents and warrants to Affiliate as follows:
----------------
(i) DMX is a corporation duly organized and validly existing under the laws of
the State of Delaware; (ii) DMX has the power and authority to enter into this
Agreement and to fully perform its obligation hereunder; (iii) DMX is under no
contractual or other legal obligation which shall in any way interfere with its
full, prompt and complete performance hereunder; (iv) the individual executing
this Agreement on behalf of DMX has the authority to do so; (v) DMX is in
material compliance with all laws to which it is subject, including, without
limitation, all applicable rules and regulations, if any, of the Federal
Communications Commission.
(b) Affiliate's Warranties. Affiliate represents and warrants to DMX as
----------------------
follows: (i) Affiliate is a corporation duly organized and validly existing
under the laws of Delaware; (ii) Affiliate has the power and authority to enter
into this Agreement and to fully perform its obligation hereunder; (iii)
Affiliate is under no contractual or other legal obligation which shall in any
way interfere with its full, prompt and complete performance hereunder; (iv) the
individual executing this Agreement on behalf of Affiliate has the authority to
do so; (v) Affiliate is in material compliance with all laws to which it is
subject, including, without limitation, all applicable rules and regulations, if
any, of the Federal Communications Commission; and (vi) the obligations created
by this Agreement, insofar as they purport to be binding on Affiliate constitute
valid and binding obligations of Affiliate in accordance with their terms.
(c) Mutual Indemnification. Affiliate and DMX shall each indemnify and
----------------------
forever hold harmless the other, the other's affiliate companies and their
respective officers directors,
7
<PAGE>
employees and agents from and against any and all claims, liabilities, costs,
damages and expenses (including, without limitation, reasonable counsel fees of
counsel of the other party's choice) arising out of any breach or claimed breach
of any representation or any of its obligations pursuant to this Agreement.
(d) Intellectual Property Indemnification. DMX shall indemnify
-------------------------------------
Affiliate from and against any and all claims, liabilities costs, damages and
expenses (including, without limitation, reasonable counsel fees of counsel of
the other party's choice) arising out of the content or distribution of the
Service pursuant to (and as permitted by) this Agreement, to the extent that
such claims, liabilities, costs, damages and expenses are: (i) based upon
alleged libel, slander defamation, or invasion of the right of privacy; (ii)
based upon alleged violation or infringement of copyright, literary, dramatic
music synchronization or music performance rights, provided that DMX's liability
with respect to any such claim shall be limited to a claim based on rights as
such rights exist as of the date of this Agreement; (iii) based upon the
distribution of the Service as furnished by DMX without any deletions or
additions by Affiliate or any other person except as permitted hereby; and (iv)
not based on any material added to the Service by Affiliate or any other person
(as to which deletions or added material, to the extent effected by Affiliate,
Affiliate shall, to the like extent, indemnify DMX). Notwithstanding the
foregoing, in the event that the music performance societies, (i.e., ASCAP, BMI,
SESAC) no longer offer DMX a single "through-to-the-viewer" license, instead
requiring a separate public performance license from Affiliate, DMX and
Affiliate shall negotiate in good faith for a reduction in Affiliate's license
fees to equitably reflect any reduction in such costs to DMX and corresponding
increase in such costs to Affiliate. If, within ninety (90) days after
Affiliate's written request to DMX to commence such negotiations, the parties
cannot reach resolution on this issue, Affiliate may terminate this Agreement
upon thirty (30) days' prior written notice to DMX given after passage of such
ninety (90) days, which termination shall take effect unless, prior to the
stated date of termination, DMX offers to pay for such license in its entirety.
(e) Notice of Claims. In connection with any indemnification provided for
----------------
in this Agreement, each party shall so indemnify the other only if such other
party claiming indemnity shall give the indemnifying party prompt notice of any
claim or litigation to which its indemnity applies; it being agreed that the
indemnifying party shall have the right to assume the defense of any or all
claims or litigation to which its 4 indemnity applies and that the indemnified
party will cooporate fully (at the cost of the indemnifying party) with the
indemnifying party in such defense and in the settlement of such claim or
litigation.
16. FORCE MAJEURE.
----- -------
Except as herein provided to the contrary, neither Affiliate nor DMX shall have
any rights against the other party hereto for the non-operation of facilities
(including general satellite or transponder failure) or the non-furnishing of
the Service if such non-operation or non-furnishing is due to an act of God;
inevitable accident; fire; lockout; strike, or other labor dispute; riot or
civil commotion; act of government or governmental instrumentality (whether
federal, state or local); failure in whole or in part of transmission
facilities; or any other cause beyond such party's reasonable control. The
foregoing notwithstanding, if during any month, as a result of any cause outside
of DMX's reasonable control, the satellite transmission of the Service to
Affiliate is interrupted, whether as a result of satellite failure or other
failure of a function or facility to be provided by DMX hereunder, Affiliate's
sole and exclusive remedy with respect to DMX shall be
8
<PAGE>
that, if Affiliate reduces the fees payable for the Service by Affiliate
Subscribers with respect to such failure, the fees otherwise payable to DMX
pursuant to this Agreement with respect to such month, such Service Subscribers
and such Service, shall be reduced by the same proportion as the reduction bears
to the amount such Service Subscribers would have otherwise been required to pay
to Affiliate. Notwithstanding the foregoing, in the event of DMX's failure to
supply the Service for thirty (30) consecutive days or for sixty (60) days in
the aggregate, Affiliate shall have the right to terminate this Agreement.
17. NOTICES.
-------
Any notice or report given or required to be given under this Agreement shall be
in writing, shall be sent postage prepaid by registered or certified mail,
return receipt requested or by hand or messenger delivery, or by Federal Express
or similar overnight delivery service, or by facsimile transmission, to the
other party, at the following address (unless either party at any time or times
designates another address for itself by notifying the other party thereof by
certified mail, in which case all notices to such party thereafter shall be
given at its most recently so designated address):
To Affiliate: AlphaStar Television Network, Inc.
208 Harbor Drive
Building One, First Floor
Stamford, Connecticut 06904
Attn: Stuart Jacob
Vice President Programming and Marketing
Tel: (203) 359-8077
Fax: (203) 359-8281
With a courtesy copy to:
Terry S. Freedman, Esq.
325 Burnt Oak Court, N.E.
Atlanta, Georgia 30328
Tel: (770) 390-9525
Fax: (770) 390-0893
To DMX: DMX Inc.
11400 West Olympic Boulevard, Suite 1100
Los Angeles, California 90064-1507
Attn: Chairman
Tel: (310)444-1744
Fax: (310)444-1717
9
<PAGE>
With a courtesy copy to:
Peter Laird, Esq.
Edelstein, Laird & Sobel, P.C.
9225 Sunset Boulevard, Suite 800
Los Angeles, California 90069
Tel: (310)274-6184
Fax: (310)271-2664
Any notice or report given by personal delivery shall be deemed given on
delivery. Any notice or report given by mail shall be deemed given on the
earlier to occur of actual receipt thereof or on the fifth day following mailing
thereof. Any notice or report given by Federal Express or similar overnight
delivery service shall be deemed given on the next business day following
delivery of the notice or report to such service with instructions for overnight
delivery. Any notice or report given by facsimile transmission shall be deemed
given when a separate written and personally signed acknowledgment of receipt
thereof is received (by facsimile transmission or otherwise) from the recipient.
18. CONFIDENTIALITY.
---------------
Without the prior consent of the other, neither Affiliate nor DMX
shall disclose to any third party (other than its respective employees, in their
capacity as such, who have a need to know in the performance of their ordinary
employee functions, or parties with which Affiliate or DMX is participating in a
joint venture, which need to know as part of such joint venture, provided in
either case, such employees and parties agree to be bound by the provisions of
this paragraph) including, without limitation, any municipality or other
governmental entity, any information with respect to the terms and provisions of
this Agreement, or any information obtained in any inspection or audit of the
other party's books and records, except: (i) to the extent necessary to comply
with law or the valid order of a court of competent jurisdiction, in which event
the party making such disclosure shall so notify the other as promptly as
practicable (and, if possible, prior to making such disclosure) and shall seek
confidential treatment of such information; (ii) as part of its normal reporting
or review procedure to its auditors, attorneys, investors, bankers, investment
bankers, and business consultants/advisors or to performing rights societies; or
(iii) in order to enforce its rights pursuant to this Agreement.
19. ASSIGNMENT AND INSOLVENCY
---------- --- ----------
(a) Assignment; Binding Effect; Reorganization. This Agreement, including
------------------------------------------
both its obligations and benefits, shall inure to the benefit of, and be binding
on, the respective transferees and successors of the parties, except that
neither 5 Agreement nor either party's rights or obligations hereunder shall be
assigned or transferred by either party without the prior written consent of the
other party such consent not to be unreasonably withheld or delayed, provided,
however no consent shall be necessary in the event of any assignment to a
successor entity resulting from a merger, acquisition or consolidation by either
party or assignment to any entity under common control, controlled by or in
control of either party.
(b) Insolvency of Affiliate. If Affiliate makes an assignment for the
---------- -- ---------
benefit of its creditors, or commences bankruptcy, receivership, insolvency,
reorganization, dissolution or
10
<PAGE>
liquidation proceedings, Affiliate shall be deemed to be in default of its
obligations under this Agreement, and DMX shall be entitled to exercise any and
all remedies provided at law or in equity or otherwise provided in this
Agreement.
20. MISCELLANEOUS.
-------------
(a) Entire Agreement: Amendments: Waivers. This Agreement contains the
-------------------------------------
entire under-standing of the parties, and supersedes all prior understandings of
the parties relating to the distribution of the Service. This Agreement may not
be modified except in writing executed by both parties hereto. Any waiver must
be in writing and signed by the party whose rights are being waived, and no
waiver by either Affiliate or DMX of any breach of any provision hereof shall be
or be deemed to be a waiver of any subsequent breach of the same or any other
provision of this Agreement.
(b) Governing Law. The obligations of Affiliate and DMX under this
-------------
Agreement are subject to all applicable federal, state and local laws, rules and
regulations (including but not limited to the Communications Act of 1934, the
Cable Communications Policy Act of 1984 and the Cable TV Consumer Protection and
Competitor Act of 1992, each as amended and the rules and regulations of the
Federal Communications Commission), and this Agreement and all matters or issues
collateral thereto shall be governed by the laws of the State of California,
without regard to conflicts of law rules.
(c) Relationship. Neither Affiliate nor DMX shall be or hold itself out
------------
as, the agent of the other under this Agreement. No subscriber of Affiliate
shall be deemed to have any privity of contract or direct contractual or other
relationship with DMX by virtue of this Agreement or DMX' 5 delivery of the
Service to Affiliate hereunder. Nothing contained herein shall be deemed to
create, and the parties do not intend to create herein, any relationship of
partners, joint venturers or agents, as between Affiliate and DMX, and neither
party is authorized to or shall act toward third parties or the public in any
manner which would indicate any such relationship with the other. DMX disclaims
any present or future right, interest or estate in or to the transmission
facilities of Affiliate on which the programming signals delivered by Affiliate
are transmitted, such disclaimer being to acknowledge that neither Affiliate nor
the transmission facilities are common carriers.
(d) Severability. The invalidity under applicable law of any provision of
------------
this Agreement shall not affect the validity of any other provision of this
Agreement, and in the event that any provision hereof would be determined to be
invalid or otherwise illegal, this Agreement shall remain effective and shall be
construed in accordance with its terms as if the invalid or illegal provision
were not contained herein; provided, however, that both parties shall negotiate
in good faith with respect to any equitable modification of the provisions, or
application thereof, held to be invalid.
(e) No Inference Against Author. DMX and Affiliate each acknowledge that
---------------------------
this Agreement was fully negotiated by the parties and, therefore, no provision
of this Agreement shall be interpreted against any party because such party or
its legal representative drafted such provision.
(f) Headings. Paragraph headings contained in this Agreement are for
--------
convenience only, and are not to be deemed to be part of the substantive
provisions hereof, and are not to be
11
<PAGE>
considered in the construction or interpretation of this Agreement.
(g) No Third-Party Beneficiaries. The provisions of this Agreement are for
----------------------------
the exclusive benefit of the parties hereto and their permitted assigns, and no
third party shall be a beneficiary of, or have any rights by virtue of, this
Agreement.
(h) Counterparts This Agreement may be executed in one or more
------------
counterparts, each of which shall be deemed an original and all of which shall
constitute one and the same Agreement, and shall become effective when each
party has received an original counterpart which has been executed by the other
party.
(i) Schedules The schedules referred to herein and attached hereto are a
---------
part of this Agreement and are incorporated herein by reference.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first above written.
ALPHASTAR TELEVISION NETWORK, INC. DMX:
BY: /s/ Stuart Jacob BY: /s/ Robert Manning
------------------------ ---------------------------
Print Name: STUART JACOB Print Name: Robert M. Manning
---------------- -------------------
Its: VICE PRESIDENT Its: Executive Vice President
----------------------- ---------------------------
12
<PAGE>
SCHEDULE A DMX AFFILIATION AGREEMENT
GLOSSARY OF TERMS
1. Service. The term "Service" shall mean DMX's premium digital audio
-------
service, known as "Digital Music Express".
2. Private Residence. The term "Private Residence" shall mean any
-----------------
single-dwelling-unit private residence or any multiple-dwelling unit private
residence (such as an apartment building or residential hotel, but not a
transient or temporary residence establishment and not a nursing or rest home)
in which the Service is, or is to be, performed only in private residential
areas thereof and not in any public or common area thereof.
3. Commercial Establishment. The term "Commercial Establishment"
------------------------
shall mean any premises whatsoever (including, without limitation, any
restaurant, bar, office, workplace, place of business, school, park, place
frequented by the public, hotel, motel, club, nursing or rest home, school or
showroom), whether or not business is conducted at such premises, except for a
premises which is a Private Residence; it being understood that in the case of a
shopping center, mall or other multiple-business facility, each separate
business occupying a distinct space within such facility shall be deemed to
constitute a separate Commercial Establishment.
4. Distribution Area. The term "Distribution Area", shall mean that
-----------------
geographic area in North America where, at the time in question, Affiliate is
distributing any programming service.
5. Affiliate Subscribers. The term "Affiliate Subscribers" shall mean any
---------------------
subscribers who receive any programming service from Affiliate, whether or not
such subscriber is paying for the Service.
6. Distributor. "Distributor" shall mean any entity authorized by
-----------
Affiliate to market, promote and sell the Service to Affiliate Subscribers.
13
<PAGE>
SCHEDULE B DMX AFFILIATION AGREEMENT
COMMERCIAL ESTABLISHMENTS
Music Sales
- -----------
DMX shall pay Affiliate a commission of [*] of its gross sales of the Service to
Commercial Establishments using AlphaStar IRDs.
Video Sales
- -----------
Affiliate shall pay DMX a commission of [*] of its gross sales of its video
services to Commercial Establishments sold by DMX.
Satellite Dish
- --------------
Affiliate shall make available to DMX for DMX Direct and DMX Commercial Division
distribution the AlphaStar satellite dishes at Affiliate's cost plus [*] per
dish.
Joint Technology
- ----------------
The parties shall exert their respective best efforts to work together to
develop mutually beneficial joint technologies, including a tuner which will
accommodate all channels of the Service and Affiliate's programming services.
DMX shall grant Affiliate a license for the creation of such a tuner as soon as
ComStream's DMX tuner exclusivity expires.
MallSat
- -------
DMX shall exert its commercially reasonable best efforts to sell Affiliate's
programming service packages through the AT&T SkyNet MallSat Service.
- ---------------
* Indicates that material has been omitted and confidential treatment has
been requested therefore. All such omitted material has been filed
separately with the Commission pursuant to Rule 24b-2.
14
<PAGE>
EXHIBIT 10.73
_______________________________________
STOCK PURCHASE AND SHAREHOLDERS AGREEMENT
DECEMBER 18, 1996
_______________________________________
<PAGE>
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
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<S> <C>
ARTICLE 1 Sale of Stock of the Companies........................................................................... 2
1.1 Sale of the Purchased Shares............................................................................. 2
ARTICLE 2 Closing Date; Delivery................................................................................... 3
2.1 Closing Dates............................................................................................ 3
2.2 Delivery by DMX.......................................................................................... 3
2.3 Delivery by DMX-UK....................................................................................... 3
2.4 Delivery by DMX-NV....................................................................................... 4
2.5 Delivery by Purchaser.................................................................................... 4
ARTICLE 3 Representations and Warranties........................................................................... 4
3.1 Representations and Warranties of DMX.................................................................... 4
3.1.1 Corporate Power................................................................................ 4
3.1.2 Capitalization of DMX-UK....................................................................... 4
3.1.3 Capitalization of DMX-NV....................................................................... 5
3.1.4 Capitalization of DMX-UK....................................................................... 5
3.1.5 Authorization; Validity........................................................................ 5
3.1.6 Ownership...................................................................................... 5
3.1.7 Brokers or Finders............................................................................. 5
3.2 Representations and Warranties of Purchaser.............................................................. 6
3.2.1 Investment Purpose; Experience................................................................. 6
3.2.2 Purchaser's Specific Knowledge of the Companies................................................ 6
3.2.3 Brokers or Finders............................................................................. 7
3.3 Survival................................................................................................. 7
</TABLE>
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<PAGE>
<TABLE>
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<S> <C>
ARTICLE 4 Conditions to Closing; Termination....................................................................... 7
4.1 Conditions to Closing of the Purchaser................................................................... 7
4.1.1 Satisfactory Arrangements with Creditors....................................................... 8
4.1.2 Representations and Warranties Correct......................................................... 8
4.1.3 Covenants...................................................................................... 8
4.1.4 Opinion of UK Counsel.......................................................................... 8
4.2 Conditions to Closing of the DMX......................................................................... 8
4.2.1 Representations and Warranties Correct......................................................... 8
4.2.2 Covenants...................................................................................... 8
4.2.3 Opinion of UK Counsel.......................................................................... 8
4.3 Conditions to Closing related to Satellite Contract...................................................... 9
4.3.1 Uplink and Satellite Transmission Contract..................................................... 9
4.3.2 Guaranty of the Satellite Contract............................................................. 9
4.3.3 Release of DMX by WTCI......................................................................... 9
4.4 Conditions to Closing related to the Restructure of the Companies........................................ 9
4.4.1 Capital Structure of DMX-UK.................................................................... 9
4.4.3 Transfer of NV Common Stock.................................................................... 10
4.4.4 Unissued Shares................................................................................ 10
4.5 Termination.............................................................................................. 10
4.5.1 Coordination with Subscription Agreement....................................................... 10
4.5.2 Termination of Subscription Agreement.......................................................... 10
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
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<S> <C>
ARTICLE 5 Covenants.................................................................................................... 10
5.1 Affirmative Covenants of DMX............................................................................. 10
5.1.1 Recapitalization; Amendment of Constituent Documents; Certain Transfers........................ 11
5.1.2 Qualification under Blue Sky Laws.............................................................. 11
5.1.3 Transactions with Related Entities............................................................. 11
5.1.4 Access......................................................................................... 11
5.1.5 Amendment, Compromise, or Forgiveness of Note or Indebtedness.................................. 11
5.2 Affirmative Covenants of Purchaser....................................................................... 12
5.2.1 [*]............................................................................................ 12
5.2.2 Recapitalization; Amendment of Constituent Documents; Certain Transfers........................ 12
5.2.3 Board Appointment and Nominations.............................................................. 12
5.2.4 Confidentiality of Information Provided by DMX, DMX-UK, and DMX-NV............................. 13
5.2.5 Dilution Protection of DMX's Interest in the Raising of Initial Capital........................ 13
5.3 Affirmative Covenants of the Companies................................................................... 13
5.3.1 Access and Maintenance of Records.............................................................. 13
5.3.2 [*]............................................................................................ 14
5.3.3 Board Appointment and Nominations.............................................................. 14
</TABLE>
- ---------------
* Indicates that material has been omitted and confidential treatment has
been requested therefore. All such omitted material has been filed
separately with the Commission pursuant to Rule 24b-2.
-iii-
<PAGE>
<TABLE>
<CAPTION>
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<S> <C>
ARTICLE 6 Preemptive Rights............................................................................................ 15
6.1 DMX's Preemptive Rights.................................................................................. 15
6.2 Definition of New Securities............................................................................. 15
6.3 Definition of Purchaser Affiliate........................................................................ 15
6.4 Termination of Preemptive Rights......................................................................... 16
6.5 Incorporation in Articles of Association................................................................. 16
ARTICLE 7 Registration Rights.......................................................................................... 16
7.1 Registration Rights of DMX............................................................................... 16
7.2 Registration Rights on Foreign Exchanges................................................................. 16
ARTICLE 8 Tag-Along and Drag-Along Rights.............................................................................. 16
8.1 Definitions.............................................................................................. 16
8.1.1 Permitted Transfer............................................................................. 16
8.1.2 Permitted Transferee........................................................................... 17
8.1.3 Securities Act................................................................................. 17
8.1.4 Selling Shareholder............................................................................ 17
8.1.5 Shareholder.................................................................................... 17
8.1.6 Stock.......................................................................................... 17
8.1.7 Tag-Along Seller............................................................................... 17
8.1.8 Transfer....................................................................................... 17
8.2 Tag-Along Rights......................................................................................... 17
8.2.1 Right to Participate in Sale................................................................... 17
8.2.2 Exceptions to Tag-Along Rights................................................................. 18
8.2.3 Procedures for Tag-Along Sale.................................................................. 18
</TABLE>
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<PAGE>
<TABLE>
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<S> <C>
8.3 Application of Tag-Along Rights to Indirect Transfer of Stock............................................ 19
8.4 Drag-Along Rights........................................................................................ 19
8.4.1 Right to Require Sale.......................................................................... 19
8.4.2 Drag-Along Notice.............................................................................. 20
8.4.3 Non-Cash Consideration......................................................................... 20
8.5 Termination of Tag-Along and Drag-Along Rights........................................................... 20
ARTICLE 9 Miscellaneous................................................................................................ 21
9.1 Governing Law............................................................................................ 21
9.2 Jurisdiction and Venue................................................................................... 21
9.3 Waiver of Jury Trial..................................................................................... 21
9.4 Successors and Assigns................................................................................... 21
9.5 Entire Agreement; Amendment.............................................................................. 22
9.6 Notices.................................................................................................. 22
9.7 Delays or Omissions...................................................................................... 23
9.8 Expenses................................................................................................. 24
9.9 Counterparts............................................................................................. 24
9.10 Severability............................................................................................. 24
9.11 Gender................................................................................................... 24
9.12 No Third Parties Benefitted.............................................................................. 25
9.13 Attorneys' Fees and Expenses............................................................................. 25
</TABLE>
-v-
<PAGE>
STOCK PURCHASE AND SHAREHOLDERS AGREEMENT
This Agreement is made as of December 18, 1996 between DMX Inc. ("DMX"), a
Delaware corporation, DMX-Europe (UK) Limited, a United Kingdom company ("DMX-
UK"), DMX-Europe N.V., a Netherlands corporation ("DMX-NV") and Jerold H.
Rubinstein, an individual ("PURCHASER"). DMX-UK and DMX-NV will be referred to
collectively as the "COMPANIES" and individually as a "COMPANY", and DMX and
Purchaser will be referred to collectively as the "SHAREHOLDERS" and
individually as a "SHAREHOLDER".
WHEREAS, the Companies are wholly owned direct and indirect subsidiaries of
DMX;
WHEREAS, the Companies are in significant financial difficulty, and without
additional financial support will be placed into insolvency proceedings;
Purchaser has informed the Board of Directors of DMX that in his opinion the
business operations of the Companies are viable and potentially valuable; the
Board of Directors of DMX has determined that DMX will not provide any further
financial support for the Companies;
WHEREAS, Purchaser has offered to use his best efforts to secure other
financing to permit the Companies to continue operations and, if Purchaser is
able to effect an agreement with the creditors and potential equity investors to
reorganize the operations of the Companies (the "REORGANIZATION"), to acquire
certain interests in the Companies;
WHEREAS, in connection with the acquisition by Purchaser of certain
interests in the Companies, the ownership of DMX-NV and DMX-UK will be
restructured to make DMX-NV a subsidiary of DMX-UK, and the capital structure of
DMX-UK will be recapitalized;
WHEREAS, Purchaser will deliver a continuing guaranty pursuant to which
Purchaser will agree to guarantee certain liabilities associated with the
operations of the Companies;
WHEREAS, the Board of Directors of DMX believes it is in the best interest
of DMX's shareholders to enter into this Agreement and to provide Purchaser with
an opportunity to reorganize the operations of the Companies;
WHEREAS, if Purchaser is unable to effect the Reorganization, then DMX will
subscribe for shares of a corporation newly organized by Purchaser to effect the
<PAGE>
distribution of the DMX digital audio service in Europe, pursuant to that
certain Subscription and Shareholders Agreement of even date herewith (the
"SUBSCRIPTION AGREEMENT");
NOW THEREFORE, the parties agree as follows:
ARTICLE 1
SALE OF
-------
STOCK OF THE COMPANIES
----------------------
1.1 SALE OF THE PURCHASED SHARES. In consideration of the various
----------------------------
agreements undertaken pursuant to and subject to the terms and conditions of
this Agreement, DMX will sell to Purchaser, and Purchaser will buy from DMX, at
the Closing, the following interests in the Companies:
(i) 5,000,000 Common Shares (as defined in Section 4.4.1, below);
(ii) a 90 percent interest in that certain note dated May 19, 1993, in
the principal amount of $24,436,000 owed by DMX-NV to DMX under a
promissory note payable by DMX to the order of TCI-Euromusic, Inc.,
which note was acquired by DMX in the merger of TCI-Euromusic, Inc.
with and into DMX, including all unpaid interest accrued thereon (the
entire note shall be referred to as the "NOTE"), together with a
corresponding interest in the rights of DMX pursuant to any
instruments or loan agreements associated with the Note (the
"INSTRUMENTS"); and
(iii) a 90 percent interest in all other outstanding indebtedness, if
any, of DMX-NV or DMX-UK to DMX (the total amount such other
indebtedness of DMX-UK or DMX-NV to DMX shall be referred to as the
"INDEBTEDNESS").
The Common Shares to be transferred to Purchaser pursuant to this Section 1.1
shall be referred to collectively as the "PURCHASED SHARES". The Purchased
Shares and the above described interests in the Note and the Indebtedness to be
transferred to Purchaser shall be referred to collectively as the "PURCHASED
INTERESTS".
-2-
<PAGE>
ARTICLE 2
CLOSING DATE; DELIVERY
----------------------
2.1 CLOSING DATES. The closing of the purchase and sale of the
-------------
Purchased Interests (the "CLOSING") shall be held at the offices of Irell &
Manella (i) at 11:00 a.m., on or before January 31, 1996; (ii) at such other
time and place upon which the parties shall agree; or (iii) if necessary to the
Reorganization of the Companies, at such earlier time as Purchaser designates by
written notice to the other parties at least 10 business days before the
designated date of the Closing; provided, however, that all parties will use
their reasonable efforts to close as soon as possible after such notice from
Purchaser. The date of the Closing shall be referred to in this Agreement as
the "CLOSING DATE".
2.2 DELIVERY BY DMX. At the Closing, DMX will deliver:
---------------
2.2.1 To Purchaser, documentation evidencing Purchaser's ownership of
the Purchased Shares, which shall be accompanied by such other
documents as are required under applicable law to effect the transfer
of ownership on the shareholders' register;
2.2.2 To DMX-UK, a copy of the Channel Distribution Agreement, in the
form attached as Exhibit 2.2.2 (the "DISTRIBUTION AGREEMENT"),
executed by DMX;
2.2.3 To Purchaser, a duly executed bill of sale and assignment,
executed by DMX and transferring to Purchaser, without recourse and
without representation or warranty, the interests described above in
Section 1.1 (ii) and (iii) in the Note, the Instruments, and the
Indebtedness; and
2.2.4 To Purchaser, a certificate acknowledging the termination of
the Subscription Agreement and the release of the parties from their
obligations under the Subscription Agreement, in the form attached as
Exhibit 2.2.4 (the "TERMINATION CERTIFICATE"), executed by DMX.
2.3 DELIVERY BY DMX-UK. At the Closing, DMX-UK shall deliver to DMX:
------------------
2.3.1 A release executed by DMX-UK in form satisfactory to counsel
for DMX, releasing DMX from any and all obligations to DMX-UK or DMX-
NV except those specified in this Agreement and the Distribution
Agreement (the "RELEASE"); and
-3-
<PAGE>
2.3.2 A copy of the Distribution Agreement executed by DMX-UK.
2.4 DELIVERY BY DMX-NV. At the Closing, DMX-NV shall deliver to DMX:
------------------
2.4.1 A copy of the Release executed by DMX-NV.
2.5 DELIVERY BY PURCHASER. At the Closing, Purchaser shall deliver to
---------------------
DMX:
2.5.1 A copy of the Termination Certificate, executed by Purchaser
and by Xtra Music Limited; and
2.5.2 A Spousal Consent, consenting to the obligations undertaken
pursuant to this Agreement and pursuant to the documents delivered by
Purchaser pursuant to this Agreement.
The Distribution Agreement and the Release are collectively referred to herein
as the "RELATED AGREEMENTS".
ARTICLE 3
REPRESENTATIONS AND WARRANTIES
------------------------------
3.1 REPRESENTATIONS AND WARRANTIES OF DMX. Except as set forth on the
-------------------------------------
attached Exhibit 3.1, DMX represents and warrants to Purchaser as follows:
3.1.1 CORPORATE POWER. At the Closing Date, DMX will have all
---------------
requisite legal and corporate power to execute and deliver this Agreement, to
sell the Purchased Interests, and to carry out and perform its obligations under
the terms of this Agreement.
3.1.2 CAPITALIZATION OF DMX-UK. As of the date of this Agreement,
------------------------
the authorized capital stock of DMX-UK consists of 100 (Pound)1 ordinary shares,
of which 100 shares are issued and outstanding and are owned by DMX-NV, and
10,000,000 of $1 preference shares of DMX-UK (the $1 preference shares of DMX-UK
to be referred to herein as "EXISTING PREFERRED STOCK"), of which 10,000,000
shares are issued and outstanding and are owned by DMX. As of the date of this
Agreement, DMX-UK is obligated to issue an additional 3,337,000 shares of
Existing Preferred Stock after increasing its authorized capital (the "UNISSUED
SHARES"). Except as contemplated by this Agreement, DMX is not aware of any
other options, warrants, conversion privileges, contracts, understandings or
other rights outstanding to purchase or otherwise acquire any
-4-
<PAGE>
authorized but unissued shares of DMX-UK's capital stock or any other securities
of DMX-UK.
3.1.3 CAPITALIZATION OF DMX-NV. As of the date of this Agreement,
------------------------
the authorized capital stock of DMX-NV consists of 100,000 shares of common
stock (the common stock of DMX-NV to be referred to herein as the "NV COMMON
STOCK"), of which 39,216 shares are issued and outstanding. Except as
contemplated by this Agreement, DMX is not aware of any options, warrants,
conversion privileges, contracts, understandings or other rights outstanding to
purchase or otherwise acquire any authorized but unissued shares of DMX-NV's
capital stock or any other securities of DMX-NV.
3.1.4 CAPITALIZATION OF DMX-UK AS OF THE CLOSING DATE. As of the
-----------------------------------------------
Closing Date, the authorized capital stock of DMX-UK shall consist of 20,000,000
Common Shares, of which 5,000,100 shares will be issued and outstanding and
5,000,000 will be owned by DMX, and 100,000 of the Preference Shares, of which
100,000 shares will be issued and outstanding and will be owned by DMX. Except
as contemplated by this Agreement and by any arrangements made by Purchaser in
connection with the Reorganization, DMX is not aware of any other options,
warrants, conversion privileges, contracts, understandings or other rights that
will be outstanding to purchase or otherwise acquire any authorized but unissued
shares of DMX-UK's capital stock or any other securities of DMX-UK.
3.1.5 AUTHORIZATION; VALIDITY. As of the Closing Date, DMX shall
-----------------------
have taken all corporate actions necessary for the authorization, execution,
delivery and performance of this Agreement by DMX, and the sale and delivery of
the Purchased Interests. This Agreement, when executed and delivered by DMX
(assuming the due execution and delivery by the other parties), shall constitute
the valid and binding obligation of DMX, enforceable according to its terms,
subject to laws of general application relating to bankruptcy, insolvency and
the relief of debtors, rules of law governing specific performance, injunctive
relief or other equitable remedies, and limitations of public policy.
3.1.6 OWNERSHIP. The Purchased Shares will be validly issued,
---------
fully paid and non-assessable; and except as provided in this Agreement, none of
the shares are subject to any restriction on transfer. DMX will have good and
marketable title, free and clear of any liens, to the Purchased Interests, and
will convey such title to Purchaser with the delivery of the transfer documents
provided for herein.
3.1.7 BROKERS OR FINDERS. DMX has not incurred, and will not
------------------
incur, directly or indirectly, any liability for brokers' or finders' fees,
agents' commissions or any similar charges in connection with this Agreement.
-5-
<PAGE>
3.2 REPRESENTATIONS AND WARRANTIES OF PURCHASER. Except as set forth on
-------------------------------------------
the attached Exhibit 3.2, Purchaser represents and warrants to DMX as follows:
3.2.1 INVESTMENT PURPOSE; EXPERIENCE. The Purchaser is acquiring
------------------------------
the Purchased Shares for investment for his own account, not as a nominee or
agent, and not with a view to, or for resale in connection with, any
distribution of the Purchased Shares. Purchaser understands that the Purchased
Shares have not been registered under the Securities Act or qualified pursuant
to the California Corporations Code by reason of specific exemptions therefrom
which depend upon, among other things, the bona fide nature of and the accuracy
of Purchaser's representations as expressed in this Agreement. The Purchaser is
experienced in evaluating and investing in companies such as DMX-UK and DMX-NV
and has the financial resources to bear the economic risks associated with his
investment and with the Guaranty.
3.2.2 PURCHASER'S SPECIFIC KNOWLEDGE OF THE COMPANIES. Purchaser
-----------------------------------------------
acknowledges that Purchaser has acted as the Chief Executive Officer of DMX and
has had both the primary responsibility for overseeing DMX's investment in the
Companies and the principal involvement on behalf of DMX in reorganizing the
affairs of the Companies. Purchaser acknowledges that Purchaser and his
representatives have had regular access to the books and records, facilities,
equipment, tax returns, contracts and other assets of the Companies. Purchaser
has detailed knowledge of the business and financial condition, assets, and
liabilities of the Companies. Purchaser agrees that DMX, its Board of
Directors, and its representatives have had no active involvement, except
through the activities of Purchaser, in the day-to-day affairs, business
operations and activities of the Companies. Except as specifically and
expressly provided in this Agreement, Purchaser will acquire the Purchased
Interests without any representation or warranty (including as to
merchantability or fitness for any particular purpose and any other implied
warranty) by DMX, the Board of Directors of DMX, any shareholder of DMX, or any
agent of DMX. Purchaser specifically acknowledges that the Companies are in
financial difficulty and may be insolvent, and that the Companies cannot survive
without a substantial reorganization of their affairs. None of DMX, any member
of the Board of Directors of DMX, any shareholder of DMX, or any agent of DMX
makes any representation concerning any of the following matters:
3.2.2.1 The business, financial condition, or prospects of
DMX-UK or DMX-NV;
3.2.2.2 The accuracy of the financial statements of DMX-UK or
DMX-NV (including but not limited to the effects of a
determination that DMX-UK and DMX-NV cannot be considered as
-6-
<PAGE>
going concerns), the accuracy of any other financial information
concerning DMX-UK or DMX-NV that Purchaser had obtained from DMX,
DMX-UK, or DMX-NV, or the possibility of material adverse changes
in the assets, liabilities, business, and financial condition of
DMX-UK and DMX-NV since the date of any such financial statements
or financial information;
3.2.2.3 Any transactions or commitments undertaken by either
DMX-UK or DMX-NV whether or not out of the ordinary course of
business for such Company; or
3.2.2.4 The indebtedness and liabilities of DMX-UK and DMX-NV
(including but not limited to any liability under applicable laws
related to pensions, employee benefits, or employee rights upon
termination of the business of DMX-UK or DMX-NV); the ownership
or right to possession by DMX-UK or DMX-NV of the assets and
properties necessary to the conduct of their business (including
any patents, trademarks, service marks, trade names, copyrights,
proprietary information and other rights material to its business
as now conducted); DMX-UK or DMX-NV's compliance with or
continuing rights under material contracts, leases, commitments
or other instruments; or compliance by DMX-UK or DMX-NV with
applicable law (including any applicable environmental laws).
3.2.3 BROKERS OR FINDERS. The Purchaser has not incurred, and
------------------
will not incur, directly or indirectly, any liability for brokers' or finders'
fees, agents' commissions or any similar charges in connection with this
Agreement.
3.3 SURVIVAL. Except as otherwise expressly provided, the
--------
representations, warranties, and acknowledgements made by each party pursuant to
this Article 3 shall survive the Closing.
ARTICLE 4
CONDITIONS TO CLOSING; TERMINATION
----------------------------------
4.1 CONDITIONS TO CLOSING OF THE PURCHASER. Purchaser's obligation to
--------------------------------------
purchase the Purchased Shares at the Closing and to close under this Agreement
is, at the option of the Purchaser, subject to the fulfillment on or prior to
the Closing Date of each of following conditions:
-7-
<PAGE>
4.1.1 SATISFACTORY ARRANGEMENTS WITH CREDITORS. Purchaser shall have
----------------------------------------
reached agreement in principle with the creditors of the Companies, and with any
proposed equity investors in DMX-UK or DMX-NV, to effect the Reorganization on
terms and conditions satisfactory to Purchaser, as determined in his sole and
absolute discretion.
4.1.2 REPRESENTATIONS AND WARRANTIES CORRECT. The representations
--------------------------------------
and warranties made in Article 3 of this Agreement by DMX shall be materially
correct when made, and shall be materially correct on the Closing Date with the
same force and effect as if they had been made on the Closing Date.
4.1.3 COVENANTS. All covenants, agreements and conditions
---------
contained in this Agreement to be performed by DMX on or prior to the Closing
Date shall have been performed or complied with in all material respects.
4.1.4 OPINION OF UK COUNSEL. DMX shall have received an opinion
---------------------
of its United Kingdom counsel to the effect that the execution and delivery of
the Distribution Agreement and the Release will not conflict with any obligation
of DMX to the creditors of the Companies, and will terminate any rights of the
Companies under that certain Technology License and Services Agreement dated as
of May 19, 1993, or that certain Trademark Agreement effective as of July 1,
1992.
4.2 CONDITIONS TO CLOSING OF THE DMX. The obligation of DMX to sell the
--------------------------------
Purchased Interests at the Closing and to close under this Agreement is, at the
option of DMX, subject to the fulfillment on or prior to the Closing Date of
each of following conditions:
4.2.1 REPRESENTATIONS AND WARRANTIES CORRECT. The representations
--------------------------------------
and warranties made by Purchaser in Article 3 shall be materially correct when
made, and shall be materially correct on the Closing Date with the same force
and effect as if they had been made on the Closing Date.
4.2.2 COVENANTS. All covenants, agreements and conditions
---------
contained in this Agreement to be performed by Purchaser on or prior to the
Closing Date shall have been performed or complied with in all material
respects.
4.2.3 OPINION OF UK COUNSEL. DMX shall have received an opinion
---------------------
of its United Kingdom counsel to the effect that the execution and delivery of
the Distribution Agreement and the Release will not conflict with any obligation
of DMX to the creditors of the Companies, and will terminate any rights of the
Companies under that certain Technology License and Services Agreement dated as
of May 19, 1993, or that certain Trademark Agreement effective as of July 1,
1992.
-8-
<PAGE>
4.3 CONDITIONS TO CLOSING RELATED TO SATELLITE CONTRACT. The obligations
---------------------------------------------------
of DMX to sell, and of Purchaser to purchase, the Purchased Interests at the
Closing and to close under this Agreement are subject to the fulfillment on or
prior to the Closing Date of each of following conditions:
4.3.1 UPLINK AND SATELLITE TRANSMISSION CONTRACT. DMX-UK shall
------------------------------------------
have entered into or assumed contractual arrangements with Western Tele-
Communications, Inc. ("WTCI"), pursuant to which WTCI will supply uplink
services and satellite transmission services to transmit the signal for the DMX
music service to the facilities of the Companies in Europe. Such contractual
arrangements shall be referred to as the "SATELLITE CONTRACT".
4.3.2 GUARANTY OF THE SATELLITE CONTRACT. Purchaser and WTCI
----------------------------------
shall have entered into contractual arrangements pursuant to which Purchaser
shall have guaranteed the payment obligations under the Satellite Contract for
the period beginning January 1, 1997, and ending December 31, 1997, (the
"CONTINUING GUARANTY") and pursuant to which such guaranty is secured by the
pledge of certain shares of DMX owned by Purchaser (the "PLEDGE"). The
Continuing Guaranty, the Pledge, and the associated security documents are
collectively referred to herein as the "GUARANTY".
4.3.3 RELEASE OF DMX BY WTCI. WTCI shall have released DMX from
----------------------
the European Transmission Obligations, as defined below, to the extent such
obligations relate to periods after the earlier of December 31, 1996, or the
effective date of the Satellite Contract. "EUROPEAN TRANSMISSION OBLIGATIONS"
shall mean all obligations and liabilities (including Paragraphs 1.7, 1.8, and
1.9 of Exhibit H to the Master Service Agreement) of DMX under the Master
Service Agreement between DMX and WTCI dated March 1, 1994 (the "MASTER SERVICE
AGREEMENT") related to the rights of DMX under the Master Service Agreement to
obtain transmission services (including both satellite and uplink services) to
transmit the DMX digital audio service to Europe, including the European C-Band
Transmission Services as described in Section 3 of Exhibit B to the Master
Service Agreement.
4.4 CONDITIONS TO CLOSING RELATED TO THE RESTRUCTURE OF THE COMPANIES.
-----------------------------------------------------------------
The obligations of DMX to sell, and of Purchaser to purchase, the Purchased
Interests at the Closing and to close under this Agreement are subject to the
fulfillment on or prior to the Closing Date of each of following conditions:
4.4.1 CAPITAL STRUCTURE OF DMX-UK. The constituent documents of
---------------------------
DMX-UK shall have been amended, the capital structure of DMX-UK recapitalized,
and the Existing Preferred Stock converted, all to the effect that (i) the
-9-
<PAGE>
authorized capital stock of DMX-UK shall consist of 20,000,000 (Pound)1 ordinary
shares (the "COMMON SHARES") and 100,000 preference shares (the "PREFERENCE
SHARES"); (ii) the holder of 100,000 Preference Shares have the right to convert
such shares, at the option of the holder, into whatever number of Common Shares
as will constitute 10 percent of the issued and outstanding Common Shares at the
time of the exercise by the holder of such conversion rights; (iii) DMX-UK shall
have the right to force the conversion of the Preference Shares at any time
after the completion of the raising of the Initial Capital, as described in
Section 5.2.5, below; (iv) the Preference Shares shall have the same right to
dividends or distributions by DMX-UK, and the same voting rights, as the number
of Common Shares into which such Preference Shares could be converted at the
time of such dividend, distribution, or vote; and (v) DMX shall hold 5,000,000
Common Shares (including the shares received pursuant to Section 4.4.3, below)
and 100,000 Preference Shares.
4.4.2 TRANSFER OF COMMON SHARES BY DMX-NV. DMX-NV shall have
-----------------------------------
transferred 100 Common Shares to Purchaser in exchange for that amount in cash
as the parties shall determine is equivalent in value to the 100 Common Shares.
4.4.3 TRANSFER OF NV COMMON STOCK. DMX shall have transferred all
---------------------------
of its shares of NV Common Stock to DMX-UK in exchange for that number of Common
Shares as the parties shall determine is equivalent in value to the transferred
NV Common Stock.
4.4.4 UNISSUED SHARES. All right of DMX to the Unissued Shares
---------------
shall have been extinguished.
4.5 TERMINATION. If the Closing does not occur on or before 5:00 PM
-----------
(Pacific Standard Time) on January 31, 1996, this Agreement may be terminated at
the election of any party to this Agreement unless the Closing was prevented by
the wrongful action of that party.
4.5.1 COORDINATION WITH SUBSCRIPTION AGREEMENT. If the closing
----------------------------------------
occurs under the Subscription Agreement, then this Agreement shall terminate at
the time of that closing.
4.5.2 TERMINATION OF SUBSCRIPTION AGREEMENT. If the Closing
-------------------------------------
occurs, then the Subscription Agreement shall terminate at the time of the
Closing.
ARTICLE 5
COVENANTS
---------
5.1 AFFIRMATIVE COVENANTS OF DMX. DMX hereby covenants and agrees as
----------------------------
follows:
-10-
<PAGE>
5.1.1 RECAPITALIZATION; AMENDMENT OF CONSTITUENT DOCUMENTS; CERTAIN
-------------------------------------------------------------
TRANSFERS. DMX shall take all actions within its legal authority, and will
- ---------
cooperate with Purchaser, to effect the changes in the capital structure and
ownership of the Companies described in Sections 4.4.1, 4.4.2, 4.4.3, and 4.4.4.
Prior to the Closing DMX shall not permit DMX-NV or DMX-UK to make any other
amendment to the constituent documents of DMX-UK or DMX-NV without the consent
of Purchaser.
5.1.2 QUALIFICATION UNDER BLUE SKY LAWS. Qualification under
---------------------------------
applicable Blue Sky laws (or taking such action as may be necessary to secure an
exemption from qualification, if available) of the offer and sale of the
Purchased Shares pursuant to this Agreement, if required, will be accomplished
in a timely manner prior to or promptly following the Closing. Purchaser will
cooperate in obtaining any such qualification or exemption.
5.1.3 TRANSACTIONS WITH RELATED ENTITIES. Except for transactions
----------------------------------
explicitly contemplated by this Agreement and the Related Agreements, DMX will
not cause either DMX-UK or DMX-NV to enter into any agreement, contract, or
transaction with DMX, any shareholder of DMX, or any entity or individual
affiliated with DMX without the consent of Purchaser. Prior to the Closing DMX
shall not permit either DMX-UK or DMX-NV to enter into any material contracts
without the consent of Purchaser.
5.1.4 ACCESS. From and after the execution of this Agreement, DMX
------
shall afford to Purchaser and Purchaser's representatives reasonable access to
the personnel, properties, books, records, and contracts relating to the
Companies. Purchaser may engage in discussions with the creditors of the
Companies in order to effect an arrangement or compromise of their claims
against the Companies.
5.1.5 AMENDMENT, COMPROMISE, OR FORGIVENESS OF NOTE OR
------------------------------------------------
INDEBTEDNESS. As described above, DMX will retain a 10 percent interest in the
- ------------
Note, the Instruments, and the Indebtedness. If Purchaser shall amend,
compromise, or forgive the interests that Purchaser acquires in the Note, the
Instruments, or the Indebtedness, and if such amendment, compromise, or
forgiveness (i) occurs concurrently with the Closing, (ii) occurs pursuant to
binding contracts in effect at the time of the Closing, (iii) occurs within six
months of the Closing and is part of the Reorganization, or (iv) occurs as part
of raising the Initial Capital as described in Section 5.2.5, then DMX shall
amend, compromise, or forgive the interests that it has retained in the Note,
the Instruments, and the Indebtedness in the same manner, in a proportionate
amount, and for the same consideration, if any, in a proportionate amount.
-11-
<PAGE>
5.2 AFFIRMATIVE COVENANTS OF PURCHASER. Purchaser hereby covenants and
----------------------------------
agrees as follows:
5.2.1 [*]
5.2.2 RECAPITALIZATION; AMENDMENT OF CONSTITUENT DOCUMENTS;
-----------------------------------------------------
CERTAIN TRANSFERS. Purchaser shall take all actions within his legal authority,
- -----------------
and will cooperate with DMX, to effect the changes in the capital structure and
ownership of the Companies described in Sections 4.4.1, 4.4.2, 4.4.3, and 4.4.4.
5.2.3 BOARD APPOINTMENT AND NOMINATIONS. For so long as (i) DMX
---------------------------------
holds in excess of 4 percent of the outstanding Common Shares (including the
Common Shares into which the Preference Shares may be converted) and (ii)
Purchaser has the ability to control the actions of DMX-UK, Purchaser shall
cause DMX-UK to include in the slate of nominees recommended by DMX-UK's
management to shareholders for election as directors at each annual meeting of
shareholders of DMX-UK (or any successor company), one nominee designated by
DMX. After voting Purchaser's shares to the extent necessary to elect Purchaser
or his designee as a director of DMX-UK, Purchaser shall vote Purchaser's shares
for such nominee of DMX to the extent that under applicable law and voting
procedures the shares held by DMX would be inadequate to elect such director.
In the event that any such designee of DMX shall cease to serve as a director
for any
- ---------------
* Indicates that material has been omitted and confidential treatment has
been requested therefore. All such omitted material has been filed
separately with the Commission pursuant to Rule 24b-2.
-12-
<PAGE>
reason (including removal for cause), Purchaser shall use his best efforts to
fill such vacancy with a designee of DMX.
5.2.4 CONFIDENTIALITY OF INFORMATION PROVIDED BY DMX, DMX-UK, AND
-----------------------------------------------------------
DMX-NV. Purchaser will not use or disclose any non-public information of DMX,
- ------
DMX-UK, or DMX-NV to any person for any reason or purpose, except that (i) after
the consummation of transactions contemplated by this Agreement, Purchaser may
use or disclose such information related to the Companies, (ii) Purchaser may
disclose information to the extent that disclosure of such information is
reasonably required in discussions with a creditor of DMX-UK or DMX-NV or a
prospective equity investor in DMX-UK or DMX-NV, and Purchaser obtains
commercially reasonable assurances that the creditor or prospective investor
will keep such information confidential, (iii) such information is or becomes
publicly available otherwise than by disclosure in violation of this Section
5.2.4, or (iv) such disclosure is required by law or compelled through judicial
proceedings.
5.2.5 DILUTION PROTECTION OF DMX'S INTEREST IN THE RAISING OF
-------------------------------------------------------
INITIAL CAPITAL. The parties contemplate that the Reorganization of the
- ---------------
business operations of the Companies will require that DMX-UK raise $15,000,000
US of capital, whether in the form of debt forgiveness, cash contributions,
contribution of services for equity, or contribution of property for equity, in
addition to the contributions and agreements required by this Agreement (the
"Initial Capital"). Purchaser shall arrange for DMX-UK to obtain the Initial
Capital by providing to the contributors of such funds, services, or property,
equity interests in DMX-UK (or a successor company) either through the issuance
of shares by DMX-UK or from the Purchased Interests held by Purchaser after the
Closing; provided, however, that Purchaser shall have no affirmative obligation
to provide the Initial Capital other than through the use of newly issued stock
of DMX-UK and the Purchased Interests. Such arrangements shall not create any
liability of DMX-UK to Purchaser. After DMX-UK has received the Initial
Capital, Purchaser shall have no further obligation under this Section 5.2.5 to
dispose of the Purchased Interests for the benefit of the Companies.
5.2.6 OWNERSHIP OF DMX-NV. For so long as DMX or any transferee
-------------------
of DMX shall have rights pursuant to Article 6 or Article 7, Purchaser shall
cause DMX-UK shall retain ownership of all of the outstanding stock of DMX-NV;
provided, however, that after such time as Purchaser is no longer in control of
DMX-UK, Purchaser shall be obligated under this Section 5.2.6 only to use his
best efforts to cause DMX-UK to maintain such ownership.
-13-
<PAGE>
5.3 AFFIRMATIVE COVENANTS OF THE COMPANIES. DMX-UK and DMX-NV hereby
--------------------------------------
covenant and agree as follows:
5.3.1 ACCESS AND MAINTENANCE OF RECORDS. From and after the
---------------------------------
consummation of the transactions contemplated by this Agreement, each of DMX-UK
and DMX-NV shall maintain all of its corporate records and other documents which
are in its possession for a period of at least five years, except that all
documents related to taxes based on or measured by net income shall be preserved
for ten years or any applicable limitation period, including extensions thereof,
whichever is longer. The Companies shall afford to DMX and its counsel,
accountants and other representatives reasonable access upon prior written
notice to all such books, corporate records and other documents, including, at
DMX's expense, copies of relevant documents. In lieu of retaining any such
records, the Companies may at their election deliver any such records to DMX.
5.3.2 *
5.3.3 BOARD APPOINTMENT AND NOMINATIONS. For so long as (i) DMX
---------------------------------
holds in excess of 4 percent of the outstanding Common Shares (including the
Common Shares into which the Preference Shares may be converted), DMX-UK (or any
successor company) shall include in the slate of nominees recommended by DMX-
UK's management to shareholders for election as directors at each annual meeting
of its shareholders, one nominee designated by DMX. In the event that any such
designee of DMX shall cease to serve as a director for any reason (including
removal for cause), DMX-UK or its successor shall use its best efforts to fill
such vacancy with a designee of DMX.
5.3.4 OWNERSHIP OF DMX-NV. For so long as DMX or any transferee
-------------------
of DMX shall have rights pursuant to Article 6 or Article 7, DMX-UK shall
retain ownership of all of the outstanding stock of DMX-NV.
- ---------------
* Indicates that material has been omitted and confidential treatment has
been requested therefore. All such omitted material has been filed
separately with the Commission pursuant to Rule 24b-2.
-14-
<PAGE>
ARTICLE 6
PREEMPTIVE RIGHTS
-----------------
6.1 DMX'S PREEMPTIVE RIGHTS. DMX-UK grants to DMX a right of first
-----------------------
refusal to purchase on the same terms and for the same consideration that
percentage defined below of any New Securities (as defined in Section 6.2,
below) which DMX-UK may, from time to time, propose to sell and issue (i) to
Purchaser (other than New Securities issued to Purchaser as compensation for
services that are both rendered more than three months after the Closing and not
rendered in connection with raising the Initial Capital) or any Purchaser
Affiliate (as defined in Section 6.3, below), or (ii) to other purchasers if
Purchaser or any Purchaser Affiliate has preemptive rights that attach to the
sale to such other purchaser. In such circumstances DMX shall have the right to
purchase that percentage of the New Securities equal to the number of shares of
Common Shares then held by DMX (directly or indirectly) (including the number of
shares of Common Shares issuable upon conversion of other securities of DMX-UK,
if any, held by DMX, directly or indirectly, that are convertible into Common
Shares) divided by the total number of shares of Common Shares outstanding
(including the number of shares of Common Shares issuable upon conversion of any
other outstanding securities that are convertible into Common Shares).
6.2 DEFINITION OF NEW SECURITIES. "New Securities" shall mean any
----------------------------
shares of capital stock of DMX-UK including common stock and preferred stock,
whether now authorized or not, and rights, options or warrants to purchase said
shares of common stock or preferred stock, and securities of any type whatsoever
that are, or may become, convertible into said shares of common stock or
preferred stock; provided, however, the term "New Securities" does not include
(i) preferred stock that is not convertible into any other security of DMX-UK
and bears a fixed dividend; (ii) securities offered to the public generally
pursuant to a registration statement or pursuant to Regulation A under the
Securities Act (or comparable provisions of foreign law); or (iii) Common
Shares issued in raising of the Initial Capital and issued prior to the
conversion of the Preference Shares.
6.3 DEFINITION OF PURCHASER AFFILIATE. As used in this Agreement
---------------------------------
(including Exhibit 7.1), the term "PURCHASER AFFILIATE" means Purchaser's
spouse, child, or grandchild; a trust for the benefit of Purchaser or any of
such persons; any corporation or other entity in which Purchaser, together with
any Purchaser Affiliates, owns at least 50 percent of the equity; or any
corporation or other entity that is otherwise controlled by Purchaser.
-15-
<PAGE>
6.4 TERMINATION OF PREEMPTIVE RIGHTS. The preemptive rights of DMX
--------------------------------
pursuant to Section 6, 6.1, above, shall terminate if (i) DMX holds less than 1
percent of the outstanding Common Shares (including the number of shares of
Common Shares issuable upon conversion of securities of DMX-UK, if any, held by
DMX, directly or indirectly, that are convertible into Common Shares) and (ii)
no stock of DMX-UK has been issued in violation of any rights of DMX under
Section 6, 6.1, above.
6.5 INCORPORATION IN ARTICLES OF ASSOCIATION. DMX, Purchaser, and
----------------------------------------
the Companies shall take all actions required to incorporate the rights and
obligations described in this Article 6, 6.1 into the Articles of Association of
DMX-UK to the extent necessary to make such rights and obligations enforceable
under the laws of the United Kingdom.
ARTICLE 7
REGISTRATION RIGHTS
-------------------
7.1 REGISTRATION RIGHTS OF DMX. DMX-UK shall provide DMX, and
--------------------------
Purchaser shall cause DMX-UK to provide DMX, with registration rights as
described in Exhibit 7.1; provided, however, that after such time as Purchaser
is no longer in control of DMX-UK, Purchaser shall be obligated under this
Section 7.1 only to use his best efforts to cause DMX-UK to provide such
registration rights.
7.2 REGISTRATION RIGHTS ON FOREIGN EXCHANGES. If DMX-UK registers or
----------------------------------------
lists its stock on an exchange outside the United States, then DMX-UK shall
provide to DMX registration rights equivalent to those described in Exhibit 7.1,
with such changes as are necessary to reflect differences in applicable law and
practices on such exchange.
ARTICLE 8
TAG-ALONG AND DRAG-ALONG RIGHTS
-------------------------------
8.1 DEFINITIONS. As used in this Article 8, the following terms shall
-----------
have the following respective meanings:
8.1.1 PERMITTED TRANSFER. "PERMITTED TRANSFER" shall mean (i) a
------------------
Transfer by a Shareholder to another corporation that is a member of the same
affiliated group (within the meaning of Section 1504 of the Internal Revenue
Code of 1986, as amended) as the transferring Shareholder; (ii) a Transfer by a
Shareholder without consideration to such Shareholder's spouse, child, or
grandchild, or to a trust for the benefit of such Shareholder or any of such
persons; or (iii) a Transfer by a Shareholder to a corporation or other
-16-
<PAGE>
entity in which at least 80 percent of the equity interests in that entity are
held by such Shareholder or such Shareholder's spouse, child, or grandchild;
provided, however, that in any such Transfer, the transferee must agree prior to
the Transfer to be bound by the terms of this Article 8.
8.1.2 PERMITTED TRANSFEREE. "PERMITTED TRANSFEREE" shall mean any
--------------------
person or entity to which a Permitted Transfer of Stock is made.
8.1.3 SECURITIES ACT. "SECURITIES ACT" shall mean the Securities Act
--------------
of 1933, as amended, or any similar federal statute and the rules and
regulations of the Commission thereunder, all as the same shall be in effect at
the time.
8.1.4 SELLING SHAREHOLDER. "SELLING SHAREHOLDER" shall mean
-------------------
Purchaser, or any Permitted Transferee to whom Purchaser Transfers Stock.
8.1.5 SHAREHOLDER. "SHAREHOLDER" shall mean DMX, any Permitted
-----------
Transferee to whom DMX makes a Transfer of Stock, Purchaser, or any Permitted
Transferee to whom Purchaser makes a Transfer of Stock.
8.1.6 STOCK. "STOCK" shall mean the Common Shares, the Preference
-----
Shares, or any other stock of DMX-UK.
8.1.7 TAG-ALONG SELLER. "TAG-ALONG SELLER" shall mean DMX or any
----------------
Permitted Transferee to whom DMX makes a Transfer of Stock.
8.1.8 TRANSFER. "TRANSFER" shall mean any sale, transfer,
--------
assignment, or other disposition, whether voluntary or involuntary, whether by
gift, bequest or otherwise, of Stock, and shall specifically include any
Transfer of Stock in a public offering.
8.2 TAG-ALONG RIGHTS.
----------------
8.2.1 RIGHT TO PARTICIPATE IN SALE. If a Selling Shareholder, at any
----------------------------
time or from time to time, enters into an agreement (whether oral or written) to
make a Transfer of any shares of Stock (a "TAG-ALONG SALE"), then each Tag-Along
Seller shall have the right, but not the obligation, to participate in such Tag-
Along Sale by selling up to the number of its shares of Stock (the "TAG-ALONG
ALLOTMENT") equal to the product of (A) the total number of shares of Stock
proposed to be sold by the Selling Shareholder in the Tag-Along Sale times (B) a
fraction, the numerator of which is equal to the number of shares of Stock owned
by such Tag-Along Seller immediately prior to the Tag-Along Sale and the
denominator of which is equal to the sum of the aggregate number of shares of
Stock owned by the Shareholders
-17-
<PAGE>
immediately prior to the Tag-Along Sale. Any such sales by the Tag-Along
Sellers shall be on the same terms and conditions as the proposed Tag-Along Sale
by the Selling Shareholder. For purposes of this calculation, shares of
Preference or other securities convertible into Common Shares shall be treated
as the equivalent of the number of Common Shares into which such Preference or
other securities could be converted.
8.2.2 EXCEPTIONS TO TAG-ALONG RIGHTS. The foregoing notwithstanding,
------------------------------
Section 8.2 and Section 8.4 shall not apply to any Transfer of shares of Stock
(i) to a Permitted Transferee, (ii) to a creditor of DMX-NV or DMX-UK in
satisfaction of indebtedness that arose prior to the Closing Date, (iii) that
occurs concurrently with the Closing, (iv) that occurs pursuant to a binding
contract in effect at the time of the Closing, (v) that occurs within 6 months
of the Closing in which the Companies are the principal recipients of the
consideration for such Transfer, (vi) that occurs as part of the Reorganization
or otherwise as part of an arrangement with creditors of the Companies, or (vii)
that occurs as consideration for the contribution of the Initial Capital as
described in Section 5.2.5, above.
8.2.3 PROCEDURES FOR TAG-ALONG SALE. The Selling Shareholder shall
-----------------------------
promptly provide each Tag-Along Seller with written notice (the "SALE NOTICE")
setting forth the terms and conditions of the proposed Transfer. Each Tag-Along
Seller shall provide written notice (the "TAG-ALONG NOTICE") to the Selling
Shareholder and the Company within 15 days after receiving the Sale Notice. The
Tag-Along Notice shall set forth the number of shares of Stock, if any, such
Tag-Along Seller elects to include in the Tag-Along Sale, which shall not exceed
the Tag-Along Allotment of such Tag-Along Seller as calculated pursuant to
Section 8.2.1, above. The Selling Shareholder shall determine the aggregate
number of shares to be sold by each Tag-Along Seller in the Tag-Along Sale in
accordance with the terms hereof, and the Tag-Along Notices given by such Tag-
Along Sellers shall constitute their respective binding agreements to sell such
shares on the terms and conditions applicable to such sale (including the
requirements of this Section 8.2); provided, however, that the Tag-Along Sellers
-------- -------
shall not be obligated to sell such shares in the Tag-Along Sale unless the sale
of the shares of the Selling Shareholders is consummated. If the proposed
purchaser does not purchase the shares of the Tag-Along Sellers as required
under this Section 8.2, then the Selling Shareholder shall sell the entire
amount of the shares specified in the Sale Notice, and shall implement the
proposed Tag-Along Sale by purchasing from the Tag-Along Sellers the number of
shares specified by each Shareholder in its Tag-Along Notice; provided, however,
that the Selling Shareholder shall not be obligated to purchase such shares if
the sale specified in the Sale Notice is not consummated.
-18-
<PAGE>
If a Tag-Along Notice is not received by the Selling Shareholder from any
of the Tag-Along Sellers within the 15-day period specified above, the Selling
Shareholder shall have the right to sell or otherwise transfer the Stock to the
proposed purchaser without any participation by such other Shareholders, but
only on the terms and conditions stated in the notice to such Tag-Along Sellers
and only if such sale occurs not later than 90 days following the expiration of
the 15-day period specified above.
8.3 APPLICATION OF TAG-ALONG RIGHTS TO INDIRECT TRANSFER OF STOCK.
-------------------------------------------------------------
If (i) a Selling Shareholder exchanges Stock for an equity interest in any
entity, or (ii) a Selling Shareholder sells Stock to any entity that is owned or
controlled by the Selling Shareholder and the Stock constitutes more that 25
percent of the fair market value of the assets of the entity, then the Tag-Along
Sellers' rights to participate in a Transfer shall attach to any Transfer of the
Selling Shareholder's interest in that entity. If the proposed purchaser
refuses to purchase the Stock of the Shareholders electing to exercise their
Tag-Along Sale rights pursuant to this Section 8.3, then the Selling Shareholder
shall sell the entire amount of the interest specified in the Sale Notice, and
shall implement the proposed Tag-Along Sale by purchasing from the Tag-Along
Sellers the number of shares of Stock specified by each Shareholder in its Tag-
Along Notice; provided, however, that the Selling Shareholder shall not be
obligated to purchase such shares if the sale specified in the Sale Notice is
not consummated.
8.4 DRAG-ALONG RIGHTS.
-----------------
8.4.1 RIGHT TO REQUIRE SALE. If Purchaser and all Purchaser
---------------------
Affiliates agree to sell 100 percent of the Common Shares and other stock of
DMX-UK held by them to a third person who is not affiliated with or related to
Purchaser in any manner that could allow Purchaser or a Purchaser Affiliate to
enjoy an economic benefit attributable to the sale that would not be enjoyed by
DMX (any such party, a "THIRD PARTY", and any such transaction, a "DRAG-ALONG
SALE"), then DMX or any Permitted Transferee of DMX (a "DRAG-ALONG SELLER"),
subject to Sections 8.4.1, 8.4.2, and 8.4.3 shall sell to such Third Party, upon
the demand by Purchaser, 100 percent of Common Shares and Preference held by the
Drag-Along Seller on the date of the Drag-Along Notice (as defined in Section
8.4.2, below), at the same proportionate price and on the same terms and
conditions as Purchaser has agreed with such Third Party; provided, however,
-------- -------
that the terms of such Drag-Along Sale shall provide (i) that the only
representation and warranty or covenant which any Drag-Along Seller shall be
required to make in connection with the Drag-Along Sale is a representation and
warranty with respect to its own ownership of the shares to be sold by it and
its ability to convey title thereto free and clear of liens, encumbrances or
adverse
-19-
<PAGE>
claims and (ii) that the liability of any Drag-Along Seller with respect to any
representation and warranty made in connection with the Drag-Along Sale is the
several liability of that Drag-Along Seller (and not joint with any other
person) and that such liability is limited to the amount of proceeds actually
received by that Drag-Along Seller in the Drag-Along Sale. If the Drag-Along
Sale is in the form of a merger transaction, each Drag-Along Seller shall vote
its shares in favor of such merger and shall not exercise any rights of
appraisal or dissent afforded under applicable law.
8.4.2 DRAG-ALONG NOTICE. Prior to making any Drag-Along Sale, if
-----------------
Purchaser elects to exercise the rights afforded under Section 8.4, Purchaser
shall provide each Drag-Along Seller with written notice (the "DRAG-ALONG
NOTICE") not less than twenty (20) days prior to the proposed date of the Drag-
Along Sale (the "DRAG-ALONG SALE DATE"). The Drag-Along Notice shall set forth:
(i) the name and address of the Third Party; (ii) the proposed amount and form
of consideration to be paid per share and the terms and conditions of payment
offered by the Third Party; (iii) the aggregate number of shares held of record
by Purchaser as of the date of the Drag-Along Notice; (iv) the Drag-Along Sale
Date; and (v) confirmation that the proposed Third Party has agreed to purchase
the Drag-Along Seller's Stock in accordance with the terms hereof.
8.4.3 NON-CASH CONSIDERATION. The provisions of Section 8.4 shall
----------------------
not apply unless the only consideration to be received in the Drag-Along Sale
consists of cash and securities for which an active trading market exists (it
being understood that an active trading market shall be conclusively deemed to
exist for a particular security if that security is listed on the New York Stock
Exchange, the American Stock Exchange, the NASDAQ National Market System, the
NASDAQ Small Cap Market, the UK Stock Exchange, or the Alternative Investment
Market and that the failure of the security to be so listed shall not per se
--- --
determine that an active trading market does not exist).
8.5 TERMINATION OF TAG-ALONG AND DRAG-ALONG RIGHTS. Sections 8.2,
----------------------------------------------
8.3 and 8.4 shall terminate (i) with respect to Stock held by DMX or a Permitted
Transferee of DMX that is transferred to any transferee other than a Permitted
Transferee, when that Stock is so transferred, or (ii) with respect to all the
Stock held by DMX and all Permitted Transferees of DMX, at such time after DMX-
UK's initial registered public offering as all Stock held by DMX and its
Permitted Transferees can be sold within a given three-month period without
compliance with the registration requirements of the Securities Act pursuant to
Rule 144, or another applicable exemption of equivalent effect, supported by a
written opinion of legal counsel for DMX-UK which shall be
-20-
<PAGE>
reasonably satisfactory in form and substance to legal counsel for DMX.
ARTICLE 9
MISCELLANEOUS
-------------
9.1 GOVERNING LAW. This Agreement has been negotiated and entered into
-------------
in the State of California and this Agreement shall be governed by and construed
in accordance with the laws of the State of California, without regard to the
choice of laws provisions of California or any other jurisdiction.
9.2 JURISDICTION AND VENUE. The parties irrevocably agree that any
----------------------
legal action or proceedings with respect to this Agreement may be brought in the
courts of the State of California, or in any United States District Court of
California, and, by execution and delivery of this Agreement, each party
irrevocably submits to each such jurisdiction and irrevocably waives any and all
objections which the party may have as to venue in any of the above courts.
9.3 WAIVER OF JURY TRIAL. EACH PARTY HEREBY AGREES TO WAIVE ITS RIGHTS
--------------------
TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF
THIS AGREEMENT OR ANY DEALINGS AMONG THE PARTIES RELATING TO THE SUBJECT MATTER
OF THE TRANSACTION CONTEMPLATED BY THIS AGREEMENT. The scope of this waiver is
intended to be all encompassing of any and all disputes that may be filed in any
court and that relate to the subject matter of this transaction, including
contract claims, tort claims, breach of duty claims, and all other common law
and statutory claims. Each party acknowledges that this waiver is a material
inducement to enter into a business relationship, that each other party has
already relied on this waiver in entering into this Agreement, and will continue
to rely on this waiver in any future dealings. Each party further warrants and
represents that it has reviewed this waiver with its legal counsel, and that it
knowingly and voluntarily waives its jury trial rights following consultation
with legal counsel. THIS WAIVER IS IRREVOCABLE, MEANING THAT IT MAY NOT BE
MODIFIED EITHER ORALLY OR IN WRITING, AND THE WAIVER SHALL APPLY TO ANY
SUBSEQUENT AMENDMENTS, RENEWALS, SUPPLEMENTS OR MODIFICATIONS TO THIS AGREEMENT.
In the event of litigation, this Agreement may be filed as a written consent to
a trial by the court.
9.4 SUCCESSORS AND ASSIGNS. Except as otherwise provided herein, the
----------------------
provisions hereof shall inure to the benefit of, and be binding upon, the
successors, assigns, heirs, executors and administrators of the parties hereto;
provided, however, that the right of the Purchaser to purchase the Purchased
Interests shall not be assignable without the
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<PAGE>
consent of DMX (which consent shall not be unreasonably withheld) except to an
entity in which Purchaser holds 100 percent of the common equity. Any such
assignment by Purchaser shall not relieve Purchaser of any of Purchaser's
obligations under this Agreement.
9.5 ENTIRE AGREEMENT; AMENDMENT. This Agreement, the Related
---------------------------
Agreements, the Subscription Agreement, and the other documents delivered
pursuant to such agreements constitute the full and entire understanding and
agreement between the parties with regard to the subjects hereof and thereof.
Neither this Agreement nor any term hereof may be amended, waived, discharged or
terminated other than by a written instrument signed by each of the parties.
9.6 NOTICES. Any notice, demand or request required hereunder shall be
-------
given in writing (at the addresses set forth below) by any of the following
means: (a) personal service; (b) electronic communication, whether by telex,
telegram or telecopy; or (c) registered or certified, first class mail, return
receipt requested.
(i) If to DMX:
DMX Inc.
11400 W. Olympic Boulevard
Los Angeles, CA 90064
with a copy to:
Irell & Manella
1800 Avenue of the Stars
Los Angeles, CA 90067
Attn: C. Kevin McGeehan, Esq.
and a copy to:
J.C. Sparkman
2530 South Dudley
Lakewood, Colorado
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(ii) If to Purchaser:
Jerold H. Rubinstein
700 Park Lane
Santa Barbara, CA 93108
(805) 565-3403
with a copy to:
Shapiro, Rosenfeld & Close
2029 Century Park East, Suite 2600
Los Angeles, CA 90069
Attention: Alan D. Jacobson
(iii) If to DMX-UK or DMX-NV:
Prior to the Closing, as provided in Subsection (i) of this
Section 9.6.
After the Closing,
DMX-Europe (UK) Limited
3d and 4th Floors
Europa House
Church Street
Middlesex TW7 6DA, United Kingdom
With a copy as provided in Subsection (ii) of this Section 9.6.
Such addresses may be changed by notice to the other parties given in the
same manner as above provided. Any notice, demand or request sent pursuant to
either subsection (a) or (b) hereof shall be deemed received upon such personal
service or upon dispatch by electronic means, and, if sent pursuant to
subsection (c) shall be deemed received three business days following deposit in
the mail.
9.7 DELAYS OR OMISSIONS. No delay or omission to exercise any right,
-------------------
power or remedy accruing to any party, upon any breach or default under this
Agreement, shall impair any such right, power or remedy of such holder 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 thereafter occurring; nor
shall any waiver of any single breach or default be deemed a waiver of any other
breach or default theretofore or thereafter occurring. Any waiver, permit,
consent or approval of any kind or character on the part of any party of any
breach or default under this Agreement must be in writing and shall be effective
only to the extent specifically set forth in such writing. All remedies, either
under this Agreement or by law or otherwise
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<PAGE>
afforded to any holder, shall be cumulative and not alternative.
9.8 EXPENSES. Except as expressly provided above, each of the parties
--------
shall bear its own expenses and legal fees incurred on its behalf with respect
to this Agreement and the transactions contemplated hereby.
9.9 COUNTERPARTS. This Agreement may be executed in any number of
------------
counterparts, each of which shall be enforceable against the parties actually
executing such counterparts, and all of which together shall constitute one
instrument.
9.10 SEVERABILITY. In the event that any provision of this Agreement
------------
becomes or is declared by a court of competent jurisdiction to be illegal,
unenforceable or void, this Agreement shall continue in full force and effect
without said provision; provided that no such severability shall be effective if
it materially changes the economic benefit of this Agreement to any party.
9.11 GENDER. The use of the neuter gender herein shall be deemed to
------
include the masculine and the feminine gender, if the context so requires.
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<PAGE>
9.12 NO THIRD PARTIES BENEFITTED. This Agreement is made and entered
---------------------------
into for the sole protection and benefit of the parties hereto, their successors
and assigns, and no other person or persons shall have any right of action
hereon.
9.13 ATTORNEYS' FEES AND EXPENSES. Each party hereby agrees to be
----------------------------
responsible for and to pay upon demand all costs and expenses, including,
without limitation, attorneys' fees incurred by another party in connection with
any dispute between such parties concerning this Agreement and the transactions
contemplated herein in which the latter party prevails (whether or not suit is
filed).
The foregoing agreement is hereby executed as of the date first above
written.
DMX Inc.,
a Delaware corporation
By /s/ L.A. Troxel
-----------------------------
Its Executive Vice President
-------------------------
DMX-Europe (UK) Limited,
a United Kingdom corporation
By /s/ Lance Thomas
------------------------------
Managing Director
--------------------------
DMX-Europe N.V.,
a Netherlands corporation
By /s/ Lance Thomas
-------------------------------
Its Managing Director
---------------------------
JEROLD H. RUBINSTEIN,
an individual
/s/ Jerold H. Rubinstein
---------------------------------
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EXHIBIT 2.2.4
TERMINATION CERTIFICATE
DMX Inc. ("DMX"), a Delaware corporation, and Jerold H. Rubinstein, an
individual ("RUBINSTEIN"), and Xtra Music, Ltd., a United Kingdom corporation,
agree and acknowledge that:
1. Pursuant to the terms of the Subscription and Shareholders Agreement
dated as of December 18, 1996 (the "SUBSCRIPTION AGREEMENT"), and pursuant
to the terms of the Stock Purchase and Shareholders Agreement dated as of
December 18, 1996, the Subscription Agreement is terminated.
2. Each of DMX, Rubinstein, and Xtra Music, Ltd. mutually release the
other from any obligation or liability under the Subscription Agreement.
DMX Inc.,
a Delaware corporation
By ____________________________
Its ________________________
JEROLD H. RUBINSTEIN,
an individual
______________________________
Xtra Music, Ltd.,
a United Kingdom corporation
By ___________________________
Its _______________________
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EXHIBIT 3.1
EXCEPTIONS TO REPRESENTATIONS
AND WARRANTIES OF PURCHASER
This page intentionally left blank.
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EXHIBIT 3.2
EXCEPTIONS TO REPRESENTATIONS
AND WARRANTIES OF DMX
This page intentionally left blank.
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EXHIBIT 7.1
REGISTRATION RIGHTS
1.1 CERTAIN DEFINITIONS. As used in this Exhibit 7.1, any capitalized
-------------------
term shall have the meaning assigned to such term in the Agreement, and the
following terms shall have the following respective meanings:
"COMMISSION" shall mean the Securities and Exchange Commission or any other
----------
federal agency at the time administering the Securities Act.
"EXCHANGE ACT" shall mean the Securities Exchange Act of 1934, as amended,
------------
or any similar federal statute and the rules and regulations of the Commission
thereunder, all as the same shall be in effect at the time.
"HOLDER" shall mean DMX or a transferee of registration rights under
------
Section 1.9.
"REGISTER," "REGISTERED" OR "REGISTRATION" refers to a registration
-------- ---------- ------------
effected by preparing and filing a registration statement in compliance with the
Securities Act (or any comparable provision of foreign law), and the declaration
or ordering of the effectiveness of such registration statement.
"REGISTRABLE SECURITIES" means the shares of common stock or preference
----------------------
stock of DMX-UK held by DMX after the consummation of the transactions
contemplated in the Agreement, shares issued in respect of such shares of common
stock or preference stock upon any stock split, stock dividend,
recapitalization, conversion, or similar event, which have not been sold to the
public.
"REGISTRATION EXPENSES" shall mean all expenses incurred by DMX-UK in
---------------------
complying with Sections 1.2 and 1.3, below, including without limitation all
registration, qualification and filing fees, printing expenses, escrow fees,
fees and disbursements of counsel for DMX-UK, blue sky fees and expenses, and
the expense of any special audits incident to or required by any such
registration (but excluding the compensation of regular employees of DMX-UK
which shall be paid in any event by DMX-UK).
"PURCHASER AFFILIATE" shall have the meaning described in Section 6.3 of
-------------------
the Agreement.
"SECURITIES ACT" shall mean the Securities Act of 1933, as amended, or any
--------------
similar federal statute and the rules and regulations of the Commission
thereunder, all as the same shall be in effect at the time.
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<PAGE>
"SELLING EXPENSES" shall mean all underwriting discounts and selling
----------------
commissions applicable to the sale and all fees and disbursements of counsel for
any holder.
1.2 REQUESTED REGISTRATION.
----------------------
1.2.1 PARITY WITH PURCHASER. DMX-UK shall provide Holder with the
---------------------
same demand registration rights, if any, that are provided to Purchaser or any
Purchaser Affiliate under any existing contract or any contract entered into in
the future by DMX-UK and Purchaser or any Purchaser Affiliate. DMX-UK shall
provide DMX with notice of any such registration rights.
1.2.2 MODIFICATIONS AS APPLIED TO DMX. If the registration rights
-------------------------------
that are used to define the demand registration rights of Holder call for
calculations or determine rights based on the number of shares of DMX-UK held by
Purchaser or any Purchaser Affiliate or based upon a minimum number of shares
which must be registered, such provision shall apply to Holder with the
following modification. Any such provision shall apply to Holder using as a
standard that number of shares of DMX-UK which bears the same relationship to
the total number of shares of DMX-UK owned by Holder as the number of shares
called for in that provision bears to the total number of shares of DMX-UK owned
by Purchaser or any Purchaser Affiliate.
1.3 DMX-UK REGISTRATION.
-------------------
1.3.1 NOTICE OF REGISTRATION. If, at any time or from time to time,
----------------------
DMX-UK shall determine to register any of its securities, either for its own
account or the account of a holder or holders of DMX-UK's securities, other than
(i) a registration relating solely to employee benefit plans on Form S-1 or S-8
or similar forms which may be promulgated in the future, (ii) a registration on
Form S-4 or similar form which may be promulgated in the future relating solely
to a Securities and Exchange Commission Rule 145 transaction, or (iii) a
registration undertaken pursuant to Section 1.2.1, above, DMX-UK will:
(a) promptly give to each Holder written notice thereof (which shall
include a list of the jurisdictions in which DMX-UK intends to attempt to
qualify such securities under the applicable Blue Sky or other state securities
laws); and
(b) include in such registration (and any related qualification under
Blue Sky laws or other compliance), and in any underwriting involved therein,
all Registrable Securities specified in a written request or requests made by
any Holder or Holders within 20 days after receipt by such Holder of such
written notice from DMX-UK.
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<PAGE>
1.3.2 UNDERWRITING. If the registration of which DMX-UK gives notice
------------
is for a registered public offering involving an underwriting, DMX-UK shall so
advise the Holders as a part of the written notice given pursuant to Section
1.3.1. In such event the right of any Holder to registration pursuant to Section
1.3 shall be conditioned upon such Holder's agreeing to participate in such
underwriting and in the inclusion of such Holder's Registrable Securities in the
underwriting to the extent provided herein. All Holders proposing to distribute
their securities through such underwriting shall (together with DMX-UK and the
other holders distributing their securities through such underwriting) enter
into an underwriting agreement in customary form with the underwriter or
underwriters selected for such underwriting by DMX-UK or by the other holders
whose securities are being registered. Notwithstanding any other provision of
this Section 1.3, if the underwriter determines that marketing factors require a
limitation of the number of shares to be underwritten, DMX-UK shall so advise
all Holders and the other holders distributing their securities through such
underwriting. The number of Registrable Securities and other securities that may
be included in the registration and underwriting shall be allocated among all
holders thereof on the following basis: (i) first to the securities to be
registered by DMX-UK for its own account, if any; (ii) second, to holders of
securities other than Purchaser or any Purchaser Affiliate who are exercising
contractual "demand" registration rights; (iii) then to holders of securities
(including Holders, Purchaser, and any Purchaser Affiliate) who are exercising
contractual, "piggyback" registration rights; and (iv) finally to other holders
of securities of DMX-UK. As among those holders of equal priority suffering such
cut-back, the cut-back shall be in proportion, as nearly as practicable, to the
respective amounts of securities entitled to inclusion in such registration held
by such holders at the time of filing the registration statement. If at any time
Purchaser or any Purchaser Affiliate is granted registration rights that would
provide them higher priority or more protection against a cut-back than is
described in the preceding two sentences, then DMX-UK shall afford the same
priority or protection to the Holders. If any Holder disapproves of the terms of
any such underwriting, he may elect to withdraw therefrom by written notice to
DMX-UK and the underwriter. Any securities excluded or withdrawn from such
underwriting shall be withdrawn from such registration.
1.4 EXPENSES OF REGISTRATION. All Registration Expenses incurred in
------------------------
connection with any registration, qualification or compliance pursuant to
Sections 1.3 shall be borne pro rata by those selling securities pursuant to
such registration. All Registration Expenses incurred in connection with
registration, qualification or compliance pursuant to Section 1.2.1 shall be
borne by DMX-UK and the Holders selling securities pursuant to such registration
on the same basis as
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<PAGE>
provided in the registration rights afforded to Purchaser or any Purchaser
Affiliate. All Selling Expenses relating to securities registered by the
Holders or other holders shall be borne by the Holders or other holders of such
securities pro rata on the basis of the number of shares so registered.
1.5 REGISTRATION PROCEDURES. In the case of each registration,
-----------------------
qualification or compliance effected by DMX-UK pursuant to this Exhibit 7.1,
DMX-UK will:
(a) Keep each Holder advised in writing as to the initiation of each
registration, qualification and compliance and as to the completion thereof.
(b) Keep such registration, qualification or compliance effective for
a period of 120 days or until the Holder or Holders have completed the
distribution described in the registration statement relating thereto, whichever
first occurs.
(c) Furnish such number of prospectuses and other documents incident
thereto as a Holder from time to time may reasonably request.
(d) Prepare and file with the SEC such amendments and supplements to
such registration statement and the prospectus used in connection with such
registration statement as may be necessary to comply with the provisions of the
Act with respect to the disposition of all securities covered by such
registration statement.
(e) Use its best efforts to register and qualify the securities
covered by such registration statement under such other securities or Blue Sky
laws of such jurisdictions as shall be reasonably requested by the Holders,
provided that DMX-UK shall not be required in connection therewith or as a
condition thereto to qualify to do business or to file a general consent to
service of process in any such states or jurisdictions.
(f) In the event of any underwritten public offering, enter into and
perform its obligations under an underwriting agreement, in usual and customary
form, with the managing underwriter of such offering. Each Holder participating
in such underwriting shall also enter into and perform its obligations under
such an agreement.
(g) Notify each Holder of Registrable Securities covered by such
registration statement at any time when a prospectus relating thereto is
required to be delivered under the Act of the happening of any event as a result
of which the prospectus included in such registration statement, as then in
effect, includes an untrue statement of material fact or omits to state a
material fact required to be stated therein or
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<PAGE>
necessary to make the statements therein not misleading in the light of the
circumstances then existing.
(h) At the request of any Holder requesting registration of
Registrable Securities pursuant to this Exhibit 7.1, on the date that such
Registrable Securities are delivered to the underwriters for sale in connection
with an underwritten registration pursuant to this Exhibit 7.1, (i) furnish an
opinion dated such date, of the counsel representing DMX-UK for the purposes of
such registration, addressed to the underwriters and, if such counsel is also
representing the Holders requesting registration of Registrable Securities, to
such Holders, and (ii) use its best efforts to furnish a letter dated such date,
from the independent certified public accountants of DMX-UK, addressed to the
underwriters and to the Holders.
1.6 INDEMNIFICATION.
---------------
1.6.1 INDEMNIFICATION BY DMX-UK. DMX-UK will indemnify and defend
-------------------------
each Holder, each of its officers and directors and partners, and each person
controlling such Holder within the meaning of Section 15 of the Securities Act,
with respect to which registration, qualification or compliance has been
effected pursuant to this Exhibit 7.1, and each underwriter, if any, and each
person who controls any underwriter within the meaning of Section 15 of the
Securities Act, against all expenses, claims, losses, damages and liabilities
(or actions in respect thereof), including any of the foregoing incurred in
settlement of any litigation, commenced or threatened, arising out of or based
on any untrue statement (or alleged untrue statement) of a material fact
contained in any registration statement, prospectus, offering circular or other
document, or any amendment or supplement thereto, incident to any such
registration, qualification or compliance, or based on any 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 in which
they were made, not misleading, or any violation by DMX-UK of any rule or
regulation promulgated under the Securities Act applicable to DMX-UK and
relating to action or inaction required of DMX-UK in connection with any such
registration, qualification or compliance, and will pay to each such Holder,
each of its officers and directors and partners, and each person controlling
such Holder, each such underwriter and each person who controls any such
underwriter, as incurred, any legal and any other expenses reasonably incurred
in connection with investigating, preparing or defending any such claim, loss,
damage, liability or action; provided, however, that DMX-UK will not be liable
to any such case to the extent that any such claim, loss, damage, liability or
expense arises out of or is based on any untrue statement or omission or alleged
untrue statement or omission, made in reliance upon and in conformity with
written
-5-
<PAGE>
information furnished to DMX-UK by an instrument duly executed by a Holder or
underwriter and stated to be specifically for use therein or any violation by a
Holder or underwriter of any rule of regulation promulgated under the Securities
Act applicable to such Holder or such underwriter in connection with such
registration.
1.6.2 INDEMNIFICATION BY HOLDERS. Each Holder will, if Registrable
--------------------------
Securities held by such Holder are included in the securities as to which such
registration, qualification or compliance is being effected, indemnify and
defend DMX-UK, each of its directors and officers, each underwriter, if any, of
DMX-UK's securities covered by such a registration statement, each person who
controls DMX-UK or such underwriter within the meaning of Section 15 of the
Securities Act, and each other such Holder, each of its officers and directors
and partners and each person controlling such Holder within the meaning of
Section 15 of the Securities Act, against all expenses, claims, losses, damages
and liabilities (or actions in respect thereof) including any of the foregoing
incurred in settlement of any litigation commenced or threatened, arising out of
or based on any untrue statement (or alleged untrue statement) of a material
fact contained in any such registration statement, prospectus, offering circular
or other document, or any amendment or supplement thereto, incident to any such
registration, qualification or compliance or based on any omission (or alleged
omission) to state therein a material fact required to be stated therein or
necessary to make the statements therein, in the light of the circumstances in
which they were made, not misleading, or any violation by such Holder of any
rule or regulation promulgated under the Securities Act applicable to such
Holder in connection with such registration, and will pay to DMX-UK, such other
Holders, such directors, officers, partners, persons, underwriters or control
persons, as incurred, any legal or any other expenses reasonably incurred in
connection with investigating, preparing or defending any such claim, loss,
damage, liability or action, in each case to the extent, but only to the extent,
that such expenses, claims, losses, damages or liability arise out of or are
based upon (i) such an untrue statement (or alleged untrue statement) or
omission (or alleged omission) is made in such registration statement,
prospectus, offering circular or other document or any amendment or supplement
thereto in reliance upon and in conformity with written information furnished to
DMX-UK by an instrument duly executed by such Holder and stated to be
specifically for use therein, or (ii) any such violation by such Holder of any
rule or regulation promulgated under the Securities Act applicable to such
Holder in connection with such registration; provided, however, that the
obligations of such Holder hereunder shall be limited to an amount equal to the
greater of (x) the proceeds to such Holder of Registrable Securities sold as
contemplated herein, or (y) the out-of-pocket expenses incurred by DMX-UK (not
including defense costs or amounts
-6-
<PAGE>
paid to those claiming against DMX-UK) in connection with any such registration
that cannot by completed as a result of the untrue statement or violation of
such Holder that gives rise to the indemnity obligation under this Section.
1.6.3 PROCEDURES. Each party entitled to indemnification under this
----------
Section 1.6 (the "Indemnified Party") shall give notice to the party required to
provide indemnification (the "Indemnifying Party") promptly after such
Indemnified Party has actual knowledge of any claim as to which indemnity may be
sought, and shall permit the Indemnifying Party to assume the defense of any
such claim or any litigation resulting therefrom, provided that counsel for the
Indemnifying Party, who shall conduct the defense of such claim or litigation,
shall be approved by the Indemnified Party (whose approval shall not be
unreasonably withheld), and the Indemnified Party may participate in such
defense at its own expense, and provided further that the failure of any
Indemnified Party to give notice as provided herein shall not relieve the
Indemnifying Party of its obligations under this Section 1.6 unless such failure
resulted in actual detriment to the Indemnifying Party. Notwithstanding the
above, however, if representation of one or more Indemnified Parties by the
counsel retained by the Indemnifying Party would be inappropriate due to actual
conflicting interests between such Indemnified Parties (the "Conflicting
Indemnified Parties") and any other party represented by such counsel in such
proceeding, then such Conflicting Indemnified Parties shall have the right to
retain one separate counsel, chosen by the holders of a majority of the
Registrable Securities included in the registration, at the expense of the
Indemnifying Party. No Indemnifying Party, (i) in the defense of any such claim
or litigation, shall, except with the consent of each Indemnified Party, which
consent shall not be unreasonably withheld, consent to entry of any judgment or
enter into any settlement which does not include as an unconditional term
thereof the giving by the claimant or plaintiff to such Indemnified Party of a
release from all liability in respect to such claim or litigation, or (ii) shall
be liable for amounts paid in any settlement if such settlement is effected
without the consent of the Indemnifying Party, which consent shall not be
unreasonably withheld.
1.7 INFORMATION BY HOLDER. The Holder or Holders of Registrable
---------------------
Securities included in any registration shall furnish to DMX-UK such information
regarding such Holder or Holders and the distribution proposed by such Holder or
Holders as DMX-UK may request in writing and as shall be required in connection
with any registration, qualification or compliance referred to in this Exhibit
7.1.
1.8 RULE 144 REPORTING. With a view to making available the benefits of
------------------
certain rules and regulations of the Commission which may at any time permit the
sale of the
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<PAGE>
Restricted Securities to the public without registration, after such time as a
public market exists for the common stock of DMX-UK, DMX-UK agrees to each of
the following:
1.8.1 PUBLIC INFORMATION. DMX-UK will use its best efforts to make
------------------
and keep public information available, as those terms are understood and defined
in Rule 144 under the Securities Act at all times after the effective date of
the first registration under the Securities Act filed by DMX-UK for an offering
of its securities to the general public.
1.8.2 FILINGS. DMX-UK will use its best efforts to file with the
-------
Commission in a timely manner all reports and other documents required of DMX-UK
under the Securities Act and the Exchange Act (at any time after it has become
subject to such reporting requirements).
1.8.3 WRITTEN STATEMENT OF COMPLIANCE. DMX-UK will furnish to a
-------------------------------
Holder forthwith upon request a written statement by DMX-UK as to its compliance
with the reporting requirements of said Rule 144 (at any time after 90 days
after the effective date of the first registration statement filed by DMX-UK for
an offering of its securities to the general public) and of the Securities Act
and the Exchange Act (at any time after it has become subject to such reporting
requirements), a copy of the most recent annual or quarterly report of DMX-UK,
and such other reports and documents of DMX-UK as a Holder may reasonably
request in availing itself of any rule or regulation of the Commission allowing
a Holder to sell any such securities without registration.
1.9 TRANSFER OF REGISTRATION RIGHTS. The rights to cause DMX-UK to
-------------------------------
register securities granted under Sections 1.2 and 1.3 may be assigned only to
a transferee or assignee in connection with the transfer or assignment by DMX of
not less than 25 percent of DMX's ownership of the Registrable Securities of
DMX-UK immediately after the Closing or in connection with the transfer or
assignment by the transferee of not less than all of the transferee's ownership
of the Registrable Securities of DMX-UK; provided that DMX-UK shall be entitled
to notice of any such transfer of registration rights within thirty (30) days of
the date such transfer is effected. No transferee, assignee or other person
purporting to exercise rights under this Exhibit 7.1 who is not a signatory to
the Agreement shall be entitled to do so unless and until such person agrees to
be bound by the terms of this Exhibit 7.1.
1.10 TERMINATION OF REGISTRATION RIGHTS. The registration rights granted
----------------------------------
pursuant to this Exhibit 7.1 shall terminate as to a Holder at such time after
DMX-UK's initial registered public offering as all Registrable Securities held
by the Holder can be sold within a given three-month period without compliance
with the registration requirements of the
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<PAGE>
Securities Act pursuant to Rule 144, supported by a written opinion of legal
counsel for DMX-UK which shall be reasonably satisfactory in form and substance
to legal counsel for such Holder.
1.11 "MARKET STAND OFF" AGREEMENT. Each Holder agrees that it shall not,
----------------------------
to the extent requested by DMX-UK and an underwriter of common or preference
stock (or other securities) of DMX-UK, sell or otherwise transfer or dispose
(other than to donees who agree to be similarly bound) of any Registrable
Securities during the one hundred and twenty (120) day period following the
effective date of a registration statement of DMX-UK filed under the Securities
Act; provided, however, that such agreement shall not apply to Registrable
Securities being registered and sold pursuant to such registration statement. A
Holder's obligations under this Section 1.11 shall terminate at such time as
any other person with registration rights (whether or not pursuant to this
Agreement) or any officer or director of DMX-UK is not bound by a similar
obligation. In order to enforce the foregoing covenant, DMX-UK may impose stop-
transfer instructions with respect to the Registrable Securities of each Holder
(and the shares or securities of every other person subject to the foregoing
restriction) until the end of such one hundred and twenty (120) day period.
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<PAGE>
EXHIBIT 2.2.2
CHANNEL DISTRIBUTION AGREEMENT
------------------------------
THIS CHANNEL DISTRIBUTION AGREEMENT (the "AGREEMENT") is made this _____
day of ______, 199_, between DMX Inc., ("DMX") a Delaware corporation having its
registered office at 11400 West Olympic Boulevard, Suite 1100, Los Angeles,
California 90064-1507, and DMX-Europe (UK) Limited, a company organized and
existing under the laws of the United Kingdom ("DMX-UK") (collectively
hereinafter referred to as the "PARTIES" and individually as a "PARTY").
WHEREAS DMX distributes various channels of digital audio programming in
the United States and other markets;
WHEREAS DMX has distributed such digital audio programming in Europe
through DMX-Europe N.V. ("DMX-NV") and its subsidiary, DMX-UK (the "COMPANIES")
pursuant to that certain Technology License and Services Agreement dated as of
May 19, 1993, and that certain Trademark Agreement effective as of July 1, 1992
(the "FORMER LICENSES");
WHEREAS, in connection with the Stock Purchase and Shareholders Agreement
dated as of December 18, 1996, (the "STOCK PURCHASE AGREEMENT"), DMX has agreed
to license such digital audio programming to DMX-UK for distribution in Europe
on the terms and conditions set forth herein, and the Former Licenses have been
terminated.
NOW, THEREFORE, for and in consideration of the mutual covenants and
conditions hereinafter set forth, the Parties agree as follows:
1. CERTAIN DEFINITIONS
As used in this Agreement, the following terms shall unless the context
otherwise requires have the following meanings:
1.1 "AFFILIATE(S)" shall mean, with respect to either party, a company
directly or indirectly controlling, controlled by or under common control with
such Party. A company shall be deemed, for the purposes of this Agreement, to
control a corporation or other entity if such company possesses, directly or
indirectly, the power to direct or cause the direction of the management and
policies of such corporation or other entity, whether through the ownership of
voting securities, by contract or otherwise.
1.2 "CHANNELS" shall mean all channels of audio programming provided by
DMX to its Customers (except for those channels which are subject to an
exclusive license from DMX to any Customer) and all Territory-Specific Channels.
<PAGE>
1.3 "COMMERCIAL ESTABLISHMENT" shall mean each and every premise
(including, without limitation, any restaurant, bar or similar social facility,
office, factory, work-place, place of business, school, university or other
educational facility, religious, government or other public facility, military
installation or facility, air, train, bus or other public transportation
facility, park, place frequented by the public, hotel, motel, club or similar
hospitality facility or medical facility), whether or not business is conducted
at such premises, except for premises which are Private Residences, it being
understood that in the case of a shopping center or other multiple-business
facility, each separate business occupying a distinct space within such facility
shall be deemed to constitute a separate Commercial Establishment.
1.4 "CONFIDENTIAL INFORMATION" shall mean financial, marketing,
Subscriber, engineering, satellite, broadcast and other technical or
transmission data, software, computer and systems management, programming,
licensing, and any other information relating to the conduct of the business of
either Party, and not generally available to the public, in any form whatsoever.
1.5 "CONTENT SUPERVISION AUTHORITIES" shall have the meaning described in
Section 2.5, below.
1.6 "CUSTOMERS" shall mean any and all third parties located outside of
the Territory who are authorized by DMX to receive the Channels.
1.7 "DELIVERY SITE" shall mean the site used from time to time by DMX as
its studio to create the signal for the Channels, which site is located as of
the date of this Agreement at Denver, Colorado, U.S.A.
1.8 "DMX MARKS" shall mean the trademarks, service marks, and trade names
and other similar property relating to DMX and/or the Channels that are
specified on Exhibit "A" attached hereto.
1.9 "ENHANCEMENTS" shall mean revisions, modifications or additions to any
or all of the Channels by DMX and made available in the ordinary course by DMX
to its Customers.
1.10 "EXPLOIT" shall mean to sell directly to customers or to license
another to sell to customers, but only if the holder of such license sells to
customers.
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1.11 "FORCE MAJEURE" shall mean any delays, pre-emptions or other
failure to perform when such delays, pre-emptions or failures are due to any
cause beyond the control of the Party whose performance is so affected,
including, without limitation, an act of God, fire, war, strike, riot, labor
dispute, natural disaster, technical failure (including the failure of all or
part of the equipment of others, including the communications satellite on which
the Channels are delivered) or any other reason beyond the control of the Party
whose performance is prevented during the period of such occurrence, including
any legal prohibition, significant, change of law or application of laws
governing performance hereunder, decree, regulation or requirement of any
governmental authority having jurisdiction.
1.12 "INCREMENTAL COSTS" shall have the meaning described in Section 5.1,
below.
1.13 "MAINTENANCE" shall mean the general updating of the formats and
contents of the Channels by DMX and made available in the ordinary course by DMX
to its Customers.
1.14 "DMX-UK SERVICE" shall mean the digital audio service provided to
Subscribers by DMX-UK, its Affiliates, or its licensees.
1.15 "PRIVATE RESIDENCE" shall mean any single dwelling unit or multiple
dwelling unit private residences, including without limitation, apartment and
condominium buildings, residential hotels, residences for military personnel or
separate unit student housing, but not including transient or temporary
residence establishments such as hotels, motels or medical care facilities.
1.16 "PROMOTIONAL MATERIALS" shall mean any marketing, promotional or
advertising materials which incorporate the DMX Marks.
1.17 "SERVICE TECHNOLOGY" shall mean the technology, that (i) is owned by,
acquired by, or licensed to DMX, (ii) DMX has the right to license as provided
herein, and (iii) is necessary for the reception, transmission or distribution
of the Channels, including, without limitation, the addressing system for cable
decoder boxes.
1.18 "SUBSCRIBER" shall mean a paying customer to whom DMX-UK, its
Affiliate, or its licensee provides, for the payment of a prescribed fee, any or
all of the Channels.
1.19 "TECHNICAL ACCESSORIES" shall mean all other portions of the signal
that transmits the Channels that may be created or made usable now or in the
future for purposes other than transmitting the Channels.
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1.20 "TERM" shall mean the term of this Agreement as set out in
Section 11.1, below.
1.21 "TERRITORY" shall mean the territory within the countries listed on
Exhibit "B", attached hereto, as such countries are constituted as of the date
of this Agreement, and such territory shall not be affected by any subsequent
alteration of the boundaries of those countries or the emergence of new
political entities within or including such territory.
1.22 "TERRITORY-SPECIFIC CHANNELS" shall mean any Channels which are
produced by DMX specifically for Use and distribution to Subscribers in the
Territory, or any part thereof.
1.23 "TRADEMARK TERM" shall mean that two-year period beginning on the
Closing Date (as defined in the Stock Purchase Agreement).
1.24 "USE" shall mean to downlink from the Delivery Satellite, receive,
decode, digitize, compress, encode, scramble, edit, substitute programming,
insert advertising in, uplink, and transmit the signal of the Channels to
Subscribers in the Territory, as permitted by the terms of this Agreement.
2. RIGHTS OF DMX-UK WITH RESPECT TO THE CHANNELS
2.1 GRANT OF LICENSE. Subject to the terms of this Agreement, DMX hereby
grants to DMX-UK and DMX-UK hereby accepts, the exclusive, non-transferable,
royalty-free license and right during the Term to market, distribute and license
the Channels to Subscribers and to Use the signal of the Channels, the Service
Technology, and the Technical Accessories in the Territory. This Agreement does
not give DMX-UK any right or license to distribute or to Use the Channels, the
Service Technology, or the Technical Accessories outside of the Territory.
2.2 FAILURE TO EXPLOIT LICENSE. DMX-UK agrees to Exploit the Channels in
substantially all of the Territory; provided, however, that DMX's only remedy
for the failure by DMX-UK to Exploit the Channels shall be to take the actions
described in this Section 2.2. If DMX-UK fails to Exploit the Channels in a
substantial portion of the Territory, and does not cure such failure to Exploit
within ninety (90) days of notice by DMX, then at the conclusion of such ninety
day period the license granted pursuant to Sections 2.1 and 2.4 shall become a
non-exclusive license and DMX shall be relieved of its obligations under Section
2.10, below. If DMX-UK fails to Exploit the Channels in any country that is a
part of the Territory, and does not cure such failure to Exploit within ninety
(90) days of notice by DMX, then at the conclusion of
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such ninety day period the license granted pursuant to Section 2.1 and 2.4 shall
become a non-exclusive license with respect to such country and DMX shall be
relieved of its obligations under Section 2.10, below, with respect to such
country. All or any part of the Territory that becomes non-exclusive pursuant
to this Section 2.2 shall be referred to as a "NON-EXCLUSIVE TERRITORY", and the
date on which that Non-Exclusive Territory becomes non-exclusive pursuant to
this Section 2.2 shall be referred to as the "NON-EXCLUSIVE DATE". If DMX does
not Exploit the Channels within a Non-Exclusive Territory within 180 days of the
Non-Exclusive Date, and if DMX-UK does Exploit the Channels within that Non-
Exclusive Territory within 180 days of the Non-Exclusive Date, then the license
granted pursuant to Sections 2.1 and 2.4 shall again become an exclusive license
for that Non-Exclusive Territory and the rights of DMX-UK under Section 2.10,
below, with respect to that Non-Exclusive Territory shall be restored.
2.3 SUBLICENSE. During the Term DMX-UK shall be entitled to sublicense
third parties to redistribute the Channels in the Territory, provided that such
sublicensing does not entitle such sublicensee to do any act or thing which if
done by DMX-UK would be a breach of the terms of this Agreement.
2.4 TECHNICAL ACCESSORIES. During the Term and subject to the other
restrictions described in this Agreement, DMX-UK shall have the exclusive right
to Use in the Territory any Technical Accessories included within the signal of
the Channels for any lawful purpose, including, but not limited to close
captioning, games, sweepstakes, contests, advertising and promotions. DMX-UK
shall obtain any license or authorization required under applicable law for such
use, and shall not use the Technical Accessories in a jurisdiction in any manner
which is not lawful in that jurisdiction. If DMX-UK determines in its sole
discretion not to use any part of the Technical Accessories, DMX-UK may license
such Technical Accessories to DMX or to another third party for any lawful
purpose.
2.5 CENSORSHIP AND PROGRAM SUBSTITUTION. DMX acknowledges and agrees that
the Channels may be subject to censorship by certain government authorities and
may be edited by them or by DMX-UK according to guidelines and directives
prescribed by such authorities ("CONTENT SUPERVISION AUTHORITIES") prior to
distribution within certain countries in the Territory. DMX-UK shall have the
right to edit programs and, with the prior approval of DMX where reasonably
possible, which approval shall not be unreasonably withheld, substitute programs
solely in order to comply with codes, practices, directives or orders from the
Content Supervision Authorities. To enable DMX-UK to meet with and comply with
any governmental programming standards and practices and other governmental and
regulatory directives, DMX-UK may retransmit
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the Channels with a delay from the time the signal is received. Except as
expressly provided in this Agreement, including this Section 2.5, DMX-UK shall
use the Channels without insertion (whether of advertising or otherwise),
deletion, or editing.
2.6 INSERTION OF LOGO AND MARK OF DMX-UK. DMX-UK shall have the right to
use its own logo, station identity mark, trade name, service mark or other
identifiers within the Channels as part of its network identity and branding
within the DMX-UK Service.
2.7 INCLUDING CHANNELS IN DMX-UK SERVICE; ADDITION OF CHANNELS. DMX-UK
shall be entitled, in its sole discretion, to include any or all of the Channels
in the DMX-UK Service. DMX-UK shall be entitled, at its sole discretion, to
create and distribute additional channels within the DMX-UK Service and within
the Territory; provided, however, that DMX shall have to right to approve
(acting reasonably) such additional channels that are distributed with the
Channels. DMX-UK may request that DMX create such additional Channels or
Territory-Specific Channels on terms and conditions to be agreed between the
Parties, or DMX-UK may create such channels itself or through the engagement of
third parties. Any such additional channels created by or on behalf of DMX-UK
shall be owned solely by DMX-UK.
2.8 COMMERCIAL ANNOUNCEMENTS. DMX-UK shall be entitled, in its sole
discretion, to include commercial announcements within the Channels distributed
to Commercial Establishments, so long as such commercial announcements relate
specifically to the Commercial Establishment to which such Channels are
distributed. Furthermore, DMX-UK shall be entitled to include in the Channels
the same types of commercial announcements and/or advertisements that DMX
includes in the Channels as provided to its Customers. Except as provided
herein, no commercial announcements will be included in any of the Channels.
2.9 RESTRICTIONS ON USE. In order to ensure the integrity of the Channels
and compliance with the restrictions that may be applicable to the underlying
programming, sound recording, music and statutory use permits, DMX-UK shall not,
and the rights granted herein shall not be interpreted to grant DMX-UK or any
other person any right to:
2.9.1 Record, make or manufacture any recordings or other
reproductions of any Channel for commercial use, other than to effect
distribution as part of the DMX-UK Service; or
2.9.2 Transmit, re-transmit or authorize the transmission or re-
transmission of any Channel outside the Territory.
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DMX-UK shall not distribute the Channels over any medium or in any manner that
does not permit DMX-UK to institute adequate controls to prevent the reception,
transmission or re-transmission of any Channel outside the Territory by any
person. Controls imposed by DMX-UK that are equivalent to the controls imposed
by DMX in the United States on the same medium to prevent unauthorized
transmission or retransmission shall be deemed to be adequate controls for
purposes of the preceding sentence. Notwithstanding anything else contained in
this Agreement, the transmission of the Channels outside the Territory solely
because a portion of the footprint of the satellite used by DMX-UK falls outside
the geographical boundaries of the Territory shall not violate DMX-UK's
obligations under this Agreement if (i) DMX-UK does not otherwise Exploit or Use
the Channels outside the Territory, and (ii) substantially all of the footprint
of the satellite used by DMX-UK falls within the Territory.
2.10 NON-COMPETITION. DMX agrees that during the Term it will not
distribute the Channels or any of them in the Territory via any medium, nor will
DMX authorize any other person to do the same. Notwithstanding the foregoing,
DMX shall be entitled to distribute video channels or music services other than
the Channels in the Territory, so long as the format of such other music
services is not substantially similar to that of the Channels.
2.11 DELETION OF CHANNEL. At any time and from time to time, DMX shall be
entitled, in its sole discretion, to delete one or more Channels from the
Channels offered to its Customers, and upon such deletion such Channel shall
cease to be available to DMX-UK. DMX may not delete a Channel pursuant to this
Section 2.11 unless, at least thirty days before the effective date of such
deletion, DMX provides to DMX-UK (i) notice of the deletion, (ii) one or more
disks inscribed with the music programming for the Channel as of the date of the
notice, and (iii) a copy of the software prepared by DMX to select the music for
such Channel; provided, however, that in order to delete a Channel, DMX shall
not be required to provide any software or other intellectual property that DMX
does not own or otherwise have right to transfer to DMX-UK. The provisions of
Section 6.3 shall apply to the use by DMX-UK of any items provided pursuant to
this Section 2.11.
2.12 ENHANCEMENTS AND MAINTENANCE. DMX shall provide Enhancements and
Maintenance to DMX-UK at the same time as DMX provides Enhancements and
Maintenance to DMX's Customers.
3. DELIVERY AND DISTRIBUTION
3.1 DELIVERY OF THE CHANNELS. DMX shall deliver to DMX-UK at the Delivery
Site digital audio signals of the Channels, to enable DMX-UK to Use the signal
in a manner and quality as contemplated by this Agreement. DMX shall provide
DMX-UK with
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any technical information in its possession that is reasonably requested by DMX-
UK for the purpose of uplinking, downlinking, receiving the Channels in the
Territory, and interfacing the signal of the Channels to the DMX-UK Service.
3.2 SATELLITE AND UPLINK ARRANGEMENTS. DMX-UK shall designate the
satellite to be used to transmit the Channels to Europe (the "DESIGNATED
SATELLITE") and shall arrange to uplink the Channels from the delivery point at
DMX's Denver studio to the Designated Satellite.
3.3 CHANGE IN DESIGNATED SATELLITE. DMX-UK shall provide written notice
to DMX of any planned permanent change in the Designated Satellite not less than
ninety (90) days prior to such change. If a temporary change in the Designated
Satellite is required, DMX and DMX-UK shall each use their reasonable efforts
(including the earliest practicable notice by DMX-UK to DMX of such events) to
avoid any interruption of or disruption in delivery of the Channels to the
Subscribers. DMX-UK shall be responsible for all costs associated with any
permanent or temporary change in the Designated Satellite, including
administrative and technical costs of aligning or setting reception equipment.
4. LICENSE OF TRADEMARKS
4.1 LICENSE TO TRADEMARKS FOR PROMOTIONAL PURPOSES. DMX hereby grants to
DMX-UK for the Trademark Term a non-exclusive, non-transferable, royalty-free
license to use the DMX Marks for the distribution, marketing and promotion of
the Channels to Subscribers and potential Subscribers within the Territory.
4.2 APPROVAL RIGHTS. DMX-UK shall not use the DMX Marks in distribution,
marketing, promotion or advertising without the prior written approval of such
use by DMX. In its sole discretion, DMX shall be entitled to provide DMX-UK
with a copy of its corporate guidelines or style guides for proper usage of the
DMX Marks, which such guidelines shall be followed by DMX-UK. In addition, DMX-
UK agrees to use the DMX Marks on materials of high quality and in a manner
which upholds the image and reputation of DMX.
4.3 PROCEDURE FOR APPROVAL. In the event that DMX-UK proposes to produce
Promotional Materials, DMX-UK shall provide samples of such proposed Promotional
Materials to DMX for its approval. Within ten (10) days of receipt of such
proposed Promotional Materials, DMX shall, in writing, either approve or object
to the use of the DMX Marks on such proposed Promotional Materials, and, in the
event of an objection, DMX shall state its reasons for such objection. In the
event that DMX does not object to the use of the DMX Marks within such ten (10)
day period, such use shall be deemed to be approved
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and the proposed Promotional Materials may be used. Upon request, DMX-UK shall
provide DMX with samples of all approved Promotional Materials as used by DMX-
UK.
4.4 CONSEQUENCES OF TERMINATION. Upon the earlier of the expiration of
the Trademark Term or the termination of this Agreement ("TRADEMARK TERMINATION
DATE"), DMX-UK shall:
(i) immediately discontinue all use of the DMX Marks or marks
confusingly similar thereto; and
(ii) change its corporate name, the corporate name of DMX-Europe (UK)
Limited, and the name of any other Affiliate to a name that does not
include the phrase "DMX", any other DMX Mark, or any mark confusingly
similar thereto.
4.5 USE OF "FORMERLY KNOWN AS DMX". For two (2) years after the earlier
of the expiration of the Trademark Term or the date on which DMX-UK stops using
the DMX Marks for the distribution, marketing and promotion of the Channels to
Subscribers and potential Subscribers within the Territory, DMX-UK shall be
entitled to refer to the Channels in its promotional materials as "formerly
known as DMX" or "formerly know as Digital Music Express", and to refer to
itself as "formerly known as DMX-Europe N.V." During the same period DMX-Europe
(UK) Limited may refer to itself as "formerly known as DMX-Europe (UK) Limited."
5. COSTS AND REPORTING REQUIREMENTS
5.1 PAYMENT OF INCREMENTAL COSTS. DMX-UK shall pay to DMX the incremental
costs incurred by DMX for the creation and delivery of the Channels to DMX-UK
("INCREMENTAL COSTS"), including without limitation, the following costs and
charges:
a. All costs of creation and delivery of the Territory-Specific Channels
made at the request of DMX-UK; and
b. All costs of modifications to the Channels, Enhancements, or
Maintenance made at the request of DMX-UK.
On a quarterly basis, DMX shall provide to DMX-UK an invoice which sets forth
the amount and nature of such Incremental Costs, and within thirty (30) days of
receipt of the invoice, DMX-UK shall pay to DMX the amount of Incremental Costs
set forth in such invoice. DMX shall have no obligation to create, deliver, or
effect any Territory-Specific Channels, Enhancements, or Maintenance requested
by DMX-UK.
5.2 INTEREST. In the event that any payments due under Section 5.1 from
DMX-UK are not paid on the due date therefor,
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there shall be added to the amount of such payment interest for the period from
the due date until payment is made, at an interest rate equal to the lesser of
10 percent per annum or the highest legal rate under applicable law.
5.3 WITHHOLDING AND SIMILAR CHARGES. All payments shall be made in U.S.
Dollars and shall be paid in full without set-off or counterclaim and free and
clear of and without any deduction or withholding for or on account of any
taxes, unless required to do so by law. Each party shall make application to
any relevant tax authority for double tax relief in respect of amounts payable
hereunder if the other party so requests in writing. DMX-UK shall be
responsible for collecting and paying any income, franchise, sales, use,
occupational, general service or other taxes, assessments, licenses, or other
charges assessed, levied, imposed or collected by any governmental or political
entity, or any agencies or instrumentalities thereof, with respect to its
receipt or distribution of the channels or any other activity hereunder, except
income taxes payable by DMX. Each party shall provide the other party with any
documentation reasonably requested by the other party to permit the other party
to claim a credit or deduction for foreign taxes paid or born by the other
party.
5.4 COST RECORDS AND AUDITS. DMX shall keep accurate and complete records
and accounts of all Incremental Costs. No more than twice in each one (1) year
period during the Term, and for one (1) year following expiration or termination
of this Agreement, on reasonable notice to DMX during normal business hours,
DMX-UK shall have the right to appoint an internationally recognized accounting
firm to examine and audit such Incremental Cost records. All costs of
conducting such an audit shall be borne by DMX-UK, unless it is determined that
the Incremental Costs paid to DMX for the period to which such audit relates
have been over-reported by DMX by more than five percent (5%), in which case DMX
shall pay the cost of the audit. All information obtained by DMX-UK as a result
of such audit shall be treated as Confidential Information in accordance with
the provisions of Section 7 of this Agreement.
6. OWNERSHIP OF INTELLECTUAL PROPERTY
6.1 OWNERSHIP OF CHANNELS. Except as otherwise provided herein, DMX
retains all rights, title and interest in and to the Channels and all
programming produced for or included in the Channels, including worldwide rights
for use in all media.
6.2 OWNERSHIP OF MARKS. DMX-UK hereby acknowledges the right, title and
interest of DMX and its Affiliates in and to the DMX Marks and the right of DMX
to use and license the use of the DMX Marks. DMX-UK agrees not to claim any
title to the DMX Marks or any right to use the DMX Marks except as
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permitted by this Agreement. At no time shall DMX-UK adopt or use, without the
prior written consent of DMX, any variation of the DMX Marks or any work or mark
likely to be similar to, or confused with, the DMX Marks. Any and all goodwill
arising from the use by DMX-UK of the DMX Marks shall inure solely to the
benefit of DMX. As may be required by law, DMX-UK will at its expense record
this Agreement and register the DMX Marks with appropriate government
authorities in Territory, and DMX will cooperate in effecting such recordation
and registration. DMX-UK shall not assert any claim to the DMX Marks or such
goodwill, either during or after the Term of this Agreement, and DMX-UK shall
not take any action that could be detrimental to the goodwill associated with
the DMX Marks.
6.3 COPYRIGHT, MUSIC PERFORMANCE, SOUND RECORDING AND REPRODUCTION RIGHTS
AND FEES. DMX-UK shall acquire from the owners, composers, licensees and/or
music or copyright rights societies all of the intellectual property rights
necessary for the distribution of the Channels in the Territory, including
copyrights, synchronization of music contained in the Channels and non-dramatic
performing rights, mechanical, performing and author's rights in each musical
composition and sound recording contained in the Channels. DMX-UK shall also be
responsible for all royalties, fees, and other charges of any kind with respect
to such rights.
7. CONFIDENTIALITY
7.1 NON-DISCLOSURE OF CONFIDENTIAL INFORMATION. Neither DMX-UK nor DMX
shall disclose to any third party (other than its respective employees or
financial and legal advisers, in their capacity as such) any Confidential
Information concerning the other Party derived in the course of performance
hereunder, including, without limitation, any information relating to
identification of Subscribers or financial material obtained through any audit,
or any of the terms of this Agreement, except:
7.1.1 to the extent necessary to comply with law or the valid order
of a court of competent jurisdiction or a regulatory authority having
jurisdiction, in which event the Party making such disclosure shall so
notify the other Party as promptly as practicable (and, if possible, prior
to making such disclosure) and shall seek confidential treatment of such
information;
7.1.2 as part of its reporting or review procedure to its parent
company, its auditors, its attorneys and potential investors; provided,
however, that such parent company, auditors, attorneys and potential
investors agree to be bound by the provisions of the confidentiality
provisions of this Agreement;
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7.1.3 in order to enforce its rights pursuant to this Agreement;
7.1.4 as part of its obligation to make timely disclosure to public
investors in its securities; or
7.1.5 to the extent necessary to engage third parties to distribute
the Channels or manufacture equipment for distribution of the Channels in
accordance with this Agreement, provided that such third party distributors
or manufacturers agree to comply with the confidentiality provisions of
this Agreement.
8. REPRESENTATIONS AND WARRANTIES
8.1 REPRESENTATIONS OF DMX. DMX hereby represents and warrants to DMX-UK
that:
8.1.1 DMX is a corporation duly organized and validly existing under
the laws of Delaware.
8.1.2 DMX has the power and authority to enter into this Agreement
and to perform fully its obligations hereunder.
8.1.3 DMX is under no contractual or other legal obligation which
shall in any way interfere with its full, prompt and complete performance
hereunder, except to the extent that any continuing rights of the Companies
under the Former Licenses would interfere with the rights granted under
this Agreement.
8.1.4 Within the United States, neither the Channels nor any material
or programming contained therein shall libel, slander of defame any person,
or violate, infringe upon or give rise to or advance any claim with respect
to any contractual right, common law right or any other right of any party
(including, without limitation, any copyright, patent, trademark, literary
or dramatic right, music synchronization or performance right or right of
privacy or publicity) or violate any law.
8.2 REPRESENTATIONS OF DMX-UK. DMX-UK hereby represents and warrants to
DMX that:
8.2.1 DMX-UK is a corporation duly organized and validly existing
under the laws of the United Kingdom.
8.2.2 DMX-UK has the corporate power and authority to enter into this
Agreement and to perform fully its obligations hereunder.
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8.2.3 DMX-UK is under no contractual or other legal obligation which
shall in any way interfere with its full, prompt and complete performance
hereunder.
8.2.4 DMX-UK shall during the Term have valid licenses or other
authorizations granted by the appropriate governmental authorities
throughout the Territory, if required under applicable law, to distribute
the Channels in accordance with this Agreement, and will operate such
systems throughout the Term in accordance with such licenses or
authorization.
9. COMPLIANCE WITH LAWS AND LICENSES
9.1 REGULATORY COMPLIANCE. DMX-UK shall ensure that the content of the
DMX-UK Service complies in all aspects with the regulatory requirements in the
Territory or any part thereof. DMX-UK further undertakes to obtain any
requisite governmental approvals required in the Territory or any part thereof
for the distribution of the DMX-UK Service.
9.2 PIRACY. DMX-UK agrees that it will not authorize parties other than
Subscribers to receive the signal of the Channels, nor will it authorize others
to copy, take or otherwise reproduce any part of the Channels without the prior
written consent of DMX. DMX-UK further agrees to take all reasonable and
practical security measures to prevent the unauthorized or otherwise unlawful
copying, taping or distribution of the Channels by others; provided, however,
security measures that are equivalent to the security measures taken by DMX in
the United States on the same medium to prevent unauthorized or otherwise
unlawful copying, taping or distribution of the Channels by others shall be
deemed to be adequate security measures for purposes of this sentence.
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10. INDEMNIFICATION
10.1 INDEMNIFICATION. Each Party shall indemnify and hold the other Party
harmless from and against any and all claims, liabilities, costs and expenses,
including attorneys fees and costs, arising out of any breach by such Party of
any of its respective representations, warranties or covenants herein contained.
In addition, without limiting the foregoing, DMX-UK shall indemnify and hold DMX
harmless against any and all claims, liabilities, costs and expenses, including
attorneys fees and costs, arising from and in connection with (i) any non-
payment of any amounts payable in respect of copyrights, and music and sound
recording performance and reproduction rights, arising from the distribution of
the Channels in the Territory; (ii) any assertion by any third party that the
distribution, promotion, and other exploitation of the Channels, and any
programming contained therein, violate or infringe upon any rights of such third
party in the Territory, unless such third party is not a creditor (as of the
date of this Agreement), receiver or trustee of the Companies and the claims of
such third party derive from a purported grant of rights by DMX to the third
party that is inconsistent with this Agreement; or (iii) the failure of DMX-UK
to obtain or maintain proper governmental authority to distribute the Channels
in the Territory.
10.2 PROCEDURE FOR INDEMNIFICATION. The Party entitled to indemnification
hereunder (the "INDEMNIFIED PARTY") shall notify the other Party hereto (the
"INDEMNIFYING PARTY") in writing of the claim or action for which such indemnity
applies. The Indemnifying Party shall undertake the defense of any such claim or
action and permit the Indemnified Party to participate therein at the
Indemnified Party's own expense. The settlement of any such claim or action by
an Indemnified Party, without the Indemnifying Party's prior written consent,
shall release the Indemnifying Party from its obligations hereunder with respect
to such claim or action so settled. The Indemnifying Party shall not settle or
otherwise dispose of any claim without the prior written consent of the
Indemnified Party, which consent shall not be unreasonably withheld.
11. TERM AND TERMINATION
11.1 TERM. Unless terminated earlier pursuant to the provisions of this
Agreement, the Term of this Agreement shall be a period of five (5) years from
the Closing Date (as defined in the Stock Purchase Agreement).
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11.2 TERMINATION FOR BREACH. This Agreement may be terminated by a party
(the "Noticing Party") as follows:
11.2.1 thirty (30) days following written notice by the Noticing
Party to the other Party (the "Noticed Party") of any material inaccuracy
of a representation made by the Noticed Party herein or in the Stock
Purchase Agreement or of a material breach by the Noticed Party of any of
its obligations hereunder or under the Stock Purchase Agreement, if such
misrepresentation or breach is not cured within the thirty (30) day period
following such notice;
11.2.2 immediately upon written notice by the Noticing Party to the
Noticed Party if the Noticed Party has made a voluntary petition for
protection under the bankruptcy laws, or if the Noticed Party has taken any
similar action in consequence of debt;
11.2.3 thirty (30) days following written notice by the Noticing
Party to the Noticed Party if the Noticed Party has been the subject of the
filing of an involuntary petition in bankruptcy, or if any distress or
attachment is levied or any receiver is appointed in respect of the
business or a substantial part of the property or assets of the Noticed
Party, unless such petition, distress, attachment, or receiver is dismissed
within such thirty-day period; or
11.2.4 upon thirty (30) days prior written notice by the Noticing
Party to the Noticed Party if any event of Force Majeure shall continue for
a period of sixty (60) consecutive days.
The exercise of any right to termination under this Section 11.2 is not an
exclusive remedy, and the Noticing Party may in addition exercise any other
remedy available to it in law or equity.
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<PAGE>
11.3 EFFECT OF TERMINATION. The expiration or termination of this
Agreement for whatever reason shall not affect any rights of either Party which
may have accrued prior to such expiration or termination. Subject to the
foregoing, neither party shall by reason of the expiration or termination of
this Agreement be liable to the other for compensation or damage on account of
the loss of present or prospective profits on distribution or anticipated
distribution of the Channels, or expenditures, investments or commitments made
in connection therewith. Upon the expiration or termination of this Agreement,
DMX-UK shall promptly pay all outstanding and/or accrued Incremental Costs to
DMX and return to DMX, or otherwise dispose of as DMX may reasonably instruct,
all tapes and materials in relation to the Channels, programming contained
therein, advertisements or Promotional Materials, and other materials, documents
and papers provided to DMX-UK and relating to the Channels which DMX-UK may have
in its possession or under its control.
12. MISCELLANEOUS
12.1 NOTICES. Any notice in connection with this Agreement shall be
in writing and shall be delivered by air courier or by facsimile to the
addresses or facsimile numbers given below. Notice given by air courier shall
be deemed given when recorded on the records of the air courier as received by
the receiving party. Notice given by facsimile shall be deemed given upon
transmission if on a business day and during business hours in the country of
receipt, otherwise notice shall be deemed to have been given at 9:00 a.m. on the
next business day in the country of receipt.
-16-
<PAGE>
If to DMX:
DMX Inc.
11400 West Olympic Blvd., Suite 1100
Los Angeles, California 90064
If to DMX-UK:
DMX-Europe (UK) Limited
3d and 4th Floors
Europa House
Church Street
Middlesex TW7 6DA, United Kingdom
with a copy to:
Jerold H. Rubinstein
700 Park Lane
Santa Barbara, CA 93108
Either party may change its address by giving notice to the other in the manner
set forth above.
12.2 GOVERNING LAW; JURISDICTION AND VENUE. This Agreement has been
negotiated and entered into in the State of California and this Agreement shall
be governed by and construed in accordance with the laws of the State of
California, without giving effect to its conflict of laws rules. The Parties
hereby irrevocably agree that any legal action or proceedings with respect to
this Agreement may be brought in the courts of the State of California, or in
any United States District Court of California and by execution and delivery of
this Agreement, each party irrevocably submits to each such jurisdiction and
irrevocably waives any and all objections which it may have as to venue in any
of the above courts.
12.3 WAIVER OF JURY TRIAL. EACH PARTY HEREBY AGREES TO WAIVE ITS RIGHTS TO
A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF THIS
AGREEMENT OR ANY DEALINGS AMONG THE PARTIES RELATING TO THE SUBJECT MATTER OF
THE TRANSACTION CONTEMPLATED BY THIS AGREEMENT. The scope of this waiver is
intended to be all encompassing of any and all disputes that may be filed in any
court and that relate to the subject matter of this transaction, including
contract claims, tort claims, breach of duty claims, and all other common law
and statutory claims. Each Party acknowledges that this waiver is a material
inducement to enter into a business relationship, that each other Party has
already relied on this waiver in entering into this Agreement, and will continue
to rely on this waiver in any future dealings. Each Party further warrants and
represents that it has reviewed this
-17-
<PAGE>
waiver with its legal counsel, and that it knowingly and voluntarily waives its
jury trial rights following consultation with legal counsel. THIS WAIVER IS
IRREVOCABLE, MEANING THAT IT MAY NOT BE MODIFIED EITHER ORALLY OR IN WRITING,
AND THE WAIVER SHALL APPLY TO ANY SUBSEQUENT AMENDMENTS, RENEWALS, SUPPLEMENTS
OR MODIFICATIONS TO THIS AGREEMENT. In the event of litigation, this Agreement
may be filed as a written consent to a trial by the court.
12.4 ASSIGNMENT. The right and obligations of the Parties may be
assigned in whole or in part, voluntarily or by operation of law, without the
prior written consent of the other Party if such assignment is to an Affiliate
of the assigning Party. Each Party shall notify the other within seven (7) days
of any such assignment. In addition, DMX shall be entitled to assign its rights
and obligations under this Agreement in connection with a merger or acquisition
transaction (in whatever form) between DMX and a subsidiary of Tele-
Communications, Inc. Except as expressly provided, neither Party may assign or
transfer this Agreement to any third party without the consent of the other
Party, which consent shall not be unreasonably withheld.
12.5 NO PARTNERSHIP. Nothing contained herein shall be deemed to
create, and the Parties do not intend to create, any relationship of partners or
joint venturers as between DMX-UK and DMX with respect to this Agreement.
Neither DMX-UK nor DMX shall be, or shall hold itself out to be, the agent of
the other under this Agreement. No Subscriber shall be deemed to have any
privity of contract or direct contractual or other relationship with DMX by
virtue of this Agreement or DMX's delivery of the Channels to DMX-UK hereunder.
12.6 SEVERABILITY. If at any time, any provision of this Agreement
is, or becomes under any law, or is found by a court of competent jurisdiction
to be illegal, void, invalid, prohibited or unenforceable, then such provision
shall be ineffective to the extent of such illegality, voidness, invalidity,
prohibition or unenforceability and the remaining provisions of this Agreement
shall remain in full force and effect. In such event, the Parties shall
thereafter use their respective best endeavors to negotiate and agree upon a
substitute provision which is valid and enforceable and achieves to the greatest
extent the legal and commercial objectives of the prohibited provision.
12.7 CAPTIONS AND HEADINGS. The captions and headings herein are
included for convenience only and shall not be considered a part of or used to
construe this Agreement.
12.8 COSTS OF PREPARATION. Each of the Parties herein undertakes to
bear its own costs in relation to and arising from the preparation and execution
of this Agreement.
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<PAGE>
12.9 ATTORNEYS' FEES AND EXPENSES. Each Party hereby agrees to be
responsible for and to pay upon demand all costs and expenses, including,
without limitation, reasonable attorneys' fees incurred by another Party in
connection with any dispute between such parties concerning this Agreement and
the transactions contemplated herein in which the latter Party prevails (whether
or not suit is filed).
12.10 SUCCESSORS AND PERMITTED ASSIGNS. This Agreement shall be binding
upon and shall inure to the benefit of the Parties and their respective
successors, assigns and permitted assignees.
12.11 FORCE MAJEURE. Neither DMX nor DMX-UK shall be liable to the
other for any event of Force Majeure. In the event of any such delay, pre-
emption or failure due to Force Majeure, the Party whose performance is affected
shall promptly notify the other Party of the nature and anticipated length of
continuance of such Force Majeure, and during such period both Parties shall be
excused from performance.
12.12 SURVIVAL. Upon termination of this Agreement for any reason,
Sections 4.4, 6.1, 6.2, 7.1, 10.1, 10.2, 12.1, 12.2, 12.3, 12.9, and 12.12
(including any definitions that are necessary to the operation of such sections)
shall continue to remain in full force and effect.
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<PAGE>
12.13 ENTIRE AGREEMENT. This Agreement (together with all Exhibits
attached hereto, which are incorporated herein by this reference) and the Stock
Purchase Agreement (and all documents delivered pursuant thereto) constitute the
whole agreement between the Parties and it is expressly declared that no
variations hereof shall be effective unless made in writing and signed by both
Parties. All prior terms sheets and other correspondence between the parties
shall be deemed to have lapsed upon the signing of this Agreement.
IN WITNESS WHEREOF, the parties hereto have entered into this Agreement as
of the date first set forth above.
DMX Inc.
By:__________________________
Its__________________________
DMX-Europe (UK) Limited
By:__________________________
Its:_________________________
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<PAGE>
EXHIBIT A
TRADEMARKS
- ----------
. ICT
. International Cablecasting Technologies Inc.
. ICT & Design (former corporate logo)
. DMX DJ
. DMX
. Digital Music Express
. DMX & Design:
[LOGO OF DIGITAL MUSIC EXPRESS]
. DMX World Logo:
[LOGO OF DMX WORLD]
<PAGE>
EXHIBIT B
TERRITORY
1. EUROPE: Albania, Andorra, Austria, Belarus, Belgium, Bosnia and Herzegovia,
Bulgaria, Croatia, the Czech Republic, Denmark, Estonia, Finland, France,
Germany, Greece, Hungary, Iceland, Ireland, Italy, Latvia, Liechtenstein,
Lithuania, Luxembourg, Macedonia, Malta, Moldova, Monaco, Netherlands, Norway,
Poland, Portugal, Romania, Russia, San Marino, Serbia & Montenegro, Slovakia,
Slovenia, Spain, Sweden, Switzerland, Turkey, Ukraine, United Kingdom, Vatican
City, Yugoslavia, and any political entity whose borders are enclosed entirely
within the countries listed in this paragraph 1.
2. MIDDLE EAST: Bahrain, Cyprus, Egypt, Iran, Iraq, Israel, Jordan, Kuwait,
Lebanon, Oman, Palestine, Qatar, Saudi Arabia, Syria, United Arab Emirates,
Yemen, and any political entity whose borders are enclosed entirely within the
countries listed in this paragraph 2.
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<PAGE>
EXHIBIT 10.74
_______________________________________
SUBSCRIPTION AND SHAREHOLDERS AGREEMENT
DECEMBER 18, 1996
_______________________________________
<PAGE>
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
ARTICLE 1 Sale of Stock of Xtra..................................... 2
1.1 Sale of the Purchased Shares.............................. 2
ARTICLE 2 Closing Date; Delivery.................................... 2
2.1 Closing Dates............................................. 2
2.2 Delivery by Xtra.......................................... 2
2.3 Delivery by DMX........................................... 2
2.4 Delivery by Rubinstein.................................... 3
ARTICLE 3 Representations and Warranties............................ 3
3.1 Representations and Warranties of
Xtra and Rubinstein....................................... 3
3.1.1 Corporate Power................................. 3
3.1.2 Capitalization of Xtra.......................... 3
3.1.3 Capitalization of Xtra as of
the Closing Date................................ 3
3.1.4 Articles and Bylaws............................. 4
3.1.5 Authorization; Validity......................... 4
3.1.6 Ownership....................................... 4
3.1.7 Brokers or Finders.............................. 4
3.1.8 Rubinstein's Specific Knowledge
of the Companies and Business
Operations of Xtra.............................. 4
3.2 Representations and Warranties of DMX..................... 5
3.2.1 Corporate Power................................. 5
3.2.2 Authorization; Validity......................... 5
3.2.3 Investment Purpose; Experience.................. 5
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
3.2.4 Brokers or Finders............................. 6
3.3 Survival................................................. 6
ARTICLE 4 Conditions to Closing; Termination....................... 6
4.1 Conditions to Closing of Xtra............................ 6
4.1.1 Satisfactory Arrangements for
the Initiation of Xtra's
operations.................................... 6
4.1.2 Representations and Warranties
Correct........................................ 6
4.1.3 Covenants...................................... 6
4.1.4 Opinion of UK Counsel.......................... 6
4.2 Conditions to Closing of the DMX......................... 6
4.2.1 Representations................................ 7
4.2.2 Covenants...................................... 7
4.2.3 Opinion of UK Counsel.......................... 7
4.3 Conditions to Closing related to Satellite
Contract................................................. 7
4.3.1 Uplink and Satellite Transmission
Contract...................................... 7
4.3.2 Guaranty of the Satellite Contract............ 7
4.3.3 Release of DMX by WTCI........................ 7
4.4 Conditions to Closing related to the
Capital Structure of Xtra................................ 8
4.4.1 Capital Structure of Xtra...................... 8
4.4.2 Share Ownership................................ 8
4.5 Termination.............................................. 8
4.5.1 Coordination with Stock
Purchase Agreement............................. 8
4.5.2 Termination of Stock Purchase
Agreement...................................... 8
</TABLE>
-ii-
<PAGE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
ARTICLE 5 Covenants................................................ 9
5.1 Affirmative Covenants of DMX............................. 9
5.1.1 Assets of the Companies........................ 9
5.2 Affirmative Covenants of Xtra and Rubinstein............. 9
5.2.1 Recapitalization; Amendment of
Constituent Documents.......................... 9
5.2.2 Dilution Protection of DMX's Interest
in the Raising of Initial Capital.............. 9
5.2.3 Qualification under Blue Sky Laws.............. 9
5.2.4 Transactions with Related Entities............. 10
5.2.5 Access......................................... 10
5.2.6 Board Appointment and Nominations.............. 10
ARTICLE 6 Preemptive Rights........................................ 10
6.1 DMX's Preemptive Rights.................................. 10
6.2 Definition of New Securities............................. 11
6.3 Definition of Rubinstein Affiliate....................... 11
6.4 Termination of Preemptive Rights......................... 11
6.5 Incorporation in Articles of Association................. 11
ARTICLE 7 Registration Rights...................................... 12
7.1 Registration Rights of DMX............................... 12
7.2 Registration Rights on Foreign Exchanges................. 12
ARTICLE 8 Tag-Along and Drag-Along Rights.......................... 12
8.1 Definitions.............................................. 12
8.1.1 Permitted Transfer............................. 12
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
8.1.2 Permitted Transferee........................... 12
8.1.3 Securities Act................................. 12
8.1.4 Selling Shareholder............................ 13
8.1.5 Shareholder.................................... 13
8.1.6 Stock.......................................... 13
8.1.7 Tag-Along Seller............................... 13
8.1.8 Transfer....................................... 13
8.2 Tag-Along Rights......................................... 13
8.2.1 Right to Participate in Sale................... 13
8.2.2 Exceptions to Tag-Along Rights................. 13
8.2.3 Procedures for Tag-Along Sale.................. 14
8.3 Application of Tag-Along Rights to Indirect
Transfer of Stock........................................ 14
8.4 Drag-Along Rights........................................ 15
8.4.1 Right to Require Sale.......................... 15
8.4.2 Drag-Along Notice.............................. 15
8.4.3 Non-Cash Consideration......................... 16
8.5 Termination of Tag-Along and Drag-Along Rights........... 16
ARTICLE 9 Miscellaneous............................................ 16
9.1 Governing Law............................................ 16
9.2 Jurisdiction and Venue................................... 16
9.3 Waiver of Jury Trial..................................... 17
9.4 Successors and Assigns................................... 17
9.5 Entire Agreement; Amendment.............................. 17
9.6 Notices.................................................. 17
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
9.7 Delays or Omissions...................................... 18
9.8 Expenses................................................. 19
9.9 Counterparts............................................. 19
9.10 Severability............................................. 19
9.11 Gender................................................... 19
9.12 No Third Parties Benefitted.............................. 20
9.13 Attorneys' Fees and Expenses............................. 20
</TABLE>
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<PAGE>
SUBSCRIPTION AND SHAREHOLDERS AGREEMENT
This Agreement is made as of December 18, 1996 between DMX Inc. ("DMX"), a
Delaware corporation, Jerold H. Rubinstein, an individual ("RUBINSTEIN"), and
Xtra Music Limited, a corporation incorporated under the laws of England
("XTRA").
WHEREAS, DMX-Europe (UK) Limited, a United Kingdom company ("DMX-UK"), DMX-
Europe N.V., a Netherlands corporation ("DMX-NV") (collectively, the
"COMPANIES", and individually a "COMPANY") are wholly owned direct and indirect
subsidiaries of DMX;
WHEREAS, the Companies are in significant financial difficulty, and without
additional financial support will be placed into insolvency proceedings;
Rubinstein has informed the Board of Directors of DMX that in his opinion the
business operations of the Companies are viable and potentially valuable; the
Board of Directors of DMX has determined that DMX will not provide any further
financial support for the Companies;
WHEREAS, Rubinstein has agreed to use his best efforts to secure other
financing to permit the Companies to continue operations; if Rubinstein is able
to effect an agreement with the creditors and potential equity investors to
reorganize the operations of the Companies (the "REORGANIZATION"), Rubinstein
has agreed to acquire certain interests in the Companies pursuant to that
certain Stock Purchase and Shareholders Agreement of even date herewith (the
"STOCK PURCHASE AGREEMENT");
WHEREAS, if Rubinstein is unable to effect the Reorganization, then DMX and
Rubinstein intend to establish in Xtra business operations similar to certain
segments of the business previously conducted by the Companies, and Rubinstein
has organized Xtra for that purpose;
WHEREAS, Rubinstein will deliver a continuing guaranty pursuant to which
Rubinstein will agree to guarantee certain liabilities associated with the
operations of Xtra;
WHEREAS, the Board of Directors of DMX believes it is in the best interest
of DMX's shareholders to enter into this Agreement.
NOW THEREFORE, the parties agree as follows:
<PAGE>
ARTICLE 1
SALE OF STOCK OF XTRA
---------------------
1.1 SALE OF THE PURCHASED SHARES. In consideration of the various
----------------------------
agreements undertaken pursuant to and subject to the terms and conditions of
this Agreement, Xtra will sell to DMX, and DMX will buy from Xtra, at the
Closing, 100,000 shares of the Preference Shares of Xtra (as defined in Section
4.4.1, below). The shares of Preference Stock to be transferred to DMX pursuant
to this Section 1.1 shall be referred to as the "PURCHASED SHARES".
ARTICLE 2
CLOSING DATE; DELIVERY
----------------------
2.1 CLOSING DATES. The closing of the purchase and sale of the
-------------
Purchased Shares (the "CLOSING") shall be held at the offices of Irell & Manella
(i) at 11:00 a.m., on January 31, 1996; (ii) at such other time and place upon
which the parties shall agree; or (iii) if necessary to the successful
initiation of the operations of Xtra, at such earlier time as Rubinstein
designates by written notice to the other parties at least 10 business days
before the designated date of the Closing; provided, however, that all parties
will use their reasonable efforts to close as soon as possible after such notice
from Rubinstein. The date of the Closing shall be referred to in this Agreement
as the "CLOSING DATE".
2.2 DELIVERY BY XTRA. At the Closing, Xtra will deliver to DMX:
----------------
2.2.1 Documentation evidencing DMX's ownership of the Purchased
Shares, which shall be accompanied by such other documents as are
required under applicable law to effect the transfer of ownership to
DMX; and
2.2.2 an copy of the Channel Distribution Agreement, in the form
attached as Exhibit 2.2.2 (the "DISTRIBUTION AGREEMENT"), executed by
Xtra.
2.3 DELIVERY BY DMX. At the Closing, DMX shall deliver:
---------------
2.3.1 To Rubinstein, a certificate acknowledging the termination of
the Stock Purchase Agreement and the release of the parties from their
obligations under the Stock Purchase Agreement, in the form attached
as Exhibit 2.3.1 (the "TERMINATION CERTIFICATE"), executed by DMX; and
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<PAGE>
2.3.2 To Xtra, a copy of the Distribution Agreement, executed by DMX.
2.4 DELIVERY BY RUBINSTEIN. At the Closing, Rubinstein shall deliver to
----------------------
DMX:
2.4.1 A copy of the Termination Certificate, executed by Rubinstein;
and
2.4.2 A Spousal Consent, consenting to the obligations undertaken
pursuant to this Agreement and pursuant to the documents delivered by
Rubinstein pursuant to this Agreement.
ARTICLE 3
REPRESENTATIONS AND WARRANTIES
------------------------------
3.1 REPRESENTATIONS AND WARRANTIES OF XTRA AND RUBINSTEIN. Except as set
-----------------------------------------------------
forth on the attached Exhibit 3.1, Xtra and Rubinstein represent and warrant to
DMX as follows:
3.1.1 CORPORATE POWER. At the Closing Date, Xtra will have all
---------------
requisite legal and corporate power to execute and deliver this Agreement, to
sell and issue the Purchased Shares, and to carry out and perform its
obligations under the terms of this Agreement.
3.1.2 CAPITALIZATION OF XTRA AS OF THE CLOSING DATE. As of the
---------------------------------------------
Closing Date, the authorized capital stock of Xtra shall consist of 20,000,000
Common Shares of which 5,000,000 Common Shares will be issued and outstanding
and will be owned by Rubinstein, and 100,000 Preference Shares, of which no
Preference Shares will be issued and outstanding. Except as contemplated by
this Agreement, as of the Closing Date there will be no other options, warrants,
conversion privileges, contracts, understandings or other rights that will be
outstanding to purchase or otherwise acquire any authorized but unissued shares
of the Xtra's capital stock or any other securities of Xtra.
3.1.3 ARTICLES AND BYLAWS. Xtra will deliver a true and correct
-------------------
copy of its Memorandum and Articles of Association (or such other equivalent
constituent documents as exist under applicable law) to DMX.
3.1.4 AUTHORIZATION; VALIDITY. As of the Closing Date, Xtra shall
-----------------------
have taken all corporate actions necessary for the authorization, execution,
delivery and performance of this Agreement by Xtra, and the issuance, sale, and
delivery of the Purchased Shares. This Agreement, when
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<PAGE>
executed and delivered by Xtra (assuming the due execution and delivery by the
other parties), shall constitute the valid and binding obligation of Xtra,
enforceable according to its terms, subject to laws of general application
relating to bankruptcy, insolvency and the relief of debtors, rules of law
governing specific performance, injunctive relief or other equitable remedies,
and limitations of public policy.
3.1.5 OWNERSHIP. The Purchased Shares will be validly issued,
---------
fully paid and non-assessable; and except as provided in this Agreement, none of
the shares will be subject to any restriction on transfer. Xtra will convey good
and marketable title, free and clear of any liens, to the Purchased Shares, and
will convey such title to DMX with the delivery of the transfer documents
provided for herein.
3.1.6 BROKERS OR FINDERS. Xtra has not incurred, and will not
------------------
incur, directly or indirectly, any liability for brokers' or finders' fees,
agents' commissions or any similar charges in connection with this Agreement.
3.1.7 RUBINSTEIN'S SPECIFIC KNOWLEDGE OF THE COMPANIES AND
----------------------------------------------------
BUSINESS OPERATIONS OF XTRA. Rubinstein acknowledges that Rubinstein has acted
- ---------------------------
as the Chief Executive Officer of DMX and has had both the primary
responsibility for overseeing DMX's investment in the Companies and the
principal involvement on behalf of DMX in attempting to reorganize the affairs
of the Companies. Rubinstein acknowledges that he and his representatives have
had regular access to the books and records, facilities, equipment, tax returns,
contracts and other assets of Companies. Rubinstein has detailed knowledge of
the business and financial condition, assets, and liabilities of the Companies.
Rubinstein agrees that DMX, its Board of Directors, and its representatives have
had no active involvement, except through the activities of Rubinstein, in the
day-to-day affairs, business operations and activities of the Companies. Except
as specifically and expressly provided in this Agreement, none of DMX, any
member of the Board of Directors of DMX, any shareholder of DMX, or any agent of
DMX makes any representation concerning any of the following matters:
3.1.7.1 The potential or prospects of the business of the
Companies, including any portion of the business that is similar
to the business that is to be conducted by Xtra;
3.1.7.2 The accuracy of any financial information concerning the
Companies or their assets, including but not limited to the
accuracy of any information concerning the continued existence or
condition of the assets to be obtained by DMX and contributed to
Xtra pursuant to Section 5.1.1; or
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<PAGE>
3.1.7.3 Any claims that might be asserted against Rubinstein or
Xtra by the Companies, any receiver appointed to take charge of
the assets of the Companies, or any creditor of the Companies
other than DMX.
3.2 REPRESENTATIONS AND WARRANTIES OF DMX. Except as set forth on the
-------------------------------------
attached Exhibit 3.2, DMX represents and warrants to Xtra and Rubinstein as
follows:
3.2.1 CORPORATE POWER. At the Closing Date, DMX will have all
---------------
requisite legal and corporate power to execute and deliver this Agreement, to
purchase the Purchased Shares, and to carry out and perform its obligations
under the terms of this Agreement.
3.2.2 AUTHORIZATION; VALIDITY. As of the Closing Date, DMX shall
-----------------------
have taken all corporate actions necessary for the authorization, execution,
delivery and performance of this Agreement by DMX, and the purchase of the
Purchased Shares. This Agreement, when executed and delivered by DMX (assuming
the due execution and delivery by the other parties) shall constitute the valid
and binding obligation of DMX, enforceable according to its terms, subject to
laws of general application relating to bankruptcy, insolvency and the relief of
debtors, rules of law governing specific performance, injunctive relief or other
equitable remedies, and limitations of public policy.
3.2.3 INVESTMENT PURPOSE; EXPERIENCE. DMX is acquiring the
------------------------------
Purchased Shares for investment for its own account, not as a nominee or agent,
and not with a view to, or for resale in connection with, any distribution of
the Purchased Shares. DMX understands that the Purchased Shares have not been
registered under the Securities Act or qualified pursuant to the California
Corporations Code by reason of specific exemptions therefrom which depend upon,
among other things, the bona fide nature of the investment intent and the
accuracy of DMX's representations as expressed in this Agreement. DMX is
experienced in evaluating and investing in companies such as Xtra and has the
financial resources to bear the economic risks associated with its investment
and with the Guaranty.
3.2.4 BROKERS OR FINDERS. DMX has not incurred, and will not
------------------
incur, directly or indirectly, any liability for brokers' or finders' fees,
agents' commissions or any similar charges in connection with this Agreement.
3.3 SURVIVAL. Except as otherwise expressly provided, the
--------
representations, warranties, and acknowledgements made by each party pursuant to
this Article 3 shall survive the Closing.
-5-
<PAGE>
ARTICLE 4
CONDITIONS TO CLOSING; TERMINATION
----------------------------------
4.1 CONDITIONS TO CLOSING OF XTRA. Xtra's obligation to issue and
-----------------------------
sell the Purchased Shares at the Closing and to close under this Agreement is,
at the option of Xtra, subject to the fulfillment on or prior to the Closing
Date of each of following conditions:
4.1.1 SATISFACTORY ARRANGEMENTS FOR THE INITIATION OF XTRA'S
------------------------------------------------------
OPERATIONS. Xtra shall have reached agreement in principle with potential
- ----------
customers of Xtra and with any proposed equity investors in Xtra to begin
operations on a basis satisfactory to Rubinstein, as determined in his sole and
absolute discretion.
4.1.2 REPRESENTATIONS AND WARRANTIES CORRECT. The representations
--------------------------------------
and warranties made in Article 3 of this Agreement by DMX shall be materially
correct when made, and shall be materially correct on the Closing Date with the
same force and effect as if they had been made on the Closing Date.
4.1.3 COVENANTS. All covenants, agreements and conditions contained
---------
in this Agreement to be performed by DMX on or prior to the Closing Date shall
have been performed or complied with in all respects.
4.1.4 OPINION OF UK COUNSEL. DMX shall have received an opinion of
---------------------
its United Kingdom counsel to the effect that the execution and delivery of the
Distribution Agreement, and the exercise by Xtra of its rights under the
Distribution Agreement, will not conflict with any obligation of DMX to the
Companies or their creditors or any rights of the Companies under that certain
Technology License and Services Agreement dated as of May 19, 1993, or that
certain Trademark Agreement effective as of July 1, 1992.
4.2 CONDITIONS TO CLOSING OF THE DMX. The obligation of DMX to
--------------------------------
purchase the Purchased Shares at the Closing and to close under this Agreement
is, at the option of DMX, subject to the fulfillment on or prior to the Closing
Date of each of following conditions:
4.2.1 REPRESENTATIONS. The representations and warranties made by
---------------
Xtra and Rubinstein in Article 3 of this Agreement shall be materially correct
when made, and shall be materially correct on the Closing Date with the same
force and effect as if they had been made on the Closing Date.
4.2.2 COVENANTS. All covenants, agreements and conditions contained
---------
in this Agreement to be performed by Xtra or by Rubinstein on or prior to the
Closing Date shall have been performed or complied with in all respects.
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4.2.3 OPINION OF UK COUNSEL. DMX shall have received an opinion of
---------------------
its United Kingdom counsel to the effect that the execution and delivery of the
Distribution Agreement, and the exercise by Xtra of its rights under the
Distribution Agreement, will not conflict with any obligation of DMX to the
Companies or their creditors or any rights of the Companies under that certain
Technology License and Services Agreement dated as of May 19, 1993, or that
certain Trademark Agreement effective as of July 1, 1992.
4.3 CONDITIONS TO CLOSING RELATED TO SATELLITE CONTRACT. The obligations of
---------------------------------------------------
DMX to purchase, and of Xtra to sell, the Purchased Shares at the Closing and to
close under this Agreement are subject to the fulfillment on or prior to the
Closing Date of each of following conditions:
4.3.1 UPLINK AND SATELLITE TRANSMISSION CONTRACT. Xtra shall have
------------------------------------------
entered into or assumed contractual arrangements with Western Tele-
Communications, Inc. ("WTCI"), pursuant to which WTCI will supply uplink
services and satellite transmission services to transmit the signal for the DMX
music service to the facilities of Xtra in Europe. Such contractual
arrangements shall be referred to as the "SATELLITE CONTRACT".
4.3.2 GUARANTY OF THE SATELLITE CONTRACT. Rubinstein and WTCI shall
----------------------------------
have entered into contractual arrangements pursuant to which Rubinstein shall
have guaranteed the payment obligations of Xtra under the Satellite Contract for
the period beginning January 1, 1997, and ending December 31, 1997, (the
"CONTINUING GUARANTY") and pursuant to which such guaranty is secured by the
pledge of certain shares of DMX owned by Rubinstein (the "PLEDGE"). The
Continuing Guaranty, the Pledge, and the associated security documents are
collectively referred to herein as the "GUARANTY".
4.3.3 RELEASE OF DMX BY WTCI. WTCI shall have released DMX from the
----------------------
European Transmission Obligations, as defined below, to the extent such
obligations relate to periods after the earlier of December 31, 1996, or the
effective date of the Satellite Contract. "EUROPEAN TRANSMISSION OBLIGATIONS"
shall mean all obligations and liabilities (including Paragraphs 1.7, 1.8, and
1.9 of Exhibit H to the Master Service Agreement) of DMX under the Master
Service Agreement between DMX and WTCI dated March 1, 1994 (the "MASTER SERVICE
AGREEMENT") related to the rights of DMX under the Master Service Agreement to
obtain transmission services (including both satellite and uplink services) to
transmit the DMX digital audio service to Europe, including the European C-Band
Transmission Services as described in Section 3 of Exhibit B to the Master
Service Agreement.
4.4 CONDITIONS TO CLOSING RELATED TO THE CAPITAL STRUCTURE OF XTRA. The
--------------------------------------------------------------
obligations of DMX to purchase, and of
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Xtra to sell, the Purchased Shares at the Closing and to close under this
Agreement are subject to the fulfillment on or prior to the Closing Date of each
of following conditions:
4.4.1 CAPITAL STRUCTURE OF XTRA. The constituent documents of Xtra
-------------------------
shall have been amended and the capital structure of Xtra recapitalized to the
effect that (i) the authorized capital stock of Xtra shall consist of 20,000,000
1 ordinary shares (the "COMMON SHARES") and 100,000 of preference shares (the
"PREFERENCE SHARES"); (ii) the holder of 100,000 Preference Shares have the
right to convert such shares, at the option of the holder, into whatever number
of Common Shares as will constitute 10 percent of the issued and outstanding
Common Shares at the time of the exercise by the holder of such conversion
rights; (iii) Xtra shall have the right to force the conversion of the
Preference Shares at any time after the completion of the raising of the Initial
Capital, as described in Section 5.2.2, below; and (iv) the Preference Shares
shall have the same right to dividends or distributions by Xtra, and the same
voting rights, as the number of Common Shares into which such Preference Shares
could be converted at the time of such dividend, distribution, or vote.
4.4.2 SHARE OWNERSHIP. There shall be 5,000,000 Common Shares
---------------
issued, outstanding, and owned by Rubinstein, and there shall be no Preference
Shares issued or outstanding.
4.5 TERMINATION. If the Closing does not occur before 5:00 PM (Pacific
-----------
Standard Time) on January 31, 1996, this Agreement may be terminated at the
election of any party to this Agreement unless the Closing was prevented by the
wrongful action of that party.
4.5.1 COORDINATION WITH STOCK PURCHASE AGREEMENT. If the closing
------------------------------------------
occurs under the Stock Purchase Agreement, then this Agreement shall terminate
at the time of that closing.
4.5.2 TERMINATION OF STOCK PURCHASE AGREEMENT. If the Closing
---------------------------------------
occurs, then the Stock Purchase Agreement shall terminate at the time of the
Closing.
ARTICLE 5
COVENANTS
---------
5.1 AFFIRMATIVE COVENANTS OF DMX. DMX hereby covenants and agrees as
----------------------------
follows:
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5.1.1 ASSETS OF THE COMPANIES. DMX holds certain debt obligations of
-----------------------
the Companies. DMX will use its best efforts to obtain from the Companies (in
partial or complete satisfaction of the indebtedness of the Companies to DMX)
the assets of the Companies, and if any tangible assets are obtained by DMX, DMX
will promptly transfer such tangible assets to Xtra without receipt of
additional consideration.
5.2 AFFIRMATIVE COVENANTS OF XTRA AND RUBINSTEIN. Xtra and Rubinstein
--------------------------------------------
hereby covenant and agree as follows:
5.2.1 RECAPITALIZATION; AMENDMENT OF CONSTITUENT DOCUMENTS. Xtra
----------------------------------------------------
shall take all actions within its legal authority, and Rubinstein shall cause
Xtra to take such actions, to effect the changes in the capital structure of
Xtra described in Sections 4.4.1 and 4.4.2. Prior to the Closing, Xtra shall not
and Rubinstein shall not permit Xtra to make any other amendment to the
constituent documents of Xtra without the consent of DMX.
5.2.2 DILUTION PROTECTION OF DMX'S INTEREST IN THE RAISING OF INITIAL
---------------------------------------------------------------
CAPITAL. The parties contemplate that the initial arrangements for the business
- -------
operations of Xtra will require that Xtra raise $15,000,000 US of capital,
whether in the form of cash contributions, contribution of services for equity,
or contribution of property for equity, in addition to the contributions and
agreements required by this Agreement (the "INITIAL CAPITAL"). Rubinstein shall
arrange for Xtra to obtain the Initial Capital by providing the contributors of
such funds, services, or property equity interests in Xtra either through the
issuance of shares by Xtra or from the Common Shares held by Rubinstein after
the Closing; provided, however, that Rubinstein shall have no affirmative
obligation to provide the Initial Capital other than through the use of newly
issued equity interests in Xtra and his Common Shares in Xtra. Such arrangements
shall not create any liability of Xtra to Rubinstein. After Xtra has received
the Initial Capital, Rubinstein shall have no further obligation under this
Section 5.2.2 to dispose of his Common Shares for the benefit of Xtra.
5.2.3 QUALIFICATION UNDER BLUE SKY LAWS. Xtra will accomplish in a
---------------------------------
timely manner prior to or promptly following the Closing, the qualification
under applicable Blue Sky laws (or taking such action as may be necessary to
secure an exemption from qualification, if available) of the offer and sale of
the Purchased Shares pursuant to this Agreement, if required. DMX will
cooperate in obtaining any such qualification or exemption.
5.2.4 TRANSACTIONS WITH RELATED ENTITIES. Xtra will not enter into
----------------------------------
any agreement, contract, or transaction with Rubinstein or any Rubinstein
Affiliate (as defined in Section 6.3, below) except on arm's length terms.
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5.2.5 ACCESS. From and after the execution of this Agreement, Xtra
------
shall afford to DMX and DMX's representatives reasonable access to the
personnel, properties, books, records, and contracts of Xtra.
5.2.6 BOARD APPOINTMENT AND NOMINATIONS. For so long as DMX holds in
---------------------------------
excess of 4 percent of the Common Shares (including the Common Shares into which
the Preference Shares may be converted), Xtra shall (and if Rubinstein retains
the ability to control the actions of Xtra, Rubinstein shall cause Xtra) to
include in the slate of nominees recommended by Xtra's management to
shareholders for election as directors at each annual meeting of shareholders of
Xtra, one nominee designated by DMX. Rubinstein shall vote Rubinstein's shares
in Xtra for such nominee to the extent that under applicable law and voting
procedures the shares held by DMX would be inadequate to elect such director.
In the event that any such designee shall cease to serve as a director for any
reason (including removal for cause), Xtra and Rubinstein shall use their best
efforts to fill such vacancy with a designee of DMX.
ARTICLE 6
PREEMPTIVE RIGHTS
-----------------
6.1 DMX'S PREEMPTIVE RIGHTS. Xtra grants to DMX a right of first refusal to
-----------------------
purchase on the same terms and for the same consideration that percentage
defined below of any New Securities (as defined in Section 6.2, below) which
Xtra may, from time to time, propose to sell and issue (i) to Rubinstein (other
than New Securities issued to Rubinstein as compensation for services that are
both rendered more than three months after the Closing and not rendered in
connection with raising the Initial Capital) or any Rubinstein Affiliate (as
defined in Section 6.3, below), or (ii) to other purchasers if Rubinstein or any
Rubinstein Affiliate has preemptive rights that attach to the sale to such other
purchasers. In such circumstances DMX shall have the right to purchase that
percentage of the New Securities equal to the number of shares of Common Shares
then held by DMX (directly or indirectly) (including the number of shares of
Common Shares issuable upon conversion of other securities of Xtra, if any, held
by DMX, directly or indirectly, that are convertible into Common Shares) divided
by the total number of shares of Common Shares outstanding (including the number
of shares of Common Shares issuable upon conversion of any other outstanding
securities that are convertible into Common Shares).
6.2 DEFINITION OF NEW SECURITIES. "NEW SECURITIES" shall mean any shares of
----------------------------
capital stock of Xtra including Common Shares, other classes of common stock,
and preferred
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stock, whether now authorized or not, and rights, options or warrants to
purchase said shares of Common Shares, other common stock, or preferred stock,
and securities of any type whatsoever that are, or may become, convertible into
said shares of Common Shares, other common stock, or preferred stock; provided,
however, the term "New Securities" does not include (i) preferred stock that is
not convertible into any other security of Xtra and bears a fixed dividend; (ii)
securities offered to the public generally pursuant to a registration statement
or pursuant to Regulation A under the Securities Act (or comparable provisions
of foreign law)' or (iii) Common Shares issued in raising the Initial Capital
and issued prior to the conversion of the Preference Shares.
6.3 DEFINITION OF RUBINSTEIN AFFILIATE. As used in this Agreement
----------------------------------
(including Exhibit 7.1), the term "RUBINSTEIN AFFILIATE" means Rubinstein's
spouse, child, or grandchild; a trust for the benefit of Rubinstein or any of
such persons; any corporation or other entity in which Rubinstein, together with
any Rubinstein Affiliates, owns at least 50 percent of the equity; or any
corporation or other entity that is otherwise controlled by Rubinstein.
6.4 TERMINATION OF PREEMPTIVE RIGHTS. The preemptive rights of DMX
--------------------------------
pursuant to Section 6.1, above, shall terminate if (i) DMX holds less than 1
percent of the outstanding Common Shares (including the number of Common Shares
issuable upon conversion of other securities of Xtra, if any, held by DMX,
directly or indirectly, that are convertible into Common Shares) and (ii) no
stock of Xtra has been issued in violation of any rights of DMX under Section
6.1, above.
6.5 INCORPORATION IN ARTICLES OF ASSOCIATION. DMX, Rubinstein, and
----------------------------------------
Xtra shall take all actions required to incorporate the rights and obligations
described in this Article 6.1 into the Articles of Association of Xtra to the
extent necessary to make such rights and obligations enforceable under the laws
of the United Kingdom.
ARTICLE 7
REGISTRATION RIGHTS
-------------------
7.1 REGISTRATION RIGHTS OF DMX. Xtra shall provide DMX, and
--------------------------
Rubinstein shall cause Xtra to provide DMX, with registration rights as
described in Exhibit 7.1; provided, however, that after such time as Rubinstein
is no longer in control of Xtra, Rubinstein shall be obligated under this
Section 7.1 only to use his best efforts to cause Xtra to provide such
registration rights.
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<PAGE>
7.2 REGISTRATION RIGHTS ON FOREIGN EXCHANGES. If Xtra registers or lists
----------------------------------------
its stock on an exchange outside the United States, then Xtra shall provide to
DMX registration rights equivalent to those described in Exhibit 7.1, with such
changes as are necessary to reflect differences in applicable law and practices
on such exchange.
ARTICLE 8
TAG-ALONG AND DRAG-ALONG RIGHTS
-------------------------------
8.1 DEFINITIONS. As used in this Article 8, the following terms shall have
-----------
the following respective meanings:
8.1.1 PERMITTED TRANSFER. "PERMITTED TRANSFER" shall mean (i) a
------------------
Transfer by a Shareholder to another corporation that is a member of the same
affiliated group (within the meaning of Section 1504 of the Internal Revenue
Code of 1986, as amended) as the transferring Shareholder; (ii) a Transfer by a
Shareholder without consideration to such Shareholder's spouse, child, or
grandchild, or to a trust for the benefit of such Shareholder or any of such
persons; or (iii) a Transfer by a Shareholder to a corporation or other entity
in which at least 80 percent of the equity interests in that entity are held by
such Shareholder or Shareholder's spouse, child, or grandchild; provided,
however, that in any such Transfer, the transferee must agree prior to the
Transfer to be bound by the terms of this Article 8.
8.1.2 PERMITTED TRANSFEREE. "PERMITTED TRANSFEREE" shall mean any
--------------------
person or entity to which a Permitted Transfer of Stock is made.
8.1.3 SECURITIES ACT. "SECURITIES ACT" shall mean the Securities Act
--------------
of 1933, as amended, or any similar federal statute and the rules and
regulations of the Commission thereunder, all as the same shall be in effect at
the time.
8.1.4 SELLING SHAREHOLDER. "SELLING SHAREHOLDER" shall mean
-------------------
Rubinstein or any Permitted Transferee to whom Rubinstein Transfers Stock.
8.1.5 SHAREHOLDER. "SHAREHOLDER" shall mean DMX, any Permitted
-----------
Transferee to whom DMX makes a Transfer of Stock, Rubinstein, or any Permitted
Transferee to whom Rubinstein makes a Transfer of Stock.
8.1.6 STOCK. "STOCK" shall mean Common Shares, Preference Shares, or
-----
any other stock of Xtra.
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<PAGE>
8.1.7 TAG-ALONG SELLER. "TAG-ALONG SELLER" shall mean DMX or any
----------------
Permitted Transferee to whom DMX makes a Transfer of Stock.
8.1.8 TRANSFER. "TRANSFER" shall mean any sale, transfer,
--------
assignment, or other disposition, whether voluntary or involuntary, whether by
gift, bequest or otherwise, of Stock, and shall specifically include any
Transfer of Stock in a public offering.
8.2 TAG-ALONG RIGHTS.
----------------
8.2.1 RIGHT TO PARTICIPATE IN SALE. If a Selling Shareholder, at any
----------------------------
time or from time to time, enters into an agreement (whether oral or written) to
make a Transfer of any shares of Stock (a "TAG-ALONG SALE"), then each Tag-Along
Seller shall have the right, but not the obligation, to participate in such Tag-
Along Sale by selling up to the number of its shares of Stock (the "TAG-ALONG
ALLOTMENT") equal to the product of (A) the total number of shares of Stock
proposed to be sold by the Selling Shareholder in the Tag-Along Sale times (B) a
fraction, the numerator of which is equal to the number of shares of Stock owned
by such Tag-Along Seller immediately prior to the Tag-Along Sale and the
denominator of which is equal to the sum of the aggregate number of shares of
Stock owned by the Shareholders immediately prior to the Tag-Along Sale. Any
such sales by the Tag-Along Sellers shall be on the same terms and conditions as
the proposed Tag-Along Sale by the Selling Shareholder. For purposes of this
calculation, Preference Shares or shares of any other preferred stock shall be
treated as the equivalent of the number of Common Shares into which such
Preference Shares or preferred stock could be converted.
8.2.2 EXCEPTIONS TO TAG-ALONG RIGHTS. The foregoing notwithstanding,
------------------------------
Section 8.2 and Section 8.4 shall not apply to any Transfer of shares of Stock
(i) to a Permitted Transferee, (ii) that occurs as consideration for the
contribution of the Initial Capital as described in Section 5.2.2, above, or
(iii) in which Xtra is the principal recipient of the consideration for such
Transfer.
8.2.3 PROCEDURES FOR TAG-ALONG SALE. The Selling Shareholder shall
-----------------------------
promptly provide each Tag-Along Seller with written notice (the "SALE NOTICE")
setting forth the terms and conditions of the proposed Transfer. Each Tag-Along
Seller shall provide written notice (the "TAG-ALONG NOTICE") to the Selling
Shareholder and Xtra within 15 days after receiving the Sale Notice. The Tag-
Along Notice shall set forth the number of shares of Stock, if any, such Tag-
Along Seller elects to include in the Tag-Along Sale, which shall not exceed the
Tag-Along Allotment of such Tag-Along Seller as calculated pursuant to Section
8.2.1, above. The Selling Shareholder shall determine the aggregate number of
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<PAGE>
shares to be sold by each Tag-Along Seller in the Tag-Along Sale in accordance
with the terms hereof, and the Tag-Along Notices given by such Tag-Along Sellers
shall constitute their respective binding agreements to sell such shares on the
terms and conditions applicable to such sale (including the requirements of this
Section 8.2); provided, however, that the Tag-Along Sellers shall not be
-------- -------
obligated to sell such shares in the Tag-Along Sale unless the sale of the
shares of the Selling Shareholders is consummated. If the proposed purchaser
does not purchase the shares of the Tag-Along Sellers as contemplated by this
Section 8.2, then the Selling Shareholder shall sell the entire amount of the
shares specified in the Sale Notice, and shall implement the proposed Tag-Along
Sale by purchasing from the Tag-Along Sellers the number of shares specified by
each Shareholder in its Tag-Along Notice; provided, however, that the Selling
Shareholder shall not be obligated to purchase such shares if the sale specified
in the Sale Notice is not consummated.
If a Tag-Along Notice is not received by the Selling Shareholder from
any of the Tag-Along Sellers within the 15-day period specified above, the
Selling Shareholder shall have the right to sell or otherwise transfer the Stock
to the proposed purchaser without any participation by such Tag-Along Sellers,
but only on the terms and conditions stated in the notice to such Tag-Along
Sellers and only if such sale occurs not later than 90 days following the
expiration of the 15-day period specified above.
8.3 APPLICATION OF TAG-ALONG RIGHTS TO INDIRECT TRANSFER OF STOCK.
-------------------------------------------------------------
If (i) a Selling Shareholder exchanges Stock for an equity interest in any
entity, or (ii) a Selling Shareholder sells Stock to any entity that is owned or
controlled by the Selling Shareholder and the Stock constitutes more that 25
percent of the fair market value of the assets of the entity, then the Tag-Along
Sellers' rights to participate in a Transfer shall attach to any Transfer of the
Selling Shareholder's interest in that entity. If the proposed purchaser
refuses to purchase the Stock of the Shareholders electing to exercise their
Tag-Along Sale rights pursuant to this Section 8.3, then the Selling Shareholder
shall sell the entire amount of the interest specified in the Sale Notice, and
shall implement the proposed Tag-Along Sale by purchasing from the Tag-Along
Sellers the number of shares of Stock properly specified by each Tag-Along
Seller in its Tag-Along Notice; provided, however, that the Selling Shareholder
shall not be obligated to purchase such shares if the sale specified in the Sale
Notice is not consummated.
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<PAGE>
8.4 DRAG-ALONG RIGHTS.
-----------------
8.4.1 RIGHT TO REQUIRE SALE. If Rubinstein and all Rubinstein
---------------------
Affiliates agree to sell 100 percent of the Stock held by them to a third person
who is not affiliated with or related to Rubinstein in any manner that could
allow Rubinstein or a Rubinstein Affiliate to enjoy an economic benefit
attributable to the sale that would not be enjoyed by DMX (any such party, a
"THIRD PARTY", and any such transaction, a "DRAG-ALONG SALE"), then DMX or any
Permitted Transferee of DMX (a "DRAG-ALONG SELLER"), subject to Sections 8.4.1,
8.4.2, and 8.4.3, shall sell to such Third Party, upon the demand by Rubinstein,
100 percent of Common Shares and Preference Shares held by the Drag-Along Seller
on the date of the Drag-Along Notice (as defined in Sections 8.4.2, below), at
the same proportionate price and on the same terms and conditions as Rubinstein
has agreed with such Third Party; provided, however, that the terms of such
-------- -------
Drag-Along Sale shall provide (i) that the only representation and warranty or
covenant which any Drag-Along Seller shall be required to make in connection
with the Drag-Along Sale is a representation and warranty with respect to its
own ownership of the shares to be sold by it and its ability to convey title
thereto free and clear of liens, encumbrances or adverse claims and (ii) that
the liability of any Drag-Along Seller with respect to any representation and
warranty made in connection with the Drag-Along Sale is the several liability of
that Drag-Along Seller (and not joint with any other person) and that such
liability is limited to the amount of proceeds actually received by that Drag-
Along Seller in the Drag-Along Sale. If the Drag-Along Sale is in the form of a
merger transaction, each Drag-Along Seller shall vote its shares in favor of
such merger and shall not exercise any rights of appraisal or dissent afforded
under applicable law.
8.4.2 DRAG-ALONG NOTICE. Prior to making any Drag-Along Sale, if
-----------------
Rubinstein elects to exercise the rights afforded under Section 8.4, Rubinstein
shall provide each Drag-Along Seller with written notice (the "DRAG-ALONG
NOTICE") not less than twenty (20) days prior to the proposed date of the Drag-
Along Sale (the "DRAG-ALONG SALE DATE"). The Drag-Along Notice shall set forth:
(i) the name and address of the Third Party; (ii) the proposed amount and form
of consideration to be paid per share and the terms and conditions of payment
offered by the Third Party; (iii) the aggregate number of shares held of record
by Rubinstein as of the date of the Drag-Along Notice; (iv) the Drag-Along Sale
Date; and (v) confirmation that the proposed Third Party has agreed to purchase
the Drag-Along Seller's Stock in accordance with the terms hereof.
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<PAGE>
8.4.3 NON-CASH CONSIDERATION. The provisions of Section 8.4 shall
----------------------
not apply unless the only consideration to be received in the Drag-Along Sale
consists of cash or securities for which an active trading market exists (it
being understood that an active trading market shall be conclusively deemed to
exist for a particular security if that security is listed on the New York Stock
Exchange, the American Stock Exchange, the NASDAQ National Market System, the
NASDAQ Small Cap Market, the UK Stock Exchange, or the Alternative Investment
Market, and that the failure of the security to be so listed shall not per se
--- --
determine that an active trading market does not exist).
8.5 TERMINATION OF TAG-ALONG AND DRAG-ALONG RIGHTS. Sections 8.2,
----------------------------------------------
8.3 and 8.4 shall terminate (i) with respect to the Stock held by DMX or a
Permitted Transferee of DMX that is transferred to any transferee other than a
Permitted Transferee, when that Stock is so Transferred, or (ii) with respect
all the Stock held by DMX and all Permitted Transferees of DMX, at such time
after Xtra's initial registered public offering as all Stock held by DMX and its
Permitted Transferees can be sold within a given three-month period without
compliance with the registration requirements of the Securities Act pursuant to
Rule 144, or another applicable exemption of equivalent effect, supported by a
written opinion of legal counsel for Xtra which shall be reasonably satisfactory
in form and substance to legal counsel for DMX.
ARTICLE 9
MISCELLANEOUS
-------------
9.1 GOVERNING LAW. This Agreement has been negotiated and entered
-------------
into in the State of California and this Agreement shall be governed by and
construed in accordance with the laws of the State of California, without regard
to the choice of laws provisions of California or any other jurisdiction.
9.2 JURISDICTION AND VENUE. The parties irrevocably agree that any
----------------------
legal action or proceedings with respect to this Agreement may be brought in the
courts of the State of California, or in any United States District Court of
California, and, by execution and delivery of this Agreement, each party
irrevocably submits to each such jurisdiction and irrevocably waives any and all
objections which the party may have as to venue in any of the above courts.
9.3 WAIVER OF JURY TRIAL. EACH PARTY HEREBY AGREES TO WAIVE ITS
--------------------
RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT
OF THIS AGREEMENT OR ANY DEALINGS AMONG THE PARTIES RELATING TO THE SUBJECT
MATTER OF
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<PAGE>
THE TRANSACTION CONTEMPLATED BY THIS AGREEMENT. The scope of this waiver is
intended to be all encompassing of any and all disputes that may be filed in any
court and that relate to the subject matter of this transaction, including
contract claims, tort claims, breach of duty claims, and all other common law
and statutory claims. Each party acknowledges that this waiver is a material
inducement to enter into a business relationship, that each other party has
already relied on this waiver in entering into this Agreement, and will continue
to rely on this waiver in any future dealings. Each party further warrants and
represents that it has reviewed this waiver with its legal counsel, and that it
knowingly and voluntarily waives its jury trial rights following consultation
with legal counsel. THIS WAIVER IS IRREVOCABLE, MEANING THAT IT MAY NOT BE
MODIFIED EITHER ORALLY OR IN WRITING, AND THE WAIVER SHALL APPLY TO ANY
SUBSEQUENT AMENDMENTS, RENEWALS, SUPPLEMENTS OR MODIFICATIONS TO THIS AGREEMENT.
In the event of litigation, this Agreement may be filed as a written consent to
a trial by the court.
9.4 SUCCESSORS AND ASSIGNS. Except as otherwise provided herein,
----------------------
the provisions hereof shall inure to the benefit of, and be binding upon, the
successors, assigns, heirs, executors and administrators of the parties hereto.
9.5 ENTIRE AGREEMENT; AMENDMENT. This Agreement, the Guaranty, the
---------------------------
Distribution Agreement, the Stock Purchase Agreement and the other documents
delivered pursuant to such agreements constitute the full and entire
understanding and agreement between the parties with regard to the subjects
hereof and thereof. Neither this Agreement nor any term hereof may be amended,
waived, discharged or terminated other than by a written instrument signed by
each of the parties.
9.6 NOTICES. Any notice, demand or request required hereunder
-------
shall be given in writing (at the addresses set forth below) by any of the
following means: (a) personal service; (b) electronic communication, whether by
telex, telegram or telecopy; or (c) registered or certified, first class mail,
return receipt requested.
(i) If to DMX:
DMX, Inc.
11400 W. Olympic Boulevard
Los Angeles, CA 90064
with a copy to:
Irell & Manella
1800 Avenue of the Stars
Los Angeles, CA 90067
Attn: C. Kevin McGeehan, Esq.
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<PAGE>
and a copy to:
J.C. Sparkman
2530 South Dudley
Lakewood, Colorado
(ii) If to Rubinstein:
Jerold H. Rubinstein
700 Park Lane
Santa Barbara, CA 93108
(805) 565-3403
with a copy to:
Shapiro, Rosenfeld & Close
2029 Century Park East, Suite 2600
Los Angeles, CA 90069
Attention: Alan D. Jacobson, Esq.
(iii) If to Xtra:
Xtra Music, Limited
c/o Wiggin and Co.
Imperial Square
Cheltenham
Gloucestershire GL50 1YX
Attn: Timothy Osborne and Michael Turner
With a copy to Rubinstein as provided in Subsection (ii) of this
Section 9.6.
Such addresses may be changed by notice to the other parties given in the
same manner as above provided. Any notice, demand or request sent pursuant to
either subsection (a) or (b) hereof shall be deemed received upon such personal
service or upon dispatch by electronic means, and, if sent pursuant to
subsection (c) shall be deemed received three business days following deposit in
the mail.
9.7 DELAYS OR OMISSIONS. No delay or omission to exercise any right,
-------------------
power or remedy accruing to any party, upon any breach or default under this
Agreement, shall impair any such right, power or remedy of such holder 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 thereafter occurring; nor
shall any waiver of any single breach or default be deemed a waiver of any other
breach or default theretofore or thereafter occurring. Any waiver, permit,
consent or approval of any kind or character on the part of any party of any
breach or default under this Agreement must be in writing and shall be effective
only to
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the extent specifically set forth in such writing. All remedies, either under
this Agreement or by law or otherwise afforded to any holder, shall be
cumulative and not alternative.
9.8 EXPENSES. Except as expressly provided above, each of the
--------
parties shall bear its own expenses and legal fees incurred on its behalf with
respect to this Agreement and the transactions contemplated hereby.
9.9 COUNTERPARTS. This Agreement may be executed in any number of
------------
counterparts, each of which shall be enforceable against the parties actually
executing such counterparts, and all of which together shall constitute one
instrument.
9.10 SEVERABILITY. In the event that any provision of this Agreement
------------
becomes or is declared by a court of competent jurisdiction to be illegal,
unenforceable or void, this Agreement shall continue in full force and effect
without said provision; provided that no such severability shall be effective if
it materially changes the economic benefit of this Agreement to any party.
9.11 GENDER. The use of the masculine, feminine or neuter gender herein
------
shall be deemed to include any other gender, if the context so requires.
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9.12 NO THIRD PARTIES BENEFITTED. This Agreement is made and entered
---------------------------
into for the sole protection and benefit of the parties hereto, their successors
and assigns, and no other person or persons shall have any right of action
hereon.
9.13 ATTORNEYS' FEES AND EXPENSES. Each party hereby agrees to be
----------------------------
responsible for and to pay upon demand all costs and expenses, including,
without limitation, attorneys' fees incurred by another party in connection with
any dispute between such parties concerning this Agreement and the transactions
contemplated herein in which the latter party prevails (whether or not suit is
filed).
The foregoing agreement is hereby executed as of the date first above
written.
DMX Inc.,
a Delaware corporation
By /s/ L. A. Troxel
------------------------------
Its Executive Vice President
--------------------------
Xtra Music, Ltd.
a corporation incorporated under the laws
of England
By /s/ Illegible
------------------------------
Its Director
--------------------------
JEROLD H. RUBINSTEIN,
an individual
/s/ Jerold H. Rubinstein
---------------------------------
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EXHIBIT 2.2.2
CHANNEL DISTRIBUTION AGREEMENT
------------------------------
THIS CHANNEL DISTRIBUTION AGREEMENT (the "AGREEMENT") is made this _____
day of _______, 199_, between DMX Inc., ("DMX") a Delaware corporation having
its registered office at 11400 West Olympic Boulevard, Suite 1100, Los Angeles,
California 90064-1507, and Xtra Music Limited, a company incorporated under the
laws of the United Kingdom ("XTRA") (collectively hereinafter referred to as the
"PARTIES" and individually as a "PARTY").
WHEREAS DMX distributes various channels of digital audio programming in
the United States and other markets;
WHEREAS DMX formerly distributed such digital audio programming in Europe
through two subsidiaries of DMX, DMX-Europe N.V. and DMX-Europe (UK) Limited
(the "COMPANIES") pursuant to that certain Technology License and Services
Agreement dated as of May 19, 1993, and that certain Trademark Agreement
effective as of July 1, 1992 (the "FORMER LICENSES"); the Companies have been
placed in insolvency proceedings;
WHEREAS, in connection with the Subscription and Shareholders Agreement
dated as of December 18, 1996 (the "SUBSCRIPTION AGREEMENT"), DMX has agreed to
license such digital audio programming to Xtra for distribution in Europe on the
terms and conditions set forth herein.
NOW, THEREFORE, for and in consideration of the mutual covenants and
conditions hereinafter set forth, the Parties agree as follows:
1. CERTAIN DEFINITIONS
As used in this Agreement, the following terms shall have the following
meanings:
1.1 "AFFILIATE(S)" shall mean, with respect to either party, a company
directly or indirectly controlling, controlled by or under common control with
such Party. A company shall be deemed, for the purposes of this Agreement, to
control a corporation or other entity if such company possesses, directly or
indirectly, the power to direct or cause the direction of the management and
policies of such corporation or other entity, whether through the ownership of
voting securities, by contract or otherwise.
1.2 "CHANNELS" shall mean all channels of audio programming provided by
DMX to its Customers (except for those channels which are subject to an
exclusive license from DMX to any Customer) and all Territory-Specific Channels.
<PAGE>
1.3 "COMMERCIAL ESTABLISHMENT" shall mean each and every premise
(including, without limitation, any restaurant, bar or similar social facility,
office, factory, work-place, place of business, school, university or other
educational facility, religious, government or other public facility, military
installation or facility, air, train, bus or other public transportation
facility, park, place frequented by the public, hotel, motel, club or similar
hospitality facility or medical facility), whether or not business is conducted
at such premises, except for premises which are Private Residences, it being
understood that in the case of a shopping center or other multiple-business
facility, each separate business occupying a distinct space within such facility
shall be deemed to constitute a separate Commercial Establishment.
1.4 "CONFIDENTIAL INFORMATION" shall mean financial, marketing,
Subscriber, engineering, satellite, broadcast and other technical or
transmission data, software, computer and systems management, programming,
licensing, and any other information relating to the conduct of the business of
either Party, and not generally available to the public, in any form whatsoever.
1.5 "CONTENT SUPERVISION AUTHORITIES" shall have the meaning described in
Section 2.5, below.
1.6 "CUSTOMERS" shall mean any and all third parties located outside of
the Territory who are authorized by DMX to receive the Channels.
1.7 "DELIVERY SITE" shall mean the site used from time to time by DMX as
its studio to create the signal for the Channels, which site is located as of
the date of this Agreement at Denver, Colorado, U.S.A.
1.8 "DMX MARKS" shall mean the trademarks, service marks, and trade names
and other similar property relating to DMX and/or the Channels that are
specified on Exhibit "A" attached hereto.
1.9 "ENHANCEMENTS" shall mean revisions, modifications or additions to any
or all of the Channels by DMX and made available in the ordinary course by DMX
to its Customers.
1.10 "EXPLOIT" shall mean to sell directly to customers or to license
another to sell to customers, but only if the holder of such license sells to
customers.
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1.11 "FORCE MAJEURE" shall mean any delays, pre-emptions or other failure
to perform when such delays, pre-emptions or failures are due to any cause
beyond the control of the Party whose performance is so affected, including,
without limitation, an act of God, fire, war, strike, riot, labor dispute,
natural disaster, technical failure (including the failure of all or part of the
equipment of others, including the communications satellite(s) on which the
Channels are delivered) or any other reason beyond the control of the Party
whose performance is prevented during the period of such occurrence, including
any legal prohibition, significant, change of law or application of laws
governing performance hereunder, decree, regulation or requirement of any
governmental authority having jurisdiction.
1.12 "INCREMENTAL COSTS" shall have the meaning described in Section 5.1,
below.
1.13 "MAINTENANCE" shall mean the general updating of the formats and
contents of the Channels by DMX and made available in the ordinary course by DMX
to its Customers.
1.14 "XTRA SERVICE" shall mean the digital audio service provided to
Subscribers by Xtra, its Affiliates, or its Licensees.
1.15 "PRIVATE RESIDENCE" shall mean any single dwelling unit or multiple
dwelling unit private residences, including without limitation, apartment and
condominium buildings, residential hotels, residences for military personnel or
separate unit student housing, but not including transient or temporary
residence establishments such as hotels, motels or medical care facilities.
1.16 "PROMOTIONAL MATERIALS" shall mean any marketing, promotional or
advertising materials which incorporate the DMX Marks.
1.17 "SERVICE TECHNOLOGY" shall mean the technology, that (i) is owned by,
acquired by, or licensed to DMX, (ii) DMX has the right to license as provided
herein, and (iii) is necessary for the reception, transmission or distribution
of the Channels, including, without limitation, the addressing system for cable
decoder boxes.
1.18 "SUBSCRIBER" shall mean a paying customer to whom Xtra, its Affiliate,
or its Licensee provides, for the payment of a prescribed fee, any or all of the
Channels.
1.19 "TECHNICAL ACCESSORIES" shall mean all other portions of the signal
that transmits the Channels that may be created or made usable now or in the
future for purposes other than transmitting the Channels.
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1.20 "TERM" shall mean the term of this Agreement as set out in Section
11.1, below.
1.21 "TERRITORY" shall mean the territory within the countries listed on
Exhibit "B", attached hereto, as such countries are constituted as of the date
of this Agreement, and such territory shall not be affected by any subsequent
alteration of the boundaries of those countries or the emergence of new
political entities within or including such territory.
1.22 "TERRITORY-SPECIFIC CHANNELS" shall mean any Channels which are
produced by DMX specifically for Use and distribution to Subscribers in the
Territory, or any part thereof.
1.23 "TRADEMARK TERM" shall mean that two-year period beginning on the
Closing Date (as defined in the Subscription Agreement).
1.24 "USE" shall mean to down-link from the Delivery Satellite, receive,
decode, digitize, compress, encode, scramble, edit, substitute programming,
insert advertising in, uplink and transmit the signal of the Channels to
Subscribers in the Territory, as permitted by the terms of this Agreement.
2. RIGHTS OF XTRA WITH RESPECT TO THE CHANNELS
2.1 GRANT OF LICENSE. Subject to the terms of this Agreement, DMX hereby
grants to Xtra and Xtra hereby accepts the exclusive, non-transferable, royalty-
free license and right during the Term to market, distribute and license the
Channels to Subscribers and to Use the signal of the Channels, the Service
Technology, and the Technical Accessories in the Territory. This Agreement does
not give Xtra any right or license to distribute or to Use the Channels, the
Service Technology, or the Technical Accessories outside of the Territory.
2.2 FAILURE TO EXPLOIT LICENSE. Xtra agrees to Exploit the Channels in
substantially all of the Territory; provided, however, that DMX's only remedy
for the failure by Xtra to Exploit the Channels shall be to take the actions
described in this Section 2.2. If Xtra fails to Exploit the Channels in a
substantial portion of the Territory, and does not cure such failure to Exploit
within ninety (90) days of notice by DMX, then at the conclusion of such ninety
day period the license granted pursuant to Sections 2.1 and 2.4 shall become a
non-exclusive license and DMX shall be relieved of its obligations under Section
2.10, below. If Xtra fails to Exploit the Channels in any country that is a
part of the Territory, and does not cure such failure to Exploit within ninety
(90) days of notice by DMX, then at the conclusion of such ninety day
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period the license granted pursuant to Section 2.1 and 2.4 shall become a non-
exclusive license with respect to such country and DMX shall be relieved of its
obligations under Section 2.10, below, with respect to such country. All or any
part of the Territory that becomes non-exclusive pursuant to this Section 2.2
shall be referred to as a "NON-EXCLUSIVE TERRITORY", and the date on which that
Non-Exclusive Territory becomes non-exclusive pursuant to this Section 2.2 shall
be referred to as the "NON-EXCLUSIVE DATE". If DMX does not Exploit the
Channels within a Non-Exclusive Territory within 180 days of the Non-Exclusive
Date, and if Xtra does Exploit the Channels within that Non-Exclusive Territory
within 180 days of the Non-Exclusive Date, then the license granted pursuant to
Sections 2.1 and 2.4 shall again become an exclusive license for that Non-
Exclusive Territory and the rights of Xtra under Section 2.10, below, with
respect to that Non-Exclusive Territory shall be restored.
2.3 SUBLICENSE. During the Term Xtra shall be entitled to sublicense
third parties to redistribute the Channels in the Territory, provided that such
sublicensing does not entitle such sub-licensee to do any act or thing which if
done by Xtra would be a breach of the terms of this Agreement.
2.4 TECHNICAL ACCESSORIES. During the Term and subject to the other
restrictions described in this Agreement, Xtra shall have the exclusive right to
Use in the Territory any Technical Accessories included within the signal of the
Channels for any lawful purpose, including, but not limited to close captioning,
games, sweepstakes, contests, advertising and promotions. Xtra shall obtain any
license or authorization required under applicable law for such Use, and shall
not use the Technical Accessories in a jurisdiction in any manner which is not
lawful in that jurisdiction. If Xtra determines in its sole discretion not to
use any part of the Technical Accessories, Xtra may license such Technical
Accessories to DMX or to another third party for any lawful purpose.
2.5 CENSORSHIP AND PROGRAM SUBSTITUTION. DMX acknowledges and agrees that
the Channels may be subject to censorship by certain government authorities and
may be edited by them or by Xtra according to guidelines and directives
prescribed by such authorities ("CONTENT SUPERVISION AUTHORITIES") prior to
distribution within certain countries in the Territory. Xtra shall have the
right to edit programs and, with the prior approval of DMX where reasonably
possible, which approval shall not be unreasonably withheld, substitute programs
solely in order to comply with codes, practices, directives or orders from the
Content Supervision Authorities. To enable Xtra to comply with any governmental
programming standards and practices and other governmental and regulatory
directives, Xtra may retransmit the Channels with a delay from the time the
signal is received. Except as expressly provided
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in this Agreement, including this Section 2.5, Xtra shall use the Channels
without insertion (whether of advertising or otherwise), deletion, or editing.
2.6 INSERTION OF LOGO AND MARK OF XTRA. Xtra shall have the right to use
its own logo, station identity mark, trade name, service mark or other
identifiers within the Channels as part of its network identity and branding
within the Xtra Service.
2.7 INCLUDING CHANNELS IN XTRA SERVICE; ADDITION OF CHANNELS. Xtra shall
be entitled, in its sole discretion, to include any or all of the Channels in
the Xtra Service. Xtra shall be entitled, at its sole discretion, to create and
distribute additional channels within the Xtra Service and within the Territory;
provided, however, that DMX shall have to right to approve (acting reasonably)
such additional channels that are distributed with the Channels. Xtra may
request that DMX create such additional Channels or Territory-Specific Channels
on terms and conditions to be agreed between the Parties, or Xtra may create
such channels itself or through the engagement of third parties. Any such
additional channels created by or on behalf of Xtra shall be owned solely by
Xtra.
2.8 COMMERCIAL ANNOUNCEMENTS. Xtra shall be entitled, in its sole
discretion, to include commercial announcements within the Channels distributed
to Commercial Establishments, so long as such commercial announcements relate
specifically to the Commercial Establishment to which such Channels are
distributed. Furthermore, Xtra shall be entitled to include in the Channels the
same types of commercial announcements and/or advertisements that DMX includes
in the Channels as provided to its Customers. Except as provided herein, no
commercial announcements will be included in any of the Channels.
2.9 RESTRICTIONS ON USE. In order to ensure the integrity of the Channels
and compliance with the restrictions that may be applicable to the underlying
programming,sound recording, music and statutory use permits, Xtra shall not,
and the rights granted herein shall not be interpreted to grant Xtra or any
other person any right to:
2.9.1 Record, make or manufacture any recordings or other
reproductions of any Channel for commercial use, other than to effect
distribution as part of the Xtra Service; or
2.9.2 Transmit, re-transmit or authorize the transmission or re-
transmission of any Channel outside the Territory.
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<PAGE>
Xtra shall not distribute the Channels over any medium or in any manner that
does not permit Xtra to institute adequate controls to prevent the reception,
transmission, or re-transmission of any Channel outside the Territory by any
person. Controls imposed by Xtra that are equivalent to the controls imposed by
DMX in the United States on the same medium to prevent unauthorized transmission
or retransmission shall be deemed to be adequate controls for purposes of the
preceding sentence. Notwithstanding anything else contained in this Agreement,
the transmission of the Channels outside the Territory solely because a portion
of the footprint of the satellite used by Xtra falls outside the geographical
boundaries of the Territory shall not violate Xtra's obligations under this
Agreement if (i) DMX-UK does not otherwise Exploit or Use the Channels outside
the Territory, and (ii) substantially all of the footprint of the satellite used
by DMX-UK falls within the Territory.
2.10 NON-COMPETITION. DMX agrees that during the Term it will not
distribute the Channels or any of them in the Territory via any medium, nor will
DMX authorize any other person to do the same. Notwithstanding the foregoing,
DMX shall be entitled to distribute video channels or music services other than
the Channels in the Territory, so long as the format of such other music
services is not substantially similar to that of the Channels.
2.11 DELETION OF CHANNEL. At any time and from time to time, DMX shall be
entitled, in its sole discretion, to delete one or more Channels from the
Channels offered to its Customers, and upon such deletion such Channel shall
cease to be available to Xtra. DMX may not delete a Channel pursuant to this
Section 2.11 unless, at least thirty days before the effective date of such
deletion, DMX provides to Xtra (i) notice of the deletion, (ii) one or more
disks inscribed with the music programming for the Channel as of the date of the
notice, and (iii) a copy of the software prepared by DMX to select the music for
such Channel; provided, however, that in order to delete a Channel, DMX shall
not be required to provide any software or other intellectual property that DMX
does not own or otherwise have right to transfer to Xtra. The provisions of
Section 6.3 shall apply to the use by Xtra of any items provided pursuant to
this Section 2.11.
2.12 ENHANCEMENTS AND MAINTENANCE. DMX shall provide Enhancements and
Maintenance to Xtra at the same time as DMX provides Enhancements and
Maintenance to DMX's Customers.
3. DELIVERY AND DISTRIBUTION
3.1 DELIVERY OF THE CHANNELS. DMX shall deliver to Xtra at the Delivery
Site digital audio signals of the Channels, to enable Xtra to Use the signal in
a manner and quality as contemplated by this Agreement. DMX shall provide Xtra
with
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any technical information in its possession that is reasonably requested by Xtra
for the purpose of uplinking, downlinking, receiving the Channels in the
Territory, and interfacing the signal of the Channels to the Xtra Service.
3.2 SATELLITE AND UPLINK ARRANGEMENTS. Xtra shall designate the satellite
to be used to transmit the Channels to Europe (the "DESIGNATED SATELLITE") and
shall arrange to uplink the Channels from the delivery point at DMX's Denver
studio to the Designated Satellite.
3.3 CHANGE IN DELIVERY SATELLITE. Xtra shall provide written notice to
DMX of any planned permanent change in the Designated Satellite not less than
ninety (90) days prior to such change. If a temporary change in the Designated
Satellite is required, DMX and Xtra shall each use their reasonable efforts
(including the earliest practicable notice by Xtra to DMX of such events) to
avoid any interruption of or disruption in delivery of the Channels to the
Subscribers. Each Party shall be responsible for its own costs associated with
any permanent or temporary change in the Designated Satellite, including
administrative and technical costs of aligning or setting reception equipment.
4. LICENSE OF TRADEMARKS
4.1 LICENSE TO TRADEMARKS FOR PROMOTIONAL PURPOSES. DMX hereby grants to
Xtra for the Trademark Term a non-exclusive, non-transferable, royalty-free
license to use the DMX Marks for the distribution, marketing and promotion of
the Channels to Subscribers and potential Subscribers within the Territory.
4.2 APPROVAL RIGHTS. Xtra shall not use the DMX Marks in distribution,
marketing, promotion or advertising without the prior written approval of such
use by DMX. In its sole discretion, DMX shall be entitled to provide Xtra with
a copy of its corporate guidelines or style guides for proper usage of the DMX
Marks, which guidelines shall be followed by Xtra. In addition, Xtra agrees to
use the DMX Marks on materials of high quality and in a manner which upholds the
image and reputation of DMX.
4.3 PROCEDURE FOR APPROVAL. In the event that Xtra proposes to produce
Promotional Materials, Xtra shall provide samples of such proposed Promotional
Materials to DMX for its approval. Within ten (10) days of receipt of such
proposed Promotional Materials, DMX shall, in writing, either approve or object
to the use of the DMX Marks on such proposed Promotional Materials, and, in the
event of an objection, DMX shall state its reasons for such objection. In the
event that DMX does not object to the use of the DMX Marks within such ten (10)
day period, such use shall be deemed to be approved and the proposed Promotional
Materials may be used. Upon
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request, Xtra shall provide DMX with samples of all approved Promotional
Materials as used by Xtra.
4.4 CONSEQUENCES OF TERMINATION. Upon the earlier of the expiration of
the Trademark Term or the termination of this Agreement ("TRADEMARK TERMINATION
DATE"), Xtra shall immediately discontinue all use of the DMX Marks or marks
confusingly similar thereto.
4.5 USE OF "FORMERLY KNOWN AS DMX". For two (2) years after the earlier
of the expiration of the Trademark Term or the date on which Xtra stops using
the DMX Marks for the distribution, marketing and promotion of the Channels to
Subscribers and potential Subscribers within the Territory, Xtra shall be
entitled to refer to the Channels in its promotional materials as "formerly
known as DMX" or "formerly know as Digital Music Express".
5. COSTS AND REPORTING REQUIREMENTS
5.1 PAYMENT OF INCREMENTAL COSTS. Xtra shall pay to DMX the incremental
costs incurred by DMX for the creation and delivery of the Channels to Xtra
("INCREMENTAL COSTS"), including without limitation, the following costs and
charges:
a. All costs of creation and delivery of the Territory-Specific Channels
made at the request of Xtra; and
b. All costs of modifications to the Channels, Enhancements, or
Maintenance made at the request of Xtra.
On a quarterly basis, DMX shall provide to Xtra an invoice which sets forth the
amount and nature of such Incremental Costs, and within thirty (30) days of
receipt of the invoice, Xtra shall pay to DMX the amount of Incremental Costs
set forth in such invoice. DMX shall have no obligation to create, deliver, or
effect any Territory-Specific Channels, Enhancements, or Maintenance requested
by Xtra.
5.2 INTEREST. In the event that any payments due under Section 5.1 from
Xtra are not paid on the due date therefor, there shall be added to the amount
of such payment interest for the period from the due date until payment is made,
at an interest rate equal to the lesser of 10 percent per annum or the highest
legal rate under applicable law.
5.3 WITHHOLDING AND SIMILAR CHARGES. All payments shall be made in U.S.
Dollars and shall be paid in full without set-off or counterclaim and free and
clear of and without any deduction or withholding for or on account of any
taxes, unless required to do so by law. Each party shall make application to
any relevant tax authority for double tax
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relief in respect of amounts payable hereunder if the other party so requests in
writing. Xtra shall be responsible for collecting and paying any income,
franchise, sales, use, occupational, general service or other taxes,
assessments, licenses, or other charges assessed, levied, imposed or collected
by any governmental or political entity, or any agencies or instrumentalities
thereof, with respect to its receipt or distribution of the channels or any
other activity hereunder, except income taxes payable by DMX. Each party shall
provide the other party with any documentation reasonably requested by the other
party to permit the other party to claim a credit or deduction for foreign taxes
paid or born by the other party.
5.4 COST RECORDS AND AUDITS. DMX shall keep accurate and complete records
and accounts of all Incremental Costs. No more than twice in each one (1) year
period during the Term, and for one (1) year following expiration or termination
of this Agreement, on reasonable notice to DMX during normal business hours,
Xtra shall have the right to appoint an internationally recognized accounting
firm to examine and audit such Incremental Cost records. All costs of
conducting such an audit shall be borne by Xtra, unless it is determined that
the Incremental Costs paid to DMX for the period to which such audit relates
have been over-reported by DMX by more than five percent (5%), in which case DMX
shall pay the cost of the audit. All information obtained by Xtra as a result
of such audit shall be treated as Confidential Information in accordance with
the provisions of Section 7 of this Agreement.
6. OWNERSHIP OF INTELLECTUAL PROPERTY
6.1 OWNERSHIP OF CHANNELS. Except as otherwise provided herein, DMX
retains all rights, title and interest in and to the Channels and all
programming produced for or included in the Channels, including worldwide rights
for use in all media.
6.2 OWNERSHIP OF MARKS. Xtra hereby acknowledges the right, title and
interest of DMX and its Affiliates in and to the DMX Marks and the right of DMX
to use and license the use of the DMX Marks. Xtra agrees not to claim any title
to the DMX Marks or any right to use the DMX Marks except as permitted by this
Agreement. At no time shall Xtra adopt or use, without the prior written
consent of DMX, any variation of the DMX Marks or any work or mark likely to be
similar to, or confused with, the DMX Marks. Any and all goodwill arising from
the use by Xtra of the DMX Marks shall inure solely to the benefit of DMX. As
may be required by law, Xtra will at its expense record this Agreement and
register the DMX Marks with appropriate government authorities in the Territory,
and DMX will cooperate in effecting such recordation and registration. Xtra
shall not assert any claim to the DMX Marks or such goodwill, either during or
after the Term of this Agreement, and Xtra shall not take any action that could
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be detrimental to the goodwill associated with the DMX Marks.
6.3 COPYRIGHT, MUSIC PERFORMANCE, SOUND RECORDING AND REPRODUCTION RIGHTS
AND FEES. Xtra shall acquire from the owners, composers, licensees and/or
music or copyright rights societies all of the intellectual property rights
necessary for the distribution of the Channels in the Territory, including
copyrights, synchronization of music contained in the Channels and non-dramatic
performing rights, mechanical, performing and author's rights in each musical
composition and sound recording contained in the Channels. Xtra shall also be
responsible for all royalties, fees, and other charges of any kind with respect
to such rights.
7. CONFIDENTIALITY
7.1 NON-DISCLOSURE OF CONFIDENTIAL INFORMATION. Neither Xtra nor DMX
shall disclose to any third party (other than its respective employees or
financial and legal advisers, in their capacity as such) any Confidential
Information concerning the other Party derived in the course of performance
hereunder, including, without limitation, any information relating to
identification of Subscribers or financial material obtained through any audit,
or any of the terms of this Agreement, except:
7.1.1 to the extent necessary to comply with law or the valid order
of a court of competent jurisdiction or a regulatory authority having
jurisdiction, in which event the Party making such disclosure shall so
notify the other Party as promptly as practicable (and, if possible, prior
to making such disclosure) and shall seek confidential treatment of such
information;
7.1.2 as part of its reporting or review procedure to its parent
company, its auditors, attorneys and potential investors provided, however,
that such parent company, auditors, its attorneys and potential investors
agree to be bound by the provisions of the confidentiality provisions of
this Agreement;
7.1.3 in order to enforce its rights pursuant to this Agreement;
7.1.4 as part of its obligation to make timely disclosure to public
investors in its securities; or
7.1.5 to the extent necessary to engage third parties to distribute
the Channels or manufacture equipment for distribution of the Channels in
accordance with this Agreement, provided that such third party distributors
or manufacturers agree to comply with the confidentiality provisions of
this Agreement.
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8. REPRESENTATIONS AND WARRANTIES
8.1 REPRESENTATIONS OF DMX. DMX hereby represents and warrants to Xtra
that:
8.1.1 DMX is a corporation duly organized and validly existing under
the laws of Delaware.
8.1.2 DMX has the power and authority to enter into this Agreement
and to perform fully its obligations hereunder.
8.1.3 DMX is under no contractual or other legal obligation which
shall in any way interfere with its full, prompt and complete performance
hereunder, except to the extent that any continuing rights of the Companies
under the Former Licenses would interfere with the rights granted under
this Agreement.
8.1.4 Within the United States, neither the Channels nor any material
or programming contained therein shall libel, slander or defame any person,
or violate, infringe upon or give rise to or advance any claim with respect
to any contractual right, common law right or any other right of any party
(including, without limitation, any copyright, patent, trademark, literary
or dramatic right, music synchronization or performance right or right of
privacy or publicity) or violate any law.
8.2 REPRESENTATIONS OF XTRA. Xtra hereby represents and warrants to DMX
that:
8.2.1 Xtra is a corporation duly organized and validly existing under
the laws of the United Kingdom.
8.2.2 Xtra has the corporate power and authority to enter into this
Agreement and to perform fully its obligations hereunder.
8.2.3 Xtra is under no contractual or other legal obligation which
shall in any way interfere with its full, prompt and complete performance
hereunder.
8.2.4 Xtra shall during the Term have valid licenses or other
authorizations granted by the appropriate governmental authorities
throughout the Territory, if required under applicable law, to distribute
the Channels in accordance with this Agreement, and will operate such
systems throughout the Term in accordance with such licenses or
authorizations.
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9. COMPLIANCE WITH LAWS AND LICENSES
9.1 REGULATORY COMPLIANCE. Xtra shall ensure that the content of the Xtra
Service complies in all aspects with the regulatory requirements in the
Territory or any part thereof. Xtra further undertakes to obtain any requisite
governmental approvals required in the Territory or any part thereof for the
distribution of the Xtra Service.
9.2 PIRACY. Xtra agrees that it will not authorize parties other than
Subscribers to receive the signal of the Channels, nor will it authorize others
to copy, take or otherwise reproduce any part of the Channels without the prior
written consent of DMX. Xtra further agrees to take all reasonable and
practical security measures to prevent the unauthorized or otherwise unlawful
copying, taping or distribution of the Channels by others; provided, however,
security measures that are equivalent to the security measures taken by DMX in
the United States on the same medium to prevent unauthorized or otherwise
unlawful copying, taping or distribution of the Channels by others shall be
deemed to be adequate security measures for purposes of this sentence.
10. INDEMNIFICATION
10.1 INDEMNIFICATION. Each Party shall indemnify and hold the other Party
harmless from and against any and all claims, liabilities, costs and expenses,
including attorneys fees and costs, arising out of any breach by such Party of
any of its respective representations, warranties or covenants herein contained.
In addition, without limiting the foregoing, Xtra shall indemnify and hold DMX
harmless against any and all claims, liabilities, costs and expenses, including
attorneys fees and costs, arising from and in connection with (i) any non-
payment of any amounts payable in respect of copyrights, and music and sound
recording performance and reproduction rights, arising from the distribution of
the Channels in the Territory; (ii) any assertion by any third party that the
distribution, promotion, and other exploitation of the Channels, and any
programming contained therein, violate or infringe upon any rights of such third
party in the Territory, unless such third party is not a creditor (as of the
date of this Agreement), receiver or trustee of the Companies and the claims of
such third party derive from a purported grant of rights by DMX to the third
party that is inconsistent with this Agreement; or (iii) the failure of Xtra to
obtain or maintain proper governmental authority to distribute the Channels in
the Territory.
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10.2 PROCEDURE FOR INDEMNIFICATION. The Party entitled to indemnification
hereunder (the "INDEMNIFIED PARTY") shall notify the other Party hereto (the
"INDEMNIFYING PARTY") in writing of the claim or action for which such indemnity
applies. The Indemnifying Party shall undertake the defense of any such claim or
action and permit the Indemnified Party to participate therein at the
Indemnified Party's own expense. The settlement of any such claim or action by
an Indemnified Party, without the Indemnifying Party's prior written consent,
shall release the Indemnifying Party from its obligations hereunder with respect
to such claim or action so settled. The Indemnifying Party shall not settle or
otherwise dispose of any claim without the prior written consent of the
Indemnified Party, which consent shall not be unreasonably withheld.
11. TERM AND TERMINATION
11.1 TERM. Unless terminated earlier pursuant to the provisions of this
Agreement, the Term of this Agreement shall be a period of five (5) years from
the Closing Date (a defined in the Subscription Agreement).
11.2 TERMINATION FOR BREACH. This Agreement may be terminated by a party
(the "NOTICING PARTY") as follows:
11.2.1 thirty (30) days following written notice by the Noticing
Party to the other Party (the "NOTICED PARTY") of any material inaccuracy
of a representation made by the Noticed Party herein or in the Subscription
Agreement or of a material breach by the Noticed Party of any of its
obligations hereunder or under the Subscription Agreement, if such
misrepresentation or breach is not cured within the thirty (30) period
following such notice;
11.2.2 immediately upon written notice by the Noticing Party to the
Noticed Party if the Noticed Party has made a voluntary petition for
protection under the bankruptcy laws, or if the Noticed Party has taken any
similar action in consequence of debt;
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11.2.3 thirty (30) days following written notice by the Noticing
Party to the Noticed Party if the Noticed Party has been the subject of the
filing of an involuntary petition in bankruptcy, or if any distress or
attachment is levied or any receiver is appointed in respect of the
business or a substantial part of the property or assets of the Noticed
Party, unless such petition, distress, attachment, or receiver is dismissed
within such thirty-day period; or
11.2.4 upon thirty (30) days following written notice by the Noticing
Party to the Noticed Party if any event of Force Majeure shall continue for
a period of sixty (60) consecutive days.
The exercise of any right to termination under this Section 11.2 is not an
exclusive remedy, and the Noticing Party may in addition exercise any other
remedy available to it in law or equity.
11.3 EFFECT OF TERMINATION. The expiration or termination of this
Agreement for whatever reason shall not affect any rights of either Party which
may have accrued prior to such expiration or termination. Subject to the
foregoing, neither party shall by reason of the expiration or termination of
this Agreement be liable to the other for compensation or damage on account of
the loss of present or prospective profits on distribution or anticipated
distribution of the Channels, or expenditures, investments or commitments made
in connection therewith. Upon the expiration or termination of this Agreement,
Xtra shall promptly pay all outstanding and/or accrued Incremental Costs to DMX
and return to DMX, or otherwise dispose of as DMX may reasonably instruct, all
tapes and materials in relation to the Channels, programming contained therein,
advertisements or Promotional Materials, and other materials, documents and
papers provided to Xtra and relating to the Channels which Xtra may have in its
possession or under its control.
12. MISCELLANEOUS
12.1 NOTICES. Any notice in connection with this Agreement shall be
in writing and shall be delivered by air courier or by facsimile to the
addresses or facsimile numbers given below. Notice given by air courier shall be
deemed given when recorded on the records of the air courier as received by the
receiving party. Notice given by facsimile shall be deemed given upon
transmission if on a business day and during business hours in the country of
receipt, otherwise notice shall be deemed to have been given at 9:00 a.m. on the
next business day in the country of receipt.
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If to DMX:
DMX Inc.
11400 West Olympic Blvd., Suite 1100
Los Angeles, California 90064
If to Xtra:
Xtra Music, Limited
c/o Wiggin and Co.
Imperial Square
Cheltenham
Gloucestershire GL50 1YX
Attn: Timothy Osborne and Michael Turner
with a copy to:
Jerold H. Rubinstein
700 Park Lane
Santa Barbara, CA 93108
Either party may change its address by giving notice to the other in the manner
set forth above.
12.2 GOVERNING LAW; JURISDICTION AND VENUE. This Agreement has been
negotiated and entered into in the State of California and this Agreement shall
be governed by and construed in accordance with the laws of the State of
California, without giving effect to its conflict of laws rules. The Parties
hereby irrevocably agree that any legal action or proceedings with respect to
this Agreement may be brought in the courts of the State of California, or in
any United States District Court of California and by execution and delivery of
this Agreement, each party irrevocably submits to each such jurisdiction and
irrevocably waives any and all objections which it may have as to venue in any
of the above courts.
12.3 WAIVER OF JURY TRIAL. EACH PARTY HEREBY AGREES TO WAIVE ITS
RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT
OF THIS AGREEMENT OR ANY DEALINGS AMONG THE PARTIES RELATING TO THE SUBJECT
MATTER OF THE TRANSACTION CONTEMPLATED BY THIS AGREEMENT. The scope of this
waiver is intended to be all encompassing of any and all disputes that may be
filed in any court and that relate to the subject matter of this transaction,
including contract claims, tort claims, breach of duty claims, and all other
common law and statutory claims. Each Party acknowledges that this waiver is a
material inducement to enter into a business relationship, that each other Party
has already relied on this waiver in entering into this Agreement, and will
continue to rely on this waiver in any future dealings. Each Party further
warrants and represents that it has reviewed this waiver with its legal counsel,
and that it knowingly and
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voluntarily waives its jury trial rights following consultation with legal
counsel. THIS WAIVER IS IRREVOCABLE, MEANING THAT IT MAY NOT BE MODIFIED EITHER
ORALLY OR IN WRITING, AND THE WAIVER SHALL APPLY TO ANY SUBSEQUENT AMENDMENTS,
RENEWALS, SUPPLEMENTS OR MODIFICATIONS TO THIS AGREEMENT. In the event of
litigation, this Agreement may be filed as a written consent to a trial by the
court.
12.4 ASSIGNMENT. The right and obligations of the Parties may be
assigned in whole or in part, voluntarily or by operation of law, without the
prior written consent of the other Party if such assignment is to an Affiliate
of the assigning Party. Each Party shall notify the other within seven (7) days
of any such assignment. In addition, DMX shall be entitled to assign its rights
and obligations under this Agreement in connection with a merger or acquisition
transaction (in whatever form) between DMX and a subsidiary of Tele-
Communications, Inc. Except as expressly provided, neither Party may assign or
transfer this Agreement to any third party without the consent of the other
Party, which consent shall not be unreasonably withheld.
12.5 NO PARTNERSHIP. Nothing contained herein shall be deemed to
create, and the Parties do not intend to create, any relationship of partners or
joint venturers as between Xtra and DMX with respect to this Agreement. Neither
Xtra nor DMX shall be, or shall hold itself out to be, the agent of the other
under this Agreement. No Subscriber shall be deemed to have any privity of
contract or direct contractual or other relationship with DMX by virtue of this
Agreement or DMX's delivery of the Channels to Xtra hereunder.
12.6 SEVERABILITY. If at any time, any provision of this Agreement
is, or becomes under any law, or is found by a court of competent jurisdiction
to be illegal, void, invalid, prohibited or unenforceable, then such provision
shall be ineffective to the extent of such illegality, voidness, invalidity,
prohibition or unenforceability and the remaining provisions of this Agreement
shall remain in full force and effect. In such event, the Parties shall
thereafter use their respective best endeavors to negotiate and agree upon a
substitute provision which is valid and enforceable and achieves to the greatest
extent the legal and commercial objectives of the prohibited provision.
12.7 CAPTIONS AND HEADINGS. The captions and headings herein are
included for convenience only and shall not be considered a part of or used to
construe this Agreement.
12.8 COSTS OF PREPARATION. Each of the Parties herein undertakes to
bear its own costs in relation to and arising from the preparation and execution
of this Agreement.
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12.9 ATTORNEYS' FEES AND EXPENSES. Each Party hereby agrees to be
responsible for and to pay upon demand all costs and expenses, including,
without limitation, reasonable attorneys' fees incurred by another Party in
connection with any dispute between such parties concerning this Agreement and
the transactions contemplated herein in which the latter Party prevails (whether
or not suit is filed).
12.10 SUCCESSORS AND PERMITTED ASSIGNS. This Agreement shall be
binding upon and shall inure to the benefit of the Parties and their respective
successors, assigns and permitted assignees.
12.11 FORCE MAJEURE. Neither DMX nor Xtra shall be liable to the other
for any event of Force Majeure. In the event of any such delay, pre-emption or
failure due to Force Majeure, the Party whose performance is affected shall
promptly notify the other Party of the nature and anticipated length of
continuance of such Force Majeure, and during such period both Parties shall be
excused from performance.
12.12 SURVIVAL. Upon termination of this Agreement for any reason,
Sections 4.4, 6.1, 6.2, 7.1, 10.1, 10.2, 12.1, 12.2, 12.3, 12.9, and 12.12
(including any definitions that are necessary to the operation of such sections)
shall continue to remain in full force and effect.
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12.13 ENTIRE AGREEMENT. This Agreement (together with all Schedules
attached hereto, which are incorporated herein by this reference) and the
Subscription Agreement (and all documents delivered pursuant thereto) constitute
the whole agreement between the Parties and it is expressly declared that no
variations hereof shall be effective unless made in writing and signed by both
Parties. All prior terms sheets and other correspondence between the parties
shall be deemed to have lapsed upon the signing of this Agreement.
IN WITNESS WHEREOF, the parties hereto have entered into this Agreement as
of the date first set forth above.
DMX Inc.
By:__________________________
Its__________________________
Xtra Music, Limited
By:__________________________
Its:__________________________
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EXHIBIT A
TRADEMARKS
- ----------
. ICT
. International Cablecasting Technologies Inc.
. ICT & Design (former corporate logo)
. DMX DJ
. DMX
. Digital Music Express
. DMX & Design:
[LOGO OF DIGITAL MUSIC EXPRESS]
. DMX World Logo:
[LOGO OF DMX WORLD]
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EXHIBIT B
TERRITORY
1. EUROPE: Albania, Andorra, Austria, Belarus, Belgium, Bosnia and Herzegovia,
Bulgaria, Croatia, the Czech Republic, Denmark, Estonia, Finland, France,
Germany, Greece, Hungary, Iceland, Ireland, Italy, Latvia, Liechtenstein,
Lithuania, Luxembourg, Macedonia, Malta, Moldova, Monaco, Netherlands, Norway,
Poland, Portugal, Romania, Russia, San Marino, Serbia & Montenegro, Slovakia,
Slovenia, Spain, Sweden, Switzerland, Turkey, Ukraine, United Kingdom, Vatican
City, Yugoslavia, and any political entity whose borders are enclosed entirely
within the countries listed in this paragraph 1.
2. MIDDLE EAST: Bahrain, Cyprus, Egypt, Iran, Iraq, Israel, Jordan, Kuwait,
Lebanon, Oman, Palestine, Qatar, Saudi Arabia, Syria, United Arab Emirates,
Yemen, and any political entity whose borders are enclosed entirely within the
countries listed in this paragraph 2.
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EXHIBIT 2.2.2
DISTRIBUTION AGREEMENT
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<PAGE>
EXHIBIT 2.3.1
TERMINATION CERTIFICATE
DMX Inc. ("DMX"), a Delaware corporation and Jerold H. Rubinstein, an
individual ("RUBINSTEIN"), agree and acknowledge that:
1. Pursuant to the terms of the Subscription and Shareholders Agreement
dated as of December 18, 1996, and pursuant to the terms of the Stock
Purchase and Shareholders Agreement dated as of December 18,1996 (the
"STOCK PURCHASE AGREEMENT"), the Stock Purchase Agreement is terminated.
2. Each of DMX and Rubinstein mutually release the other from any
obligation or liability under the Stock Purchase Agreement.
DMX Inc.,
a Delaware corporation
By _____________________________
Its _________________________
JEROLD H. RUBINSTEIN,
an individual
______________________________
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EXHIBIT 3.1
EXCEPTIONS TO REPRESENTATIONS
AND WARRANTIES OF XTRA AND RUBINSTEIN
This page intentionally left blank.
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EXHIBIT 3.2
EXCEPTIONS TO REPRESENTATIONS
AND WARRANTIES OF DMX
This page intentionally left blank.
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<PAGE>
EXHIBIT 7.1
REGISTRATION RIGHTS
1.1 CERTAIN DEFINITIONS. As used in this Exhibit 7.1, any capitalized
-------------------
term shall have the meaning assigned to such term in the Agreement, and the
following terms shall have the following respective meanings:
"COMMISSION" shall mean the Securities and Exchange Commission or any other
----------
federal agency at the time administering the Securities Act.
"EXCHANGE ACT" shall mean the Securities Exchange Act of 1934, as amended,
------------
or any similar federal statute and the rules and regulations of the Commission
thereunder, all as the same shall be in effect at the time.
"HOLDER" shall mean DMX or a transferee of registration rights under
------
Section 1.9.
"REGISTER," "REGISTERED" OR "REGISTRATION" refers to a registration
-------- ---------- ------------
effected by preparing and filing a registration statement in compliance with the
Securities Act (or any comparable provision of foreign law), and the declaration
or ordering of the effectiveness of such registration statement.
"REGISTRABLE SECURITIES" means the shares of Common Stock held by DMX after
----------------------
the consummation of the transactions contemplated in the Agreement, shares
issued in respect of such shares of Common Stock upon any stock split, stock
dividend, recapitalization, conversion, or similar event, which have not been
sold to the public.
"REGISTRATION EXPENSES" shall mean all expenses incurred by Xtra in
---------------------
complying with Sections 1.2 and 1.3, below, including without limitation all
registration, qualification and filing fees, printing expenses, escrow fees,
fees and disbursements of counsel for Xtra, blue sky fees and expenses, and the
expense of any special audits incident to or required by any such registration
(but excluding the compensation of regular employees of Xtra which shall be paid
in any event by Xtra).
"RUBINSTEIN AFFILIATE" shall have the meaning described in Section 6.3 of
--------------------
the Agreement.
"SECURITIES ACT" shall mean the Securities Act of 1933, as amended, or any
--------------
similar federal statute and the rules and regulations of the Commission
thereunder, all as the same shall be in effect at the time.
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"SELLING EXPENSES" shall mean all underwriting discounts and selling
----------------
commissions applicable to the sale and all fees and disbursements of counsel for
any holder.
1.2 REQUESTED REGISTRATION.
----------------------
1.2.1 PARITY WITH RUBINSTEIN. Xtra shall provide Holder with the
----------------------
same demand registration rights, if any, that are provided to Rubinstein or any
Rubinstein Affiliate under any existing contract or any contract entered into in
the future by Xtra and Rubinstein or any Rubinstein Affiliate. Xtra shall
provide DMX with notice of any such registration rights.
1.2.2 MODIFICATIONS AS APPLIED TO DMX. If the registration rights
-------------------------------
that are used to define the demand registration rights of a Holder call for
calculations or determine rights based on the number of shares of Xtra held by
Rubinstein or any Rubinstein Affiliate or based upon a minimum number of shares
which must be registered, such provision shall apply to Holder with the
following modification. Any such provision shall apply to Holder using as a
standard that number of shares of Xtra which bears the same relationship to the
total number of shares of Xtra owned by Holder as the number of shares called
for in that provision bears to the total number of shares of Xtra owned by
Rubinstein or any Rubinstein Affiliate.
1.3 XTRA REGISTRATION.
-----------------
1.3.1 NOTICE OF REGISTRATION. If, at any time or from time to
----------------------
time, Xtra shall determine to register any of its securities, either for its own
account or the account of a holder or holders of the Xtra's securities, other
than (i) a registration relating solely to employee benefit plans on Form S-1 or
S-8 or similar forms which may be promulgated in the future, (ii) a registration
on Form S-4 or similar form which may be promulgated in the future relating
solely to a Commission Rule 145 transaction, or (iii) a registration undertaken
pursuant to Section 1.2.1, above, Xtra will:
(a) promptly give to each Holder written notice thereof (which shall
include a list of the jurisdictions in which the Xtra intends to attempt to
qualify such securities under the applicable Blue Sky or other state securities
laws); and
(b) include in such registration (and any related qualification under
Blue Sky laws or other compliance), and in any underwriting involved therein,
all Registrable Securities specified in a written request or requests made by
any Holder or Holders within 20 days after receipt by such Holder of such
written notice from Xtra.
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1.3.2 UNDERWRITING. If the registration of which Xtra gives notice
------------
is for a registered public offering involving an underwriting, Xtra shall so
advise the Holders as a part of the written notice given pursuant to Section
1.3.1. In such event the right of any Holder to registration pursuant to Section
1.3 shall be conditioned upon such Holder's agreeing to participate in such
underwriting and in the inclusion of such Holder's Registrable Securities in the
underwriting to the extent provided herein. All Holders proposing to distribute
their securities through such underwriting shall (together with Xtra and the
other holders distributing their securities through such underwriting) enter
into an underwriting agreement in customary form with the underwriter or
underwriters selected for such underwriting by Xtra or by the other holders
whose securities are being registered. Notwithstanding any other provision of
this Section 1.3, if the underwriter determines that marketing factors require a
limitation of the number of shares to be underwritten, Xtra shall so advise all
Holders and the other holders distributing their securities through such
underwriting. The number of Registrable Securities and other securities that may
be included in the registration and underwriting shall be allocated on the
following basis: (i) first to the securities to be registered by Xtra for its
own account, if any; (ii) second, to holders of securities other than Rubinstein
or any Rubinstein Affiliate who are exercising contractual, "demand"
registration rights; (iii) then to holders of securities (including Holders,
Rubinstein and any Rubinstein Affiliate) who are exercising contractual,
"piggyback" registration rights; and (iv) finally to other holders of securities
of Xtra. As among those holders of equal priority suffering such cut-back, the
cut-back shall be in proportion, as nearly as practicable, to the respective
amounts of securities entitled to inclusion in such registration held by such
holders at the time of filing the registration statement. If at any time
Rubinstein or any Rubinstein Affiliate is granted registration rights that would
provide them higher priority or more protection against a cut-back than is
described in the preceding two sentences, then Xtra shall afford same priority
or protection to the Holders. If any Holder disapproves of the terms of any such
underwriting, he may elect to withdraw therefrom by written notice to Xtra and
the underwriter. Any securities excluded or withdrawn from such underwriting
shall be withdrawn from such registration.
1.4 EXPENSES OF REGISTRATION. All Registration Expenses incurred in
------------------------
connection with any registration, qualification or compliance pursuant to
Sections 1.3 shall be borne pro rata by those selling securities pursuant to
such registration. All Registration Expenses incurred in connection with
registration, qualification or compliance pursuant to Section 1.2.1 shall be
borne by Xtra and the Holders selling securities pursuant to such registration
on
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<PAGE>
the same basis as provided in the registration rights afforded to Rubinstein or
any Rubinstein Affiliate. All Selling Expenses relating to securities
registered by the Holders or other holders shall be borne by the Holders or
other holders of such securities pro rata on the basis of the number of shares
so registered.
1.5 REGISTRATION PROCEDURES. In the case of each registration,
-----------------------
qualification or compliance effected by Xtra pursuant to this Exhibit 7.1, Xtra
will:
(a) Keep each Holder advised in writing as to the initiation of each
registration, qualification and compliance and as to the completion thereof;
(b) Keep such registration, qualification or compliance effective for
a period of 120 days or until the Holder or Holders have completed the
distribution described in the registration statement relating thereto, whichever
first occurs;
(c) Furnish such number of prospectuses and other documents incident
thereto as a Holder from time to time may reasonably request;
(d) Prepare and file with the SEC such amendments and supplements to
such registration statement and the prospectus used in connection with such
registration statement as may be necessary to comply with the provisions of the
Act with respect to the disposition of all securities covered by such
registration statement;
(e) Use its best efforts to register and qualify the securities
covered by such registration statement under such other securities or Blue Sky
laws of such jurisdictions as shall be reasonably requested by the Holders,
provided that Xtra shall not be required in connection therewith or as a
condition thereto to qualify to do business or to file a general consent to
service of process in any such states or jurisdictions;
(f) In the event of any underwritten public offering, enter into and
perform its obligations under an underwriting agreement, in usual and customary
form, with the managing underwriter of such offering; each Holder participating
in such underwriting shall also enter into and perform its obligations under
such an agreement;
(g) Notify each Holder of Registrable Securities covered by such
registration statement at any time when a prospectus relating thereto is
required to be delivered under the Act of the happening of any event as a result
of which the prospectus included in such registration statement, as then in
effect, includes an untrue statement of material fact or omits
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<PAGE>
to state a material fact required to be stated therein or necessary to make the
statements therein not misleading in the light of the circumstances then
existing; and
(h) At the request of any Holder requesting registration of
Registrable Securities pursuant to this Exhibit 7.1, on the date that such
Registrable Securities are delivered to the underwriters for sale in connection
with an underwritten registration pursuant to this Exhibit 7.1, (i) furnish an
opinion dated such date, of the counsel representing Xtra for the purposes of
such registration, addressed to the underwriters and, if such counsel is also
representing the Holders requesting registration of Registrable Securities, to
such Holders, and (ii) use its best efforts to furnish a letter dated such date,
from the independent certified public accountants of Xtra, addressed to the
underwriters and to the Holders.
1.6 INDEMNIFICATION.
---------------
1.6.1 INDEMNIFICATION BY XTRA. Xtra will indemnify and defend
-----------------------
each Holder, each of its officers and directors and partners, and each person
controlling such Holder within the meaning of Section 15 of the Securities Act,
with respect to which registration, qualification or compliance has been
effected pursuant to this Exhibit 7.1, and each underwriter, if any, and each
person who controls any underwriter within the meaning of Section 15 of the
Securities Act, against all expenses, claims, losses, damages and liabilities
(or actions in respect thereof), including any of the foregoing incurred in
settlement of any litigation, commenced or threatened, arising out of or based
on any untrue statement (or alleged untrue statement) of a material fact
contained in any registration statement, prospectus, offering circular or other
document, or any amendment or supplement thereto, incident to any such
registration, qualification or compliance, or based on any 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 in which
they were made, not misleading, or any violation by Xtra of any rule or
regulation promulgated under the Securities Act applicable to Xtra and relating
to action or inaction required of Xtra in connection with any such registration,
qualification or compliance, and will pay to each such Holder, each of its
officers and directors and partners, and each person controlling such Holder,
each such underwriter and each person who controls any such underwriter, as
incurred, any legal and any other expenses reasonably incurred in connection
with investigating, preparing or defending any such claim, loss, damage,
liability or action; provided, however, that Xtra will not be liable in any such
case to the extent that any such claim, loss, damage, liability or expense
arises out of or is based on any untrue statement or omission or alleged untrue
statement or omission,
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<PAGE>
made in reliance upon and in conformity with written information furnished to
Xtra by an instrument duly executed by a Holder or underwriter and stated to be
specifically for use therein or any violation by a Holder or underwriter of any
rule or regulation promulgated under the Securities Act applicable to such
Holder or such underwriter in connection with such registration.
1.6.2 INDEMNIFICATION BY HOLDERS. Each Holder will, if
--------------------------
Registrable Securities held by such Holder are included in the securities as to
which such registration, qualification or compliance is being effected,
indemnify and defend Xtra, each of its directors and officers, each underwriter,
if any, of Xtra's securities covered by such a registration statement, each
person who controls Xtra or such underwriter within the meaning of Section 15 of
the Securities Act, and each other such Holder, each of its officers and
directors and partners and each person controlling such Holder within the
meaning of Section 15 of the Securities Act, against all expenses, claims,
losses, damages and liabilities (or actions in respect thereof) including any of
the foregoing incurred in settlement of any litigation commenced or threatened,
arising out of or based on any untrue statement (or alleged untrue statement) of
a material fact contained in any such registration statement, prospectus,
offering circular or other document, or any amendment or supplement thereto,
incident to any such registration, qualification or compliance or based on any
omission (or alleged omission) to state therein a material fact required to be
stated therein or necessary to make the statements therein, in the light of the
circumstances in which they were made, not misleading, or any violation by such
Holder of any rule or regulation promulgated under the Securities Act applicable
to such Holder in connection with such registration, and will pay to Xtra, such
other Holders, such directors, officers, partners, persons, underwriters or
control persons, as incurred, any legal or any other expenses reasonably
incurred in connection with investigating, preparing or defending any such
claim, loss, damage, liability or action, in each case to the extent, but only
to the extent, that such expenses, claims, losses, damages or liability arise
out of or are based upon (i) such an untrue statement (or alleged untrue
statement) or omission (or alleged omission) made in such registration
statement, prospectus, offering circular or other document or any amendment or
supplement thereto in reliance upon and in conformity with written information
furnished to Xtra by an instrument duly executed by such Holder and stated to be
specifically for use therein, or (ii) any such violation by such Holder of any
rule or regulation promulgated under the Securities Act applicable to such
Holder in connection with such registration; provided, however, that the
obligations of such Holder hereunder shall be limited to an amount equal to the
greater of (x) the proceeds to such Holder of Registrable Securities sold as
contemplated herein, or (y) the out-of-
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pocket expenses incurred by Xtra (not including defense costs or amounts paid to
those claiming against the Xtra) in connection with any such registration that
cannot be completed as a result of the untrue statement or violation of such
Holder that gives rise to the indemnity obligation under this Section.
1.6.3 PROCEDURES. Each party entitled to indemnification under
----------
this Section 1.6 (the "INDEMNIFIED PARTY") shall give notice to the party
required to provide indemnification (the "INDEMNIFYING PARTY") promptly after
such Indemnified Party has actual knowledge of any claim as to which indemnity
may be sought, and shall permit the Indemnifying Party to assume the defense of
any such claim or any litigation resulting therefrom, provided that counsel for
the Indemnifying Party, who shall conduct the defense of such claim or
litigation, shall be approved by the Indemnified Party (whose approval shall not
be unreasonably withheld), and the Indemnified Party may participate in such
defense at its own expense, and provided further that the failure of any
Indemnified Party to give notice as provided herein shall not relieve the
Indemnifying Party of its obligations under this Section 1.6 unless such failure
resulted in actual detriment to the Indemnifying Party. Notwithstanding the
above, however, if representation of one or more Indemnified Parties by the
counsel retained by the Indemnifying Party would be inappropriate due to actual
conflicting interests between such Indemnified Parties (the "CONFLICTING
INDEMNIFIED PARTIES") and any other party represented by such counsel in such
proceeding, then such Conflicting Indemnified Parties shall have the right to
retain one separate counsel, chosen by the holders of a majority of the
Registrable Securities included in the registration, at the expense of the
Indemnifying Party. No Indemnifying Party (i) in the defense of any such claim
or litigation, shall, except with the consent of each Indemnified Party, which
consent shall not be unreasonably withheld, consent to entry of any judgment or
enter into any settlement which does not include as an unconditional term
thereof the giving by the claimant or plaintiff to such Indemnified Party of a
release from all liability in respect to such claim or litigation, or (ii) shall
be liable for amounts paid in any settlement if such settlement is effected
without the consent of the Indemnifying Party, which consent shall not be
unreasonably withheld.
1.7 INFORMATION BY HOLDER. The Holder or Holders of Registrable
---------------------
Securities included in any registration shall furnish to Xtra such information
regarding such Holder or Holders and the distribution proposed by such Holder or
Holders as Xtra may request in writing and as shall be required in connection
with any registration, qualification or compliance referred to in this Exhibit
7.1.
-7-
<PAGE>
1.8 RULE 144 REPORTING. With a view to making available the benefits of
------------------
certain rules and regulations of the Commission which may at any time permit the
sale of the Restricted Securities to the public without registration, after such
time as a public market exists for the Common Stock, Xtra agrees to each of the
following:
1.8.1 PUBLIC INFORMATION. Xtra will use its best efforts to make
------------------
and keep public information available, as those terms are understood and defined
in Rule 144 under the Securities Act at all times after the effective date of
the first registration under the Securities Act filed by the Xtra for an
offering of its securities to the general public.
1.8.2 FILINGS. Xtra will use its best efforts to file with the
-------
Commission in a timely manner all reports and other documents required of Xtra
under the Securities Act and the Exchange Act (at any time after it has become
subject to such reporting requirements).
1.8.3 WRITTEN STATEMENT OF COMPLIANCE. Xtra will furnish to a
-------------------------------
Holder forthwith upon request a written statement by Xtra as to its compliance
with the reporting requirements of said Rule 144 (at any time after 90 days
after the effective date of the first registration statement filed by Xtra for
an offering of its securities to the general public) and of the Securities Act
and the Exchange Act (at any time after it has become subject to such reporting
requirements), a copy of the most recent annual or quarterly report of Xtra and
such other reports and documents of Xtra as a Holder may reasonably request in
availing itself of any rule or regulation of the Commission allowing a Holder to
sell any such securities without registration.
1.9 TRANSFER OF REGISTRATION RIGHTS. The rights to cause Xtra to register
-------------------------------
securities granted under Sections 1.2 and 1.3 may be assigned only to a
transferee or assignee in connection with the transfer or assignment by DMX of
not less than 25 percent of DMX's ownership of the Registrable Securities of
Xtra immediately after the Closing or in connection with the transfer or
assignment by the transferee of not less than all of the transferee's ownership
of the Registrable Securities of Xtra; provided that Xtra shall be entitled to
notice of any such transfer of registration rights within thirty (30) days of
the date such transfer is effected. No transferee, assignee or other person
purporting to exercise rights under this Exhibit 7.1 who is not a signatory to
the Agreement shall be entitled to do so unless and until such person agrees to
be bound by the terms of this Exhibit 7.1.
1.10 TERMINATION OF REGISTRATION RIGHTS. The registration rights granted
----------------------------------
pursuant to this Exhibit 7.1 shall terminate as to a Holder at such time after
Xtra's initial registered public offering as all Registrable Securities held
-8-
<PAGE>
by the Holder can be sold within a given three-month period without compliance
with the registration requirements of the Securities Act pursuant to Rule 144,
supported by a written opinion of legal counsel for Xtra which shall be
reasonably satisfactory in form and substance to legal counsel for such Holder.
1.11 "MARKET STAND OFF" AGREEMENT. Each Holder agrees that it shall not,
----------------------------
to the extent requested by Xtra and an underwriter of common stock (or other
securities) of Xtra, sell or otherwise transfer or dispose (other than to donees
who agree to be similarly bound) of any Registrable Securities during the one
hundred and twenty (120) day period following the effective date of a
registration statement of Xtra filed under the Securities Act; provided,
however, that such agreement shall not apply to Registrable Securities being
registered and sold pursuant to such registration statement. A Holder's
obligations under this Section 1.1.1 shall terminate at such time as any other
person with registration rights (whether or not pursuant to this Agreement) or
any officer or director of Xtra is not bound by a similar obligation. In order
to enforce the foregoing covenant, Xtra may impose stop-transfer instructions
with respect to the Registrable Securities of each Holder (and the shares or
securities of every other person subject to the foregoing restriction) until the
end of such one hundred and twenty (120) day period.
-9-
<PAGE>
Exhibit 21.1
List of Subsidiaries
TEMPO Sound, Inc.,
an Oklahoma Corporation
450714 B.C.
a British Columbia, Canada Corporation
DMX-Europe N.V.,
a Netherlands Corporation
<PAGE>
Exhibit 23.1
------------
KPMG Peat Marwick LLP
Los Angeles
(To be filed with Auditor's Report)
<PAGE>
Exhibit 23.2
------------
The Board of Directors
DMX Europe-N.V.
We consent to the incorporation by reference in the registration statement (No.
33-62002) on Form S-8 of DMX Inc. of our report dated January 9, 1997, relating
to the consolidated balance sheets of DMX-Europe N.V. as of September 30, 1996
and 1995 and the related consolidated statement of operations, stockholders'
equity and cash flows for each of the years in the three year period ended
September 30, 1996, which appears in the September 30, 1996 annual report on
Form 10-K of DMX Inc.
We were unable to express an opinion and we did not express an opinion in our
report dated January 9, 1997 on the financial statements of DMX-Europe N.V. as
DMX-Europe N.V. has suffered recurring losses from operations and has a net
capital deficiency that raise substantial doubt about its ability to continue as
a going concern. The financial statements do not include any adjustments that
might result from the outcome of this uncertainty.
/s/ KPMG
KPMG
London, England
January 9, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10K FOR
THE FISCAL YEAR ENDED SEPTEMBER 30, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 12-MOS
<FISCAL-YEAR-END> SEP-30-1996 SEP-30-1995
<PERIOD-START> OCT-01-1995 OCT-01-1994
<PERIOD-END> SEP-30-1996 SEP-30-1995
<CASH> 1,121,034 8,622,119
<SECURITIES> 0 165,000
<RECEIVABLES> 4,996,471 3,815,165
<ALLOWANCES> 251,247 856,802
<INVENTORY> 536,680 264,895
<CURRENT-ASSETS> 7,719,069 12,122,658
<PP&E> 12,453,010 7,612,943
<DEPRECIATION> 6,559,022 3,276,565
<TOTAL-ASSETS> 18,717,019 17,082,384
<CURRENT-LIABILITIES> 16,601,107 3,250,042
<BONDS> 0 0
0 0
0 0
<COMMON> 596,722 436,806
<OTHER-SE> (1,950,972) (5,565,043)
<TOTAL-LIABILITY-AND-EQUITY> 18,717,019 17,082,384
<SALES> 17,326,603 12,773,384
<TOTAL-REVENUES> 17,326,603 12,773,384
<CGS> 0 0
<TOTAL-COSTS> 39,497,712<F3> 23,508,673
<OTHER-EXPENSES> 11,429,217<F2> 12,417,780<F2>
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 134,571<F1> (73,540)<F1>
<INCOME-PRETAX> (33,854,777) (23,079,529)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (33,854,777) (23,079,529)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (33,854,777) (23,079,529)
<EPS-PRIMARY> (0.68) (0.60)
<EPS-DILUTED> 0 0
<FN>
<F1> NET OF INTEREST INCOME
<F2> NET OF OTHER INCOME, INCLUDES EQUITY IN LOSS OF DMX-E
<F3> INCLUDES LOSS ON DISPOSAL RELATED TO DMX-E OF $7,153,278
</FN>
</TABLE>
