Satellite Capacity Lease

EXHIBIT 10.2


[A portion of this exhibit has been omitted and separately filed with the Securities and Exchange Commission pursuant to Rule 406 promulgated under the Securities Act of 1933, as amended]


SATELLITE CAPACITY LEASE


This Satellite Capacity Lease (the "Lease" or "Agreement"), is made and effective as of this Fourth (4th) day of June, 1999, by and between American Digital Communications, Inc., a Wyoming corporation ("Network"), having a principal place of business at 745 Fifth avenue, suite 900, New York, New York 10151, and Transponder Encryption Services Corporation ("TESC"), having a principal place of business at 90 Inverness Circle East, Englewood, Colorado 80112.


RECITALS


A. Network is in the business of producing and/or distributing a certain video programming service ("Video Programming Service") and a certain data programming service ("Data Programming Service") (the Video Programming Service and the Data Programming Service are sometimes collectively referred to herein as the "Programming Service", as more particularly described in Section 1.3.1 below) for viewing by end-users located in the Territory (as defined in Section 1.4 below).


B. TESC is in the business of distributing programming services in a digitally-compressed and encrypted format via satellites using Ku-Band and/or Ka-Band frequencies (the "DTH System").


C. Network desires to lease four video channels and one data channel of capacity on the DTH System for the purpose of transmitting the Programming Service in a digitally encrypted format for receipt on a subscription basis by end-users in the Territory via one or more Ku-Band and/or KaBand satellite(s) to be selected by TESC from time to time in its sole judgment (any of which shall be hereinafter referred to as the "Satellite"), which are directly or indirectly owned and/or operated in whole or in part by TESC and are located at the 61.5 degrees west longitude orbital position.


D. Subject to the terms and conditions set forth below, TESC agrees to allow Network to lease such capacity on the Satellite for the purpose of transmitting the Programming Service in a digitally encrypted format for receipt on a subscription basis by end-users in the Territory.


NOW, THEREFORE, in consideration of the mutual promises and the covenants hereinafter set forth, and for other good and valuable consideration, the receipt of which is hereby acknowledged, Network and TESC agree as follows:


1. LEASE


1.1 Service Subscribers. A "Service Subscriber" is hereinafter defined to mean any customer in the Territory which receives any portion or all of the Programming Service from the Satellite in an encrypted format. A Service Subscriber may include, but shall not be limited to, hotel and motel guest rooms, private offices, and patient rooms in hospitals. For residential or commercial Service Subscribers, each single residential dwelling unit or commercial establishment regardless of the number of televisions or integrated receiver-decoders ("IRDs") within the unit or establishment that are authorized to receive the Programming Service shall be deemed to be a single Service Subscriber. For hotel/motel rooms, hospital patient rooms and private business offices, each television authorized to receive the Programming Service shall be deemed to be a single Service Subscriber. For bulk-billed Service Subscribers, the number of Service Subscribers per account shall be determined on an equivalent billing unit basis, assuming one hundred percent (100%) penetration Notwithstanding the foregoing, the following subscribers to the Programming Service shall not be considered "Service Subscribers": (a) TESC's and/or any of its Affiliates' test sites; (b) TESC's and/or any of its Affiliates, retailer showrooms; and (c) employees of TESC and/or any of its Affiliates. For purposes of this Lease, "Affiliate" shall mean, with respect to a person or entity, any other person or entity directly or indirectly controlling, controlled by or under common control with such person or entity.


1.2 Grant of Rights


1.2.1.1 By TESC. Subject to the terms and conditions of this Lease, TESC hereby agrees to lease four (4) video channels, at approximately three (3) megabits per second each, of capacity on the Satellite to Network for the sole purpose of transmitting the Video Programming Service in a digitally compressed and encrypted format (or any other transmission method determined by TESC in its sole discretion) on a twenty-four (24) hour per day, 7 days per week subscription (as opposed to a transaction, demand purchase, pay-per-view or pay-per-block) basis to end-users in the Territory without any transport or "bulk" rights granted or permitted.


1.2.1.2 Subject to the terms and conditions of this Lease, TESC hereby agrees to lease one (1) data channel, at up to one (1) megabit per second, of capacity on the Satellite to Network for the sole purpose of transmitting the Data Programming Service in a digitally compressed and encrypted format (or any other transmission method determined by TESC in its sole discretion) on a multiple-hour per day format 7 days per week subscription (as opposed to a transaction, demand purchase, pay-per-view or pay-per-block) basis to end-users in the Territory without any transport or "bulk" rights granted or permitted.


1.2.2 By Network. Subject to the terms and conditions of this Lease, Network grants TESC the rights to: (i) offer and sell subscriptions to any or all portions of the Programming Service to residential, commercial (public and private), SMATV, hotel/motel and other bulk-billed subscribers; (ii) authorize and deauthorize IRDs to receive any or all portions of the Programming Service for residential, commercial (public and private), SMATV, hotel/motel and other bulk-billed subscribers; and (iii) to transport any or all portions of the Programming Service to residential complexes, apartment buildings and other multi-unit residential and business office complexes; hotels, motels and other places of public lodging; hospitals, nursing homes and other health and medical care facilities; prisons, reform schools and other correctional facilities, in each case previously set forth in this subsection (iii) served by a centralized receiving antenna or "SMATV" system. Network represents and warrants that it has all rights necessary to grant TESC the rights contracted for by TESC under this Lease, including but not limited to transmitting and transporting any or all portions of the Programming Service and activating and deactivating subscriptions to any or all portions of the Programming Service.


1.3 Programming Service


1.3.1 The Programming Service is comprised of the programming elements set forth on the Programming Schedule attached hereto as Exhibit A, which is incorporated herein by this reference. Network acknowledges and agrees that the Programming Service will not directly or indirectly advertise, market promote or otherwise reference any distributor of programming services which is not owned and/or operated by TESC and/or its Affiliates.


1.3.2 If there is a material change in the programming content set forth in Exhibit A hereto, as determined in TESC's reasonable judgment, Network must notify TESC in writing at least thirty (30) days in advance of such programming content change. In addition, Network must provide TESC with sufficient proof as determined in TESC's reasonable judgment, of Networks license rights to the new content upon request. In the event that the new programming lineup does not contain substantially similar content as the initial programming lineup set forth in Exhibit A hereto, TESC shall have the option, exercisable in its sole discretion, to cease transmission of the Programming Service effective thirty (30) days after delivery of written notice to Network. In the event that Network does not provide TESC with sufficient proof of Networks license rights to the new content upon request TESC shall have the option, exercisable in its sole discretion to cease transmission of the Programming Service effective immediately upon delivery of written notice to Network. In the event that TESC ceases transmission of the Programming Service pursuant to this Section 1.3.2, this Lease shall automatically terminate. Any such termination shall be Without prejudice to any other rights or remedies that TESC might have under this Lease, at law, in equity or otherwise.


1.3.3 Telecast Scheduling. TESC shall have the absolute right but not the obligation to transmit any content it deems appropriate, on any channel or channels during any time period in which no content has been provided by Network for transmission during such time, or if the content supplied is not transmitted by TESC because of poor transmission quality, technical problems, non-payment, a refusal by TESC to transmit the content provided


by Network for any of the reasons set forth in Section 10.2, or for any other reason. TESC shall have the absolute right but not the obligation, in its sole discretion, to blackout or to refrain from blacking out any programming in any market at any time.


1.4 Territory. The "Territory" shall mean the geographic boundaries of the United States and its territories, possessions, and commonwealths. TESC is hereby authorized to distribute, exhibit or authorize any third party to distribute or exhibit the Programming Service, in whole or in part, to any location in the Territory, subject to all applicable laws, rules and regulations, including without limitation the laws, rules and regulations of the U.S. Government, the government of any foreign country, and their respective agencies.


2. TERM This Lease shall commence on the date first written above and shall continue for four (4) years thereafter, unless terminated sooner as provided herein (the "Term"). TESC will use reasonable commercial efforts to commence transmitting the Video Programming Service via the Satellite for revenue generating purposes by July 1, 1999 (the "Commencement Date"). TESC will use reasonable commercial efforts to commence transmitting the Data Programming Service via the Satellite for revenue generating purposes within a reasonable period of time following Network's delivery of the data signal to TESC's Affiliate's Uplink Facility. Network agrees that upon the expiration or earlier termination of this Lease, if TESC has already sold subscriptions to the Programming Service, then, at Tesac's option, Network shall continue to provide TESC the Programming Service under the terms and conditions outlined herein for a period of time ("Programming Service Extension") that is the shorter of twelve (12) months or that number of months necessary for TESC to provide the Programming Service to Service Subscribers who bought a multi-month subscription to the Programming Service prior to the receipt by TESC of notice of termination of the Lease. Network's obligation to pay Base Rent under Section 3.2 below will not apply during a Programming Service Extension.


3. RENT AND RESIDUAL REVENUES, RESIDUAL THIRD PARTY DATA REVENUES; RETAIL
PRICE OF PROGRAMMING; PAYMENTS AND DUE DATES


3.1 Rent and Residual Revenues.


3.1.1 Subject to the right hereby granted to TESC and its Affiliates to offset any amounts due to Network hereunder against any amounts due to TESC and/or any of its Affiliates from Network or any Affiliate thereof (including without limitation the payment of Base Rent under Section 3.2 below), TESC shall be entitled to retain [ ](1) percent of Video Programming Service Revenues (as defined in Section 3.1.2 below) from each Reporting Period (as defined in Section 3.3.1 below) as rent ("Video Rent") and the remaining [ ](2) percent shall be payable to Network (the "Residual Video Revenues"). For example, if [ ]: (3).


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3.1.2 "Video Programming Service Revenues" for a particular Reporting Period shall be calculated by multiplying the then current retail price per month for a single-family subscription to the Video Programming Service by the average of the sum of (a) the number of Service Subscribers to the Video Programming Service as of the last day of the Reporting Period in question; and (b) the number of Service Subscribers as of the last day of the immediately preceding Reporting Period. For example, if. (i) there are 30,000 Service Subscribers as of the last day of the Reporting Period in question; (ii) 20,000 Service Subscribers as of the last day of the immediately preceding Reporting Period; and (iii) the retail price per month for a single-family subscription to the Video Programming Service is $24.99, then there would be $624,750 in Video Programming Service Revenues for the Reporting Period in question, which is equal to $24.99 (the then current retail price per month for a single-family subscription to the Video Programming Service) times 25,000 (the average of the sum of number of Service Subscribers as of the last day of the current Reporting Period and the number of Service Subscribers as of the last day of the immediately preceding Reporting Period or (30,000 + 20,000) divided by 2).


3.2.1 Subject to the right hereby granted to TESC and its Affiliates to offset any amounts due to Network hereunder against any amounts due to TESC and/or any of its Affiliates from Network or any Affiliate thereof (including without limitation the payment of Base Rent under Section 3.4 below), TESC shall be entitled to retain [ ](4) percent of Data Service Revenues (as defined in Section 3.2.2 below) from each Reporting Period (as defined in Section 3.3.1 below) as rent ("Data Rent") and the remaining [ ](5) percent shall be payable to Network (the "Residual Data Revenues"). For example, if; [ ](6).


3.2.2 "Data Service Revenues" for a particular Reporting Period shall include all revenues generated by Network on or from the Network Data Programming on the Service including, but not limited to, advertising and sponsorship, electronic or other commerce, and/or products and services for which a Service Subscriber pays (including subscriptions, if any) Network a fee. Notwithstanding anything to the contrary contained herein, Data Service Revenues shall not include revenues derived from data related to gambling or wagering activities.


3.3-1 "Reporting Period" for all Programming Service Revenues means the period between the 22nd day of one calendar month and the 21st day of the following calendar, as such Reporting Period may change from time to time in TESC's sole discretion. The Video Programming Service Revenues and the Data Programming Service Revenues are sometimes collectively referred to herein as the Programming Service Revenues.


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3.3.2 Notwithstanding Sections 3.1.2 and 3.2.2, TESC shall be entitled to adjust Programming Service Revenues for any given Reporting Period to account for: (i) differences between Programming Service Revenues previously calculated and Programming Service revenues actually collected by TESC; (ii) Programming Service refunds and credits that have previously been issued by TESC; and/or (iii) sales tax assessed on Programming Service that has previously been remitted by TESC. Network acknowledges and agrees that revenues actually collected by TESC from a particular Service Subscriber will first be applied towards the payment of outstanding balances due for any DISH Network programming services purchased by that Service Subscriber and then will be applied towards the payment of any outstanding balance due from that Service Subscriber for the Programming Service.


3.4 Base Rent


3.4. Base Video Rent. In addition to any other amounts specified herein, Network agrees to pay TESC US$[ ](7) per calendar month for transmission of the Video Programming Service (the "Base Video Rent"). The Base Video Rent payment for each calendar month during the Term shall be due and payable in advance on the last business day of the immediately preceding calendar month. Network's obligation to pay the Base Video Rent shall be absolute, and shall not be contingent in any way on commercial viability or success of the Video Programming Service, or on amounts actually being collected from Service Subscribers.


3.4.2 Base Data Rent. In addition to any other amounts specified herein, Network agrees to pay TESC US$[ ](8) per calendar month for transmission of the Data Programming Service (the "Base Data Rent"). The Base Data Rent payment for each calendar month during the Term commencing upon launch of the data channel shall be due and payable in advance on the last business day of the immediately preceding calendar month. Network's obligation to pay the Base Data Rent shall be absolute, and shall not be contingent in any way on commercial viability or success of the Data Programming Service, or on amounts actually being collected from Service Subscribers. The Base Video Rent and the Base Data Rent are sometimes collectively referred to herein as the "Base Rent."


3.5 Residual Third Party Video Revenues. In the event that TESC transmits any third party audio or video content on the programming channels during any residual time between transmissions of Network's Video Programming, i.e., at times during which Network's Video Programming is not being transmitted, for reasons other than those set forth in Section 10.2 or due to termination or suspension by TESC of such transmissions pursuant to any other term or condition of this Agreement, then TESC shall be entitled to retain [ ](9) percent of Third Party Video Programming Service Revenues (as defined in Section 3.5.1 below) as rent ("Third


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Party Video Rent") and the remaining [ ](10) percent shall be payable to Network (the "Residual Third Party Video Revenues").


3.5.1 "Third Party Video Programming Service Revenues" for a Particular period shall be defined as the net receipts to TESC from third parties resulting from the lease of the video channels which are the subject matter of this Agreement, to third parties during the period in which the video channels are actively in use by Network as contemplated hereunder but the Video Programming Service is not being transmitted at such time. Notwithstanding the foregoing, Third Party Video Programming Service Revenues shall not include, and in no event shall Network be entitled to , any portion of revenues generated from the sale of times on the video channel during which Network's Video Programming is not being transmitted due to the reasons set forth in Section 10.2 or due to termination or suspension by TESC of such transmissions pursuant to any other, term or condition of this agreement.


3.6 Retail Price of Programming Service. The retail price for a single-family subscription to the Video Programming Service will initially be set at US$19.95 per month and US$150 per year per Service Subscriber. The retail price for a single-family subscription to the Data Programming Service will be mutually agreed by the Parties. Any subsequent changes to these rates shall be mutually agreed upon by Network and TESC. The retail price for the Programming Service for hotel and motel rooms shall be mutually agreed upon by the parties. The retail price for the Programming Service for private offices, patient rooms in hospitals, public and private commercial establishments and bulk-billed consumers shall be determined by TESC in its sole judgment.


3.7 Payments and Due Dates


3.7.1 Residual Revenues for a given Reporting Period shall be paid by TESC no later than forty-five (45) days after the end of the calendar month in which the Reporting Period ends.


3.7.2 Any payment not made by Network to TESC within thirty (30) days after it is due shall accrue interest at the rate of one percent (1%) per month, compounded monthly from the date such amount is due until it is paid.


3.7.3 Any payment not made by TESC to Network within thirty (30) days after it is due shall accrue interest at the rate of one percent (1%) per month, compounded monthly from the date such amount is due until it is paid.


4. REPORTS; BOOKS AND RECORDS; AUDIT RIGHTS


4.1 Reports. Within forty-five (45) days after the end of the calendar month in which the relevant Reporting Period ends, TESC shall supply to Network the total number of


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Service Subscribers as of the last day of the relevant Reporting Period and the immediately preceding Reporting Period. Subject to technical feasibility, TESC will use reasonable commercial efforts to supply Network with reports delineating Subscriber Information and indicating the number of new Service Subscribers activated during mutually agreed upon intervals. Network acknowledges and agrees that all information provided by TESC to Network under this Section 4.1 is deemed proprietary to TESC, and Network represents and agrees that it will treat all such information confidential in the same manner as all Subscriber Information (as hereinafter defined in Section 11.11.2 below) under Section 11.11.2 of this Lease.


4.2 Books and Records. TESC shall maintain for a period of at least two (2) years, during the Term and for one (1) year thereafter, complete and accurate records pertaining to distribution of the Programming Service pursuant to this Lease.


4.3 Audit Rights. No more than once every twelve (12) months during the term and on a one-time basis only for one (1) year thereafter, and upon at least thirty (30) business days advance written notice, Network shall have the right through a nationally recognized independent accounting firm, to perform an audit at TESC's offices, during normal business hours, of the books and records of TESC with respect to the Programming Service only for the sole purpose of verifying Residual Revenue payments. Such audit shall be conducted at Network's sole cost, and Network shall promptly provide TESC with a copy of any such audit. If during the course of an audit Network uncovers that TESC has failed to make any Residual Revenue payment or made any underpayments of greater than ten percent (10%) with respect to any Residual Revenue payment made, TESC shall pay to Network, in addition to the unpaid or underpaid Residual Revenue payment, the reasonable costs and expenses incurred by Network in connection with such audit. Network shall, and hereby agrees to obtain the written agreement of any representative or agent conducting such audit on its behalf (including, without limitations accountants and attorneys) to, maintain the confidential treatment of all audited information of TESC in accordance with the provisions of Section 11.11. Performance and acceptance of an audit by Network of TESC's books and records shall be conclusively deemed as acceptance by Network of full and final payment by TESC with respect to all accounts covered by such audit; provided that any unpaid or underpaid Residual Revenues revealed by such audit and any audit expenses required to be paid by TESC under this Section 4.3 are actually paid in full by TESC.


5. MARKETING AND SALES


5.1 Marketing and Press Releases by Network


5.1.1 Marketing by Network. Network will use its best efforts to market and promote the Programming Service to prospective Service Subscribers throughout the Territory. In no event will Network or any of its Affiliates directly or indirectly use any TESC Identifying


Information in connection with the marketing and promotion of the Programming Service without TESC's prior written approval which approval TESC may withhold in its sole discretion. For purposes of this Lease, "TESC Identifying Information" shall mean any logos, trademarks, service marks, trade names or other information in any form now or hereafter used by TESC and/or any of its Affiliates to identify itself or themselves or any of its or their products and/or services. Network shall provide to TESC, at least thirty (30) days prior to first use, an example of any advertising or promotional materials to be used by Network and/or any of its Affiliates that directly or indirectly use any TESC Identifying Information in connection with the marketing and promotion of the Programming Service, which use has not, within the past twelve months, been approved by TESC in exactly the form intended for use. TESC may reject and prohibit Network and its Affiliates from using such materials, for any reason or no reason in its sole and absolute discretion. In the event that TESC does not grant written approval of marketing materials within five (5) business days after receiving them from Network, the marketing materials submitted shall be deemed rejected and Network and its Affiliates shall be prohibited from using such materials. In the event that Network or any of its Affiliates: (i) directly or indirectly uses any TESC Identifying Information in connection with the marketing and promotion of the Programming Service without TESC's prior written approval; or (ii) is required to, but fails to provide TESC with proposed advertising or promotional materials at least thirty (30) days prior to first use, TESC shall be entitled to terminate this Lease effective immediately upon delivery of written notice to Network. Any such termination shall be without prejudice to any other rights or remedies that TESC might have under this Lease, at law, in equity or otherwise. Notwithstanding the foregoing, Network may market and promote the Programming Service as being available on a "high-powered DBS service" (or words of substantially the same import). All advertising, marketing and promotional materials utilized by Network in connection with the Programming Service: (a) will not directly or indirectly advertise, market, promote or otherwise refer to any distributor of programming services which is not owned and/or operated by TESC and/or it Affiliates; and (b) in the event that TESC exercises the Option set forth in Exhibit A hereto, will direct prospective Service Subscribers solely to the toll-free telephone number established by Network under Section 5.4.5 below.


5.1.2 Press Releases by Network. In no event will Network or any of its Affiliates directly or indirectly use any TESC Identifying Information in any press release issued by Network and/or its Affiliates without TESC's prior written approval, which approval TESC may withhold in its sole discretion. Network shall provide to TESC, at least thirty (30) days prior to release and in exactly the form intended to be publicly released by Network and/or any of its Affiliates, any and all press releases which directly or indirectly use any TESC Identifying Information (as defined in Section 5.1.1 above). TESC may reject and prohibit Network and its Affiliates from publicly releasing such press releases, for any reason or no reason in its sole and absolute discretion. In the event that TESC does not grant written approval of a press release within five (5) business days after rec ...