<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
OR
[] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________________ to ____________________
Commission File No. 0-22815
TCI MUSIC, INC.
------------------------------------------------------
(Exact name of Registrant as specified in its charter)
State of Delaware 84-1380293
- -------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
8101 East Prentice Avenue, Suite 500
Englewood, Colorado 80111
- ----------------------------------------- -----------------
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (310) 444-1744
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
The number of shares outstanding of the Registrant's common stock as of
October 31, 1997 was 9,222,631.
<PAGE> 2
TCI MUSIC, INC. AND SUBSIDIARIES
(A Subsidiary of Tele-Communications, Inc.)
Consolidated Balance Sheets
(unaudited)
<TABLE>
<CAPTION>
TCI Music, Inc. DMX Inc.
(note 2) (note 2)
September 30, June 30,
1997 1997
---------- -------
Assets amounts in thousands
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 1,783 664
Trade receivables:
Related party -- 1,482
Other 2,048 3,004
-------- --------
2,048 4,486
Allowance for doubtful accounts 432 451
-------- --------
1,616 4,035
-------- --------
Prepaid expenses 1,551 827
Equipment inventory 6,124 492
-------- --------
11,074 6,018
Cash DMX-Europe N.V 168 168
-------- --------
Total current assets 11,242 6,186
-------- --------
Investment in Galactic/TEMPO Sound ("Galactic/TEMPO")
636 558
Property and equipment, net:
Furniture and equipment 2,760 4,399
Leasehold improvements 41 213
Studio equipment 990 3,432
Music library 277 1,047
Computer system 167 571
-------- --------
4,235 9,662
Less accumulated depreciation 484 5,694
-------- --------
3,751 3,968
-------- --------
Property and equipment DMX-Europe N.V., net 164 164
Intangible assets (note 4) 97,428 --
Less accumulated amortization 2,390 --
-------- --------
95,038 --
-------- --------
Other assets 2,405 110
-------- --------
$113,236 10,986
======== ========
</TABLE>
(continued)
I-1
<PAGE> 3
TCI MUSIC, INC. AND SUBSIDIARIES
(A Subsidiary of Tele-Communications, Inc.)
Consolidated Balance Sheets
(unaudited)
<TABLE>
<CAPTION>
TCI Music, Inc. DMX Inc.
(note 2) (note 2)
September 30, June 30,
1997 1997
-------------- ----------
amounts in thousands
<S> <C> <C>
Liabilities and Stockholders' Equity (Deficit)
Current liabilities:
Accounts payable $ 1,881 1,815
Accrued liabilities 4,627 7,524
Accrued loss on disposal - DMX-Europe N.V. (note 5) 2,827 2,827
Current portion of debt 21 158
--------- ---------
9,356 12,324
--------- ---------
Current liabilities DMX-Europe N.V. (note 5):
Accounts payable 1,014 1,014
Accrued liabilities 1,525 1,525
Investment in and advances to DMX-Europe (UK) 6,721 6,591
--------- ---------
Total current liabilities DMX-Europe N.V 9,260 9,130
--------- ---------
Total current liabilities 18,616 21,454
--------- ---------
Other liabilities 2,129 2,082
Deferred income taxes 3,075 --
--------- ---------
Total liabilities 23,820 23,536
--------- ---------
Stockholders' equity (deficit):
DMX Inc. common stock, $.01 par value;
(DMX common stock)
Authorized 100,000,000 shares;
Issued 59,672,224 shares -- 597
TCI Music, Inc. preferred stock, $.01 par value;
Authorized 5,000,000 shares;
No shares issued -- --
TCI Music, Inc. common stock:
Series A Common Stock, $.01 par value;
Authorized 295,000,000 shares;
Issued 14,896,648 shares 149 --
Series B Common Stock, $.01 par value;
Authorized 200,000,000 shares;
Issued 62,500,000 shares 625 --
Additional paid-in capital 41,959 136,896
Accumulated earnings (deficit) 160 (152,787)
Foreign currency translation reserve -- (430)
Treasury stock, 85,630 shares at cost -- (578)
--------- ---------
42,893 (16,302)
Due to related party (note 6) 46,523 3,752
--------- ---------
Total stockholders' equity (deficit) 89,416 (12,550)
--------- ---------
Commitments and contingencies (note 8)
$ 113,236 10,986
========= =========
</TABLE>
See accompanying notes to consolidated financial statements
I-2
<PAGE> 4
TCI MUSIC, INC. AND SUBSIDIARIES
(A Subsidiary of Tele-Communications, Inc.)
Consolidated Statements of Operations
(unaudited)
<TABLE>
<CAPTION>
TCI Music DMX Inc.
(note 2) (note 2)
------------ ------------
Three months Three months
ended ended
September 30, September 30,
1997 1996
------------ ------------
amounts in thousands
<S> <C> <C>
Revenue:
Subscriber fee revenue:
Related party (notes 4 and 6) $ 7,042 2,438
Other 3,133 1,939
Other 260 160
DMX-Europe N.V. (note 5) -- 598
------------ ------------
10,435 5,135
------------ ------------
Operating costs and expenses:
Operating 2,926 2,591
Selling, general and administrative 2,627 3,756
Stock compensation 178 137
Depreciation and amortization 3,004 581
DMX-Europe N.V. (note 5) -- 3,630
Loss on disposal of DMX-Europe (note 5) -- 7,153
------------ ------------
8,735 17,848
------------ ------------
Operating income (loss) 1,700 (12,713)
Other income (expense):
Interest expense
Related party (note 6) (1,050) --
DMX-Europe N.V. (note 5) -- 243
Other 18 (40)
------------ ------------
(1,032) 203
Equity in earnings of Galactic/TEMPO 78 90
Other, net (253) (292)
------------ ------------
(1,207) 1
------------ ------------
Income tax expense 333 --
------------ ------------
Net income (loss) $ 160 (12,712)
============ ============
Income (loss) per common share $ .01 (.21)
============ ============
Weighted average number of common shares 77,396,648 59,586,570
============ ============
</TABLE>
See accompanying notes to consolidated financial statements
I-3
<PAGE> 5
TCI MUSIC, INC. AND SUBSIDIARIES
(A Subsidiary of Tele-Communications, Inc.)
Consolidated Statement of Stockholders' Equity
Three months ended September 30, 1997
(unaudited)
<TABLE>
<CAPTION>
Additional Due to
Common Stock Paid in Accumulated Related
Series A Series B capital earnings Party Total
-------- -------- ------- -------- -------- -----
<S> <C> <C> <C> <C> <C> <C>
Balance at July 1, 1997 $ 149 $ 625 $ 39,546 $-- $ 43,752 $ 84,072
Recognition of stock compensation -- -- 178 -- -- 178
Accretion of put option (note 4) -- -- 2,235 -- -- 2,235
Net income -- -- -- 160 -- 160
Borrowings from related party -- -- -- -- 4,233 4,233
Repayments to related party -- -- -- -- (289) (289)
Other changes due to related party -- -- -- -- (1,173) (1,173)
-------- -------- -------- -------- -------- ---------
Balance at September 30, 1997 $ 149 $ 625 $ 41,959 $ 160 $ 46,523 $ 89,416
======== ======== ======== ======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements
I-4
<PAGE> 6
TCI MUSIC, INC. AND SUBSIDIARIES
(A Subsidiary of Tele-Communications, Inc.)
Consolidated Statements of Cash Flows
(unaudited)
<TABLE>
<CAPTION>
TCI Music, Inc. DMX Inc.
(note 2) (note 2)
------------- --------------
Three months Three months
ended ended
September 30, September 30,
1997 1996
----------- ----------
amounts in thousands
(see note 3)
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 160 (12,712)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 3,004 816
Equity in earnings of Galactic/TEMPO (78) (90)
Loss on disposal of DMX-Europe N.V -- 7,153
Stock compensation 178 137
Provision for doubtful accounts 116 643
Deferred income tax expense (508) --
Changes in operating assets and
liabilities:
Change in receivables 2,303 918
Change in prepaid expenses and other
current assets (794) (120)
Change in other assets (2,269) 29
Change in accounts payable, accrued
liabilities and other (3,339) 1,760
Change in other due to related party (1,173) --
------- -------
Net cash used in operating activities (2,400) (1,466)
------- -------
Cash flows from investing activities:
Capital expended for property and
equipment, net (287) (469)
------- -------
Cash flows from financing activities:
Borrowings from related party 4,233 --
Repayments to related party (289) (102)
Repayments of debt (138) --
------- -------
Net cash provided by (used in) financing
activities 3,806 (102)
------- -------
Net increase (decrease) in cash and cash
equivalents 1,119 (2,037)
Cash and cash equivalents, beginning of period 832 3,158
------- -------
Cash and cash equivalents, end of period $ 1,951 1,121
======= =======
</TABLE>
See accompanying notes to consolidated financial statements
I-5
<PAGE> 7
TCI MUSIC, INC. AND SUBSIDIARIES
(A Subsidiary of Tele-Communications, Inc.)
Notes to Consolidated Financial Statements
September 30, 1997
(unaudited)
(1) Organization
TCI Music, Inc. ("TCI Music") was incorporated on January 21, 1997, and
on January 24, 1997 one share of TCI Music Series B common stock, $.01
par value per share ("TCI Music Series B Common Stock"), was issued to
Tele-Communications, Inc. ("TCI") for a capital contribution of $1. On
July 11, 1997, DMX Inc. ("DMX") and TCI Music, consummated a merger
pursuant to an Agreement and Plan of Merger, dated February 6, 1997, as
amended by Amendment One to Merger Agreement dated May 29, 1997 (the
"Merger Agreement"), among DMX, TCI, TCI Music, and TCI Merger Sub
("Merger Sub"), a wholly-owned subsidiary of TCI Music, whereby Merger
Sub was merged with and into DMX (the "Merger"), with DMX as the
surviving corporation and TCI Music became the successor registrant to
DMX. The Merger was deemed effective July 1, 1997 for accounting
purposes. See note 4.
The outstanding shares of TCI Music Series A Common Stock represent
approximately 19.25% of, and 2.3% of the voting power related to, the
total outstanding shares of TCI Music Series A Common Stock and TCI
Music Series B Common Stock (together, the "TCI Music Common Stock");
and the outstanding shares of TCI Music Series B Common Stock represent
approximately 80.75% of, and 97.7% of the voting power related to the
total outstanding shares of TCI Music Common Stock. TCI beneficially
owns approximately 45.7% of the outstanding shares of TCI Music Series A
Common Stock and 100% of the outstanding shares of TCI Music Series B
Common Stock, which TCI ownership collectively represents approximately
89.6% of the outstanding shares of TCI Music Common Stock and 98.7% of
the voting power of the outstanding shares of TCI Music Common Stock.
TCI Music's business consists principally of the business of DMX which
is primarily engaged in programming, distributing and marketing a
digital music service; Digital Music Express(R) (DMX(R)), providing
continuous 24 hours-per-day commercial free, compact disc quality music
programming.
(2) Basis of Presentation
In the accompanying financial statements and in the following text,
references are made to DMX and TCI Music. The financial statements as of
June 30, 1997 and for the three months ended September 30, 1996, reflect
the consolidated results of operations and financial condition of DMX
and are referred to as "DMX". The financial statements as of September
30, 1997 and for the three months then ended reflect the consolidated
results of operations and financial condition of TCI Music and are
referred to as "TCI Music". The "Company" refers to both TCI Music and
its predecessor, DMX.
The accompanying consolidated financial statements include the accounts
of the Company and those of all wholly-owned subsidiaries. All
significant intercompany accounts and transactions have been eliminated
for all periods presented. As a result of the Merger, the consolidated
financial information for the periods after the Merger is presented on a
different cost basis than that for the periods before the Merger and,
therefore, is not comparable.
(continued)
I-6
<PAGE> 8
TCI MUSIC, INC. AND SUBSIDIARIES
(A Subsidiary of Tele-Communications, Inc.)
Notes to Consolidated Financial Statements
September 30, 1997
(unaudited)
Effective July 11, 1997, TCI Music as the successor registrant to DMX,
changed its fiscal year end from September 30 to December 31, and
reported the nine month transition period ended June 30, 1997 on Form
10-K.
The accompanying interim consolidated financial statements are unaudited
but, in the opinion of management, reflect all adjustments (consisting
of normal recurring accruals) necessary for a fair presentation of the
results for such periods. The results of operations for any interim
period are not necessarily indicative of results for the full year.
These consolidated financial statements should be read in conjunction
with the consolidated financial statements and notes thereto contained
in TCI Music's Transition Report on Form 10-K for the transition period
from October 1, 1996 to June 30, 1997.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
at the date of the financial statements and the reported amounts of
revenue and expenses during the reporting period. Actual results could
differ from those estimates.
Certain amounts have been reclassified for comparability with the
current period presentation.
(3) Supplemental Disclosures to Consolidated Statements of Cash Flows
Cash paid for interest was approximately $102,000 and $62,000 for the
three months ended September 30, 1997 and 1996, respectively. Also,
during these periods, cash paid for income taxes was not material.
(4) Merger and Related Transactions
In connection with the Merger, TCI and TCI Music entered into a
Contribution Agreement dated July 11, 1997, as amended by the Amended
and Restated Contribution Agreement (the "Amended Contribution
Agreement"). Pursuant to the Amended Contribution Agreement: (i) TCI
Music issued to TCI (as designee of certain of its indirect
subsidiaries), 62,500,000 shares of TCI Music Series B Common Stock, par
value $.01 per share, and a promissory note in the amount of $40 million
(the "TCI Music Note"), (ii) until June 30, 1997, certain subsidiaries
of TCI will transfer to TCI Music the right to receive all revenue from
sales of DMX music services to their residential and commercial
subscribers, net of an amount equal to 10% of the revenue from such
sales to residential subscribers and net of the revenue otherwise
payable to DMX as license fees for DMX's music services under
affiliation agreements currently in effect (the "Contributed Net DMX
Revenues"); (iii) TCI contributed to TCI Music certain digital
commercial tuners that are not in service, and (iv) TCI granted to each
stockholder of DMX who became a stockholder of TCI Music pursuant to the
Merger, one right (a "Right") with respect to each whole share of Series
A Common Stock, $.01 par value per share, of TCI Music ("TCI Music
Series A Common Stock") acquired by such stockholder in the Merger
pursuant to the terms of the Rights Agreement
(continued)
I-7
<PAGE> 9
TCI MUSIC, INC. AND SUBSIDIARIES
(A Subsidiary of Tele-Communications, Inc.)
Notes to Consolidated Financial Statements
September 30, 1997
(unaudited)
among TCI, TCI Music and the Bank of New to require TCI to purchase from
such holder one share of TCI Music Series A Common Stock at a purchase
price of $8.00 per share payable at the election of TCI, in cash, a
number of shares of Tele-Communications, Inc. Series A TCI Group Common
Stock, having an equivalent value or a combination thereof, if during
the one-year period beginning on July 11, 1997, the effective date of
the Merger, the price of TCI Music Series A Common Stock does not equal
or exceed $8.00 per share for a period of at least 20 consecutive
trading days.
Upon consummation of the Merger, each outstanding share of DMX Common
Stock was converted into the right to receive (i) one-quarter of a share
of TCI Music Series A Common Stock, (ii) one Right with respect to each
whole share of TCI Music Series A Common Stock and (iii) cash in lieu of
fractional shares of TCI Music Series A Common Stock and Rights. Until
the Rights expire or are exercised, the Rights will be evidenced by a
legend on the certificates for shares of TCI Music Series A Common Stock
issued in the Merger. Accordingly, the Rights associated with the shares
of TCI Music Series A Common Stock will be represented solely by, and
will not be separable from, such shares of TCI Music Series A Common
Stock, and the surrender or transfer of any such certificate for shares
of TCI Music Series A Common Stock will also constitute the surrender or
transfer of the Rights associated with the TCI Music Series A Common
Stock represented by such certificate.
The estimated aggregate fair value of the Series A Common Stock and
associated Rights (the Merger Consideration) issued to entities not
controlled by TCI (the "Unaffiliated Stockholders") and the carryover
basis of the Merger Consideration issued to entities controlled by TCI
has been allocated to excess cost over fair value of assets as the net
book values of DMX's assets and liabilities are assumed to approximate
their respective fair values. The number of shares and Rights issued is
based upon DMX Common Stock ownership as of June 30, 1997. The estimated
fair value of the Merger Consideration issued to Unaffiliated
Stockholders is being accreted to the value of $8.00 per share (the
equivalent of $2.00 per share of DMX Common Stock), subject to reduction
by the aggregate amount per share of any dividend and certain other
distributions, if any, made by TCI Music to its stockholders during the
one-year period beginning on the effective date of the Merger. Such
accretion is reflected as an increase in excess cost with a
corresponding increase to additional paid-in capital. Excess cost is
being amortized over ten years. Additional information concerning the
assumed valuation of the TCI Music Series A Common Stock is set forth
below (amounts in thousands):
(continued)
I-8
<PAGE> 10
TCI MUSIC, INC. AND SUBSIDIARIES
(A Subsidiary of Tele-Communications, Inc.)
Notes to Consolidated Financial Statements
September 30, 1997
(unaudited)
<TABLE>
<S> <C>
Shares issued to TCI, valued at carryover basis at June
30, 1997 (6,812,393 shares) $ 14,087
Shares issued to others, valued at estimated fair value
of $7.40 per share (8,084,255 shares) 59,824
--------
Total value assigned to TCI Music Series A
Common Stock 73,911
Merger costs incurred by TCI 1,397
Elimination of DMX historical stockholders' deficit at
June 31, 1997 16,302
Increase in deferred income tax liability due to
purchase price allocation 3,583
Affiliation agreements and Commercial contracts (8,740)
--------
Excess purchase price $ 86,453
========
Intangibles as of September 30, 1997 (amounts in thousands):
Affiliation agreements and Commercial contracts $ 8,740
Excess cost 86,453
Accretion of put option for the three months ended
September 30, 1997 2,235
Accumulated amortization as of September 30, 1997 (2,390)
--------
Net book value $ 95,038
========
</TABLE>
The following table represents the summary balance sheet of DMX at June
30, 1997 prior to the consummation of the Merger and the opening summary
balance sheet of TCI Music subsequent to the consummation of the Merger
(amounts in thousands):
<TABLE>
<CAPTION>
TCI Music DMX
--------- -----
<S> <C> <C>
Assets
Current assets $ 5,694 5,694
Property and equipment, net 4,132 4,132
Other assets 101,953 1,160
-------- --------
$111,779 10,986
======== ========
Liabilities and Equity
Current liabilities $ 15,292 14,706
Capital lease obligation 158 158
Other liabilities 12,257 8,672
-------- --------
Total liabilities 27,707 23,536
Equity (deficit) 40,320 (16,302)
Due to related party 43,752 3,752
-------- --------
$111,779 10,986
======== ========
</TABLE>
(continued)
I-9
<PAGE> 11
TCI MUSIC, INC. AND SUBSIDIARIES
(A Subsidiary of Tele-Communications, Inc.)
Notes to Consolidated Financial Statements
September 30, 1997
(unaudited)
Unaudited pro forma summarized operating results of the Company assuming
the Merger had been consummated on July 1, 1996, are as follows (amounts
in thousands):
<TABLE>
<CAPTION>
Three months ended
September 30, 1996
-------------------
<S> <C>
Revenue $ 9,635
========
Net loss $(12,016)
========
Pro forma net loss per
common share $ (.20)
=======
</TABLE>
The foregoing unaudited pro forma information is based upon historical
results of operations and is not necessarily indicative of the results
that would have been obtained had the Merger actually occurred on July
1, 1996.
(5) Investment in and disposition of DMX-Europe N.V. and Subsidiary
On May 17, 1996, DMX consummated the merger of TCI-Euromusic, Inc.
("TCI-E"), an indirect affiliate of TCI ("the TCI-E Merger") pursuant to
the terms of the Agreement and Plan of Merger, dated August 28, 1995, as
amended as of November 1, 1995 and January 17, 1996 among DMX, TCI-E and
United Artists Programming International, Inc. ("UAPI"), an indirect
affiliate of TCI and owner of the outstanding shares of TCI-E. As a
result of the TCI-E Merger, DMX acquired the remaining 49% interest in
DMX-Europe N.V. ("DMX-E NV") and its subsidiary DMX-Europe (UK) Limited
("DMX-E UK"), collectively ("DMX-E").
DMX-E ceased operation on July 1, 1997. Due to the fact that DMX-E UK
was placed into receivership on July 1, 1997 and into liquidation on
July 18, 1997, the Company no longer has control over operations and
activities. Accordingly the accompanying balance sheets as of September
30, 1997 and June 30, 1997 give effect to the deconsolidation of DMX-E
UK. DMX-E NV, although inactive since July 1, 1997, is scheduled for
liquidation proceedings to commence during the fourth calendar quarter
of 1997.
As a result of the DMX-E cessation of operations, the Subscription and
Shareholder Agreements dated December 18, 1996 ("Definitive Agreements")
between DMX; Mr. Jerold H. Rubinstein, an individual; and XTRA Music
Limited, a corporation under laws of England ("XTRA") were put into
place whereby the termination certificate was executed in July 1997,
which terminated the stock purchase agreement dated December 18, 1996
that provided the disposition of DMX-E to Mr. Jerold H. Rubinstein.
Pursuant to the Definitive Agreements, DMX obtained a 10% interest in
XTRA and a channel distribution agreement was executed between XTRA and
DMX ("The Channel Distribution Agreement"). The Channel Distribution
Agreement provided XTRA an exclusive, five-year, royalty-free license to
distribute the
(continued)
I-10
<PAGE> 12
TCI MUSIC, INC. AND SUBSIDIARIES
(A Subsidiary of Tele-Communications, Inc.)
Notes to Consolidated Financial Statements
September 30, 1997
(unaudited)
DMX music service in Europe, the former Soviet Union and in the Middle
East and the right to use DMX's trademarks for two years. The music
service is currently not being distributed by XTRA as Mr. Jerold H.
Rubinstein is seeking financial partners.
The Company has accounted for the affects of the loss on disposal of
DMX-E and has estimated the loss on the disposal of DMX-E in the
consolidated statements of operations. The loss on disposal of
DMX-Europe N.V. reflected a write down of the assets to their estimated
net realizable value at June 30, 1997. The loss on disposal for 1996 was
estimated as the net investment of $5.7 million and the incurrence of
certain potential liabilities of $1.5 million in conjunction with such
disposal activities.
(6) Related Party Transactions
Pursuant to an Amended and Restated Contribution Agreement between TCI
and TCI Music to be effective as of July 1, 1997 (the "Amended
Contribution Agreement") TCI is required to deliver, or cause certain of
its subsidiaries to deliver (in lieu of TCI's obligation to cause its
affiliates to make contributions to TCI Music under the Contribution
Agreement, as described above) to TCI Music monthly payments aggregating
$18 million annually, adjusted annually through 2017 (the "Annual TCI
Payments"). Pursuant to the Amended Contribution Agreement, the Annual
TCI payments will represent (i) revenue of certain subsidiaries of TCI
that is attributable to the distribution and sale of the DMX service to
cable subscribers who receive the DMX Service via C-Band satellite
transmission (rather than digital compression technology) (net of an
amount equal to 10% of such revenue derived from residential customers
and license fees otherwise payable to DMX pursuant to the Affiliation
Agreement) and (ii) compensation to TCI Music and DMX for various other
rights. During the three months ended September 30, 1997, TCI Music
recognized [$4.8 million] pursuant to the Amended Contribution
Agreement.
Pursuant to an affiliation agreement (the "Affiliation Agreement")
between TCI and TCI Music, effective as of July 1, 1997, TCI has the
non-exclusive right to distribute and subdistribute the DMX Service to
commercial and residential customers for a 10-year period in exchange
for licensing fees paid by TCI to DMX. Under the Affiliation Agreement,
the annual fee paid by TCI to DMX will be $8.5 million for the initial
three years, subject to an adjustment annually for inflation and
subscribers served by certain divested systems and acquired systems, and
certain other matters. During the fourth through tenth years of the term
of the Affiliation Agreement, the annual fee will be further adjusted on
a monthly basis upward or downward, as the case may be, based on the
increase or decrease in the actual number of subscribers above or below
a specified number of subscribers, such adjustment calculated in
accordance with the terms of the Affiliation Agreement and not to exceed
a maximum annual reduction of 10% of the prior year's fees. During the
three months ended September 30, 1997, TCI Music recognized $2.1 million
pursuant to the Affiliation Agreement.
(continued)
I-11
<PAGE> 13
TCI MUSIC, INC. AND SUBSIDIARIES
(A Subsidiary of Tele-Communications, Inc.)
Notes to Consolidated Financial Statements
September 30, 1997
(unaudited)
Upon consummation of the Merger, the Company became a party to a tax
sharing agreement (the "Old Tax Sharing Agreement") among TCI and
certain subsidiaries of TCI implemented July 1, 1995. The Old Tax
Sharing Agreement formalized certain elements of a pre-existing tax
sharing arrangement and contains additional provisions regarding the
allocation of certain consolidated income tax attributes and the
settlement procedures with respect to the intercompany allocation of
current tax attributes. The tax liabilities and benefits of such
entities so determined are charged or credited to an intercompany
account between TCI and the Company. Such intercompany account is
required to be settled only upon the date that an entity ceases to be a
member of TCI's consolidated group for federal income tax purposes.
Under the Old Tax Sharing Agreement, TCI retains the burden of any
alternative minimum tax credit attributable to any beginning on or after
July 1, 1995 and ending on or before October 1, 1997.
Effective October 1, 1997, the Old Tax Sharing Agreement was replaced by
a new tax sharing agreement, as amended by the First Amendment thereto
(the "New Tax Sharing Agreement"), which governs the allocation and
sharing of income taxes by the TCI Group, the Liberty Media Group and
TCI Ventures Group (each a "Group"). The Company and its subsidiaries
are members of Liberty Media Group for purposes of the New Tax Sharing
Agreement. Effective for periods on and after October 1, 1997, federal
income taxes will be computed based upon the type of tax paid by TCI (on
a regular tax or alternative minimum tax basis) on a separate basis for
each Group. Based upon these separate calculations, an allocation of tax
liabilities and benefits will be made such that each Group will be
required to make cash payments to TCI based on its allocable share of
TCI's consolidated federal income tax liabilities (on a regular tax or
alternative minimum tax basis, as applicable) attributable to such Group
and actually used by TCI in reducing its consolidated federal income tax
liability. Pursuant to the New Tax Sharing Agreement, state and local
income taxes are calculated on a separate return basis for each Group
(applying provisions of state and local tax law and related regulations
as if the Group were a separate unitary or combined group for tax
purposes), and TCI's combined or unitary tax liability is allocated
among the Groups based upon such separate calculation.
Notwithstanding the foregoing, items of income, gain, loss, deduction or
credit resulting from certain specified transactions that are
consummated after October 1, 1997 pursuant to a letter of intent or
agreement that was entered into prior to such date will be shared and
allocated pursuant to the terms of the Old Tax Sharing Agreement, as
amended.
On February 6, 1997 the Company entered into a loan and security
agreement with TCI which provides the Company up to $3.5 million. The
loan proceeds were used to purchase and/or reimburse the Company for
equipment and certain costs related to obtaining commercial customers.
The loan, as amended on May 29, 1997, bears interest at a rate of 12.5%
per annum and is to be paid in 34 equal monthly installments commencing
September 1, 1997.
(continued)
I-12
<PAGE> 14
TCI MUSIC, INC. AND SUBSIDIARIES
(A Subsidiary of Tele-Communications, Inc.)
Notes to Consolidated Financial Statements
September 30, 1997
(unaudited)
On July 11, 1997 in connection with the Merger, the Company entered into
a $2 million revolving credit note and a $40 million promissory note
with TCI. The $2 million revolving credit bears interest at 10% per
annum maturing 180 days from the issuance with interest payable
quarterly beginning October 1, 1997. As amended on November 7, 1997, the
$40 million promissory note bears interest at 10% per annum with
principal and interest due January 10, 1999. The interest will be waived
by TCI if principal is paid in full on or before January 10, 1998.
On September 19, 1997, the Company entered into a $2,183,169 note
payable with Liberty Media Corporation, a wholly owned subsidiary of
TCI. The proceeds were issued to Paradigm Music Entertainment Company as
a note receivable in contemplation of a merge and is included in other
assets in the accompanying balance sheet. See note 9. The note bears
interest at 10% per annum payable quarterly beginning December 31, 1997
and matures on December 31, 1998.
The Company has an equipment lease with the National Digital Television
Center, Inc., a subsidiary of TCI ("NDTC"), for the equipment at the
studio and uplinking facility in Littleton, Colorado. The outstanding
balance of the capital lease obligation at September 30, 1997 was
approximately $1,134,000 with terms that extend through the year 2000,
at an interest rate of 9.5%. The related studio equipment had a net book
value of approximately $838,000 at September 30, 1997 and is included in
Property and Equipment, net, in the accompanying consolidated balance
sheets.
The components of due to related party at September 30, 1997 are as
follows (amounts in thousands):
<TABLE>
<CAPTION>
Principal Interest Total
--------- -------- -------
<S> <C> <C> <C>
$3.5 million equipment loan $ 3,379 35 $ 3,414
$2.0 million revolving credit note 900 20 920
$40 million promissory note 40,000 888 40,888
$2.18 million note payable 2,183 7 2,190
$1.13 million capital lease obligation 1,134 -- 1,134
------- ------- -------
Total debt $47,596 950 $48,546
Accounts receivable -- -- (2,864)
Taxes -- -- 841
-------
Total due to related party $46,523
=======
</TABLE>
(7) Stock Options and Commitments
Upon the consummation of the Merger, the Company granted options to the
Board of Directors to purchase 3,000,002 shares of TCI Music Series A
Common Stock at a price of $6.25 per share. The options will vest in 20%
cumulative increments, with the first increment vesting on the effective
day of the Merger, and each additional increment vesting on the
anniversary. The options will be exercisable for up to ten years with no
rights being issued in connection with TCI Music Series A Common Stock
issued upon exercise of any such options. Additionally, the Company
granted options to employees to purchase 499,400 shares of TCI Music
Series A Common Stock at a price of $6.25 per share. The options will
vest annually in 20% cumulative increments beginning on the first
anniversary of the Merger. The options will be
(continued)
I-13
<PAGE> 15
TCI MUSIC, INC. AND SUBSIDIARIES
(A Subsidiary of Tele-Communications, Inc.)
Notes to Consolidated Financial Statements
September 30, 1997
(unaudited)
exercisable for up to ten years with no rights being issued in
connection with TCI Music Series A Common Stock issued upon exercise of
any such options. In connection with the issuance of the options to the
directors and the employees, the Company recorded compensation of
approximately $178,000 for the period ended September 30, 1997.
(8) Commitments and Contingencies
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 DMX-DJ's. The Company was not obligated to purchase or
guarantee the purchase of any minimum number of tuners or DMX-DJ's,
but S-A was the exclusive tuner manufacturer in the U.S. and Canada and
earned a royalty of approximately five percent (5%) of 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 the Company, its
approved customers and/or affiliates within 42 months after commencement
of the agreement.
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.
As described in note 5, "Investment in and Disposition of DMX-Europe
N.V. and Subsidiary", DMX-E ceased operations and DMX-Europe (U.K.)
Limited was put into receivership on July 1, 1997 and into liquidation
proceedings on July 18, 1997. DMX-Europe NV, although inactive since
July 1, 1997, has not yet been put into liquidation; however, these
proceedings are scheduled to commence during the fourth calendar quarter
of 1997. In such circumstances, claims may be filed under the guarantees
discussed above or other claims may be asserted.
(continued)
I-14
<PAGE> 16
TCI MUSIC, INC. AND SUBSIDIARIES
(A Subsidiary of Tele-Communications, Inc.)
Notes to Consolidated Financial Statements
September 30, 1997
(unaudited)
Legal Actions
From time to time the Company may be a party to legal actions arising in
the ordinary course of business, including claims by former employees.
In the opinion of the Company's management, after consultation with
counsel, disposition of such matters are not expected to have a
material adverse effect upon the financial position, results of
operations or liquidity of the Company.
(9) Recent Developments
TCI Music, TCI Music Acquisition Sub, Inc., a Florida corporation and a
wholly-owned subsidiary of TCI Music ("Acquisition Sub"), and The Box
Worldwide, Inc., a Florida corporation ("The Box"), have entered into an
Agreement and Plan of Merger dated as of August 12, 1997 (the "Box
Merger Agreement"). Pursuant to the Box Merger Agreement, Acquisition
Sub will be merged with and into The Box with The Box as the surviving
corporation (the "Box Merger"). Outstanding shares of common stock of
The Box will be converted into a number of shares of TCI Music Series A
Convertible Preferred Stock, $.01 par value ("Music Preferred Stock")
based on the formula described below, and all common stock of The Box
outstanding immediately after the Box Merger (the number of which will
be equal to the number of outstanding shares of common stock of The Box
outstanding immediately before the Box Merger) will be owned by TCI
Music. Unless converted into shares of common stock of The Box or unless
the holder thereof exercises dissenters' rights under the Florida
Business Corporation Act (the "FBCA"), the 1,666,667 shares of 6%
Convertible Redeemable Preferred Stock of The Box will remain
outstanding after the Box Merger.
Consummation of the Box Merger will be subject to the satisfaction or
waiver of various conditions, including, among others, the approval of
the Box Merger by shareholders of The Box holding more than 75% of its
voting shares and receipt of governmental and other third-party
approvals and consents. There are no assurances that the Box Merger will
be consummated.
Common stock of The Box will be valued at $1.50 per share for purposes
of the Box Merger, and each share of common stock of The Box will be
convertible into the number of shares of Music Preferred Stock equal to
the product of (i) $1.50 divided by the average trading price of the TCI
Music Series A Common Stock over a period of 20 consecutive trading days
ending on the third trading day prior to the closing of the Box Merger
and (ii) one-third. Assuming that none of the holders of common stock of
The Box exercise dissenters' rights under the FBCA, and that no
outstanding options, warrants or other rights to acquire common stock of
The Box are exercised prior to the Box Merger, the aggregate value of
the consideration to be paid to the holders of common stock of The Box
would be approximately $36 million. Each share of Music Preferred Stock
will initially be convertible at the option of the holder into three
shares of TCI Music Series A Common Stock subject to certain
antidilution adjustments, and will be entitled to the number of votes
equal to the number of votes equal to the number of shares of TCI Music
Series A Common Stock into which the
(continued)
I-15
<PAGE> 17
TCI MUSIC, INC. AND SUBSIDIARIES
(A Subsidiary of Tele-Communications, Inc.)
Notes to Consolidated Financial Statements
September 30, 1997
(unaudited)
Music Preferred Stock is convertible on all matters submitted to TCI
Music stockholders for a vote, voting together with the TCI Music Series
A Common Stock and TCI Music Series B Common Stock. Unlike the shares of
TCI Music Series A Common Stock issued to former stockholders of DMX,
the shares of TCI Music Series A Common Stock into which the Music
Preferred Stock is convertible will not have any rights associated
therewith pursuant to which the holders thereof will have the right to
require TCI to purchase their shares of Series A Common Stock.
Three of The Box's shareholders, H.F. Lenfest, J. Patrick Michaels, Jr.
and StarNet/CEA II Partners (the "Voting Shareholders") have entered
into a voting agreement with TCI Music dated as of August 12, 1997 (the
"Voting Agreement"). Pursuant to the Voting Agreement, the Voting
Shareholders, who collectively beneficially own 60.5% of the outstanding
shares of common stock of The Box, have agreed to vote such shares,
which represent 56.7% of the voting stock of The Box, in favor of the
adoption and approval of the Box Merger and to vote against any proposal
that would compete or interfere with the Box Merger.
On September 18, 1997, TCI Music and Paradigm Music Entertainment
Company, a Delaware corporation ("Paradigm"), entered into a binding
letter of intent (the "LOI"). Pursuant to the LOI, a wholly-owned
subsidiary of TCI Music will be merged with and into Paradigm with
Paradigm as the surviving corporation (the "Paradigm Merger").
Outstanding shares of common stock of Paradigm (other than shares with
respect to which dissenters' rights have been demanded) will be
converted into shares of TCI Music Series A Common Stock, and all common
stock of Paradigm outstanding immediately after the Paradigm Merger will
be owned by TCI Music.
Consummation of the Paradigm Merger will be subject to the satisfaction
or waiver of various conditions, including, among others, the approval
of the Paradigm Merger by stockholders of Paradigm holding more than a
majority of its voting shares and receipt of governmental and other
third-party approvals and consents. There are no assurances that the
Paradigm Merger will be consummated.
The TCI Music Series A Common Stock to be issued to existing
stockholders of Paradigm in connection with the Paradigm Merger will
have an aggregate market value of approximately $22.3 million
(determined by the average of the mean daily closing bid and asked
prices of TCI Music Series A Common Stock during the 20 consecutive
trading days ending on the third trading day prior to the closing of the
Paradigm Merger). TCI Music will also either assume debt of, or
contribute cash to, Paradigm in connection with the Paradigm Merger, in
either case in the amount of approximately $5.0 million.
Pursuant to the LOI, TCI Music loaned approximately $2.2 million, and is
obligated to advance additional amounts of up to $550,000 per month for
the months of October, November and December 1997 (collectively the
"Advances"), to Paradigm to fund operations pending closing of the
Paradigm Merger. The Advances bear interest at 10% per annum, are
secured by all of Paradigm's assets, and are due and payable no later
than June 30, 1998.
(continued)
I-16
<PAGE> 18
TCI MUSIC, INC. AND SUBSIDIARIES
(A Subsidiary of Tele-Communications, Inc.)
Notes to Consolidated Financial Statements
September 30, 1997
(unaudited)
At the effective time of the Paradigm Merger, Thomas McPartland,
President and Chief Executive Officer of Paradigm, will be appointed
President and Chief Executive Officer of, and will become a director of,
TCI Music.
Three of Paradigm's principal stockholders (the "Paradigm Voting
Stockholders") have entered into a Voting Agreement with Paradigm and
TCI Music dated as of September 18, 1997 (the "Paradigm Voting
Agreement"). Pursuant to the Paradigm Voting Agreement, the Paradigm
Voting Stockholders, who collectively beneficially own 39.2% of the
outstanding shares of common stock of Paradigm have agreed to vote such
shares, which represent 70.3% of the voting stock of Paradigm, in favor
of the adoption and approval of the Paradigm Merger and to vote against
any proposal that would compete or interfere with the Paradigm Merger.
The Paradigm Merger is intended to qualify as a tax-free reorganization
under the Internal Revenue Code of 1986, as amended.
I-17
<PAGE> 19
TCI MUSIC, INC. AND SUBSIDIARIES
(A Subsidiary of Tele-Communications, Inc.)
Management's Discussion And Analysis Of
Financial Condition And Results Of Operations
The following discussion and analysis should be read in
conjunction with the Company's Management's Discussion and Analysis of Financial
Condition and Results of Operations included in the Company's Transition Report
on Form 10-K for the transition period from October 1, 1996 to June 30, 1997.
The following discussion focuses on material changes in trends, risks and
uncertainties affecting the Company's results of operations and financial
condition. Reference should also be made to the Company's consolidated financial
statements included herein.
(1) Material changes in financial condition:
As described in note 1 to the Company's consolidated financial
statements, on July 11, 1997, DMX and TCI Music consummated a Merger pursuant to
which DMX became a wholly-owned subsidiary of TCI Music. In connection with the
merger, TCI Music issued a $40 million promissory note payable to TCI. As
amended on November 7, 1997, the promissory note is due and payable on the
January 10, 1999 maturity date. TCI Music is seeking to obtain debt financing to
fund the repayment of such promissory note and to provide TCI Music with working
capital. No assurance can be given that such financing will be obtained on terms
acceptable to TCI Music or that such financing will be obtained prior to the
maturity date of the promissory note. Also in connection with the Merger, and
pursuant to an Amended and Restated Contribution Agreement between TCI and TCI
Music, TCI will transfer to TCI Music among other things, the revenue it derives
from its business of distributing services to DMX's subscribers. During the
three months ended September 30, 1997, TCI Music has recognized approximately
$4.8 million of revenue pursuant to the terms of the contribution agreement with
TCI. See notes 4 and 6 to the accompanying consolidated financial statements.
The Company also anticipates that it will use the funds provided by the
above-described source of liquidity to supplement its sources of liquidity, and
to satisfy other liquidity requirements, including those that may arise as the
result of the proposed acquisitions of The Box and Paradigm, as further
described below.
As further described in note 9 to the accompanying consolidated
financial statements, TCI Music has entered into separate agreement to merge
with The Box and Paradigm. The consideration for the Box Merger is anticipated
to be approximately $36 million and is to be satisfied by the issuance of Music
Preferred Stock. The consideration for the Paradigm Merger is anticipated to be
approximately $22.3 million of TCI Music Series A Common Stock and the
assumption of debt or a contribution in cash of approximately $5 million.
Although there is no assurance, it is currently anticipated that the Box Merger
and the Paradigm Merger will be consummated during the fourth quarter of 1997 or
the first quarter of 1998.
On February 6, 1997 the Company entered into a loan and security
agreement with TCI which provides the Company up to $3.5 million. The loan
proceeds were used to purchase and/or reimburse the Company for equipment and
certain costs related to obtaining commercial customers. The loan, as amended on
May 29, 1997, bears interest at a rate of 12.5% per annum and is to be paid in
34 equal monthly installments commencing September 1, 1997.
Historically, DMX has used cash provided by financing activities to fund
its operating and investing activities. With the inclusion of the Contributed
Net DMX Revenue, the discontinuance of the operations of DMX-E and the
implementation of certain cost reduction measures, management believes that the
Company will begin to
(continued)
I-18
<PAGE> 20
TCI MUSIC, INC. AND SUBSIDIARIES
(A Subsidiary of Tele-Communications, Inc.)
generate cash from its operating activities on a prospective basis. However,
there can be no assurances that the Company's operating activities will in fact
generate cash.
DMX-Europe N.V. ("DMX-E NV") and its subsidiary DMX-Europe (UK) Limited
("DMX-E UK"), collectively ("DMX-E"), ceased operation on July 1, 1997. Due to
the fact that DMX-E UK was placed into receivership and liquidation, DMX Inc. no
longer has control over operations and activities, accordingly the accompanying
balances sheets as of September 30, 1997 and June 30, 1997 give the effect of
the deconsolidation of DMX-E UK. DMX-E UK was placed into receivership on July
1, 1997 and into liquidation proceedings on July 18, 1997. DMX-E NV, although
inactive since July 1, 1997, is scheduled for liquidation proceedings to
commence during the fourth calendar quarter of 1997.
As a result of the DMX-E cessation of operations, the Subscription and
Shareholder Agreement dated December 18, 1996 ("Definitive Agreements") between
DMX Inc.; Mr. Jerold H. Rubinstein, an individual; and XTRA Music Limited, a
corporation under laws of England ("XTRA") was put into place whereby the
termination certificate was executed in July 1997, which terminated the Stock
Purchase Agreement dated December 18, 1996 that provided the disposition of
DMX-E to Mr. Jerold H. Rubinstein. Pursuant to the Definitive Agreement, DMX
Inc. obtained a 10% interest in XTRA and a Channel Distribution Agreement was
executed between XTRA and DMX Inc. The Channel Distribution Agreement provided
XTRA an exclusive, five-year, royalty-free license to distribute the DMX Music
service in Europe, the former Soviet Union and in the Middle East and the right
to use DMX Inc.'s trade marks for two years. The music service is currently not
being distributed by XTRA as Mr. Jerold H. Rubinstein is seeking financial
partners.
(2) Material changes in results of operations:
Revenue - TCI Music and DMX
Total revenues, exclusive of approximately $600,000 of DMX-E revenue for
the three month period ending September 30, 1996, increased 110% for the three
months ended September 30, 1997, as compared to the corresponding period of
1996. The increase of approximately $5.9 million is primarily due to the
inclusion of $4.8 million of revenue from sales of DMX music services to TCI's
residential and commercial subscribers as a result of the Merger (Contributed
Net DMX Revenue) and a $1.1 million increase attributed to growth in commercial
subscriber fee revenues.
Revenue - DMX-E
The Company began consolidating the operations of DMX-E from the
acquisition date of May 17, 1996. As discussed above, the Company has decided to
dispose of or cease the operations of DMX-E.
Operating Costs and Expenses - TCI Music and DMX
Operating expenses include studio and programming costs and research and
development expenses. For the three months ended September 30, 1997, operating
expenses were $2.9 million as compared to $2.6 million for the corresponding
period of 1996. The net increase of $335,000 consisted of the $332,000 fee paid
to TCI as compensation for services rendered in generating the Contributed Net
DMX Revenue pursuant to the Amended Contribution Agreement and an increase in
music rights
(continued)
I-19
<PAGE> 21
TCI MUSIC, INC. AND SUBSIDIARIES
(A Subsidiary of Tele-Communications, Inc.)
expense of $102,000, which was commensurate with the increase in subscriber fee
revenue and was offset by a reduction in research and development expenses and
programming salaries totaling $99,000.
Selling, general and administrative expenses decreased approximately
$1.1 million or 30% for the three months ended September 30, 1997, as compared
to the corresponding period of 1996. The reduction in expenses is attributable
to a decrease in the provision for doubtful accounts of approximately $550,000;
a decrease in marketing and advertising expenses of $403,000, due to a reduction
in co-op advertising expense, trade shows and conferences and the advertising
incurred during the 1996 Summer Olympics; a decrease in the Scientific Atlanta
royalty expense of $87,000 as the manufacture, distribution and servicing
agreement with Scientific Atlanta, Inc. terminated in August 1996; a decrease in
net installation cost of $62,000 as DMX typically recoups the cost of
installation; a decrease in travel and entertainment of $100,000; a $69,000
decrease in printing and investor materials and offset by an increase in
salaries of $220,000 due to growth.
The increase in depreciation and amortization expense for the three
months ended September 30, 1997 compared to the corresponding period of 1996 is
due to the amortization expense of the intangibles associated with the Merger.
The Company records compensation expense relating to stock options
granted to certain employees. In connection with the Merger, stock options were
granted to directors and employees of the Company and compensation of $178,000
was recorded for the three months ended September 30, 1997.
Operating Expenses - DMX-E
The Company began consolidating the operations of DMX-E from the
acquisition date of May 17, 1996. As discussed above, the Company has decided to
dispose of or cease the operations of DMX-E.
Disposal of DMX-E
The Company has accounted for the effect of the disposal of DMX-E and
has estimated the loss on the disposal of DMX-E in the consolidated statements
of operations. At June 30, 1997 the loss on disposal of DMX-E of $1.7 million
represented the write down of assets to their net realizable values. At
September 30, 1996 the estimated loss on disposal of DMX-E was accounted for in
DMX Inc.'s consolidated financial statements. The estimated loss on the disposal
of DMX-E includes DMX's net investment in these subsidiaries of $5.7 million and
other obligations guaranteed by DMX of $1.4 million.
Other Income and Expenses
Interest expense of $1 million for the three months ended September 30,
1997, primarily represented interest on the amounts due to related party. See
note 6 of the accompanying consolidated financial statements.
I-20
<PAGE> 22
TCI MUSIC, INC. AND SUBSIDIARIES
(A Subsidiary of Tele-Communications, Inc.)
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
None.
Item 2. Changes in Securities.
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
On July 11, 1997, a special meeting of the shareholders was held
to vote upon the approval and adoption of the Agreement and Plan of
Merger, dated as of February 6, 1997, as amended by Amendment One to
Merger Agreement dated May 29, 1997, among DMX, TCI, TCI Music and
TCI Merger Sub, pursuant to which TCI Merger Sub was merged with and
into DMX with DMX as the surviving Corporation. (See notes 1 and 4 of
the accompanying consolidated financial statements.)
There were 48,192,420 shares represented by properly executed proxies
out of 59,586,594 shares outstanding and entitled to vote; of which
48,114,895 shares voted in favor, 58,550 shares voted against and
18,975 shares abstained. There were no broker non-votes with respect
to this proposal.
Item 5. Other Events.
None.
Item 6. Exhibit and Reports on Form 8-K.
(a)Exhibit -
(27) TCI Music, Inc. Financial Data Schedule
(b)Reports on Form 8-K filed during the quarter ended September 30,
1997:
During the quarter ended September 30, 1997, the Company filed two
reports on Form 8-K. On July 24, 1997, the Company disclosed the
consummation of the July 11, 1997 merger with DMX Inc. On August 18,
1997, the Company disclosed entering into an agreement and plan of
merger, dated as of August 12, 1997, with The Box Worldwide, Inc.
II-1
<PAGE> 23
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TCI MUSIC, INC.
Date: November 14, 1997 By: /s/ David B. Koff
------------------------------------
David B. Koff
President and
Chief Executive Officer
Date: November 14, 1997 By: /s/ Joanne Wendy Kim
------------------------------------
Joanne Wendy Kim
Principal Financial Officer and
Principal Accounting Officer
II-2
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10Q OF
TCI MUSIC, INC. FOR THE PERIOD JULY 1, 1997 TO SEPTEMBER 30, 1997 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FORM 10Q FOR THE PERIOD JULY 1,
1997 TO SEPTEMBER 30, 1997.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JUL-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 1,951,424
<SECURITIES> 0
<RECEIVABLES> 2,047,953
<ALLOWANCES> 431,975
<INVENTORY> 6,123,660
<CURRENT-ASSETS> 11,241,323
<PP&E> 4,400,170
<DEPRECIATION> 484,730
<TOTAL-ASSETS> 113,235,944
<CURRENT-LIABILITIES> 18,616,787
<BONDS> 0
0
0
<COMMON> 773,966
<OTHER-SE> 46,522,777
<TOTAL-LIABILITY-AND-EQUITY> 113,235,944
<SALES> 10,435,158
<TOTAL-REVENUES> 10,435,158
<CGS> 0
<TOTAL-COSTS> 8,734,865
<OTHER-EXPENSES> 252,994
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,051,595
<INCOME-PRETAX> 493,258
<INCOME-TAX> 332,818
<INCOME-CONTINUING> 160,440
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 160,440
<EPS-PRIMARY> .01
<EPS-DILUTED> .01
</TABLE>
