<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 12, 1997
REGISTRATION NO. 333-
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
---------------------
FORM S-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
---------------------
TCI MUSIC, INC.
(Exact name of registrant as specified in its charter)
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DELAWARE 4899 84-1380293
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
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8101 EAST PRENTICE AVENUE, SUITE 500
ENGLEWOOD, COLORADO 80111
(303) 721-5400
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
---------------------
STEPHEN M. BRETT, ESQ.
C/O TELE-COMMUNICATIONS, INC.
TERRACE TOWER II
5619 DTC PARKWAY
ENGLEWOOD, COLORADO 80111
(303) 267-5500
(Name, Address, including zip code, and telephone number, including area code,
of agent for service)
---------------------
Copies to:
CHARLES Y. TANABE, ESQ.
SHERMAN & HOWARD L.L.C.
633 SEVENTEENTH STREET, SUITE 3000
DENVER, COLORADO 80202
(303) 297-2900
FAX: (303) 298-0940
---------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC: Upon
consummation of the Merger described herein.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box [ ]
CALCULATION OF REGISTRATION FEE
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PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE AGGREGATE OFFERING AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED PER SHARE PRICE(1) REGISTRATION FEE(1)(2)
- ------------------------------------------------------------------------------------------------------------------------------
Series A Convertible Preferred Stock
$.01 par value...................... $40,623,438.00 $4,878.34
Series A Common Stock $.01 par
value...............................
==============================================================================================================================
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(1) Estimated solely for purposes of determining the registration fee in
accordance with Rule 457(o), and based on the product of $1.50 times the
number of outstanding shares of The Box Worldwide, Inc. Common Stock as of
November 10, 1997, plus shares of The Box Worldwide, Inc. Common Stock that
may be issuable prior to the Merger upon exercise of options and conversion
of outstanding shares of the Box Worldwide, Inc. 6% Convertible Redeemable
Preferred Stock.
(2) Pursuant to Section 14(g)(1)(A)(i) of the Securities Exchange Act of 1934,
$7,431.79 has previously been paid and offset pursuant to Rule 457(b)
against the total registration fee of $12,310.13.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
PURSUANT TO RULE 416, THIS REGISTRATION STATEMENT ALSO RELATES TO SUCH
ADDITIONAL SHARES AS MAY BE ISSUABLE IN CONNECTION WITH THE ANTIDILUTION
PROVISIONS OF THE CERTIFICATE OF DESIGNATIONS RELATING TO THE TCI MUSIC SERIES A
CONVERTIBLE PREFERRED STOCK.
================================================================================
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PART I
INFORMATION REQUIRED IN THE SECTION 10(A) PROSPECTUS
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TCI MUSIC, INC. THE BOX WORLDWIDE, INC.
PROSPECTUS PROXY STATEMENT
2,100,000 SHARES OF SERIES A CONVERTIBLE PREFERRED FOR A SPECIAL MEETING OF SHAREHOLDERS
STOCK TO BE HELD DECEMBER 16, 1997
6,300,000 SHARES OF SERIES A COMMON STOCK ISSUABLE
UPON
CONVERSION OF SHARES OF SERIES A CONVERTIBLE
PREFERRED STOCK
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---------------------
This Proxy Statement/Prospectus is being furnished to holders of common
stock, par value $.001 per share ("BOX Common Stock"), and 6% Convertible
Redeemable Preferred Stock, par value $.15 per share and stated value $1.50 per
share ("BOX Preferred Stock" and, together with BOX Common Stock, "BOX Voting
Stock"), of The Box Worldwide, Inc., a Florida corporation (the "Company" or the
"BOX"), in connection with the solicitation of proxies by the Board of Directors
of the BOX (the "BOX Board") for use at a special meeting of the shareholders of
the BOX, or any adjournment or postponement thereof (the "Special Meeting"),
called to consider and vote upon (a) a proposal to approve and adopt an
Agreement and Plan of Merger, dated as of August 12, 1997 (the "Merger
Agreement"), by and among TCI Music, Inc., a Delaware corporation ("TCI Music"),
TCI Music Acquisition Sub, Inc., a Florida corporation and a wholly-owned
subsidiary of TCI Music ("Acquisition Sub") and the BOX and (b) a proposal, in
connection with the Merger (defined below), to approve and adopt an amendment to
the Fourth Amended and Restated Articles of Incorporation of the Company, as
amended (the "BOX Charter"), to increase the number of authorized shares of BOX
Common Stock from 40,000,000 shares to 100,000,000 shares (the "Capitalization
Amendment"). The Merger Agreement provides, among other things, for the merger
of Acquisition Sub with and into the BOX (the "Merger") with the BOX becoming
the surviving corporation (the "Surviving Corporation"). As a result of the
Merger, shareholders of BOX Common Stock will become stockholders of TCI Music
and shareholders of BOX Preferred Stock will remain shareholders of the
Surviving Corporation, on the terms described in this Proxy
Statement/Prospectus. The Merger will become effective at the time of the filing
of articles of merger ("Articles of Merger") with the Secretary of State of the
State of Florida (the "Effective Time"), which is currently expected to occur as
soon as practicable after the last of the conditions precedent to the Merger set
forth in the Merger Agreement has been satisfied or, where permissible, waived.
See "THE MERGER AGREEMENT."
Upon consummation of the Merger, (a) each share of BOX Common Stock
outstanding immediately prior to the Merger (other than shares held directly or
indirectly by the Company and shares held by holders who elect appraisal rights
with respect to their shares in accordance with applicable law) of BOX Common
Stock will be converted into the right to receive (i) a fraction of a share of
TCI Music Series A Convertible Preferred Stock, par value $.01 per share ("Music
Series A Preferred Stock"), equal to the quotient (calculated to the nearest
hundredth) of $1.50 divided by three times the average of the average daily
closing bid and asked prices of one share of TCI Music Series A Common Stock,
par value $.01 per share ("Series A Common Stock"), for a period of 20
consecutive trading days ending on the third trading day prior to the closing of
the Merger (the "Closing") as quoted on the Nasdaq SmallCap Market and (ii) cash
in lieu of fractional shares of Music Series A Preferred Stock and (b) each
share of BOX Preferred Stock outstanding immediately prior to the Merger (other
than shares held by holders who elect appraisal rights with respect to their
shares in accordance with applicable law) will remain an outstanding share of
the Surviving Corporation with all of the rights, privileges and preferences set
forth in the BOX Charter and the Florida Business Corporation Act ("FBCA"). If
the Merger had been consummated on November 10, 1997, based on a calculation of
the average of the average daily closing bid and asked prices of one share of
Series A Common Stock for a period of 20 consecutive trading days ending
November 5, 1997 ($7.58), the conversion rate would be .07 share of Series A
Common Stock for one share of BOX Common Stock. See "THE MERGER
AGREEMENT -- Consideration to be Received in the Merger." Each share of Music
Series A Preferred Stock will be initially convertible at the option of the
holder into three shares of Series A Common Stock, subject to certain
antidilution adjustments and certain adjustments for stock dividends and
distributions, if any, and will be entitled to receive cash dividends ratably in
proportion to dividends declared on each share of Series A Common Stock. Each
share of Music Series A Preferred Stock will be entitled to vote on all matters
submitted to a vote of the holders of the Series A Common Stock and to the
number of votes equal to the number of shares of Series A Common Stock into
which such share is convertible as of the record date for the matter to be voted
upon. Shares of Series A Common Stock currently outstanding trade together with
associated rights (the "TCI Rights") issued by Tele-Communications, Inc., a
Delaware corporation ("TCI"), in connection with the Company's acquisition of
DMX Inc., a Delaware corporation ("DMX"). The accompanying Proxy
Statement/Prospectus provides you with detailed information concerning the
Merger Agreement (a copy of which (exclusive of Exhibits and Schedules) is
included as Appendix I), the Music Series A Preferred Stock to be issued in
connection with the Merger (a copy of the Certificate of Designations related to
the Music Series A Preferred Stock is included as Appendix II), the
Capitalization Amendment and other information. Please give all of this
information your careful attention. See "RISK FACTORS -- Termination of TCI
Rights; Potential Decrease in Price of Series A Common Stock," "-- Nasdaq
Listing and Maintenance Requirements; Absence of Trading Market," "THE
MERGER -- Opinion of Financial Advisor Retained by the BOX Board," "THE MERGER
AGREEMENT -- Consideration to be Received in the Merger" and "CONTROL BY TCI;
ARRANGEMENTS BETWEEN TCI AND TCI MUSIC -- TCI Rights."
SEE "RISK FACTORS" BEGINNING ON PAGE 15 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED IN CONNECTION WITH CONSIDERATION OF THE MERGER AND THE
ISSUANCE OF THE MUSIC SERIES A PREFERRED STOCK.
This Proxy Statement/Prospectus and the accompanying form of proxy are first
being mailed to the shareholders of the BOX on or about November 12, 1997.
THE SECURITIES TO BE ISSUED PURSUANT TO THIS PROXY STATEMENT/PROSPECTUS HAVE NOT
BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY
STATE SECURITIES COMMISSION NOR HAS THE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROXY
STATEMENT/PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The date of this Proxy Statement/Prospectus is November 12, 1997.
<PAGE> 4
AVAILABLE INFORMATION
TCI Music has filed a registration statement on Form S-4 (together with all
amendments, exhibits and schedules thereto, the "Registration Statement") under
the Securities Act of 1933, as amended (the "Act"), relating to 2,100,000 shares
of Music Series A Preferred Stock that may be issued in connection with the
Merger to holders of outstanding shares of BOX Common Stock and 6,300,000 shares
of Series A Common Stock into which the shares of Music Series A Preferred Stock
issued in connection with the Merger are convertible. This Proxy
Statement/Prospectus also constitutes the Prospectus of TCI Music filed as part
of the Registration Statement.
This Proxy Statement/Prospectus does not include all of the information set
forth in the Registration Statement filed by TCI Music with the Securities and
Exchange Commission (the "Commission") under the Act, as permitted by the rules
and regulations of the Commission. The Registration Statement, including any
amendments, schedules and exhibits filed or incorporated by reference as a part
thereof, is available for inspection and copying as set forth below. Statements
contained in this Proxy Statement/Prospectus or in any document incorporated
herein by reference as to the contents of any contract or other document
referred to herein or therein are not necessarily complete and in each instance
reference is made to the copy of such contract or other document filed as an
exhibit to the Registration Statement or such other document, and each such
statement shall be deemed qualified in its entirety by such reference.
TCI Music and the BOX are each subject to the information requirements of
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith file reports, proxy statements and other information with
the Commission. Such reports, proxy statements and other information filed with
the Commission can be inspected and copied at the public reference facilities
maintained by the Commission at Room 1024, 450 Fifth Street, N.W., Judiciary
Plaza, Washington, D.C. 20549 and at the following Regional Offices of the
Commission: 500 West Madison Street, Suite 1400, Chicago, Illinois 60661; and 7
World Trade Center, Suite 1300, New York, New York 10048. Copies of such
material can be obtained at prescribed rates from the Public Reference Section
of the Commission at 450 Fifth Street, N.W., Judiciary Plaza, Washington, D.C.
20549. The Commission also maintains a World Wide Web site on the Internet that
contains information regarding registrants (including TCI Music and the BOX)
that file electronically with the Commission (http://www.sec.gov). In addition,
material filed by TCI Music and the BOX should be available at the offices of
the National Association of Securities Dealers, Inc., Reports Section, 1735 K
Street, N.W., Washington, D.C. 20006.
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR MAKE ANY
REPRESENTATION OTHER THAN THOSE CONTAINED OR INCORPORATED BY REFERENCE IN THIS
PROXY STATEMENT/PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED. THIS PROXY
STATEMENT/PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF
AN OFFER TO BUY THE SECURITIES COVERED BY THIS PROXY STATEMENT/PROSPECTUS OR A
SOLICITATION OF A PROXY IN ANY JURISDICTION WHERE, OR TO OR FROM ANY PERSON TO
WHOM, IT IS UNLAWFUL TO MAKE SUCH OFFER, SOLICITATION OF AN OFFER OR PROXY
SOLICITATION IN SUCH JURISDICTION. NEITHER THE DELIVERY OF THIS PROXY
STATEMENT/PROSPECTUS NOR ANY DISTRIBUTION OF SECURITIES MADE HEREUNDER SHALL,
UNDER ANY CIRCUMSTANCE, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN
THE AFFAIRS OF TCI MUSIC OR THE BOX SINCE THE DATE HEREOF OR THAT THE
INFORMATION CONTAINED OR INCORPORATED BY REFERENCE HEREIN IS CORRECT AS OF ANY
TIME SUBSEQUENT TO ITS DATE. ALL INFORMATION HEREIN WITH RESPECT TO THE BOX HAS
BEEN PROVIDED BY THE BOX; AND ALL INFORMATION HEREIN WITH RESPECT TO TCI MUSIC
HAS BEEN PROVIDED BY TCI MUSIC.
ii
<PAGE> 5
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents previously filed by TCI Music with the Commission
under the Exchange Act are incorporated herein by reference and made a part
hereof (Commission File No. 0-22815):
(a) Transition Report of TCI Music on Form 10-K for the transition
period from October 1, 1996 to June 30, 1997 (filed by TCI Music with
respect to its predecessor, DMX);
(b) TCI Music's Current Reports on Form 8-K dated July 24, 1997 and
August 18, 1997; and
(c) Description of Capital Stock of TCI Music set forth in Item 4 of a
Registration Statement on Form 8-B filed by TCI Music on July 9, 1997.
The following documents previously filed by the BOX with the Commission
under the Exchange Act are incorporated herein by reference and made a part
hereof (Commission File No. 0-15445):
(a) The BOX's Annual Report on Form 10-KSB for the fiscal year ended
December 31, 1996; and
(b) The BOX's Quarterly Reports on Form 10-QSB for the quarters ended
March 31, 1997 and June 30, 1997.
All documents filed by TCI Music and the BOX pursuant to Sections 13(a),
13(c), 14 or 15(d) of the Exchange Act after the date of this Proxy
Statement/Prospectus and prior to the Special Meeting shall be deemed to be
incorporated by reference into this Proxy Statement/Prospectus and to be a part
hereof from the date of filing of such documents. Any statement contained in a
document incorporated or deemed to be incorporated by reference herein shall be
deemed to be modified or superseded for purposes hereof to the extent that a
statement contained herein (or in any other subsequently filed document that is
or is deemed to be incorporated by reference herein) modifies or supersedes such
previous statement. Any statement so modified or superseded shall not be deemed
to constitute a part hereof except as so modified or superseded.
All information appearing in this Proxy Statement/Prospectus is qualified
in its entirety by the information and financial statements (including notes
thereto) appearing in the documents incorporated herein by reference.
THIS PROXY STATEMENT/PROSPECTUS INCORPORATES DOCUMENTS BY REFERENCE THAT
ARE NOT PRESENTED HEREIN OR DELIVERED HEREWITH. TCI MUSIC WILL PROVIDE COPIES OF
THESE DOCUMENTS (OTHER THAN EXHIBITS TO SUCH DOCUMENTS UNLESS SUCH EXHIBITS ARE
SPECIFICALLY INCORPORATED BY REFERENCE HEREIN) RELATING TO TCI MUSIC OR DMX
WITHOUT CHARGE TO ANY PERSON TO WHOM THIS PROXY STATEMENT/PROSPECTUS HAS BEEN
DELIVERED UPON WRITTEN OR ORAL REQUEST. SUCH REQUESTS SHOULD BE DIRECTED TO
STEPHEN M. BRETT, VICE PRESIDENT AND GENERAL COUNSEL, TCI MUSIC, INC., TERRACE
TOWER II, 5619 DTC PARKWAY, ENGLEWOOD, COLORADO 80111 (TELEPHONE (303)
267-5500). THE BOX WILL PROVIDE COPIES OF THESE DOCUMENTS (OTHER THAN EXHIBITS
TO SUCH DOCUMENTS UNLESS SUCH EXHIBITS ARE SPECIFICALLY INCORPORATED BY
REFERENCE HEREIN) RELATING TO THE BOX WITHOUT CHARGE, TO ANY PERSON TO WHOM THIS
PROXY STATEMENT/PROSPECTUS HAS BEEN DELIVERED UPON WRITTEN OR ORAL REQUEST. SUCH
REQUESTS SHOULD BE DIRECTED TO LUANN M. HOFFMAN, CHIEF FINANCIAL OFFICER AND
SECRETARY, 1221 COLLINS AVENUE, MIAMI BEACH, FLORIDA 33139 (TELEPHONE: (305)
674-5000). IN ORDER TO ENSURE TIMELY DELIVERY OF THE DOCUMENTS, ANY SUCH
REQUESTS SHOULD BE MADE BY DECEMBER 9, 1997.
iii
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TABLE OF CONTENTS
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PAGE
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AVAILABLE INFORMATION....................................... ii
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE............. iii
SUMMARY..................................................... 1
The Companies............................................. 1
The Special Meeting....................................... 1
The Merger................................................ 2
Accounting Treatment...................................... 5
Interests of Certain Persons in the Merger................ 5
Appraisal Rights.......................................... 6
Certain Federal Income Tax Consequences................... 6
Comparative Market Price Data............................. 6
Control by TCI; Arrangements Between TCI and TCI Music.... 7
Proposed Acquisition by TCI Music......................... 9
Dividend Policy........................................... 10
Transfer Agent............................................ 10
Risk Factors and Forward-Looking Statements............... 10
SUMMARY SELECTED FINANCIAL AND OTHER DATA................... 11
Certain Comparative Per Share Data........................ 11
RISK FACTORS................................................ 15
Limited Operating History of TCI Music.................... 15
Risks Related to DMX...................................... 15
Risks Related to the BOX.................................. 17
Limited Operating History of Paradigm and Limited Revenue
from Operations........................................ 19
Termination of TCI Rights; Potential Decrease in Price of
Series A Common Stock.................................. 19
Nasdaq Listing and Maintenance Requirements; Absence of
Trading Market......................................... 19
Dependence on Satellite Delivery Capabilities............. 20
Conflicts of Interest..................................... 21
Disparate Voting Rights; Control by TCI................... 22
Competition............................................... 23
Computer Systems and Software Compatibility in the Year
2000................................................... 23
Dependence on Key Personnel............................... 23
Dividends and Dividend Policy............................. 23
Integration of Operations................................. 24
Potential Effects of Certain TCI Music Anti-Takeover
Provisions............................................. 24
Certain Litigation........................................ 24
THE SPECIAL MEETING......................................... 25
Time and Place; Purpose................................... 25
Voting Rights; Votes Required for Approval................ 25
Proxies................................................... 25
THE MERGER.................................................. 27
Background of the Merger.................................. 27
Recommendation of the BOX Board; the BOX's Reasons for the
Merger................................................. 29
TCI Music's Reasons for the Merger........................ 30
Opinion of Financial Advisor Retained by the BOX Board.... 31
Interests of Certain Persons in the Merger................ 35
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iv
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CERTAIN CONSEQUENCES OF THE MERGER.......................... 37
General................................................... 37
Certain Federal Income Tax Consequences................... 37
Accounting Treatment...................................... 39
THE MERGER AGREEMENT........................................ 40
General; Effective Time................................... 40
Consideration to be Received in the Merger................ 40
Conditions to the Merger.................................. 42
Governmental Approvals.................................... 43
Covenants................................................. 43
No Solicitation of Transactions........................... 44
Certain Personnel Matters................................. 44
Indemnification........................................... 46
Termination; Amendment and Waiver......................... 46
Certain Restrictions on Resale of Music Series A Preferred
Stock.................................................. 47
Expenses.................................................. 47
ARRANGEMENTS BETWEEN THE BOX AND TCI MUSIC.................. 47
Voting Agreement.......................................... 47
Services Agreement........................................ 47
BOX Affiliation Agreement................................. 48
CONTROL BY TCI; ARRANGEMENTS BETWEEN TCI AND TCI MUSIC...... 48
General................................................... 48
Amended Contribution Agreement............................ 49
Affiliation Agreement..................................... 50
Extension of TCI Music Note............................... 50
TCI Rights................................................ 50
TCI Loan.................................................. 51
Services Agreement........................................ 51
Tax Sharing Agreements.................................... 52
BUSINESS OF THE BOX......................................... 54
General................................................... 54
BUSINESS OF TCI MUSIC....................................... 55
General................................................... 55
DMX Music Services........................................ 55
The BOX Services and Distribution......................... 57
Paradigm Services and Distribution........................ 57
Terms of Proposed Paradigm Merger......................... 57
CERTAIN LITIGATION.......................................... 59
DESCRIPTION OF TCI MUSIC CAPITAL STOCK...................... 60
TCI Music Common Stock.................................... 60
TCI Music Preferred Stock................................. 62
Music Series A Preferred Stock............................ 62
COMPARISON OF SHAREHOLDERS' RIGHTS.......................... 65
Authorized Capital Stock.................................. 65
Voting.................................................... 65
Special Meeting of Shareholders........................... 66
Directors................................................. 66
Removal of Directors...................................... 66
Vacancies on the Board of Directors....................... 66
v
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Anti-Takeover Statute; Mergers, Consolidations and Sales
of Assets.............................................. 67
Amendments to Certificate of Incorporation................ 69
Amendments to Bylaws...................................... 70
Limitation of Liability of Directors...................... 70
APPRAISAL RIGHTS............................................ 70
MANAGEMENT OF TCI MUSIC..................................... 73
Directors and Executive Officers.......................... 73
Board Composition......................................... 74
Committees of the Board................................... 74
Compensation of Directors................................. 74
Compensation of Executive Officers........................ 75
TCI Music, Inc. 1997 Stock Incentive Plan................. 75
Other Arrangements........................................ 79
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT OF TCI MUSIC AND THE BOX....................... 80
Security Ownership of TCI Music........................... 80
Security Ownership of TCI................................. 83
Security Ownership of the BOX............................. 86
CERTAIN TRANSACTIONS........................................ 90
LEGAL MATTERS............................................... 92
EXPERTS..................................................... 92
SHAREHOLDER PROPOSALS....................................... 92
INDEX TO FINANCIAL STATEMENTS
APPENDICES
Appendix I: Agreement and Plan of Merger
Appendix II: Certificate of Designations for Music
Series A Preferred Stock
Appendix III: Opinion of Houlihan Lokey Howard &
Zukin
Appendix IV: Sections 607.1302, 607.1302 and 607.1320
of the Florida Business Corporation Act
Appendix V: Transition Report of TCI Music on Form
10-K for the transition period from
October 1, 1996 to June 30, 1997
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vi
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INDEX OF CERTAIN DEFINED TERMS
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Acquisition Sub............................................. i
Act......................................................... ii
Affiliation Agreement....................................... 4
Amended Contribution Agreement.............................. 8
Annual TCI Payments......................................... 8
Appraisal Rights............................................ 38
Appraisal Sections.......................................... 70
Approved Transaction........................................ 78
Articles of Merger.......................................... i
ASCAP....................................................... 16
BMI......................................................... 16
BOX......................................................... i
BOX 8% Preferred Stock...................................... 65
BOX Board................................................... i
BOX Bylaws.................................................. 5
BOX Charter................................................. i
BOX Common Stock............................................ i
BOX Director Option Agreements.............................. 36
BOX Employee Option Agreements.............................. 36
BOX Indemnification Agreement............................... 37
BOX Plan.................................................... 36
BOX Preferred Stock......................................... i
BOX Service................................................. 54
BOX Services Agreement...................................... 29
BOX Voting Stock............................................ i
Capitalization Amendment.................................... i
CEA......................................................... 21
Closing..................................................... i
Commission.................................................. ii
Company..................................................... i
Contribution Agreement...................................... 4
Conversion Rate............................................. 63
CPI......................................................... 8
DBS......................................................... 15
DGCL........................................................ 60
Digital Distribution........................................ 15
DMX......................................................... i
DMX Merger.................................................. 1
DMX Service................................................. 1
EBITDA...................................................... 34
Effective Time.............................................. i
Exchange Act................................................ ii
Exchange Agent.............................................. 41
Extension of TCI Music Note................................. 8
FBCA........................................................ i
HITS........................................................ 56
Houlihan Lokey.............................................. 3
Initial Extension........................................... 48
Letter of Intent............................................ 28
Liberty..................................................... 21
Liberty Media Group Common Stock............................ 52
Merger...................................................... i
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vii
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TERM PAGE
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Merger Agreement............................................ i
Merger Conversion Ratio..................................... 2
Merger Proposals............................................ 2
Music Multiplex............................................. 29
Music Series A Preferred Stock.............................. i
NDTC........................................................ 20
Named Executive Officers.................................... 80
New Tax Sharing Agreement................................... 52
1995 Act.................................................... 16
1997 TCI Music Plan......................................... 45
Old Tax Sharing Agreement................................... 52
Options..................................................... 75
Paradigm.................................................... 9
Paradigm Agreement.......................................... 9
Paradigm Common Stock....................................... 9
Paradigm Escrow Agreement................................... 57
Paradigm Merger............................................. 9
Paradigm Voting Agreement................................... 9
Paradigm Voting Stockholders................................ 9
Person...................................................... 61
Record Date................................................. 1
Registration Statement...................................... ii
SARs........................................................ 75
Satellite Distribution...................................... 55
Selco....................................................... 59
Series A Common Stock....................................... i
Series A TCI Group Common Stock............................. 9
Series B Common Stock....................................... 7
Services Agreement.......................................... 22
SESAC....................................................... 16
Special Committee........................................... 27
Special Meeting............................................. i
Surviving Corporation....................................... i
Tandem SAR.................................................. 76
TCI......................................................... (i)
TCI Affiliate............................................... 4
TCI Group Common Stock...................................... 52
TCI Loan.................................................... 8
TCI Music................................................... i
TCI Music Board............................................. 4
TCI Music Bylaws............................................ 24
TCI Music Charter........................................... 24
TCI Music Common Stock...................................... 7
TCI Music Note.............................................. 8
TCI Music Preferred Stock................................... 62
TCI Music Voting Stock...................................... 7
TCI Rights.................................................. (i)
TCI Ventures Group Common Stock............................. 52
TCIC........................................................ 27
Tuner Distribution.......................................... 15
Voting Agreement............................................ 2
Voting Shareholders......................................... 2
</TABLE>
viii
<PAGE> 11
SUMMARY
The following summary is intended only to highlight certain information
contained elsewhere in this Proxy Statement/Prospectus. This summary is not
intended to be complete and is qualified in its entirety by the more detailed
information contained elsewhere in this Proxy Statement/Prospectus, the
Appendices hereto and the documents incorporated by reference or otherwise
referred to herein. Shareholders are urged to review this entire Proxy
Statement/Prospectus carefully, including the Appendices hereto.
THE COMPANIES
TCI Music. TCI Music was incorporated in Delaware in January 1997 as a
wholly-owned subsidiary of TCI. Effective July 11, 1997, a subsidiary of TCI
Music merged with and into DMX (the "DMX Merger") with DMX becoming the
surviving corporation and a wholly-owned subsidiary of TCI Music and TCI Music
becoming a publicly held company. Prior to the DMX Merger, TCI Music did not
conduct any significant activities other than those incident to its formation
and the DMX Merger. Subsequent to the DMX Merger, TCI Music's business has
consisted principally of the business of DMX. DMX (formerly International
Cablecasting Technologies 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 Service"). Subsequent to the Merger, TCI
Music's business will also consist of the business of the BOX. The executive
offices of TCI Music are located at 8101 East Prentice Avenue, Suite 500,
Englewood, Colorado 80111; telephone (303) 721-5400. See "BUSINESS OF TCI
MUSIC."
The BOX. The BOX, incorporated in Florida in September 1985 under the name
Cable Video Jukebox, Inc. (name changed to Video Jukebox Network, Inc. in
September 1986 and to The Box Worldwide, Inc. in February 1997), is primarily
engaged in programming, distributing and marketing an interactive music video
television programming service known as THE BOX(R), operating 24 hours per day,
seven days a week. The executive offices of the BOX are located at 1221 Collins
Avenue, Miami Beach, Florida 33139, telephone (305) 674-5000. See "BUSINESS OF
THE BOX."
THE SPECIAL MEETING
The Special Meeting will be held at the Miami Beach Ocean Resort Hotel
located at 3025 Collins Avenue, Miami Beach, Florida 33140, on December 16,
1997, starting at 10:00 a.m., local time. At the Special Meeting, holders of BOX
Voting Stock will be asked to approve and adopt the Merger Agreement and the
Capitalization Amendment, which are summarized below and described in more
detail elsewhere in this Proxy Statement/Prospectus. See "THE MERGER AGREEMENT."
Holders of record of BOX Voting Stock at the close of business on November
10, 1997 (the "Record Date") have the right to receive notice of and to vote at
the Special Meeting. Each share of BOX Voting Stock is entitled to one vote on
each matter that is properly presented to shareholders for a vote at the Special
Meeting under the BOX Charter. Pursuant to the Box Charter and the FBCA, the
affirmative vote, in person or by proxy, of the holders of record of at least
75% of the outstanding shares of BOX Voting Stock entitled to vote at the
Special Meeting is required to approve and adopt the Merger Agreement and a
majority of the outstanding shares of BOX Voting Stock entitled to vote at the
Special Meeting is required to approve the Capitalization Amendment. The
approval of the Capitalization Amendment will not be deemed effective unless the
Merger Agreement is also approved.
As of the Record Date, (i) the BOX's directors and executive officers
(other than Messrs. Lenfest and Michaels, who are Voting Shareholders, as
defined below, and other than Mr. Wolfson, who has given an irrevocable proxy
with respect to certain shares beneficially owned by him to CEA Investors
Partnership II, Ltd., a general partner of StarNet/CEA II Partners) beneficially
owned shares of BOX Common Stock (including shares issuable upon exercise of
stock options and excluding shares subject to options granted by StarNet, Inc.
to Mr. McGlade, which shares are included in those beneficially owned by the
Voting Shareholders), representing approximately 3.0% of the outstanding shares
of BOX Voting Stock on such date (assuming the exercise of such options to
acquire shares) and (ii) affiliates of TCI beneficially owned shares
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<PAGE> 12
of BOX Common Stock representing approximately 4.5% of the outstanding shares of
BOX Voting Stock on such date. Such persons have indicated they intend to vote
all of their shares of BOX Voting Stock in favor of the Merger Agreement and the
Capitalization Amendment (collectively, the "Merger Proposals"). Further, three
shareholders of the BOX, StarNet/CEA II Partners, J. Patrick Michaels, Jr. and
H.F. Lenfest (the "Voting Shareholders"), beneficially owning shares of BOX
Common Stock (inclusive of shares held by Louis and Lynn Wolfson, who have given
an irrevocable proxy with respect to shares beneficially owned by them to CEA
Investors Partnership II, Ltd.) collectively representing approximately 56.4% of
the voting power of the outstanding shares of BOX Voting Stock, entered into a
Voting Agreement dated August 12, 1997 with TCI Music (the "Voting Agreement")
pursuant to which they agreed to vote such shares in favor of approval and
adoption of the Merger Proposals and to vote against any proposal that would
compete or interfere with the Merger Proposals. See "THE SPECIAL
MEETING -- Voting Rights; Votes Required for Approval" and "THE MERGER -- Voting
Agreement."
Holders of shares of BOX Voting Stock who comply with the applicable
procedural requirements of the FBCA are entitled to appraisal rights with
respect to their shares. A vote in favor of the Merger Proposals by a BOX
shareholder will preclude such shareholder from any right to exercise appraisal
rights under the FBCA, and may, under applicable law, estop such shareholder
from later challenging the transactions to be consummated pursuant to the Merger
Proposals on fairness grounds. See "APPRAISAL RIGHTS" and Appendix IV to this
Proxy Statement/Prospectus.
THE MERGER
General; Consideration to be Received by the BOX Shareholders. Pursuant to
the Merger Agreement, Acquisition Sub, a wholly-owned subsidiary of TCI Music,
will be merged with and into the BOX with the BOX as the Surviving Corporation
of the Merger.
Upon consummation of the Merger, (a) each share of BOX Common Stock
outstanding immediately prior to the Merger (other than shares held directly or
indirectly by the BOX and shares held by holders who elect appraisal rights with
respect to their shares in accordance with applicable law) will be converted
into the right to receive (i) a fraction (the "Merger Conversion Ratio") of a
share of Music Series A Preferred Stock equal to the quotient (calculated to the
nearest hundredth) of $1.50 divided by three times the average of the average
daily closing bid and asked prices of one share of Series A Common Stock for a
period of 20 consecutive trading days ending on the third trading day prior to
the Closing as reported on the Nasdaq SmallCap Market and (ii) cash in lieu of
fractional shares of Music Series A Preferred Stock and (b) each share of BOX
Preferred Stock outstanding immediately prior to the Merger (other than shares
held by holders who elect appraisal rights with respect to their shares in
accordance with applicable law) will remain an outstanding share of the
Surviving Corporation with all of the rights, privileges and preferences set
forth in the BOX Charter and the FBCA. TCI Music has entered into discussions
with the holder of all of the outstanding shares of BOX Preferred Stock to
purchase such shares prior to the consummation of the Merger for cash in the
amount of $2,500,000 (the equivalent of $1.50 per share), plus accrued but
unpaid dividends. If the Merger had been consummated on November 10, 1997, based
on a calculation of the average of the average daily closing bid and asked
prices of one share of Series A Common Stock for a period of 20 consecutive
trading days ending November 5, 1997 ($7.58), the Merger Conversion Ratio would
be .07 of a share of Music Series A Preferred Stock for one share of BOX Common
Stock. See "THE MERGER AGREEMENT -- Consideration to be received in the Merger."
Each share of Music Series A Preferred Stock will be initially convertible into
three shares of Series A Common Stock, subject to certain antidilution
adjustments and certain adjustments for dividends and distributions, if any.
Each share of Music Series A Preferred Stock will be entitled to vote on all
matters submitted to a vote of the holders of the Series A Common Stock and to
the number of votes equal to the number of shares of Series A Common Stock into
which such share is convertible as of the Record Date for the matter to be voted
upon. Each share of Series A Common Stock currently outstanding trades together
with an associated TCI Right issued by TCI in connection with the DMX Merger.
Each TCI Right entitles the holder to require TCI to purchase from such holder
one share of Series A Common Stock for $8.00, if prior to July 11, 1998, the
price of one share of Series A Common Stock does not equal or exceed $8.00 per
share for at least 20 consecutive trading days. The TCI Rights will
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<PAGE> 13
terminate or expire on or before August 10, 1998 unless extended by their terms.
The market price of the Series A Common Stock, with reference to which the
number of shares of Music Series A Preferred Stock to be issued in the Merger
will be determined, includes the value, if any, ascribed by the market to a TCI
Right. The shares of Series A Common Stock into which the Music Series A
Preferred Stock issuable in the Merger will be convertible will not have any
associated TCI Rights, and if a holder of Music Series A Preferred Stock
converts shares into Series A Common Stock prior to the termination or
expiration of the TCI Rights, the Series A Common Stock without the TCI Rights
received upon conversion will not be tradable on the Nasdaq SmallCap Market
under the symbol "TUNE" with the Series A Common Stock that includes the TCI
Rights until such TCI Rights terminate or expire. As a condition to the Merger,
the number of shares of BOX Common Stock authorized under the BOX Charter will
be increased prior to the Merger from 40,000,000 shares to 100,000,000 shares
pursuant to the Capitalization Amendment. See "RISK FACTORS -- Termination of
TCI Rights; Potential Decrease in Price of Series A Common Stock," "-- Nasdaq
Listing and Maintenance Requirements; Absence of Trading Market," "CONTROL BY
TCI; ARRANGEMENTS BETWEEN TCI AND TCI MUSIC -- TCI Rights," "THE
MERGER -- Opinion of Financial Advisor Retained by the Box Board" and "THE
MERGER AGREEMENT -- Consideration to be Received in the Merger -- General." For
a description of the Music Series A Preferred Stock, see "DESCRIPTION OF TCI
MUSIC CAPITAL STOCK -- Music Series A Preferred Stock" and the Certificate of
Designations attached as Appendix II to this Proxy Statement/Prospectus. For a
summary of differences between the rights of holders of Music Series A Preferred
Stock, BOX Common Stock and BOX Preferred Stock, see "COMPARISON OF
SHAREHOLDERS' RIGHTS."
Opinion of Financial Advisor. Houlihan Lokey Howard & Zukin ("Houlihan
Lokey") was retained by the BOX Board to act as its financial advisor and to
render an opinion as to the fairness to the BOX's public shareholders of the
consideration to be received by such shareholders in connection with the Merger.
On August 4, 1997, prior to the execution of the Merger Agreement, Houlihan
Lokey rendered to the BOX Board an oral opinion, subsequently confirmed in
writing on August 12, 1997, to the effect that, as of the date of such opinion
and based upon and subject to certain matters, the consideration to be received
in the Merger by the public shareholders of the BOX was fair, from a financial
point of view, to such holders.
The BOX shareholders are urged to read carefully the opinion of Houlihan
Lokey, which is set forth in its entirety as Appendix III to this Proxy
Statement/Prospectus, for a description of the procedures followed, the factors
considered and the assumptions made by Houlihan Lokey in rendering its opinion.
See "THE MERGER -- Opinion of Financial Advisor Retained by the BOX Board."
Recommendation of the BOX Board; the BOX's Reasons for the Merger. On
August 4, 1997, the BOX Board (other than Messrs. Burns, Innis and Michaels, who
did not vote on the Merger Proposals) approved without dissent the Merger
Proposals and determined that the terms of the Merger Agreement are fair to, and
that the Merger Proposals are in the best interests of, the BOX and its
shareholders and therefore recommends that the holders of BOX Voting Stock vote
FOR approval of the Merger Agreement and the Capitalization Amendment. In
reaching its decision to approve the Merger Proposals and to recommend that the
BOX shareholders approve the Merger Proposals, the BOX Board identified the
following potential benefits of the Merger:
- The existing financial condition of the BOX severely limits its ability
to effectuate an increase in the distribution of the BOX's programming,
and the BOX Board believes it is unlikely that the BOX will have access
to adequate capital to implement its business plan if it does not
complete the Merger;
- The BOX Board's belief that the BOX will be able to achieve synergistic
benefits through its association with TCI Music and TCI, including
financial and administrative synergies and increased availability and
reduced cost of capital for the BOX; and
- The BOX Board's belief that TCI Music would offer a strategic
relationship with Liberty and TCI that would enhance the BOX's ability to
market and distribute its services.
In the course of its deliberations, the BOX Board reviewed and considered
various factors, including, among others: (a) the information concerning the
BOX's and TCI Music's respective businesses, financial
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<PAGE> 14
position, results of operations and properties, including the fact that the BOX
has sustained significant operating losses and has rarely generated positive
cash flow from operations; (b) the views of the BOX's management regarding the
possible synergistic and expansion opportunities for the BOX and TCI Music; (c)
the consideration paid in other comparable merger and acquisition transactions;
(d) the opinion of Houlihan Lokey that the consideration to be received by the
BOX's shareholders in connection with the Merger is fair to the BOX's
shareholders from a financial point of view (see "THE MERGER -- Opinion of
Financial Advisor Retained by the BOX Board"); (e) the prospects of the BOX on a
stand-alone basis (which the BOX Board concluded were unfavorable), including
financing alternatives for the BOX, taking into consideration the BOX's
unsuccessful efforts since December 1996 to secure equity or debt financing
either through prospective investors or strategic alliances; (f) the BOX's need
for substantial capital to compete effectively; (g) the prospects for
alternative transactions to the Merger; (h) the terms of the Merger Agreement
and the transactions contemplated thereby, including the obligation of the BOX
following the date of execution of the Merger Agreement not to solicit or
encourage other acquisition proposals, the fact that no other expressions of
acquisition interest were forthcoming after the BOX announced its signing of a
definitive letter of intent with TCI Music on July 22, 1997, the circumstances
under which the BOX can terminate the Merger Agreement and the closing
conditions to the Merger; (i) consideration of the public market and liquidity
of the securities to be issued to the BOX's shareholders in the Merger; (j)
confirmation from the BOX's chief executive officer that, as of August 4, 1997,
he was not aware of any understanding, arrangement or agreement with TCI Music
regarding the employees of the BOX to be retained by TCI Music after the Merger;
(k) in connection with the Merger, CEA agreed to reduce to $500,000 the
investment banking fee to be paid by the BOX to CEA, which fee is significantly
less than the approximately $1.9 million fee that the BOX would have otherwise
been contractually obligated to pay CEA for its services in connection with the
Merger under the Domestic Financing Agreement dated as of October 8, 1996 by and
between CEA and the BOX; (l) pursuant to the terms of the Merger Agreement,
certain employees and directors of the BOX have stock options that may be
canceled for monetary consideration or exchanged for options to purchase shares
of Series A Common Stock; and (m) the requirement under the FCBA and the BOX
Charter that holders of record of at least 75% of the outstanding shares of BOX
Voting Stock approve and adopt the Merger Proposals.
See "THE MERGER -- Recommendation of the BOX Board; the BOX's Reasons for
the Merger." For a discussion of the interests of certain members of the BOX's
management and the BOX Board in the Merger, see "THE MERGER -- Interests of
Certain Persons in the Merger."
TCI Music's Reasons for the Merger. The Board of Directors of TCI Music
(the "TCI Music Board") has unanimously approved the Merger Agreement. The
primary factors considered and relied upon by the TCI Music Board in reaching
its decision to approve the Merger are described in "THE MERGER -- TCI Music's
Reasons for the Merger."
Conditions to the Merger. The respective obligations of the BOX and TCI
Music to effect the Merger are subject to the satisfaction of certain
conditions, including (i) the Merger Agreement and the transactions contemplated
by the Merger Agreement shall have been duly approved by the holders of BOX
Voting Stock; and (ii) the Registration Statement shall have become effective in
accordance with the provisions of the Act and any necessary state securities law
approvals shall have been obtained and no stop order suspending the
effectiveness of the Registration Statement shall have been issued by the
Commission and remain in effect. The obligations of TCI Music to effect the
Merger are subject to the condition that appraisal rights under Sections
607.1301, 607.1302 and 607.1320 of the FBCA, attached as Appendix IV to this
Proxy Statement/ Prospectus, have not been demanded by the BOX shareholders of
record with respect to more than 15% of the issued and outstanding shares of BOX
Voting Stock. The BOX's obligations to effect the Merger are subject to (i) the
amendment by TCI and TCI Music of the Contribution Agreement dated July 11, 1997
entered into by TCI and TCI Music in connection with the DMX Merger (the
"Contribution Agreement") and the execution of an affiliation agreement (the
"Affiliation Agreement") by and between DMX and a TCI affiliate (the "TCI
Affiliate"), together providing for certain annual payments to TCI Music or DMX
in the aggregate amount of approximately $26.5 million (adjusted annually by the
percentage change in the CPI for the prior year) and (ii) the extension by TCI
of the maturity date of the $40,000,000 loan executed in connection with
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<PAGE> 15
the DMX Merger payable by TCI Music to TCI. In addition, the obligations of the
BOX and TCI Music to effect the Merger are subject to the satisfaction of
certain other conditions. See "THE MERGER AGREEMENT -- Conditions to the
Merger," "-- Governmental Approvals," "APPRAISAL RIGHTS," "CONTROL BY TCI;
ARRANGEMENTS BETWEEN TCI AND TCI MUSIC -- Amended Contribution Agreement,"
"-- Affiliation Agreement" and "-- Extension of TCI Music Note."
Termination of the Merger Agreement. The Merger Agreement is subject to
termination by mutual consent of the TCI Music Board and the BOX Board or at the
option of either the BOX or TCI Music (i) if the shareholders of the BOX do not
approve the Merger Proposals at the Special Meeting or (ii) if the Merger has
not been consummated on or before July 11, 1998, so long as the party seeking to
terminate the Merger Agreement has not breached its obligations under the Merger
Agreement in any material respect and, if the BOX is the terminating party, so
long as none of the Voting Shareholders is in breach of any obligations under
the Voting Agreement. The Merger Agreement is also subject to termination by
either TCI Music or the BOX prior to such time upon the occurrence of certain
events. See "THE MERGER AGREEMENT -- Termination; Amendment and Waiver."
Indemnification. The Merger Agreement provides that TCI Music will cause
the Surviving Corporation to indemnify, and should the Surviving Corporation
fail to or be unable to do so, TCI Music will indemnify the directors and
officers of the BOX for a period after the Effective Time to the fullest extent
permitted by the FBCA, the BOX Charter and the bylaws of the BOX (the "BOX
Bylaws") and certain indemnification agreements with the BOX directors and
employees in effect on the date of the Merger Agreement. See "THE
MERGER -- Interests of Certain Persons" and "THE MERGER
AGREEMENT -- Indemnification."
Voting Agreement. In connection with the Merger, TCI Music and the Voting
Shareholders, H.F. Lenfest, J. Patrick Michaels, Jr. and StarNet/CEA II
Partners, who together beneficially own approximately 56.4% of the shares of BOX
Voting Stock (inclusive of shares held by Louis and Lynn Wolfson, who have given
an irrevocable proxy with respect to shares beneficially owned by them to CEA
Investors Partnership II, Ltd.), entered into a Voting Agreement dated as of
August 12, 1997. Pursuant to the Voting Agreement, the Voting Shareholders
agreed to vote all of the shares of BOX Voting Stock beneficially owned by them
in favor of the adoption and approval of the Merger Proposals and the Merger at
every meeting of the BOX shareholders. The Voting Shareholders further agreed to
vote all of the shares of BOX Voting Stock beneficially owned by them against
any proposal that would in any way inhibit the timely consummation of the Merger
and the other transactions contemplated by the Merger Agreement. Under the
Voting Agreement, the Voting Shareholders may not deposit the shares of BOX
Voting Stock beneficially owned by them in a voting trust or sell, assign,
pledge, grant a lien on or otherwise transfer any of their interests in any of
such shares to any person unless such transferee agrees in writing to be bound
by the Voting Agreement to the same extent as the Voting Shareholder. See "RISK
FACTORS -- Conflicts of Interest," "THE MERGER -- Background of the Merger" and
"-- Interests of Certain Persons in the Merger."
ACCOUNTING TREATMENT
The Merger will be accounted for using the purchase method of accounting.
See the condensed pro forma combined financial statements and notes thereto of
TCI Music appearing under the heading "INDEX TO FINANCIAL STATEMENTS."
INTERESTS OF CERTAIN PERSONS IN THE MERGER
In considering the recommendation of the BOX Board with respect to the
Merger Proposals, shareholders should be aware that certain members of the BOX
Board and of the BOX management have certain interests in the Merger that are in
addition to or different from the interests of the shareholders of the BOX
generally. See "THE MERGER -- Interests of Certain Persons in the Merger." The
BOX Board was aware of these interests and considered them, among other matters,
in approving the Merger Proposals.
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APPRAISAL RIGHTS
Holders of shares of BOX Voting Stock who comply with the applicable
procedural requirements of the FBCA are entitled to appraisal rights with
respect to their shares. A vote in favor of the Merger Proposals by a
shareholder of the BOX will preclude such shareholder from any right to exercise
appraisal rights under the FBCA, and may, under applicable law, estop such
shareholder from later challenging the Merger Proposals on fairness grounds. See
"APPRAISAL RIGHTS" and Appendix IV to this Proxy Statement/Prospectus.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The Merger is intended to qualify as a transaction described in Section
368(a) of the Internal Revenue Code of 1986, as amended (the "Code"). See
"CERTAIN CONSEQUENCES OF THE MERGER -- Certain Federal Income Tax Consequences."
COMPARATIVE MARKET PRICE DATA
The BOX. BOX Common Stock is quoted on the Nasdaq SmallCap Market under
the symbol "BOXW."
The following table sets forth the range of the high and low bid quotations
of BOX Common Stock for the periods indicated. The BOX's fiscal year ends on
December 31.
<TABLE>
<CAPTION>
COMMON STOCK HIGH LOW
------------ ---- ---
<S> <C> <C>
Year ended December 31, 1995
First Quarter............................................. 2 1 3/8
Second Quarter............................................ 1 9/16 1
Third Quarter............................................. 2 1/8 1 1/8
Fourth Quarter............................................ 2 7/16 1
Year ended December 31, 1996
First Quarter............................................. 2 1 1/16
Second Quarter............................................ 2 3/16 1
Third Quarter............................................. 1 9/16 9/16
Fourth Quarter............................................ 15/16 1/2
Year ending December 31, 1997
First Quarter............................................. 13/16 1/2
Second Quarter............................................ 5/8 13/32
Third Quarter............................................. 1 29/32 5/8
Fourth Quarter (to November 10,1997)...................... 1 3/16 1 3/32
</TABLE>
There is no established public trading market for BOX Preferred Stock.
TCI Music. Series A Common Stock commenced trading on the Nasdaq SmallCap
Market under the symbol "TUNE" on July 14, 1997, the first business day after
the consummation of the DMX Merger. TCI Music's fiscal year ends December 31.
The high and low bid quotations for one share of Series A Common Stock during
the period beginning July 14, 1997 and ending September 30, 1997 were $7.5625
and $6.25, respectively, and the high and low bid quotations for one share of
Series A Common Stock during the period beginning October 1, 1997 and ending
November 10, 1997 were $7.75 and $7.375, respectively. See "BUSINESS OF TCI
MUSIC."
On July 21, 1997, the last full trading day before TCI Music and the BOX
publicly announced they had entered into a binding letter of intent in
connection with the Merger, the high and low sales quotations on the Nasdaq
SmallCap Market for one share of Series A Common Stock were $7.375 and $7.03125,
respectively, and for one share of BOX Common Stock were $1.4375 and $1.25,
respectively. On August 11, 1997, the last full trading day before TCI Music and
the BOX publicly announced that they had entered into the Merger Agreement, the
high and low bid quotations on the Nasdaq SmallCap Market for one share of
Series A Common Stock were $7.375 and $7.125, respectively, and for one share of
BOX Common Stock were $1.125
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and $1.09375, respectively. On November 10, 1997, the last full trading day
before the date of this Proxy Statement/Prospectus, the high and low sales
quotations on the Nasdaq SmallCap Market for one share of Series A Common Stock
were $7.5625 and $7.5625, respectively, and for one share of BOX Common Stock
were $1.1875 and $1.15625, respectively. Shareholders are urged to obtain
current market quotations for Series A Common Stock and BOX Common Stock.
The high and low sales quotations described above with respect to the
quotation of one share of Series A Common Stock, include an attached TCI Right
issued by TCI to DMX stockholders that exchanged their shares of common stock of
DMX for shares of Series A Common Stock in connection with the DMX Merger. In
connection with the Merger, TCI Music has applied for the listing of the Music
Series A Preferred Stock on the Nasdaq SmallCap Market and has received
conditional approval for such listing. Although TCI Music believes that it will
receive final approval from Nasdaq for the listing of the Music Series A
Preferred Stock, no assurances can be given that such final approval will be
obtained or, if obtained, that an active trading market in Music Series A
Preferred Stock will develop or, if developed, that an active trading market
will be sustained. See "-- Control by TCI; Arrangements Between TCI and TCI
Music," "RISK FACTORS -- Termination of TCI Rights; Potential Decrease in Price
of Series A Common Stock," "-- Nasdaq Listing and Maintenance Requirements;
Absence of a Trading Market," "THE MERGER -- Opinion of Financial Advisor
Retained by the BOX Board," and "CONTROL BY TCI; ARRANGEMENTS BETWEEN TCI AND
TCI MUSIC -- TCI Rights."
CONTROL BY TCI; ARRANGEMENTS BETWEEN TCI AND TCI MUSIC
General. The outstanding shares of Series A Common Stock and TCI Music
Series B Common Stock, par value $.01 per share ("Series B Common Stock" and,
together with Series A Common Stock, "TCI Music Common Stock") currently
represent approximately 2.3% and 97.7%, respectively, of the voting power of the
total outstanding shares of TCI Music Common Stock. If the Merger had occurred
on November 10, 1997, based on a calculation of the average daily closing bid
and asked prices of one share of Series A Common Stock for a period of 20
consecutive trading days ending November 5, 1997 ($7.58) for the Series A Common
Stock, approximately 1,750,000 shares of Music Series A Preferred Stock would
have been issued upon consummation of the Merger. Such shares would represent
approximately 0.8% of the combined voting power related to the TCI Music Common
Stock and Music Series A Preferred Stock (collectively, "TCI Music Voting
Stock"), the currently outstanding shares of Series A Common Stock will
represent approximately 2.3% and the currently outstanding shares of Series B
Common Stock will represent approximately 96.9% of the voting power related to
the total combined outstanding shares of TCI Music Voting Stock.
TCI currently beneficially owns approximately 45.7% of the outstanding
shares of Series A Common Stock and 100% of the outstanding shares of Series B
Common Stock, which collectively represent approximately 89.6% of the
outstanding shares of TCI Music Common Stock and 98.7% of the voting power
related to the outstanding shares of TCI Music Voting Stock. TCI currently
beneficially owns approximately 4.8% of the outstanding shares of BOX Common
Stock and immediately following the Merger, TCI will beneficially own
approximately 4.8% of the outstanding shares of Music Series A Preferred Stock,
representing 0.04% of the voting power related to the outstanding shares of TCI
Music Voting Stock, and together with its beneficial ownership of TCI Music
Common Stock, representing 98.0% of the total voting power related to the
outstanding shares of TCI Music Voting Stock.
Following the Merger, TCI Music will own 100% of the outstanding shares of
the common stock of the Surviving Corporation, representing 93.7% of the voting
power of the Surviving Corporation. The outstanding shares of BOX Preferred
Stock will represent approximately 6.3% of the total voting power of the
Surviving Corporation following the Merger. TCI Music has entered into
discussions with the holder of all of the outstanding shares of BOX Preferred
Stock to purchase such shares prior to the Effective Time for cash in the
aggregate amount of $2,500,000 (the equivalent of $1.50 per share), plus accrued
but unpaid dividends. If such purchase is consummated prior to the Effective
Time, the BOX will be a wholly-owned subsidiary of TCI Music immediately after
the Effective Time.
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Under agreements with TCI Music, TCI provides certain administrative,
legal, financial, treasury, accounting, tax and other services to TCI Music and
makes available certain of its employee benefit plans to TCI Music's employees.
In addition, TCI and TCI Music have a number of intercompany agreements covering
such matters as the allocation of income taxes.
Amended Contribution Agreement. In connection with the DMX Merger, TCI and
TCI Music entered into the Contribution Agreement pursuant to which, among other
things, TCI agreed to cause certain of its affiliates to contribute to TCI Music
revenue from sales of the DMX Service, net of an amount equal to 10% of the
revenue from such sales to residential subscribers and net of the license fees
otherwise payable to DMX. Pursuant to the Merger Agreement, TCI Music and TCI
entered into the Amended and Restated Contribution Agreement effective as of
July 1, 1997 (the "Amended Contribution Agreement") which provides, among other
things, for TCI to deliver, or cause certain of its subsidiaries to deliver, to
TCI Music in lieu of TCI's obligation to cause its affiliates to make
contributions to TCI Music under the Contribution Agreement as described above,
monthly payments aggregating $18 million annually (adjusted annually by the
percentage change, if any, in the Consumer Price Index, All Urban Consumers, All
Items (or any similar successor index published by a U.S. governmental agency)
for the prior year ("CPI")) for a term of 20 years (the "Annual TCI Payments").
The Annual TCI Payments represent (i) revenue of 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. See "THE MERGER
AGREEMENT -- Conditions to the Merger" and "CONTROL BY TCI; ARRANGEMENTS BETWEEN
TCI AND TCI MUSIC -- Amended Contribution Agreement" and " -- Affiliation
Agreement."
Affiliation Agreement. The TCI Affiliate and DMX expect to enter into the
Affiliation Agreement, pursuant to which, among other things, DMX will grant to
the TCI Affiliate and certain affiliates of the TCI Affiliate the non-exclusive
right to distribute and subdistribute the DMX Service in exchange for licensing
fees paid by the TCI Affiliate to DMX for a term of 10 years. For the first
three years of the Affiliation Agreement, the license fees paid by the TCI
Affiliate to DMX will be $8,500,000, adjusted annually (beginning July 1, 1998)
by the percentage change in the CPI for the prior year and subject to adjustment
for subscribers served by divested and acquired systems. After the first three
years of the term of the Affiliation Agreement, the fees will be adjusted on a
monthly basis upward or downward, as the case may be, for the increase or
decrease in the actual number of subscribers above or below a specified number
of subscribers in accordance with a determined formula and not to exceed a
maximum annual reduction of 10% of the prior year's fees. See "CONTROL BY TCI;
ARRANGEMENTS BETWEEN TCI AND TCI MUSIC -- Affiliation Agreement."
Extension of TCI Music Note. In connection with the consummation of the DMX
Merger, TCI Music issued to TCI a note in the principal amount of $40,000,000
payable to the order of TCI, bearing interest at 10% per annum, which interest
will be waived by TCI if the principal is paid in full at or before maturity,
which is January 10, 1998 (the "TCI Music Note"). TCI Music expects to refinance
the TCI Music Note, but no assurance can be given that TCI Music will be able to
obtain such financing on terms acceptable to TCI Music. The BOX's obligations to
effect the Merger are subject to the extension by TCI of the TCI Music Note
pursuant to which the maturity date of the TCI Music Note will be extended for a
period, not to exceed 18 months, as may reasonably be required to permit TCI
Music to obtain other financing sufficient to repay the note (the "Extension of
TCI Music Note"). See "THE MERGER AGREEMENT -- Conditions to the Merger" and
"CONTROL BY TCI; ARRANGEMENTS BETWEEN TCI AND TCI MUSIC -- Extension of TCI
Music Note."
TCI Loan. Pursuant to a Loan and Security Agreement between TCI and DMX, as
amended (the "TCI Loan"), TCI has made loans to DMX in the aggregate principal
amount of $3,500,000. Such loans are due on or before June 1, 2000 and accrue
interest at a rate of 12.5% per annum.
Rights Issued by TCI in the DMX Merger. In connection with the DMX Merger,
TCI issued to each DMX stockholder who became a stockholder of TCI Music one TCI
Right with respect to each whole share
8
<PAGE> 19
of Series A Common Stock acquired by such stockholder in the DMX Merger. Each
TCI Right entitles the holder to require TCI to purchase from such holder one
share of Series A Common Stock for $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 ("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 price of Series A Common Stock does not equal or exceed $8.00 per share for
a period of at least 20 consecutive trading days. The TCI Rights are evidenced
by a legend on the certificates for shares of Series A Common Stock issued in
the DMX Merger and become exercisable for a 30 day period beginning July 11,
1998, if they have not terminated prior to such date, and will expire on the
last day of such 30 day period unless extended by their terms. The shares of
Series A Common Stock issuable upon conversion of the Music Series A Preferred
Stock issuable in the Merger will not include any such TCI Rights and, if such
conversion occurs prior to the termination or expiration of the TCI Rights, the
Series A Common Stock without the TCI Rights received upon such conversion will
not be tradable on the Nasdaq SmallCap Market under the symbol "TUNE" with the
Series A Common Stock that includes the TCI Rights until the TCI Rights
terminate or expire. See "CONTROL BY TCI; ARRANGEMENTS BETWEEN TCI AND TCI
MUSIC -- TCI Rights," "-- Nasdaq Listing Maintenance Requirements; Absence of
Trading Market," "RISK FACTORS -- Termination of TCI Rights; Potential Decrease
in Price of Series A Common Stock" and "THE MERGER -- Opinion of Financial
Advisor Retained by the BOX Board." See "RISK FACTORS -- Conflicts of
Interest -- Relationship with TCI," "RISK FACTORS -- Disparate Voting Rights;
Control by TCI," "CONTROL BY TCI; ARRANGEMENTS BETWEEN TCI AND TCI MUSIC" and
"THE MERGER AGREEMENT -- Conditions to the Merger."
PROPOSED ACQUISITION BY TCI MUSIC
TCI Music and Paradigm Music Entertainment Company, a Delaware corporation
("Paradigm"), have entered into a binding letter agreement dated September 18,
1997 (the "Paradigm Agreement") pursuant to which TCI Music will acquire all of
the issued and outstanding shares of the common stock of Paradigm, par value
$.01 per share ("Paradigm Common Stock"), in a merger of a newly formed
wholly-owned subsidiary of TCI Music with and into Paradigm (the "Paradigm
Merger"). Paradigm operates music-related worldwide web sites accessible through
the internet known as SonicNet and Addicted to Noise, distributes new artist and
catalog releases of established artists through its record label businesses and
is involved in the creation and distribution of syndicated radio and on-line
music programming. TCI Music will deliver consideration in connection with the
Paradigm Merger by (a) exchanging that number of shares of Series A Common Stock
(which will not include the TCI Rights) determined by dividing $24,000,000 (less
the amount equal to the number of dissenters' shares multiplied by the portion
of $24,000,000 allocable to each share of Paradigm Common Stock assuming no
dissenters' shares) by the average of the mean daily closing bid and asked
prices of Series A Common Stock for a period of 20 consecutive trading days
ending on the third trading day prior to the effective time of the Paradigm
Merger as quoted on the Nasdaq SmallCap Market and (b) paying the amount of
$4,970,831 in cash or as a purchase or assumption by TCI Music of debt owed by
Paradigm. If the Paradigm Merger is consummated, TCI Music believes that it may
be consummated prior to the Effective Time; however there can be no assurances
that the Paradigm Merger will be consummated prior to the Effective Time or at
all. The issuance of the Series A Common Stock in connection with the Paradigm
Merger will not have a significant effect on the voting power related to the
Music Series A Preferred Stock to be issued in the Merger.
Contemporaneously with the execution of the Paradigm Agreement, TCI Music,
Paradigm and certain stockholders of Paradigm, collectively beneficially owning
approximately 70.3% of the voting power related to the total outstanding shares
of Paradigm Common Stock (the "Paradigm Voting Stockholders"), entered into a
voting agreement (the "Paradigm Voting Agreement") whereby each of the Paradigm
Voting Stockholders agreed to vote, or cause to be voted, all of the shares of
Paradigm Common Stock that are beneficially owned by such stockholder in favor
of, and to cause any holder of record of shares of Paradigm Common Stock to vote
such holder's shares in favor of, the adoption and approval of the Paradigm
Merger at every meeting of the stockholders at which the Paradigm Merger is
considered. Further, the Paradigm Voting Shareholders agreed to vote, or cause
to be voted, all of the shares of Paradigm Common Stock beneficially owned by
them,
9
<PAGE> 20
and to cause any holder of record of shares of Paradigm Common Stock to vote
such holder's shares, against any proposal that would in any way inhibit the
timely consummation of the Paradigm Merger.
In connection with the execution of the Paradigm Agreement, TCI Music
agreed to loan Paradigm an amount not to exceed $2,183,169 plus amounts
sufficient to permit Paradigm to pay its normal operating expenses (not to
exceed $550,000 for any month) in the aggregate amount of up to $3,833,169 for
the months of October, November and December 1997 (unless the consummation of
the Paradigm Merger occurs prior to the scheduled date of any such advance)
pursuant to a Loan and Security Agreement dated as of September 18, 1997 entered
into by the parties. See "BUSINESS OF TCI MUSIC -- Paradigm Services and
Distribution," "-- Terms of Proposed Paradigm Merger," "RISK FACTORS" and
"INDEX TO FINANCIAL STATEMENTS."
DIVIDEND POLICY
TCI Music does not anticipate declaring and paying cash dividends on the
TCI Music Common Stock and the Music Series A Preferred Stock in the foreseeable
future. The decision whether to apply any legally available funds to the payment
of dividends on TCI Music Common Stock and Music Series A Preferred Stock will
be made by the TCI Music Board from time to time in the exercise of its business
judgment, taking into account TCI Music's financial condition, results of
operations, existing and proposed commitments for use of TCI Music's funds and
other relevant factors. See "DESCRIPTION OF TCI MUSIC CAPITAL STOCK -- TCI Music
Common Stock -- Dividends" and "-- TCI Music Preferred Stock -- Dividends."
TRANSFER AGENT
The transfer agent and exchange agent for the Series A Common Stock is The
Bank of New York and the transfer agent and exchange agent for the Music Series
A Preferred Stock will be The Bank of New York. See "THE MERGER -- Exchange of
Shares."
RISK FACTORS AND FORWARD-LOOKING STATEMENTS
In reviewing this Proxy Statement/Prospectus, shareholders should carefully
consider the matters described under the heading "RISK FACTORS" beginning on
page 15.
This Proxy Statement/Prospectus contains statements relating to future
results of the BOX, TCI Music, Paradigm and their subsidiaries that are
"forward-looking statements" as defined in the Private Securities Litigation
Reform Act of 1995. When used in this Proxy Statement/Prospectus, the words
"estimate," "project," "intend," "expect" and similar expressions are intended
to identify forward-looking statements. Such statements are subject to risks and
uncertainties that could cause actual results to differ materially from those
contemplated in such forward-looking statements. Readers are cautioned not to
place undue reliance on these forward-looking statements, which speak only as of
the date hereof. Such risks and uncertainties include those detailed from time
to time in the filings of the BOX and TCI Music and its predecessors with the
Commission and those risks and uncertainties described under the heading "RISK
FACTORS" beginning on page 15.
10
<PAGE> 21
SUMMARY SELECTED FINANCIAL AND OTHER DATA
CERTAIN COMPARATIVE PER SHARE DATA
The following table sets forth certain comparative data related to book
value (deficit) and loss per common share (i) on a historical basis for TCI
Music and the BOX, (ii) on a pro forma basis for TCI Music and (iii) on a pro
forma equivalent basis for the BOX. The pro forma information shown is derived
from the condensed pro forma combined financial statements of TCI Music
presented elsewhere herein, which give effect to the DMX Merger, the Paradigm
Merger and the Merger as if such events had occurred as of June 30, 1997 with
respect to the pro forma balance sheet data. The pro forma operating data give
effect to the DMX Merger, the Paradigm Merger and the Merger as if such events
had occurred as of January 1, 1996. The information shown below should be read
in conjunction with the historical financial statements and notes thereto of the
BOX, which are incorporated by reference herein, and the condensed pro forma
financial statements and notes thereto of TCI Music appearing elsewhere herein.
See "INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE" and "INDEX TO FINANCIAL
STATEMENTS." The BOX did not pay any cash dividends on its common stock during
the six months ended June 30, 1997 and the year ended December 31, 1996. See
"DESCRIPTION OF TCI MUSIC CAPITAL STOCK -- Dividends."
<TABLE>
<CAPTION>
BOX
TCI MUSIC BOX TCI MUSIC PRO FORMA
HISTORICAL(1) HISTORICAL PRO FORMA EQUIVALENTS(4)
------------- ---------- --------- --------------
<S> <C> <C> <C> <C>
Book value per common share as of June 30,
1997........................................... $ -- $ 0.40 $ 1.30(2) $ 0.27
Primary and fully diluted earnings (loss)
attributable to common stockholders per common
and common equivalent share:
Six months ended June 30, 1997.............. -- (0.12) (.22)(3) (.05)
Year ended December 31, 1996................ -- 0.05 (.44)(3) (.09)
</TABLE>
- ---------------
(1) TCI Music was formed on January 21, 1997. Since its formation and prior to
June 30, 1997, TCI Music did not conduct any significant activities other
than those incident to its formation and the DMX Merger. Accordingly,
comparative per share data is not presented because it is not considered
meaningful.
(2) The pro forma book value per common share is based upon 18,131,150 shares of
Series A Common Stock and 62,500,000 shares of Series B Common Stock. Such
amounts represent the number of shares that would have been issued by TCI
Music if the DMX Merger, the Paradigm Merger and the Merger had occurred on
June 30, 1997. The TCI Music pro forma book value includes amounts owed to
TCI aggregating $41,784,889 ($.52 per common share).
(3) The pro forma net loss per share calculation is based upon 79,158,330 and
80,631,150 weighted average shares outstanding for the six months ended June
30, 1997 and the year ended December 31, 1996, respectively. Such amounts
represent the number of weighted average shares of TCI Music that would have
been outstanding if the DMX Merger, the Paradigm Merger and the Merger had
occurred on January 1, 1996.
(4) The BOX pro forma equivalents are determined by multiplying TCI Music pro
forma book value and pro forma loss per share times .21, which represents
the estimated Merger Conversion Ratio (.07) that would have been calculated
if the Merger had been consummated on June 30, 1997 multiplied by the number
of shares of Series A Common Stock into which each share of Music Series A
Preferred Stock will be initially convertible. So long as the per share
price of Series A Common Stock is between $6.66 and $7.70, the Merger
Conversion Ratio would remain at .07. See "THE MERGER AGREEMENT --
Consideration to be Received in the Merger."
11
<PAGE> 22
SELECTED FINANCIAL DATA
TCI Music. TCI Music was formed on January 21, 1997. Since its formation
and prior to June 30, 1997, TCI Music did not conduct any significant activities
other than those incident to its formation and the DMX Merger. Accordingly,
selected historical financial data for TCI Music as of June 30, 1997 is not
presented because it is not considered meaningful.
DMX. The following table sets forth selected historical financial data for
DMX and subsidiaries as of June 30, 1997 and for the nine months ended June 30,
1997 and as of and for each of the years in the five-year period ended September
30, 1996. The following information is qualified in its entirety by, and should
be read in conjunction with, the consolidated financial statements and notes
thereto of DMX, included in the Transition Report of TCI Music on Form 10-K,
included as Appendix V to this Proxy Statement/Prospectus. See "INCORPORATION OF
CERTAIN DOCUMENTS BY REFERENCE" and "INDEX TO FINANCIAL STATEMENTS."
DMX INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
NINE
MONTHS
ENDED
JUNE 30, YEARS ENDED SEPTEMBER 30,
------------ ------------------------------------------------------------------------
1997 1996 1995 1994 1993 1992
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
SUMMARY INCOME STATEMENT DATA
Revenue....................... $ 16,594,278 17,326,603 12,773,384 9,377,059 4,792,527 773,861
Operating, selling, general
and administrative
expenses.................... $(27,438,525) (30,459,586) (22,166,898) (20,558,849) (17,726,103) (27,306,904)
Loss on disposal of DMX-Europe
N.V......................... $ (1,737,554) (7,153,278) -- -- -- --
Operating loss................ $ 14,370,825) (22,169,676) (10,735,289) (12,247,456) (13,723,805) (27,098,737)
Equity loss in DMX-Europe
N.V......................... $ -- (11,853,686) (13,271,599) (4,746,239) (3,553,932) --
Net loss...................... $(14,707,744) (33,854,777) (23,079,529) (16,505,214) (16,407,975) (26,440,404)
Loss per share................ $ (0.25) (0.68) (0.60) (0.48) (0.52) (0.90)
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30,
-------------------------------------------------------------------
JUNE 30, 1997 1996 1995 1994 1993 1992
------------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
SUMMARY BALANCE SHEET DATA
Current assets..................... $ 6,186,452 7,719,069 12,122,658 9,650,493 3,102,741 10,972,178
Property and equipment, net of
accumulated depreciation......... $ 4,132,173 5,893,988 4,336,378 4,443,995 3,225,093 2,388,227
Goodwill, net of accumulated
amortization..................... -- 4,535,658 -- -- 15,459 41,960
Total assets....................... $ 10,985,895 18,752,019 17,082,384 14,599,946 6,873,741 13,954,332
Current liabilities................ $ 22,599,513 16,636,107 3,250,042 3,405,082 3,714,835 3,198,719
Non-current liabilities............ $ 4,688,607 3,470,162 3,074,463 2,836,041 650,315 37,162
Investment in DMX-Europe N.V....... $ -- -- 15,886,116 8,175,171 3,428,932 --
Stockholders' equity (deficit)..... $(16,302,225) (1,354,250) (5,128,237) 183,652 (920,341) 10,718,451
</TABLE>
The BOX. The following table sets forth selected historical financial data
for the BOX as of June 30, 1997 and for the six months ended June 30, 1997 and
1996 and as of and for each of the years in the five-year period ended December
31, 1996. The following information is qualified in its entirety by, and should
be read in conjunction with, the consolidated financial statements and notes
thereto of the BOX. See "INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE" and
"INDEX TO FINANCIAL STATEMENTS."
12
<PAGE> 23
THE BOX WORLDWIDE, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, YEARS ENDED DECEMBER 31,
--------------------------- -------------------------------------------------------------------
1997 1996 1996 1995 1994 1993 1992
------------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
SUMMARY INCOME STATEMENT DATA
Revenue...................... $ 9,619,075 10,451,767 20,263,311 22,243,890 18,852,225 14,724,583 14,139,574
Operating, selling, general
and administrative
expenses................... $ (11,171,583) (11,714,291) (23,133,619) (22,163,316) (21,382,288) (15,162,576) (16,685,416)
Operating loss(A)............ $ (2,655,326) (1,826,893) (4,304,006) (1,141,422) (4,633,237) (2,253,979) (4,395,122)
Net earnings (loss)(B)....... $ (2,734,435) (2,087,071) 1,175,414 485,058 (4,493,094) (2,489,463) (4,809,444)
Dividend requirement on
preferred stock.......... (75,000) -- (8,630) -- -- -- --
------------- ----------- ----------- ----------- ----------- ----------- -----------
Earnings (loss) attributable
to common shareholders..... $ (2,809,435) (2,087,071) 1,166,784 485,058 (4,493,094) (2,489,463) (4,809,444)
============= =========== =========== =========== =========== =========== ===========
Earnings (loss) per share.... $ (.12) (.09) .05 .02 (.23) (.18) (.45)
</TABLE>
- ---------------
(A) Includes depreciation and amortization of $1,102,818 and $564,369 for the
six months ended June 30, 1997 and 1996, respectively, and $1,433,698,
$1,221,996, $1,832,393, $1,815,986 and $1,849,280 for the years ended
December 31, 1996, 1995, 1994, 1993 and 1992, respectively, which amounts
are not included in the operating, selling, general and administrative
expenses line in this table.
(B) Includes gain on the sale of interest in a subsidiary of $5,758,940 and
$1,376,899 in the years ended December 31, 1996 and 1995, respectively.
<TABLE>
<CAPTION>
DECEMBER 31
----------------------------------------------------------------
JUNE 30, 1997 1996 1995 1994 1993 1992
------------- ---------- ----------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
SUMMARY BALANCE SHEET DATA
Current assets.............................. $ 5,729,533 11,295,610 9,810,333 10,893,461 3,170,172 2,494,983
Property and equipment, net of accumulated
depreciation.............................. $ 8,852,102 6,718,175 3,006,884 2,561,603 3,289,259 4,818,512
Total assets................................ $16,678,780 19,523,301 14,661,337 13,881,740 6,870,866 7,812,201
Current liabilities......................... $ 4,586,495 4,613,820 3,305,058 3,646,702 2,643,731 3,980,638
6% Convertible Redeemable Preferred Stock... $ 2,373,758 2,298,758 -- -- -- --
Stockholders' equity........................ $ 9,718,527 12,610,723 11,356,279 10,235,038 3,415,398 418,767
</TABLE>
TCI Music. The following table presents summary financial data relating to
the historical financial position of TCI Music, DMX, Paradigm and the BOX as of
June 30, 1997, and to the historical results of operations of TCI Music, DMX,
Paradigm and the BOX for the six months ended June 30, 1997 and the year ended
December 31, 1996. In addition, the following table presents summary financial
data relating to TCI Music's unaudited pro forma combined financial position as
of June 30, 1997 and TCI Music's unaudited pro forma combined results of
operations for the six months ended June 30, 1997 and the year ended December
31, 1996. The historical financial data for the year ended December 31, 1996 has
been derived from the respective audited financial statements of DMX, Paradigm
and the BOX. The historical data as of, and for the six months ended, June 30,
1997 has been derived from unaudited information. The unaudited pro forma
combined statement of operations data gives effect to the DMX Merger, the
Paradigm Merger and the Merger as of January 1, 1996. The unaudited pro forma
combined balance sheet data gives effect to the DMX Merger, the Paradigm Merger
and the Merger as of June 30, 1997. The unaudited pro forma combined data does
not purport to be indicative of the results of operations or financial position
that may be obtained in the future or that actually would have been obtained had
such transactions occurred on such dates. The following information is qualified
in its entirety by reference to the historical financial statements and notes
thereto of TCI Music, DMX, Paradigm and the BOX. See "INCORPORATION OF CERTAIN
DOCUMENTS BY REFERENCE" and "INDEX TO FINANCIAL STATEMENTS."
13
<PAGE> 24
<TABLE>
<CAPTION>
JUNE 30, 1997
---------------------------------------------------------------
HISTORICAL
------------------------------------------------
TCI TCI MUSIC
MUSIC DMX PARADIGM BOX PRO FORMA(1)
-------- ----------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C>
SUMMARY BALANCE SHEET DATA
Current assets............... $ 1 6,186,452 634,439 5,729,533 12,550,425
Property and equipment, net
of accumulated
depreciation............... $ -- 4,132,173 498,235 8,852,102 19,082,510
Intangible assets, net....... $ -- -- 1,581,851 -- 146,016,334
Total assets................. $809,166 10,985,895 3,839,557 16,678,780 181,538,716
Current liabilities.......... $ -- 22,599,513 5,540,333 4,586,495 32,726,341
Non-current liabilities...... $ -- 4,688,607 223,455 -- 6,710,523
Redeemable Preferred Stock... $ -- -- -- 2,373,758 35,282,618
Stockholders' equity
(deficit).................. $809,166 (16,302,225) (1,924,231) 9,718,527 104,445,426(2)
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, 1997
---------------------------------------------------------------
HISTORICAL
------------------------------------------------
TCI TCI MUSIC
MUSIC DMX PARADIGM BOX PRO FORMA(1)
-------- ----------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C>
SUMMARY OPERATING DATA
Revenue...................... $ -- 11,439,954 975,762 9,619,075 30,767,391
Operating, selling, general
and administrative
expenses................... $ -- 18,471,949 4,221,751 11,171,583 34,710,731
Operating loss............... $ -- (9,967,104) (3,559,019) (2,655,326) (15,516,022)
Net loss..................... $ -- (10,375,154) (3,549,562) (2,734,435) (18,068,724)
Dividend required on
preferred stock............ -- -- -- (75,000) --
-------- ----------- ---------- ---------- -----------
Net loss attributable to
common stockholders........ $ -- (10,375,154) (3,549,562) (2,809,435) (18,068,724)
======== =========== ========== ========== ===========
Pro forma net loss per
share...................... $ (.22)
===========
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
---------------------------------------------------------------
HISTORICAL
------------------------------------------------
TCI TCI MUSIC
MUSIC DMX PARADIGM BOX PRO FORMA(1)
-------- ----------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C>
SUMMARY OPERATING DATA
Revenue...................... $ -- 18,810,459 31,114 20,263,311 56,272,752
Operating, selling, general
and administrative
expenses................... $ -- 33,218,236 2,446,827 23,133,619 60,450,835
Operating loss............... $ -- (23,655,613) (2,458,881) (4,304,006) (29,345,916)
Net earnings (loss).......... $ -- (30,814,971) (2,399,464) 1,175,414 (34,975,067)
Dividend required on
preferred stock............ -- -- -- (8,630) --
-------- ----------- ---------- ---------- -----------
Net earnings (loss)
attributable to common
stockholders............... $ -- (30,814,971) (2,399,464) 1,166,784 (34,975,067)
======== =========== ========== ========== ===========
Pro forma net loss per
share...................... $ (.44)
===========
</TABLE>
- ---------------
(1) For additional information concerning the pro forma adjustments, see the
Condensed Pro Forma Combined Financial Statements of TCI Music, included
elsewhere herein.
(2) Includes amounts owed to TCI aggregating $41,784,889.
14
<PAGE> 25
PROXY STATEMENT/PROSPECTUS
RISK FACTORS
In deciding how to vote their shares at the Special Meeting, holders of
shares of BOX Voting Stock should carefully consider all of the information
contained in this Proxy Statement/Prospectus and, in particular, the following
factors:
LIMITED OPERATING HISTORY OF TCI MUSIC
TCI Music was incorporated in January 1997 and until the DMX Merger on July
11, 1997 conducted no significant activities other than those incident to its
formation and the DMX Merger. Subsequent to the DMX Merger, TCI Music's business
has consisted principally of the business of DMX. See " -- Risks Related to
DMX." TCI Music's operations will include the business of Paradigm upon
consummation of the Paradigm Merger and the business of the BOX after the
Merger. See "-- Risks Related to the BOX" and "-- Limited Operating History of
Paradigm and Limited Revenue from Operations." The likelihood of success of TCI
Music must be considered in light of difficulties and risks inherent in a new
developing company. There can be no assurance that revenue will increase
significantly in the future.
RISKS RELATED TO DMX
Unprofitable History of DMX. DMX began its basic audio operations in 1990
and since its formation has experienced significant losses. Net operating losses
of DMX were $14.3 million for the nine months ended June 30, 1997 and were $22.2
million, $10.7 million and $12.2 million for the fiscal years ended September
30, 1996, 1995 and 1994, respectively. DMX historically had limited capital
resources and, prior to the DMX Merger, had been operating under severe cash
flow constraints. There can be no assurances that TCI Music will be able to
successfully meet DMX's short and long term cash needs. See "CONTROL BY TCI;
ARRANGEMENTS BETWEEN TCI AND TCI MUSIC -- Amended Contribution Agreement,"
"SUMMARY SELECTED FINANCIAL AND OTHER DATA," "BUSINESS OF TCI MUSIC" and "INDEX
TO FINANCIAL STATEMENTS."
Effect of Launch of Digital Compression Technology on DMX Revenue. Cable
operators have recently begun to launch a new method of distributing video and
other programming using digital compression technology. Digital compression
technology digitizes hundreds of television channels, compressing as many as 14
of the current analog video and other programming signals into the space
normally occupied by one. Such technology improves picture quality and allows
for carriage of significantly more video and other programming product offerings
("Digital Distribution"). Digital Distribution permits subscribers to receive
video and music signals through a single standard set-top tuner or "box" without
the use of a separate tuner for music, as has historically been the case with
the more traditional distribution system whereby DMX music signals are delivered
directly to cable operators by C-band for distribution to residential and
commercial cable subscribers ("Tuner Distribution"). Tuner Distribution
subscribers electing the DMX Service pay a separate a la carte fee.
The launch of digital compression technology has the potential to provide
an additional distribution market for the DMX Service if cable operators
utilizing Digital Distribution, such as TCI, elect to offer the DMX Service as
part of one or more digital video programming packages, thereby providing DMX to
customers who might not otherwise elect to subscribe to the DMX Service on an a
la carte basis. However, the launch of and the transition to Digital
Distribution may also have the effect of materially reducing DMX's residential
subscriber fee revenue (from cable operators other than affiliates of TCI, which
will pay TCI Music an agreed upon amount regardless of distribution method) as a
result of the expected change from the a la carte fee structure currently in
effect for Tuner Distribution to a fee structure where DMX is part of a digital
video programming package. Such programming package could be similar to that
currently used for distribution of the DMX Service via direct broadcast
satellite ("DBS") or as part of a package delivered by DBS distributors. See
"BUSINESS OF TCI MUSIC -- DMX Music Services--Effect of Launch of Digital
Technology."
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In addition, TCI Music expects that Tuner Distribution will continue to be
available in markets where Digital Distribution has not been introduced.
However, because Tuner Distribution currently utilizes more of the cable
spectrum than is currently used to deliver one video channel, it is likely that
some cable operators may determine to eliminate Tuner Distribution of the DMX
Service in certain markets to recover or maintain channel capacity for Digital
Distribution. If any cable operator other than affiliates of TCI, which will
continue to pay TCI Music a fixed amount regardless of distribution method,
terminates Tuner Distribution in any system, all revenues from residential and
commercial subscribers receiving Tuner Distribution of the DMX Service in such
system would terminate, unless such residential subscribers elect to purchase a
video and music programming package through Digital Distribution, and Digital
Distribution or other distribution means were made available to such commercial
subscribers. Accordingly, DMX's revenues from cable operators other than TCI
affiliates could be materially adversely affected if Tuner Distribution were
terminated by such cable operators. Revenues from such non-TCI cable operators
represented approximately 21% of revenues of DMX for the nine month period ended
June 30, 1997. See "BUSINESS OF TCI MUSIC -- DMX Music Services -- Effect of
Launch of Digital Technology."
Dependence on Licensed Rights; Risk of Increased Fees. DMX licenses rights
to rerecord and distribute music from a variety of sources and pays royalties to
songwriters and publishers through contracts negotiated with performing rights
societies such as the American Society of Composers, Authors and Publishers
("ASCAP"), Broadcast Music, Inc. ("BMI") and the Society of European Stage
Authors and Composers ("SESAC"). DMX has separate agreements with ASCAP, BMI and
SESAC for residential and commercial distribution. DMX's agreement with ASCAP
for commercial music distribution is currently governed by an agreement that
runs through 1999. Its agreement with SESAC for commercial distribution expired
in June 1997, and DMX is accruing fees at substantially the same rate as were
being accrued under the expired contract as it continues to negotiate the
contract renewal. DMX's agreement with BMI dated October 11, 1991 for commercial
distribution has been extended on an interim basis until the resolution of a new
industry-wide commercial agreement with BMI that is currently being negotiated.
The agreement with ASCAP with respect to residential music distribution is
governed by an industry-wide agreement dated December 20, 1991. The parties are
operating under the terms of an interim agreement until the resolution of
pending proceedings in rate court. Although DMX cannot predict the outcome of
such proceedings, the rate determination, when made, may require retroactive
rate increases. In 1995, DMX entered into a new agreement with BMI for
residential distribution with a term extending to 1999. DMX's agreement with
SESAC for residential distribution also expired in June 1997, and DMX is
accruing fees at substantially the same rate as were being accrued under the
expired contract as it continues to negotiate the contract renewal. During the
year ended September 30, 1996, the DMX expenses for ASCAP, BMI and SESAC license
fees were approximately $2.3 million, in the aggregate. Although DMX has been
accruing for potential increases in the BMI commercial and ASCAP residential
rates, if the fees to be paid by DMX to these and other licensors increase in
excess of current accruals, DMX's results of operations could be materially
adversely affected by such excess amount.
Digital Performance Rights. On November 1, 1995, the Digital Performance
Right in Sound Recordings Act of 1995 was signed into law ("1995 Act"). The 1995
Act establishes the right of owners of the performance rights, such as the
performers and record companies, to control digital transmission of sound
recordings by means of subscription service digital transmissions. The 1995 Act
provides a compulsory license for noninteractive subscription services. An
arbitration proceeding relating to residential digital music distribution is
pending before the United States Copyright Office. The purpose of the proceeding
is to determine the statutory license royalty rate to be paid under the 1995 Act
by DMX (and other digital music residential subscription services) on services
transmitted to non-business subscribers. The proceeding commenced August 2,
1996. The royalty rate would be retroactive to February 1996, and accordingly,
DMX has been accruing 3% of residential subscriber fee revenue since such date.
Royalty rates of 0.5% by Muzak L.P., 1.25% by DMX, 2% by Digital Cable Radio
Associates, and 41.5% by the Recording Industry Association of America have been
proposed to the arbitrators. The results of the arbitration could have an
adverse effect on DMX if DMX is required to pay a higher license royalty rate
than the rate at which DMX has been accruing.
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RISKS RELATED TO THE BOX
The BOX's Losses from Operations. The BOX has historically sustained losses
from operations. The BOX incurred operating losses of $2,655,326 for the six
months ended June 30, 1997 and $4,304,006 and $1,141,422 for the years ended
December 31, 1996 and December 31, 1995, respectively. The recent losses from
operations are primarily attributable to the increased expenses associated with
its efforts to expand the distribution of the BOX's music video programming both
domestically and internationally. While the BOX has taken steps to reduce such
expenses, including the renegotiation of programming affiliation agreements and
satellite transponder and uplink fees, the BOX expects to continue to incur
losses through 1998 due to the costs necessary to expand the distribution of its
programming. The BOX's ability to achieve profitability depends on its ability
to successfully expand the distribution of the BOX's programming and increase
viewer and advertising revenues in excess of increased operating expenses. There
can be no assurance that the BOX will generate sufficient revenues to meet
operating expenses or operate profitably.
Limited Liquidity and Capital Resources of the BOX. As of June 30, 1997,
the BOX's current assets exceeded current liabilities by approximately
$1,143,000. The BOX has financed its operations the past two years primarily
from the proceeds of the BOX's sale of Video Jukebox Network International
Limited, the BOX's former subsidiary in the United Kingdom. The BOX generally
has not generated positive cash flow from operating activities. In addition, the
BOX will require significant additional funds in order to fully implement its
business strategy, including the expansion of the international distribution of
the BOX's programming service. Therefore, after the Merger, TCI Music will
require additional sources of working capital to fund the BOX's operations.
Other than as may be provided as a result of the Merger, the BOX has no present
agreement, understanding or arrangement with any party with respect to any
additional source of financing. If the Merger is not consummated, the BOX may
have to seek additional funds through public or private equity or debt
financing. Since December 1996, the BOX has been unsuccessful in obtaining
additional financing on terms it considered commercially reasonable.
Accordingly, if the Merger is not consummated, no assurance can be given that
the BOX will be able to obtain such financing on commercially reasonable terms
or at all.
Competition. The television programming business in the United States is
highly competitive. The BOX competes for channel space and viewers with several
music video television programmers, including MTV, VH-1, BET Jazz, M2 and Much
Music. In addition, the BOX competes with a large number of other cable
programming services for the limited amount of channel space presently available
on cable systems, including, among others, the History Channel and the Home and
Garden Channel. Substantially all of the BOX's competitors are larger and
possess greater financial resources than the BOX. The BOX is not aware of any
competitor which currently offers and operates a service comparable to the
interactive component of the BOX's programming.
Existing Program Agreements with a Minimum Fee Arrangement. The BOX has
entered into program affiliation agreements with approximately 68 percent of the
cable system operators that presently carry the BOX's programming in the United
States. Pursuant to such agreements, the BOX pays cable operators the greater of
a guaranteed minimum monthly fee per subscriber or a specified percentage of the
gross revenues generated by each cable operator's system. Substantially all such
cable operators are presently receiving the guaranteed minimum monthly fee,
which fee bears no direct relationship to the revenues generated by the BOX's
programming. Management periodically evaluates available alternatives to
affiliation agreements that do not generate revenues in excess of direct costs.
Such alternatives may include the cancellation of program affiliation
agreements, which will reduce net viewer revenues and advertising sales, unless
the BOX is able to replace these program affiliation agreements with affiliation
agreements with other cable operators.
No Assurance of Carriage on Cable Systems. Consistent with industry
practice, the BOX's written programming affiliation agreements with cable system
operators may be canceled by either party upon 90 days prior written notice. In
addition, approximately 32 percent of the BOX's domestic subscribers are carried
by cable system operators that have not entered into written programming
affiliation agreements with the BOX. Therefore, no assurance can be given that
the BOX's programming will continue to be carried on the cable systems that
currently carry the BOX. In 1996, cable system operators in New York City and
Detroit with an
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aggregate of approximately 1,025,000 subscribers elected to cancel the BOX's
programming service. See "-- Public Acceptance of Programming." If the BOX were
to experience a high rate of terminations, the BOX's business and financial
performance would likely be materially adversely affected.
Availability of Cable and Low Power Television Channels. Competition for
channel space on cable systems is significant. Although the emergence of Digital
Distribution and other changing technology in this area may expand available
channel capacity, the majority of cable systems presently carry less than 54
channels of programming. The BOX has identified for its expansion several cable
television systems and additional low power television stations located in the
United States with 900 telephone service. The BOX, however, faces significant
competition for channel space available on such cable systems. The BOX also
faces increased difficulty in locating low power television stations in areas
which have a large non-cable subscriber base and do not presently receive the
BOX's programming. Although the BOX is presently pursuing distribution
arrangements with cable operators and owners of low power television stations,
there can be no assurance that cable channel space or suitable low power
television systems will be available for the BOX to continue to expand the
distribution of its programming in the United States.
Dependence on Key Personnel. The BOX depends to a significant extent upon
the services of Alan McGlade, Luann Hoffman, Paul Sartain and other senior
management, and the loss of any member of senior management could have a
material adverse effect upon the BOX's business, financial condition and
operating results. The BOX does not have a long-term employment agreement with
any of its senior management.
Public Acceptance of Programming. Although, to date, the BOX has been able
to expand the distribution of its programming through 102 box units installed in
cable television systems, 44 box units installed in low power television
stations and eight boxes installed in full power broadcast stations, there can
be no assurance that public acceptance of the BOX's programming will be
sufficient to enable the BOX to continue to expand its operations or operate
profitably. The BOX endeavors to customize the selection of music videos
available on each box to match the programming preferences (e.g., pop,
mainstream, street or Latin) of the particular market. In the past, objections
have been raised with respect to the content of certain music videos aired by
the BOX. Since some of the cable operators' explanations for discontinuing
service in New York City and Detroit were content related, the BOX has made a
concerted effort to avoid airing videos with objectionable content, such as
unacceptable or excessive sexual and/or violent content. However, due to the
apparent popularity of such videos with viewers, net viewer revenues have been
adversely affected by the BOX's decision to avoid airing such videos. Utilizing
digital technology, the BOX recently has developed locally tailored playlists
that the BOX believes more closely reflect the specific needs and interests of
the individual communities serviced by the BOX. Although the BOX believes the
customized programming will appeal to cable operators and viewers, there can be
no assurance that the BOX will be successful in improving its net viewer
revenue.
Uncertainties of Protection of Proprietary Rights. The BOX owns two United
States copyrights on certain software. Since a copyright primarily protects
written expression but not ideas, concepts or principles, the BOX's copyrights
may not afford any protection against competitors who independently develop
comparable software. In addition, the BOX has obtained United States
registrations for several trademarks, including, "THE BOX," "THE BOX (with
design)" and "THE BOX - Music Television You Control (with design)." An
application has been filed by the BOX for registration of its trademark "Music
Television You Control." The BOX also has three United States patents on its
software and computer hardware systems, which enable a viewer to telephonically
select specific music videos and has filed two additional patent applications
for its digital technology. Additional patents have been issued in Canada and
Italy, with pending international applications in France for the analog box
technology, and in the United Kingdom and the European Community for the digital
technology. The systems may also have other interactive television applications
such as shopping, trivia, comedy, sports and general information. There can be
no assurance, however, as to the breadth or degree of protection which such
copyrights, trademarks and patents may afford the BOX.
Government Regulation. In August, 1997, the Federal Communications
Commission adopted rules regarding the closed captioning of video programming
that become effective beginning in the year 2000. The
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BOX estimates that it may cost up to $110,000 to retrofit its equipment to
display the closed captioning of its video programming, although the BOX is
contemplating applying to the Federal Communications Commission for an exemptive
order from such regulation based upon the undue burden it will place on the BOX.
LIMITED OPERATING HISTORY OF PARADIGM AND LIMITED REVENUE FROM OPERATIONS
Paradigm commenced operations in November 1995 and has a very limited
operating history. Paradigm has sustained losses from operations since its
inception, resulting in substantial working capital deficiency and capital
deficiency. Paradigm incurred net losses of $3,549,562 for the six months ended
June 30, 1997, $2,399,464 for the year ended December 31, 1996 and $131,749 for
the period beginning November 14, 1995 (date of inception) through December 31,
1995. The report of Paradigm's independent auditors dated February 11, 1997
provides that Paradigm's recurrent losses from operations raise substantial
doubt about Paradigm's ability to continue as a going concern. See "INDEX TO
FINANCIAL STATEMENTS." No assurances can be made that Paradigm will not continue
to operate at a deficit after the Paradigm Merger.
TERMINATION OF TCI RIGHTS; POTENTIAL DECREASE IN PRICE OF SERIES A COMMON STOCK
Each share of Series A Common Stock currently outstanding trades together
with a TCI Right granted by TCI in connection with the DMX Merger. Each TCI
Right entitles the holder to require TCI to purchase from such holder one share
of Series A Common Stock for $8.00 per share (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), payable at the election of TCI, in
cash, a number of shares of 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 price of Series A Common Stock does not equal or exceed $8.00 per
share (as adjusted) for a period of at least 20 consecutive trading days. If the
TCI Rights are not earlier terminated upon satisfaction of such price
requirement, they will be exercisable for a 30-day period commencing on July 11,
1998 and will expire on the last day of such 30 day period unless extended by
their terms. Because the TCI Right is associated with the shares of Series A
Common Stock, the current market price of one share of Series A Common Stock
necessarily includes a value for the associated TCI Right. However, until such
TCI Rights are exercised or terminate, the actual value attributable by
investors to such TCI Right cannot be determined since the TCI Right is not
separable from the Series A Common Stock. The shares of Series A Common Stock
into which the shares of Music Series A Preferred Stock issuable in the Merger
will be convertible will not have any associated TCI Rights. Accordingly, no
assurances can be made that the market price per share of Series A Common Stock
(with reference to which the number of shares of Music Series A Preferred Stock
issued in the Merger will be determined and into which such shares of Music
Series A Preferred Stock will be convertible) will be maintained at or near its
current level upon termination or expiration of the TCI Rights. See "CONTROL BY
TCI; ARRANGEMENTS BETWEEN TCI AND TCI MUSIC -- TCI Rights," "THE
MERGER -- Consideration to be Received in the Merger -- General" and
"-- Opinion of Financial Advisor Retained by the Box Board."
NASDAQ LISTING AND MAINTENANCE REQUIREMENTS; ABSENCE OF TRADING MARKET
Absence of Trading Market for Music Series A Preferred Stock and Series A
Common Stock (without TCI Rights). There currently is no established public
trading market for the Music Series A Preferred Stock or the Series A Common
Stock (without TCI Rights) issuable upon conversion of the Music Series A
Preferred Stock. TCI Music has applied to Nasdaq for listing of its Music Series
A Preferred Stock on the Nasdaq SmallCap Market upon consummation of the Merger
and has received conditional approval for such listing. Although TCI Music
believes that it will receive final approval from Nasdaq for the listing of its
Music Series A Preferred Stock, no assurances can be given that such final
approval will be obtained or that an active trading market will develop or if
one does develop, that it will be maintained. Although TCI Music has agreed to
use its best efforts to list the Series A Common Stock issuable upon conversion
of the Music Series A Preferred Stock (which will not include attached TCI
Rights) on the Nasdaq SmallCap Market upon consummation of the Merger, the
Series A Common Stock (without TCI Rights) will not then be eligible for such
listing, since no shares of such Series A Common Stock (without TCI Rights) will
be outstanding. In
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order to be listed on the Nasdaq SmallCap Market, the Series A Common Stock
(without the TCI Rights) issuable upon conversion of the Music Series A
Preferred Stock must satisfy the applicable listing requirements for the Nasdaq
SmallCap Market, which include, but are not limited to, (i) a market
capitalization of $50 million; (ii) a public float of 1,000,000 shares with a
value of $5 million; and (iii) a bid price of $4.00. These requirements can only
be satisfied, if at all, after a number of shares of Series A Common Stock have
been issued upon conversion of the Music Series A Preferred Stock. Accordingly,
no assurances can be made that TCI Music will be able to satisfy such listing
requirements for the Series A Common Stock. If shares of Music Series A
Preferred Stock are converted to Series A Common Stock (without the TCI Rights)
prior to the termination or expiration of the TCI Rights, which will occur no
later than August 10, 1998, unless such date is extended in accordance with the
terms of the TCI Rights, such shares of Series A Common Stock (without TCI
Rights) will not be tradable on the Nasdaq SmallCap Market under the symbol
"TUNE" with the currently outstanding shares of Series A Common Stock (with TCI
Rights) until such TCI Rights terminate or expire. Once the TCI Rights expire or
terminate, the Series A Common Stock issued upon conversion of the Music Series
A Preferred Stock will be tradable on the Nasdaq SmallCap Market under the
symbol "TUNE," if the Series A Common Stock is then eligible for continued
listing on the Nasdaq SmallCap Market. See "-- Absence of Trading Market for
Series A Common Stock After Termination of TCI Rights."
Absence of Trading Market for Series A Common Stock After Termination of
TCI Rights. In order to continue to be listed on the Nasdaq SmallCap Market, the
Series A Common Stock (which currently includes attached TCI Rights) must comply
with certain maintenance requirements of the Nasdaq SmallCap Market, which
require that TCI Music maintain (i) at least $2 million in net tangible assets,
$35 million in market capitalization or $500,000 of net income in the latest
fiscal year, (ii) a public float of 500,000 shares valued at $1 million or more,
(iii) a minimum bid price of $1.00 per share, (iv) two market makers and (v) at
least 300 shareholders. Although TCI Music believes the Series A Common Stock
currently satisfies these standards, no assurances can be made that TCI Music
will continue to be able to comply with these maintenance requirements. In
particular, if the TCI Rights become exercisable as of July 11, 1997, the number
of stockholders exercising TCI Rights and the number of TCI Rights that are
exercised may cause the Series A Common Stock to fail to satisfy one or more of
the Nasdaq SmallCap Market maintenance standards. Failure to satisfy Nasdaq's
maintenance requirements may result in the Series A Common Stock being delisted
from Nasdaq and trading would thereafter be conducted on the over-the-counter
market.
DEPENDENCE ON SATELLITE DELIVERY CAPABILITIES
There are a limited number of satellites with orbital positions suitable
for transmission of DMX's and the BOX's signals and a limited number of
available transponders on those satellites. Satellite transponders receive
signals, translate signal frequencies and transmit signals to receiving
satellite dish antennas. DMX and the BOX (in connection with a national version
of its programming) sublease transponder capacity from National Digital
Television Center, Inc., a subsidiary of TCI ("NDTC"), which also provides
facilities for uplink transmission of DMX's and the BOX's signals to the
transponders. NDTC in turn, leases the satellite transponder capacity on the
satellite known as Satcom C-3 (Transponder 24) from GE American Communications,
Inc., the satellite known as Loral Telstar 4, formerly known as AT&T Telstar
402R, from AT&T Skynet in connection with the transmission of DMX's signals and
the Hughes satellite known as Galaxy 7 (Transponder 13) in connection with the
transmission of the BOX's signals. The term of DMX's principal transponder
sublease with NDTC for the Satcom satellite runs through the end of the life of
that satellite or April 2005, whichever is earlier. The term of DMX's
transponder sublease with NDTC for the Loral Telstar 4 runs through February
2000. The BOX is in the process of negotiating a long-term sublease with NDTC
for Galaxy 7. Although there has never been sustained interruption of DMX's or
the BOX's signals due to transponder failure or satellite unavailability,
failure or loss, no assurance can be given that any such event will not occur in
the future. If such an event were to occur or if NDTC were unable to provide
transponder services to DMX or the BOX, DMX or the BOX would have to seek
alternative transponder or satellite facilities. However, alternative facilities
may not be available on a timely or cost-effective basis and may require the
expense of repositioning each DBS subscriber's satellite dish in order to
receive signals from another satellite. Any one or more of these events could
require DMX or the BOX, as the case may be, to incur additional
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expenditures and could degrade DMX's or the BOX's ability to serve its customer
base and have a material adverse effect on DMX's or the BOX's financial
condition and results of operations. If DMX or the BOX is required to enter into
new transponder lease agreements, no assurance can be given that it will be able
to do so on terms as favorable as those in its current agreements with NDTC.
CONFLICTS OF INTEREST
Potential Conflicts of Interest of the BOX Management. Certain members of
the BOX's management and of the BOX Board have interests in the Merger that are
in addition to and potentially in conflict with the interests of shareholders of
the BOX generally. Certain employees and directors have stock options that may
be canceled for monetary consideration, converted to Music Series A Preferred
Stock or exchanged for options to purchase shares of Series A Common Stock. On
August 13, 1997, the BOX paid Communications Equity Associates, Inc. ("CEA"), a
company controlled by J. Patrick Michaels, Jr., the Acting Chief Operating
Officer, director and a principal beneficial shareholder of BOX Common Stock, a
fee of $250,000 for investment banking services provided to the BOX. If the
Merger Agreement is terminated for any reason, CEA is required to refund such
fee to the BOX. However, upon the closing of the Merger, CEA is entitled to
receive an additional fee of $250,000. Further, certain shareholders of the BOX,
including H.F. Lenfest and J. Patrick Michaels, Jr. who are directors of the
BOX, entered in a Voting Agreement dated August 12, 1997, pursuant to which they
agreed to vote all of their beneficially owned shares of the BOX in favor of the
Merger. The BOX Board was aware of these interests and considered them, among
other things, in approving the Merger Agreement and the transactions
contemplated by the Merger Agreement. See "THE MERGER -- Background of the
Merger" and "-- Interests of Certain Persons in the Merger."
Relationship with TCI; Potential Conflicts of Interest. Certain members of
TCI Music's management and the TCI Music Board are also members of the
management and Board of Directors of TCI or Liberty Media Corporation, a
wholly-owned subsidiary of TCI engaged in the provision of programming services
("Liberty"). Stephen M. Brett, Vice President, Secretary and General Counsel of
TCI Music, is Executive Vice President, Secretary and General Counsel of TCI.
J.C. Sparkman and Donne F. Fisher, directors of TCI Music, are directors of TCI.
Leo J. Hindery, Jr., Chairman of the Board of TCI Music, is a director,
President and Chief Operating Officer of TCI. Robert R. Bennett, a director, is
an Executive Vice President of TCI and a director, President and Chief Executive
Officer of Liberty. David B. Koff, a director, President and Chief Executive
Officer of TCI Music, is Vice President - Corporate Development of Liberty. No
formal policies or guidelines have been adopted by TCI Music with respect to
board actions that may involve actual or potential conflicts of interest between
TCI Music and TCI or Liberty. The directors of TCI Music, however, have
fiduciary obligations under Delaware law to TCI Music and all of its
stockholders. Mr. Fisher and Mr. Sparkman also have fiduciary obligations, when
acting as TCI directors, to TCI and its stockholders. Mr. Bennett also has
fiduciary obligations, when acting as a Liberty director, to Liberty and TCI as
the sole stockholder of Liberty. See "MANAGEMENT OF TCI MUSIC."
TCI is principally engaged in the construction, acquisition, ownership and
operation of cable television systems and the provision of satellite - delivered
video services to various distribution media, principally cable television
systems. DMX is primarily engaged in programming, distributing and marketing a
digital audio music service. TCI, through certain of its affiliates, sells and
provides DMX audio music services to its cable television subscribers in
conjunction with the delivery of video programming. Such audio music services
are provided pursuant to affiliation agreements between DMX and certain TCI
affiliates that provide for such TCI affiliates to pay license fees to DMX. Such
arrangements may give rise to conflicts between TCI and TCI Music because of TCI
Music's desire to maximize the fees DMX receives for its audio music programming
and TCI's desire and its affiliates' desire to minimize the fees paid.
TCI through Liberty is engaged in the provision of video programming
services. TCI does not own any interests in any other entity providing audio or
video music services other than DMX; provided that after consummation of the
proposed Paradigm Merger, TCI will own an interest in Paradigm and after
consummation of the Merger, TCI will own an interest in the BOX. TCI has no
current plans or intentions to engage in the direct programming and distribution
of audio or video music services in the future other than through TCI Music.
However, TCI and its affiliates have the right to engage in or possess interests
in
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businesses or ventures of any nature or description, without regard to whether
any of such businesses or ventures are or may be deemed to be competitive in any
way with any of the businesses of TCI Music, DMX or the BOX; therefore there can
be no assurance that TCI or its affiliates will not engage in the provision of
competitive audio or video music services in the future. See "CONTROL BY TCI;
ARRANGEMENTS BETWEEN TCI AND TCI MUSIC."
Under various other agreements with TCI Music, TCI provides certain
administrative, legal, financial, treasury, accounting, tax and other services
to TCI Music and makes available certain of its employee benefit plans to TCI
Music's employees. In addition, TCI and TCI Music entered into a number of
intercompany agreements covering such matters as the use of services and tax
sharing. Pursuant to a services agreement between TCI and TCI Music (the
"Services Agreement"), TCI provides to TCI Music certain administrative and
other services. On the effective date of the DMX Merger, TCI Music became a
party to an existing tax sharing agreement, as amended, among TCI and certain of
its subsidiaries and as of October 1, 1997, TCI Music became a party to a second
tax sharing agreement among TCI and certain of its subsidiaries. Such agreements
provide, among other things, for the allocation among TCI Music and the other
members of the TCI consolidated tax group of tax liabilities attributable to
periods after the DMX Merger. See "CONTROL BY TCI; ARRANGEMENTS BETWEEN TCI AND
TCI MUSIC -- Services Agreement" and "-- Tax Sharing Agreements."
In addition, the BOX's obligations to effect the Merger are subject to: (a)
TCI and TCI Music entering into the Amended Contribution Agreement, (b) the TCI
Affiliate and DMX entering into the Affiliation Agreement and (c) the Extension
of TCI Music Note by TCI. See "CONTROL BY TCI; ARRANGEMENTS BETWEEN TCI AND TCI
MUSIC -- Amended Contribution Agreement," "-- Affiliation Agreement,"
"-- Extension of TCI Music Loan" and "THE MERGER AGREEMENT -- Conditions to the
Merger."
TCI and DMX have entered into the TCI Loan pursuant to which TCI has made
loans to DMX in the aggregate principal amount of $3,500,000. Such loans are due
on or before June 1, 2000 and accrue interest at a rate of 12.5% per annum. See
"CONTROL BY TCI; ARRANGEMENTS BETWEEN TCI AND TCI MUSIC -- TCI Loan."
The terms of the agreements that govern the relationship between TCI Music
and TCI were established by TCI in consultation with TCI Music's management
prior to the DMX Merger or the Merger, as the case may be, and are not the
result of arm's-length negotiations. Accordingly, although TCI Music believes
that the terms and conditions of these arrangements taken as a whole are
reasonable, there can be no assurance that the terms and conditions of these
agreements are not more or less favorable to TCI Music than those that might
have been obtained from unaffiliated third parties. In addition, there can be no
assurance that comparable services could be obtained from third parties if the
Services Agreement were to be terminated. Although TCI Music believes that its
relationship with TCI is excellent, adverse developments or material disputes
with TCI following the Merger could have a material adverse effect on TCI Music.
See "CONTROL BY TCI; ARRANGEMENTS BETWEEN TCI AND TCI MUSIC."
DISPARATE VOTING RIGHTS; CONTROL BY TCI
The outstanding shares of Series A Common Stock represent approximately
19.25% of, and 2.3% of the voting power related to, the total outstanding shares
of the TCI Music Common Stock, and the outstanding shares of Series B Common
Stock represent approximately 80.75% of, and 97.7% of the voting power related
to, the total outstanding shares of the TCI Music Common Stock. TCI beneficially
owns approximately 45.7% of the outstanding shares of Series A Common Stock and
all of the outstanding shares of Series B Common Stock, which collectively
represent approximately 89.6% of the outstanding shares of TCI Music Common
Stock. Since holders of shares of Series A Common Stock are entitled to one vote
per share, and holders of shares of Series B Common Stock are entitled to ten
votes per share, on each matter presented to a vote of the holders of TCI Music
Common Stock, TCI currently controls approximately 98.7% of the voting power of
the outstanding shares of TCI Music Common Stock. TCI currently beneficially
owns approximately 4.8% of the outstanding shares of BOX Common Stock and
following the Merger, TCI will beneficially own
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approximately 4.8% of the outstanding shares of Music Series A Preferred Stock
representing 0.04% of the voting power of the TCI Music Voting Stock, giving
TCI, together with its beneficial ownership of the TCI Music Common Stock,
control of 98% of the voting power of the outstanding shares of TCI Music Voting
Stock. Thus, TCI has the voting power to control all matters requiring approval
of TCI Music's shareholders voting as a single class, including the ability to
elect all of the members of the TCI Music Board.
Following the Merger, TCI Music will own 100% of the outstanding shares of
the common stock of the Surviving Corporation, representing 93.7% of the voting
power of the Surviving Corporation. The outstanding shares of BOX Preferred
Stock will represent approximately 6.3% of the voting power of the Surviving
Corporation following the Merger. Thus, TCI Music has the voting power to
control all matters requiring approval of the Surviving Corporation's
shareholders voting as a single class, including the ability to elect all of the
members of the Surviving Corporation's Board of Directors.
See "DESCRIPTION OF TCI MUSIC CAPITAL STOCK" and "SECURITY OWNERSHIP OF
CERTAIN BENEFICIAL OWNERS AND MANAGEMENT OF TCI MUSIC AND THE BOX."
COMPETITION
TCI Music, DMX and Paradigm each face significant competition in their
respective industries. TCI Music and DMX compete with other providers of cable
television and DBS programming (including competitors who provide digital music
programming similar to the DMX Service) for subscribers of, relationships with,
and channel space on, cable television and DBS systems.
Paradigm competes with other companies that manufacture and distribute
music recordings, many of which have substantially greater resources, including
established distribution channels, than Paradigm. In addition, Paradigm faces
competition from other providers of products, services and information available
through the Internet and online services. Further, Paradigm relies to a
significant extent upon, and competes for, licensing arrangements which allow
Paradigm to produce and distribute its products, services and information. In
light of Paradigm's limited operating history, no assurances can be given that
Paradigm will be able to successfully compete in these industries even if the
Paradigm Merger is consummated.
COMPUTER SYSTEMS AND SOFTWARE COMPATIBILITY IN THE YEAR 2000
TCI Music, DMX, Paradigm and the BOX are each in the process of identifying
computer systems and software that may not function correctly in the year 2000.
Each such company believes that it will be able to identify, and, if necessary,
modify or replace such systems and software before any year 2000 associated
problems arise; however, the costs of such modification and replacement cannot
yet be estimated, and no assurances can be given that such modification and
replacement will be completed before any year 2000 associated problems arise or
that such costs will not have a material adverse effect on the company.
DEPENDENCE ON KEY PERSONNEL
TCI Music and its subsidiaries and Paradigm each depend to a significant
extent upon the services of their respective executive officers and other senior
management. The loss of any such executive officer or member of senior
management could have a material adverse effect upon the business, financial
condition and operating results of such company and TCI Music.
DIVIDENDS AND DIVIDEND POLICY
TCI Music does not anticipate declaring and paying cash dividends on the
TCI Music Common Stock or Music Series A Preferred Stock at any time in the
foreseeable future. The decision whether to apply legally available funds to the
payment of dividends on TCI Music Common Stock and Music Series A Preferred
Stock will be made by the TCI Music Board from time to time in the exercise of
its business judgment, taking into account, among other things, TCI Music's
results of operations and financial condition, any then existing or proposed
commitments by TCI Music for the use of available funds, and TCI Music's
obligations with respect to the holders of any then outstanding indebtedness or
preferred stock. In addition, TCI Music may in
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the future issue debt securities or preferred stock or enter into loan
agreements or other agreements that restrict the payment of dividends on, and
repurchases of, TCI Music Common Stock and Music Series A Preferred Stock. See
"DESCRIPTION OF TCI MUSIC CAPITAL STOCK -- TCI Music Common Stock -- Dividends"
and " -- Music Series A Preferred Stock -- Dividends."
INTEGRATION OF OPERATIONS
The integration of the BOX's and TCI Music's operations and personnel
following the Merger will initially require certain management resources, which
may temporarily detract attention from the day-to-day business of the combined
company. The difficulties of assimilation may be increased by the necessity of
coordinating geographically separated organizations, integrating personnel with
disparate business backgrounds and combining different corporate cultures. The
process of combining the organizations may cause a temporary interruption of, or
a loss of momentum in, the business activities of the BOX and TCI Music which
could have an adverse effect on the revenue and operating results of the
combined company, at least in the near term. There can be no assurance that the
combined entity will be able to retain its key technical and management
personnel or that the combined entity will realize any of the other anticipated
benefits of the Merger. See "BUSINESS OF TCI MUSIC."
POTENTIAL EFFECTS OF CERTAIN TCI MUSIC ANTI-TAKEOVER PROVISIONS
Certain provisions of Delaware law and the Certificate of Incorporation of
TCI Music (the "TCI Music Charter") and the Bylaws of TCI Music (the "TCI Music
Bylaws") may have the effect of making more difficult an acquisition of control
of TCI Music in a transaction that is not approved by the TCI Music Board. These
provisions include the disparate voting rights of Series A Common Stock and
Series B Common Stock; provisions giving the TCI Music Board the power to issue
up to 5,000,000 shares of preferred stock, and to fix the rights and preferences
thereof, without further authorization of TCI Music's common stockholders; the
requirement of a supermajority vote to approve specified actions; and the other
provisions described under "COMPARISON OF SHAREHOLDERS' RIGHTS." In addition,
the TCI Music Board is divided into three classes, each of which serves for a
staggered three-year term, which may make it more difficult for a third party to
gain control of the TCI Music Board. Many of these provisions generally are
designed to permit TCI Music to develop its businesses and foster its long-term
growth without the disruption caused by the threat of a takeover not deemed by
the TCI Music Board to be in the best interests of TCI Music and its
stockholders. These provisions may also have the effect of discouraging a third
party from making a tender offer or otherwise attempting to obtain control of
TCI Music even though such an attempt might be economically beneficial to TCI
Music and its stockholders. See "COMPARISON OF SHAREHOLDERS' RIGHTS."
CERTAIN LITIGATION
DMX Shareholder Litigation. In September 1996, after the announcement of
TCI's proposal to merge with DMX, certain DMX shareholders filed a putative
class action lawsuit in the Delaware Court of Chancery on behalf of a purported
class consisting of all public shareholders of DMX (other than the directors of
DMX and TCI) captioned Brickell Partners v. Jerold H. Rubinstein, Donne F.
Fisher, Leo J. Hindery, Jr., James R. Shaw, Sr., Kent Burkhart, J. C. Sparkman,
Bhaskar Menon, DMX, Inc. and Tele-Communications, Inc. (Civil Action No. 15206).
The complaint sought as relief, among other things, an injunction preventing
consummation of the DMX Merger as well as unspecified compensatory damages.
Neither TCI Music nor DMX can estimate, based on facts available as of the date
of this Proxy Statement/Prospectus, the possible adverse effects of such a
result, which could include the rescission of the DMX Merger and monetary
damages.
See "CERTAIN LITIGATION."
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THE SPECIAL MEETING
TIME AND PLACE; PURPOSE
The Special Meeting will be held at the Miami Beach Ocean Resort Hotel
located at 3025 Collins Avenue, Miami Beach, Florida 33140 on December 16, 1997,
starting at 10:00 a.m., local time. At the Special Meeting, the shareholders of
the BOX will be asked to consider and vote upon the Merger Proposals and such
other matters as may properly come before the Special Meeting. A copy of the
Merger Agreement is included as Appendix I to this Proxy Statement/Prospectus.
VOTING RIGHTS; VOTES REQUIRED FOR APPROVAL
The BOX Board has fixed the close of business on November 10, 1997, as the
date for the determination of holders of BOX Voting Stock entitled to notice of
and to vote at the Special Meeting. Only holders of record of shares of BOX
Voting Stock at the close of business on the Record Date are entitled to notice
of and to vote at the Special Meeting. At the close of business on the Record
Date, there were 24,892,623 shares of BOX Common Stock held by approximately 265
shareholders of record, and 1,666,667 shares of BOX Preferred Stock held by one
shareholder of record, outstanding and entitled to vote at the Special Meeting.
Each holder of record, as of the Record Date, of BOX Voting Stock is
entitled to cast one vote per share, in person or by proxy, on approval of the
Merger. The presence, in person or by proxy, of the holders of a majority of the
outstanding shares of BOX Voting Stock entitled to vote is necessary to
constitute a quorum at the Special Meeting. The affirmative vote, in person or
by proxy, of the holders of record of at least 75% of the outstanding shares of
BOX Voting Stock entitled to vote at the Special Meeting is required to approve
and adopt the Merger Agreement. The affirmative vote, in person or by proxy, of
the holders of record of at least a majority of the outstanding shares of BOX
Voting Stock entitled to vote at the Special Meeting is required to approve and
adopt the Capitalization Amendment. The approval of the Capitalization Amendment
will not be deemed effective unless the Merger Agreement proposal is also
approved.
As of the Record Date, (i) the BOX's directors and executive officers
(other than Messrs. Lenfest and Michaels, who are Voting Shareholders, and other
than Mr. Wolfson, who has given an irrevocable proxy with respect to shares
beneficially owned by him to CEA Investors Partnership II, Ltd., a general
partner of StarNet CEA II Partners) beneficially owned outstanding shares of BOX
Common Stock (including shares issuable upon exercise of stock options and
excluding shares subject to options granted by StarNet, Inc. to Mr. McGlade,
which shares are included in those beneficially owned by the Voting
Shareholders), representing approximately 3.0% of the outstanding shares of BOX
Voting Stock on such date (assuming the exercise of such options to acquire
shares), (ii) affiliates of TCI owned outstanding shares of BOX Common Stock,
representing approximately 4.5% of the outstanding shares of BOX Voting Stock
and (iii) the Voting Shareholders beneficially owned 14,981,261 shares of BOX
Common Stock (inclusive of the shares beneficially owned by Louis and Lynn
Wolfson who have given an irrevocable proxy with respect to their shares to CEA
Investors Partnership II, Ltd.), representing approximately 56.4% of the
outstanding shares of BOX Voting Stock. Such persons and entities, who together
beneficially owned as of the Record Date approximately 62.5% of the outstanding
shares of BOX Voting Stock, have indicated they intend to vote all of their
shares of BOX Voting Stock in favor of the Merger Proposals.
PROXIES
All shares of BOX Voting Stock represented by properly executed proxies
received prior to or at the Special Meeting, and not revoked, will be voted in
accordance with the instructions indicated in such proxies. If no instructions
are indicated, such proxies will be voted FOR approval and adoption of the
Merger Proposals and, at the discretion of the proxy holder, on any other matter
that may properly come before the Special Meeting. A properly executed proxy
marked "ABSTAIN" will not be voted, although it will be counted for purposes of
determining whether there is a quorum and will have the effect of a "NO" vote on
the Merger Proposals. If a broker indicates on the proxy that it does not have
discretionary authority and has not received instructions from the beneficial
owner to vote certain shares on the Merger Proposals, those shares
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will be considered for purposes of determining whether there is a quorum and
will have the effect of a "NO" vote on the Merger Proposals.
A shareholder may revoke his or her proxy at any time prior to its use by
delivering to the Secretary of the BOX a signed notice of revocation or a later
dated signed proxy or by attending the Special Meeting and voting in person.
Attendance at the Special Meeting will not in itself constitute the revocation
of a proxy.
The cost of solicitation of proxies will be paid by the BOX. The BOX has
retained Innisfree M&A Incorporated ("Innisfree") to solicit proxies in the
enclosed form and will pay such firm a fee of $6,000 plus expenses for acting in
such capacity. In addition to solicitation by Innisfree and by mail, officers
and regular employees of the BOX may solicit proxies by telephone, telegram,
letter, facsimile or by personal interviews. Such persons will receive no
additional compensation for such services. Nominees, fiduciaries and other
custodians will be requested to forward soliciting material to the beneficial
owners of shares held of record by them and will be reimbursed for their
reasonable expenses.
SHAREHOLDERS SHOULD NOT SEND IN ANY STOCK CERTIFICATES WITH THEIR PROXY
CARDS.
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THE MERGER
BACKGROUND OF THE MERGER
TCI, indirectly through a wholly-owned subsidiary, currently beneficially
owns 1,203,464 shares, representing approximately 4.8% of the outstanding shares
of BOX Common Stock. TCI acquired beneficial ownership of 50,000 of such shares
in 1987 through a wholly-owned indirect subsidiary of TCI, Miami Tele-
Communications, Inc. TCI acquired beneficial ownership of 1,000,000 of such
shares pursuant to a Stock Purchase Agreement dated November 21, 1990 between
Video Jukebox Network, Inc. and TCI Liberty, Inc., an indirect wholly-owned
subsidiary of Liberty. Such shares were purchased for a price of $4.33 per share
for a total cash purchase price of $5 million. In connection with the Stock
Purchase Agreement, TCI acquired beneficial ownership of an additional 153,464
of such shares pursuant to the terms of the Stock Purchase Agreement, including
certain antidilution provisions. All of the rights and benefits of TCI Liberty,
Inc., including preemptive rights (granting TCI Liberty, Inc. a right to buy
additional shares of a new issue of any shares of capital stock of the BOX to
preserve its equity position before others have a right to purchase shares of
such issue) set forth in the Stock Purchase Agreement have been assigned to
Liberty VJN, Inc. As a result of a business combination of TCI Communications,
Inc. ("TCIC"), a majority owned subsidiary of TCI, and Liberty pursuant to an
Agreement and Plan of Merger dated as of January 27, 1994, as amended, TCIC and
Liberty became wholly-owned subsidiaries of TCI effective August 4, 1994. Upon
the effectiveness of the business combination, TCI became the beneficial owner
of all the BOX Common Stock beneficially owned by Liberty.
On May 16, 1996, Liberty, StarNet/CEA II Partners and StarNet, Inc. signed
a letter agreement whereby, subject to certain conditions including but not
limited to the successful negotiation of a definitive agreement and completion
of a due diligence investigation, Liberty agreed to purchase 5,581,807 shares of
BOX Common Stock and an option to purchase an additional 5,719,162 shares of BOX
Common Stock held by the sellers at an initial exercise price of $2.00 per
share. In addition, StarNet/CEA II Partners and StarNet, Inc. agreed to use
their good faith and reasonable best efforts to cause the BOX to grant Liberty
an option to purchase from the BOX an additional 4,655,341 shares of newly
issued BOX Common Stock at the initial exercise price of $2.00 per share. Upon
completion of the proposed transactions, TCI would have owned approximately 60%
of the outstanding BOX Common Stock, assuming the exercise of all options. On
July 8, 1996, Liberty terminated its rights and obligations under the letter
agreement and continued to beneficially own 1,203,464 shares of BOX Common
Stock.
On or about June 26, 1997, representatives of TCI Music orally advised
representatives of the BOX of its interest in discussing a possible merger of
the BOX into TCI Music or a wholly-owned subsidiary of TCI Music. On July 3,
1997, representatives of the BOX traveled to Denver, Colorado and met in person
with representatives of TCI Music to discuss and negotiate the terms of a
possible merger transaction between the parties. Negotiations continued through
the week of July 7, 1997 and during the latter part of that week a preliminary
term sheet was drafted by the parties.
On July 10, 1997, the BOX convened a board of directors' meeting to discuss
the proposal to merge the BOX into TCI Music. At this meeting, a special
committee (the "Special Committee") was appointed to negotiate, on a
non-exclusive basis, the terms and conditions of a merger transaction between
the BOX and TCI Music and to present such terms and conditions to the BOX Board
for its consideration and approval. In addition, at this meeting, the BOX Board
invited David Koff, President and Chief Executive Officer of TCI Music, and Lon
Troxel, President and Chief Executive Officer of DMX, to give a presentation to
the BOX Board regarding the business strategy and plan of operation of TCI Music
and DMX and to respond to questions from directors of the BOX.
During the week of July 14, 1997, the parties engaged in further
negotiations regarding the terms of the proposed merger. On July 17, 1997, the
Special Committee met to discuss the status of the negotiations of the proposed
merger transaction and to review the business, operations and financial
condition of TCI Music. From July 18 to July 20, 1997, representatives of the
Special Committee and TCI Music and their respective legal counsel held numerous
telephone conferences and exchanged several drafts of a binding letter of intent
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(the "Letter of Intent") with respect to a proposed merger. At the request of
the BOX, the Letter of Intent included a provision that provided either party
with the right to terminate the Letter of Intent if the BOX did not receive an
opinion of an independent investment banking firm that the merger was fair to
the BOX's shareholders from a financial point of view within ten business days
of the signing of the Letter of Intent. The Letter of Intent also included a
provision giving TCI Music the right to terminate the Letter of Intent if the
Voting Shareholders did not provide TCI Music, within ten days of the signing of
the Letter of Intent, with an undertaking in form and substance reasonably
satisfactory to TCI Music to vote their shares of BOX Voting Stock in favor of
the merger.
On July 21, 1997, the BOX Board met to consider the Letter of Intent. At
this meeting, which was attended, in person or by telephone, by all of the
members of the BOX Board, the BOX Board reviewed the terms and conditions of the
proposed merger and, following deliberations, determined that a merger
transaction pursuant to the terms of the Letter of Intent was advisable and in
the best interest of the BOX's shareholders. See " -- Recommendation of the BOX
Board; the BOX's Reasons for the Merger." Nonetheless, the BOX Board believed it
prudent to seek to negotiate a lower valuation of the Music Series A Preferred
Stock to be received by the BOX shareholders in the proposed merger. On two
separate occasions, the July 21, 1997 meeting was adjourned by the BOX Board
while certain members of the BOX Board contacted certain representatives of TCI
Music in an effort to negotiate a reduced valuation of the Music Series A
Preferred Stock. On each occasion, the BOX Board was advised that TCI Music was
unwilling to reduce the valuation of the Music Series A Preferred Stock. After
further discussion, the BOX Board approved, without dissent, the Letter of
Intent, subject to certain additional conditions required by the BOX Board. Such
conditions were subsequently agreed to by TCI Music and the Letter of Intent was
executed by the BOX and TCI Music on July 21, 1997.
As a condition to its approval of the Letter of Intent, the BOX Board,
through the Special Committee, engaged the firm of Houlihan Lokey to render a
fairness opinion with respect to the Merger by no later than August 4, 1997. See
" -- Opinion of Financial Advisor Retained by the BOX Board." From July 22, 1997
to August 4, 1997, representatives of the BOX and TCI Music negotiated the terms
of a definitive merger agreement. On August 1, 1997, the Special Committee
reviewed a draft of the fairness opinion of Houlihan Lokey and the assumptions
underlying such fairness opinion.
On August 4, 1997, the BOX convened a board of directors' meeting, which
was attended, in person or by telephone, by all of the members of the BOX Board.
At this meeting, a representative of Houlihan Lokey presented their oral opinion
with respect to the fairness of the Merger to the BOX's shareholders from a
financial point of view. See " -- Opinion of Financial Advisor Retained by the
BOX Board." In addition, the material terms of the proposed definitive merger
agreement and the transactions contemplated thereby were reviewed by the BOX
Board and following discussion, the BOX Board (other than Messrs. Burns, Innis
and Michaels, who did not vote on the Merger Proposals) voted to approve and
adopt the form of Merger Agreement and Merger Proposals and to recommend the
approval of the form of Merger Agreement and Merger Proposals to the BOX
shareholders. See " -- Recommendation of the BOX Board; the BOX's Reasons for
the Merger." Negotiation and approval of any non-material changes to the form of
the Merger Agreement and the fairness opinion presented to the BOX Board was
delegated to a committee of the BOX Board (the "Review Committee").
Under the Letter of Intent, the Voting Shareholders were required to
provide TCI Music, by August 4, 1997, with an undertaking in form and substance
reasonably satisfactory to TCI Music to vote their shares of BOX Voting Stock in
favor of the proposed merger. The August 4, 1997 deadline was extended to August
12, 1997 by TCI Music when the parties could not reach an agreement on this
matter. Under the voting agreement proposed by TCI Music, such voting agreement
would remain in place for 180 days after the proposed merger agreement was
terminated either because it was not approved by the BOX's shareholders or
because the BOX was presented with an unsolicited acquisition proposal from a
third party that was more favorable from a financial point of view than the
proposed merger. The Voting Shareholders objected to this provision in the
proposed voting agreement because such provision would effectively prevent the
BOX from consummating an alternative transaction for 180 days following a
termination of the proposed merger agreement for the reasons stated above. This
provision was subsequently eliminated and on August 12, 1997,
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TCI Music and each of the Voting Shareholders entered into the Voting Agreement.
See "ARRANGEMENTS BETWEEN THE BOX AND TCI MUSIC -- Voting Agreement."
In consideration of the elimination of the 180 day standstill provision,
the BOX and TCI Music entered into a services agreement (the "BOX Services
Agreement") pursuant to which TCI Music will pay the BOX for services performed
in connection with the development, marketing and management of a
multiple-channel music video service which may include interactive and scheduled
programming (the "Music Multiplex"). The BOX Services Agreement could remain in
effect even if the Merger is not consummated. See "ARRANGEMENTS BETWEEN THE BOX
AND TCI MUSIC -- BOX Services Agreement."
On August 12, 1997, the Review Committee of the BOX met and approved the
definitive Merger Agreement and fairness opinion and the TCI Music Board
approved the definitive Merger Agreement. Later that same day, the BOX and TCI
Music entered into the Merger Agreement.
RECOMMENDATION OF THE BOX BOARD; THE BOX'S REASONS FOR THE MERGER
At a meeting held on August 4, 1997, the BOX Board (other than Messrs.
Burns, Innis and Michaels, who did not vote on the Merger Proposals) approved
without dissent the Merger Proposals and determined that the terms of the Merger
Proposals are fair to, and in the best interests of, the BOX and its
shareholders from a financial point of view. Accordingly, the BOX Board
recommends that the BOX's shareholders vote FOR the approval and adoption of the
Merger Proposals.
In reaching its determination to approve the Merger Proposals and the
transactions contemplated thereby, the BOX Board concluded that the Merger was
the best way to provide an opportunity to deliver value to the BOX's
shareholders given the BOX's limited financial resources and cash requirements
to sustain operations. In addition, the BOX Board identified the following
potential benefits of the Merger that it believes should contribute to the
success of the Surviving Corporation and benefit the BOX shareholders:
(a) The existing financial constraints on the BOX severely limit its
ability to effectuate an increase in the distribution of the BOX's
programming, and it is unlikely that the BOX will have access to adequate
capital to implement its business plan if it does not complete the Merger;
(b) The BOX Board's belief that the BOX will be able to achieve
synergistic benefits through its association with TCI Music and TCI,
including financial and administrative synergies and increased availability
and reduced cost of capital for the BOX; and
(c) The BOX Board's belief that TCI Music would offer a strategic
relationship with Liberty and TCI that would enhance the BOX's ability to
market and distribute its services.
In the course of its deliberations, the BOX Board reviewed and considered
various factors, including, among others:
(a) The information concerning the BOX's and TCI Music's respective
businesses, financial positions, results of operations and properties,
including that the BOX has sustained significant operating losses and has
rarely generated positive cash flow from operations;
(b) The views of the BOX's management regarding the possible
synergistic and expansion opportunities for the BOX and TCI Music;
(c) The consideration paid in other comparable merger and acquisition
transactions (and the fact that the Merger is a strategic combination);
(d) The opinion of Houlihan Lokey that the consideration to be
received by the BOX's shareholders in connection with the Merger is fair to
the BOX's shareholders from a financial point of view (see "--Opinion of
Financial Advisor Retained by the BOX Board");
(e) The prospects of the BOX on a stand-alone basis (which the BOX
Board concluded were unfavorable), including financing alternatives for the
BOX, taking into consideration the BOX's
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unsuccessful efforts over the past nine months to secure equity or debt
financing either through prospective investors or strategic alliances;
(f) The BOX's need for substantial capital to compete effectively;
(g) The prospects for alternative transactions to the Merger;
(h) The terms of the Merger Agreement and the transactions
contemplated thereby, including the obligation of the BOX following the
date of execution of the Merger Agreement not to solicit or encourage other
acquisition proposals, the fact that no other expressions of acquisition
interest were forthcoming since the BOX announced its signing of a
definitive letter of intent with TCI Music on July 22, 1997, the
circumstances under which the BOX can terminate the Merger Agreement and
the closing conditions to the Merger;
(i) Consideration of the public market and liquidity of the securities
to be issued to the BOX's shareholders in the Merger;
(j) Confirmation from the BOX's chief executive officer that, as of
August 4, 1997, he was not aware of any understanding, arrangement or
agreement with TCI Music regarding the employees of the BOX to be retained
by TCI Music after the Merger;
(k) In connection with the Merger, CEA agreed to reduce to $500,000
the investment banking fee to be paid by the BOX to CEA, which fee is
significantly less than the approximately $1.9 million fee that the BOX
would have otherwise been contractually obligated to pay CEA for its
services in connection with the Merger under the Domestic Financing
Agreement dated as of October 8, 1996 by and between CEA and the BOX;
(l) Pursuant to the terms of the Merger Agreement, certain employees
and directors of the BOX have stock options that may be canceled for
monetary consideration, converted to Music Series A Preferred Stock or
exchanged for options to purchase shares of Series A Common Stock; and
(m) The requirement that holders of record of at least 75% of the
outstanding shares of BOX Voting Stock approve and adopt the Merger
Proposals.
The foregoing discussion of the information and factors considered by the
BOX Board is not intended to be exhaustive but includes all material factors
considered by the BOX Board. In view of the variety of factors considered in
connection with its evaluation of the Merger, the BOX Board did not find it
practicable to and did not quantify or otherwise assign relative weights to the
specific factors considered in reaching its determination. In addition,
individual members of the BOX Board may have given different weights to
different factors.
Board Recommendation. THE BOX BOARD HAS APPROVED THE MERGER AGREEMENT AND
THE CAPITALIZATION AMENDMENT AND BELIEVES THAT THE TERMS OF THE MERGER PROPOSALS
ARE FAIR TO, AND THAT THE MERGER PROPOSALS ARE IN THE BEST INTERESTS OF, THE BOX
AND ITS SHAREHOLDERS AND THEREFORE RECOMMENDS THAT THE HOLDERS OF BOX VOTING
STOCK VOTE FOR APPROVAL AND ADOPTION OF THE MERGER AGREEMENT AND THE
CAPITALIZATION AMENDMENT.
For a discussion of the interests of certain members of the BOX's
management and the BOX Board in the Merger, see " -- Interests of Certain
Persons in the Merger."
TCI MUSIC'S REASONS FOR THE MERGER
The TCI Music Board has unanimously approved the Merger Proposals. The TCI
Music Board believes that the Merger represents an opportunity for TCI Music to
add a significant and strategic business unit to its operations in a manner that
does not require expenditure of its cash resources or the borrowing of funds.
In making its determination, the TCI Music Board considered a number of
factors, including among other things, the terms and conditions of the
transactions contemplated by the Merger Agreement;
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<PAGE> 41
information with respect to the business, operations and prospects of the BOX;
and the views and opinions of the management of TCI Music. The foregoing
discussion includes all material factors considered by the TCI Music Board.
OPINION OF FINANCIAL ADVISOR RETAINED BY THE BOX BOARD
The BOX Board engaged Houlihan Lokey to render an opinion on behalf of the
public shareholders of the BOX that the consideration to be received by the
public shareholders of the BOX in connection with the Merger is fair to them
from a financial point of view.
Representatives of the BOX Board considered retaining various investment
bankers to assist it in its evaluation of TCI Music's merger proposal. In
selecting a firm, the BOX Board considered a variety of factors, including the
firm's reputation, experience, expertise in the relevant industries, cost and
ability to assist the BOX Board in a timely fashion. Based on the foregoing, the
BOX Board selected Houlihan Lokey as its financial advisor.
As compensation to Houlihan Lokey for its services in connection with the
Merger, the Special Committee agreed to pay Houlihan Lokey a fee of $100,000. No
portion of Houlihan Lokey's fees are contingent upon the successful completion
of the Merger. The Special Committee and the BOX have also agreed to indemnify
Houlihan Lokey and related persons against certain liabilities, including
liabilities under federal securities laws, arising out of the engagement of
Houlihan Lokey, and reimburse Houlihan Lokey for certain expenses.
Houlihan Lokey is a nationally recognized investment banking firm that is
continually engaged in providing financial advisory services in connection with
mergers and acquisitions, leveraged buyouts, business valuations for a variety
of regulatory and planning purposes, recapitalizations, financial
restructurings, and private placements of debt and equity securities. Houlihan
Lokey provided an opinion to DMX in connection with the DMX Merger and otherwise
has no prior relationship with the BOX or its affiliates or TCI or its
affiliates.
Houlihan Lokey did not, and was not requested by the BOX Board to, make any
recommendations as to the form or amount of consideration to be paid to the
shareholders in connection with the Merger. The BOX Board did not impose any
restrictions or limitations upon Houlihan Lokey with respect to its
investigation or the procedures it followed in rendering its opinion.
In arriving at its opinion, Houlihan Lokey took the following actions:
(i) reviewed the BOX's annual report to shareholders on Form 10-KSB
for the fiscal year ended December 31, 1996 and the quarterly report on
Form 10-QSB for the quarter ended March 31, 1997, and the BOX-prepared
interim financial statements for the period ended May 31, 1997, which the
BOX's management had identified as being the most current financial
statements available;
(ii) reviewed the Merger Agreement;
(iii) met with certain members of the senior management of the BOX to
discuss the operations, financial condition, future prospects and projected
operations and performance of the BOX, and met with representatives of the
BOX's investment bankers to discuss certain matters;
(iv) reviewed forecasts and projections prepared by the BOX's
management with respect to the BOX for the years ending December 31, 1997
through 2002;
(v) reviewed the historical market prices and trading volume of the
BOX's publicly traded securities;
(vi) reviewed certain other publicly available financial data for
certain companies that Houlihan Lokey deemed comparable to the BOX, and the
publicly available prices and premiums paid in other transactions that
Houlihan Lokey considered similar to the Merger; and
(vii) conducted such other studies, analyses and inquiries as Houlihan
Lokey deemed appropriate.
In order to render its opinion, Houlihan Lokey estimated the value of BOX
Common Stock and compared it to the value of the consideration to be paid in
connection with the Merger. When determining the value of a business enterprise,
there are three general approaches available to the valuation professional: the
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<PAGE> 42
market approach, the income approach and the asset approach. These are also
commonly referred to as the market multiple, discounted cash flow and adjusted
book value approaches, respectively. The choice of which approach to use in a
particular situation will depend upon the specific facts and circumstances
associated with the company, as well as the purpose for which the valuation
analysis is being conducted. Houlihan Lokey did not utilize the adjusted book
value approach because, in the exercise of its professional judgment, Houlihan
Lokey concluded that such approach was not appropriate for determining the value
of BOX Common Stock, since the more appropriate use of the adjusted book value
approach would be for either liquidation valuations or the valuation of capital
intensive going-concerns. The comparable market multiple analysis estimated the
per share value by calculating market multiples for both the latest twelve
month's revenue and current number of subscribers of a peer group of companies
and then applying a selected multiple based on a comparative financial analysis
of the BOX to the peer group of companies. The discounted cash flow analysis
estimated the per share value by discounting to the present, at a risk-adjusted
discount rate, the projected cash flows to be generated by the BOX's business.
The per share value generated by each methodology was lower than the
consideration to be paid in connection with the Merger, leading Houlihan Lokey
to conclude that the consideration to be paid to the public shareholders of the
BOX in connection with the Merger was fair to them from a financial point of
view. No other conclusions of value were reached by Houlihan Lokey.
Houlihan Lokey relied upon and assumed, without independent verification,
that the financial forecasts and projections provided to it have been reasonably
prepared and reflect the best currently available estimates of the future
financial results and condition of the BOX, and that there has been no material
change in the assets, financial condition, business or prospects of the BOX
since the date of the most recent financial statements made available to
Houlihan Lokey.
Houlihan Lokey did not independently verify the accuracy and completeness
of the information supplied to it with respect to the BOX and did not assume any
responsibility with respect to such information. Houlihan Lokey has not made any
physical inspection or independent appraisal of any of the properties or assets
of the BOX. Houlihan Lokey's opinion is necessarily based on business, economic,
market and other conditions as they existed and could be evaluated by it at the
date of its letter.
In reaching its conclusions, Houlihan Lokey utilized two primary valuation
methodologies, as described below:
THE MARKET MULTIPLE APPROACH. The market multiple approach is one of
determining a level of earnings or revenue that is considered to be
representative of the future performance of the business, and multiplying this
figure by an appropriate risk-adjusted market multiple.
The market multiple is an expression of what investors believe to be a fair
and reasonable rate of return for the particular security, given the inherent
risks of ownership. It incorporates expectations of growth and rests on the
implicit assumption that some level of earnings or revenue will be generated by
the enterprise into perpetuity. The market multiple employed was selected
through the market comparison method, whereby companies having their stock
traded in the public market were selected for comparison purposes and used as a
basis for choosing a reasonable market multiple for the BOX.
In employing the market multiple approach, a representative list of
publicly owned companies that are similar to the BOX in those respects carrying
the greatest weight with the investing public were selected for comparison
purposes. Houlihan Lokey conducted a search for companies which were comparable
to the BOX in terms of its operating and financial characteristics. Key search
criteria included:
- The company's primary business had to be supplying content to cable
systems and networks.
- The company's common stock had to be outstanding in the hands of the
public.
- The trading market of the company had to be relatively active to obtain
true investor sentiment.
- The company had to make its financial information public.
The results of this search indicated that the following four companies met
these search criteria and were most comparable to the BOX: BET Holdings Inc.,
International Family Entertainment, Spice Entertainment Companies, Inc. and
ValueVision International, Inc. In some cases, companies may be quite similar
from an investment standpoint, even though they appear to be engaged in somewhat
different lines of business.
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<PAGE> 43
Primarily, they offered operational and economic comparability in the areas of
major importance to the investing public. Accordingly, Houlihan Lokey relied
upon the entire peer group, taken as a whole, for comparison purposes.
Houlihan Lokey noted that the selected comparable companies are
significantly larger than the BOX, have more liquidity and are more profitable.
Moreover, several of the comparable companies operate more diversified
activities than the BOX.
Total invested capital to revenue multiples for the comparable companies
were derived by dividing the value of each company's total invested capital by
the latest twelve months' revenue. Total invested capital ("TIC") is defined as
the book value of a company's debt and preferred equity (where book value
approximates fair market value), plus the enterprise value of the company's
common equity. The enterprise value of the common equity is computed by
multiplying the number of shares outstanding and the most recent 20-day average
price per share as of the valuation date. These resulting multiples of
TIC/Revenue ranged from 0.76 to 5.22. Likewise, total invested capital to
subscriber multiples for the comparable companies were derived by dividing the
value of each company's TIC by the most recent number of subscribers to each
company's network. The resulting multiples of TIC/Subscriber ranged from 2.47 to
27.74.
It was Houlihan Lokey's opinion that an investor considering an investment
in the BOX would select a TIC/Revenue multiple at the low end of the comparable
range based upon the greater relative risk of an investment in the BOX given its
smaller size, relative liquidity and profitability and relative lack of
diversification. Based on all the evidence analyzed, Houlihan Lokey considered a
TIC/Revenue multiple of 1.25 times the BOX's trailing twelve months' revenue to
be reasonable for the BOX. The selected multiple was multiplied by the BOX's
last twelve months' revenue to arrive at an estimate of its equity value.
Through a similar analysis, TIC/Subscriber multiples ranging from .25 to 1.5
were considered reasonable for the BOX and were multiplied by the number of
subscribers of the BOX's network in various markets.
The Discounted Cash Flow Approach. Forecasts for the five-year period ended
December 31, 2002 were provided by the BOX's management. The key determinants to
value once the forecasted cash flows are established is the rate used to
discount the cash flows to present value and the expected annual growth rate or
market multiple to be applied to the last year's cash flow in estimating the
terminal value of the enterprise.
Selecting Discount Rates. Houlihan Lokey utilized several approaches in the
determination of relevant discount rates (costs of capital) by which projected
cash streams may be discounted. Generally, Houlihan Lokey utilizes different
discount rates for different corporate assets (i.e., receivables, real estate,
library receipts, future production receipts and so on). When discounting the
cash stream of the combined operations of a company, Houlihan Lokey will utilize
a weighted average discount rate of the various assets.
Houlihan Lokey utilizes two general approaches in developing discount rates
that are risk-adjusted for the assets (or company) being valued. The first
approach consists of comparing the subject company (or subject company's assets)
with companies that have publicly traded debt and/or equity. By contrasting the
subject company with the public company information, Houlihan Lokey is able to
determine whether rates of return for the subject company should be
risk-adjusted as compared to those of the public companies. In the selection of
discount rates appropriate for the BOX, consideration was given to the growth
expectations and the risk characteristics of an investment in the BOX relative
to those of the pubic companies used in the analysis. While no one public
company is perfectly comparable to the BOX, information regarding how investors
would view the BOX can be gained by a comparative analysis of the four public
companies included in this analysis as listed in the market multiple approach
section.
The second approach, a market-based approach, consists of Houlihan Lokey's
continual required return information updates arising from conversations with
debt and equity providers.
Depending upon whether the cash flows being discounted are before the
payment of interest expense or after, the appropriate discount rate is either
the cost of equity ("K(e)") or a weighted average cost of capital ("WACC"). The
cash flows throughout this analysis do not consider the payment of interest,
they are debt-free cash flows, and therefore WACC was selected as the
appropriate discount rate. The WACC represents the combined average cost of debt
and equity. The cost of debt is determined, in this analysis, from the median
cost of debt of the comparable public companies as well as from consideration of
information gathered from debt providers in the market. The Capital Asset
Pricing Model ("CAPM"), which states that the return on
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any risky asset must be greater than the risk-free rate, is used to calculate
the cost of equity K(e), as indicted in the following table.
<TABLE>
<S> <C> <C> <C>
K(e) = R(F)(R(M)-R(F))(B(L))
R(F) = Risk-free rate of return
Where R(M) = Return on market portfolio
B(L) = Leveraged beta*
</TABLE>
* Beta is a standardized measure of the nondiversifiable risk and is defined as
the covariance of the subject company return with the market divided by the
variance of the market returns.
Houlihan Lokey's application of the CAPM to compute a reasonable cost of
equity for the BOX, and selection of the additional variables used in the WACC
equation were based on the comparative analysis summarized in the "Market
Multiple" section, above. In addition, Houlihan Lokey's selection of an
appropriate discount rate incorporated Houlihan Lokey's assessment of the BOX's
ability to achieve the results projected by its management. In summary, Houlihan
Lokey's analysis yielded an estimated WACC ranging from 14 percent to 16
percent.
Determination of Terminal Value. The terminal value used in the discounted
cash flow approach is essentially an estimate of the value of the enterprise as
of the end of the final period for which cash flow projections have been made.
It is necessary to compute this value because, although the expectation is that
the company will remain a viable going-concern beyond the final period, one
cannot project with enough certainty the cash flows to be generated in any given
period.
The primary method of computing the terminal value for a going-concern is
the "multiple method," which uses a projected market multiple as in the market
multiple approach. Typically, the earnings before interest, taxes, depreciation
and amortization ("EBITDA") for the final projection period is adjusted to
arrive at a "normalized" EBITDA level, and then multiplied by a reasonable
TIC/EBITDA multiple to yield an indication of value for the TIC of the company.
The terminal value is then discounted back to the present using the previously
selected discount rate. In Houlihan Lokey's analysis of the BOX, Houlihan Lokey
concluded that a TIC/EBITDA multiple ranging from 8.0 to 10.0 is reasonable for
determining the terminal value of the BOX.
In analyzing the value of the consideration to be paid in connection with
the Merger, Houlihan Lokey utilized sophisticated financial models to value the
TCI Right attached to the Series A Common Stock and subtracted the estimated
value of the TCI Right from the spot price of the Series A Common Stock as of
August 11, 1997. The spot price of the Series A Common Stock as of July 31, 1997
of $7.44 was used as the average of the average daily closing bid and asked
prices of one share of Series A Common Stock for a period of 20 consecutive
trading days ending on the third trading day prior to the closing of the Merger
as reported on the Nasdaq SmallCap Market. The value of the TCI Right of $0.52
subtracted from the value of a share of the Series A Common Stock of $7.44
resulted in an implied value of the underlying Series A Common Stock without the
Right of $6.92. This computation resulted in a value indication for the
consideration to be paid in connection with the Merger of $1.40, computed as
follows:
<TABLE>
<S> <C>
The Box Number of Shares Outstanding (Includes Outstanding
Convertible Preferred Stock and Expected Exercised
Options).................................................. 26,635,624
Multiplied by Exchange Price................................ $ 1.50
-----------
$39,953,436
Divided by Spot Price of Series A Common Stock as of July
31, 1997.................................................. $ 7.44
-----------
Number of Shares of Series A Common Stock into which Music
Series A Preferred Stock is Convertible................... 5,371,891
Multiplied by the implied value of the underlying Series A
Common Stock without the TCI Right........................ $ 6.92
-----------
Total Merger Consideration.................................. $37,173,486
===========
Per Share................................................... $ 1.40
-----------
</TABLE>
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Houlihan Lokey's analysis described above resulted in indications of the
value of the BOX's operations ranging from $19.6 million to $27.7 million. Based
on Houlihan Lokey's analyses and considerations which it deems appropriate under
the circumstances, Houlihan Lokey concluded that the relevant range of value for
the BOX's aggregate equity is $24.2 million to $28.4 million and on a per share
basis ranged from $0.91 to $1.11.
Because the value of the consideration in the Merger was higher than the
implied value of the BOX's stock price generated by the above analysis, Houlihan
Lokey concluded that the consideration to be received by the public shareholders
of the BOX in connection with the Merger was fair to them from a financial point
of view.
The aforementioned analyses required studies of the overall market,
economic and industry conditions in which the BOX operates, and the BOX's
operating results. Research into, and consideration of, these conditions were
incorporated into the analyses.
Houlihan Lokey's opinion is based on the business, economic, market and
other conditions as they existed as of August 12, 1997. In rendering its
opinion, Houlihan Lokey has relied upon and assumed, without independent
verification, that the financial results provided to Houlihan Lokey by the BOX's
management have been reasonably prepared and reflect the best current available
estimates of the financial results and condition of the BOX. Houlihan Lokey did
not independently verify the accuracy or completeness of the information
supplied to it with respect to the BOX and does not assume responsibility for
it. Except as set forth above, Houlihan Lokey did not make any physical
inspection or independent appraisal of the specific properties or assets of the
BOX.
The preparation of a fairness opinion is a complex analytical process
involving various determinations as to the most appropriate and relevant methods
of financial analysis and application of those methods to the particular
circumstances and is therefore not readily susceptible to summary description.
In arriving at its opinion, Houlihan Lokey did not attribute any particular
weight to any analysis or factor considered by it, but rather made the
qualitative judgements as to the significance and relevance of each analysis and
factor. Accordingly, Houlihan Lokey believes that its analyses and the summary
set forth herein must be considered as a whole and that selecting portions of
its analyses without considering all factors and analyses could create an
incomplete view of the processes underlying the analyses set forth in the
Houlihan Lokey opinion. In its analysis, Houlihan Lokey made numerous
assumptions with respect to the BOX, industry performance, general business,
economic, market and financial conditions and other matters, many of which are
beyond the control of the BOX. The estimates contained in such analyses are not
necessarily indicative of actual values or predictive of future results or
values, which may be more or less favorable than suggested by such analyses.
Additionally, analyses relating to the value of businesses or securities are not
appraisals. Accordingly, such analyses and estimates are inherently subject to
substantial uncertainty.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
In considering the recommendations of the BOX Board with respect to the
Merger, shareholders should be aware that certain members of the BOX's
management and the BOX Board have certain interests in the Merger that are in
addition to or different from the interests of shareholders of the BOX
generally. The BOX Board was aware of these interests and considered them, among
other matters, in approving the Merger Proposals.
Interests of the BOX Management. J. Patrick Michaels, the chief operating
officer and a director of the BOX, is the chief operating officer of StarNet/CEA
II Partners, which holds a 60.2% beneficial interest in the BOX. StarNet/CEA II
Partners will be dissolved upon the consummation of the Merger. On August 13,
1997, the BOX paid CEA, a company controlled by Mr. Michaels, a fee of $250,000
for investment banking services provided to the BOX. If the Merger Agreement is
terminated for any reason, CEA is required to refund such fee to the BOX;
however, upon the closing of the Merger, CEA is entitled to receive an
additional fee of $250,000. CEA agreed to accept these payments as satisfaction
of the BOX's obligation to pay CEA a fee of approximately $1.9 million in
connection with the Merger pursuant to the Domestic Financing Agreement between
the BOX and CEA dated as of October 8, 1996. Mr. Lenfest, chairman of the board
of the Company, is also president, chief executive officer and a director of
LCI, which holds a 60.5% beneficial interest in the Company through its general
partnership interest in StarNet/CEA II Partners. Certain
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<PAGE> 46
shareholders of the BOX, including H.F. Lenfest and J. Patrick Michaels, Jr. who
are directors of the BOX, entered into a Voting Agreement dated August 12, 1997,
pursuant to which they agreed to vote all of their beneficially owned shares of
the BOX in favor of the Merger. In addition, the directors and executive
officers of the BOX (other than Messrs. Lenfest and Michaels, whose interests
are described above, and other than Mr. Wolfson, who has given an irrevocable
proxy with respect to 1,320,155 shares beneficially owned by him to CEA
Investors Partnership II, Ltd.) beneficially own an aggregate of 820,120 shares
of BOX Common Stock (including 635,000 shares issuable upon exercise of stock
options and excluding 200,000 shares subject to options granted by StarNet, Inc.
to Mr. McGlade, which shares are included in those beneficially owned by Messrs.
Lenfest and Michaels) representing 3.0% of the combined voting power of BOX
Voting Stock (assuming the exercise of such options to acquire 635,000 shares).
See "THE MERGER -- Background of the Merger," "RISK FACTORS -- Conflicts of
Interest" and "SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWENRS AND MANAGEMENT OF
TCI MUSIC AND THE BOX -- Security Ownership of the BOX."
Stock Options. The terms of the BOX's 1988 Stock Option Plan, as amended
(the "BOX Plan"), do not address the rights of option holders in the case of a
merger such as the Merger. However, the agreements between the BOX and the BOX's
employees that grant stock options to such employees pursuant to the BOX Plan
(the "BOX Employee Option Agreements") provide, in most cases that, in the case
of a merger such as the Merger, all outstanding options automatically vest on
the closing date of a merger and are exercisable in accordance with their terms.
The terms of the agreements between the BOX and the BOX non-employee directors
that grant stock options to such non-employee directors pursuant to actions by
the BOX Board (the "BOX Director Option Agreements") provide that, in the case
of the Merger, all outstanding options not exercised by the director shall be
null and void if not exercised on or prior to the closing of the Merger.
Pursuant to the Merger Agreement, the BOX agreed to take all actions
necessary to cause any outstanding stock options, warrants or other rights to
acquire any capital stock of the BOX to be canceled if not exercised prior to or
at the Effective Time, except for shares of BOX Preferred Stock; provided,
however, that, except as provided in the Merger Agreement, the BOX will not pay
or agree to pay or deliver any cash or other consideration to the holder of any
such option, warrant or other right in consideration of the cancellation or
termination thereof.
Accordingly, pursuant to the Merger Agreement, the BOX will offer $0.50 per
share of BOX Common Stock underlying options to Ms. Luann M. Hoffman, Chief
Financial and Administrative Officer and Secretary of the BOX, Mr. Peter Cohen,
Vice President -- Programming of the BOX and Mr. E. Paul Sartain, Vice
President -- Operations of the BOX, in exchange for cancellation of their
options to acquire 100,000 shares, 25,000 shares and 40,000 shares,
respectively, which are currently exercisable at a price of $1.00 per share. All
of these options are fully vested. The price per share to be paid to Ms.
Hoffman, Mr. Cohen and Mr. Sartain for cancellation of their options was derived
by subtracting the exercise price of such options from $1.50, the value of one
share of BOX Common Stock for purposes of the Merger.
Pursuant to the Merger Agreement, TCI Music and the BOX agreed to offer
options to acquire shares of Series A Common Stock to certain holders of options
to acquire shares of BOX Common Stock in exchange for the cancellation of such
options. Such holders will receive options to acquire .214 of a share of Series
A Common Stock for each share of BOX Common Stock underlying such options, which
attributes a value of $7.00 to one share of Series A Common Stock. The persons
to whom such offer will be made and the number of shares of BOX Common Stock
underlying options to be canceled and the exercise price per share of such
options are as follows: Mr. Alan McGlade, President, Chief Executive Officer and
a director of the BOX, 300,000 shares at $2.00 per share; Mr. Gino Natalicchio,
the former Senior Vice President -- International Development of the BOX, 50,000
shares at $2.00 per share; Mr. Joel S. Rudich, a director of the BOX, 45,000
shares at $1.75 per share; and Mr. Leonard J. Sokolow, a director of the BOX,
45,000 shares at $1.75 per share. All of the options owned by Mr. McGlade would
otherwise automatically vest at the Effective Time and would be exercisable in
accordance with their terms. In connection with the termination of Mr.
Natalicchio's employment with the BOX, the BOX has offered to pay Mr.
Natalicchio $10,000 for the cancellation of such options to acquire BOX Common
Stock in lieu of the options to acquire shares of Series A Common Stock
otherwise to be granted for such cancellation. The options owned by Messrs.
Rudich and Sokolow are fully vested and will expire at the Effective Time.
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<PAGE> 47
Each of Messrs. Rudich and Sokolow and Mr. Stanley H. Greene, each a
director of the BOX, holds vested options to acquire 10,000 shares of BOX Common
Stock currently exercisable at a price of $1.00 per share. Pursuant to the terms
of such options, they will expire if not exercised at or prior to the Effective
Time. Further, the following persons hold options to acquire shares of BOX
Common Stock at an exercise price of $1.00 per share which are not currently
exercisable: Mr. Greene, 150,000 shares; Mr. Sartain, 25,000 shares; and Mr.
Cohen, 50,000 shares. These options have not vested and pursuant to agreements
entered into with each of them, will expire at the Effective Time.
Indemnification. After the Effective Time, TCI Music will cause the
Surviving Corporation to, and, should the Surviving Corporation fail or be
unable to do so, TCI Music will indemnify, defend and hold harmless each person
who is now, has been at any time prior to August 12, 1997, or who becomes prior
to the Effective Time, an officer or director of the BOX, against all losses,
expenses, damages, liabilities, costs, judgments, and amounts paid in settlement
in connection with any claim, action, suit, proceeding, or investigation based
on or arising out of, in whole or in part, any actions or omissions of such
person as an officer or director of the BOX on or prior to the Effective Time,
including actions or omissions relating to any transactions contemplated by the
Merger Agreement, to the fullest extent permitted under the FBCA, the BOX
Charter, the BOX Bylaws and any indemnification agreement to which such person
is a party in effect on the date of the Merger Agreement (the "BOX
Indemnification Agreements"). See "THE MERGER AGREEMENT -- Indemnification."
Security Ownership. For information regarding the security ownership of BOX
Voting Stock by the BOX's directors, the five highest paid executive officers,
and directors and executive officers as a group, see "SECURITY OWNERSHIP OF
CERTAIN BENEFICIAL OWNERS AND MANAGEMENT OF TCI MUSIC AND THE BOX -- Security
Ownership of the BOX."
CERTAIN CONSEQUENCES OF THE MERGER
GENERAL
Upon consummation of the Merger (i) Acquisition Sub will cease to exist as
a separate corporation and the BOX will become the Surviving Corporation; (ii)
holders of BOX Common Stock will be entitled to receive shares of Music Series A
Preferred Stock and cash in lieu of the issuance of fractional shares of Music
Series A Preferred Stock; (iii) holders of BOX Preferred Stock will retain their
shares which will be shares of the Surviving Corporation with the rights,
privileges and preferences set forth in the BOX Charter and the FBCA; and (iv)
TCI Music will hold all of the issued and outstanding shares of the common stock
of the Surviving Corporation. See "THE MERGER AGREEMENT -- Consideration to be
Received in the Merger." As described under the caption "APPRAISAL RIGHTS,"
shareholders of BOX Common Stock and BOX Preferred Stock have the right to
pursue appraisal rights in lieu of receiving the Music Series A Preferred Stock
or retaining their BOX Preferred Stock, as the case may be, pursuant to the
Merger. The BOX shareholders who receive Music Series A Preferred Stock pursuant
to the Merger will cease to be shareholders of a Florida corporation and will
become stockholders of a Delaware corporation. The BOX shareholders who retain
their BOX Preferred Stock will continue to be shareholders of the Surviving
Corporation, a Florida corporation. See "COMPARISON OF SHAREHOLDERS' RIGHTS."
Following the consummation of the Merger, the officers and directors of
Acquisition Sub will be the officers and directors of the Surviving Corporation
and the bylaws of Acquisition Sub will be the bylaws of the Surviving
Corporation. The BOX Charter, amended pursuant to the Capitalization Amendment
to increase the authorized number of shares of BOX Common Stock from 40,000,000
shares to 100,000,000 shares, will become the articles of incorporation of the
Surviving Corporation.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
Introduction. TCI Music has not requested a ruling from the IRS with
respect to the federal income tax consequences of the Merger. It is not a
condition to the Merger that the parties receive such a ruling or an opinion of
tax counsel with respect to the intended tax consequences of the Merger. The
following is a summary of the anticipated material federal income tax
consequences of the Merger to holders of BOX
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Common Stock. Sherman & Howard L.L.C., counsel to TCI Music, is of the opinion
that the following summary, to the extent it represents matters of law or legal
conclusions, accurately summarizes the anticipated material federal income tax
consequences of the Merger to the holders of BOX Common Stock.
The following discussion is not intended to be comprehensive and does not
address all aspects of federal income taxation that may be important to
particular shareholders. Furthermore, the following discussion may not be
relevant or applicable to certain shareholders who are subject to specific tax
rules, including but not limited to BOX shareholders who acquired their shares
of BOX Common Stock pursuant to the exercise of stock options or otherwise as
compensation, shareholders who are not citizens or residents of the United
States, or shareholders subject to the alternative minimum tax. This discussion
is based upon laws, regulations and rulings and judicial authorities now in
effect, all of which are subject to change, and any such change could have
retroactive effect.
Discussion. For federal income tax purposes, the Merger should qualify as a
reorganization described in Section 368(a)(1) of the Code, pursuant to Section
368(a)(2)(E) of the Code. Under Section 368(a)(2)(E), the Merger will qualify as
a reorganization under Section 368(a)(1) if at least eighty percent of the total
value of BOX Voting Stock is acquired by TCI Music pursuant to the Merger in
exchange for Music Series A Preferred Stock (rather than for cash or other
consideration). It is anticipated that at least eighty percent of BOX Voting
Stock will be acquired by TCI Music pursuant to the Merger in exchange for Music
Series A Preferred Stock. Although TCI Music will pay cash consideration to
certain BOX option holders and dissenting shareholders exercising appraisal
rights, it is anticipated that the total cash consideration paid will not
constitute more than twenty percent of the total consideration paid to BOX
shareholders in the transaction, and thus the eighty percent requirement of
Section 368(a)(2)(E) will be satisfied. The conclusion that the Merger should
constitute a reorganization under Section 368(a)(1) is based on the factual
assumption that this eighty percent requirement will be met. If this requirement
is not satisfied, the Merger will not qualify for reorganization treatment under
Section 368(a)(1).
The following discussion also assumes that Music Series A Preferred Stock
issued to BOX shareholders pursuant to the Merger will not constitute
"nonqualified preferred stock" within the meaning of Section 351(g) of the Code.
Section 351(g)(3)(A) of the Code defines "preferred stock" as stock which is
limited and preferred as to dividends and which does not participate in
corporate growth to any significant extent. Based on applicable legal
authorities, Music Series A Preferred stock should not be considered "limited"
as to dividends and should be considered to participate in the corporate growth
of TCI Music. Thus, Music Series A Preferred Stock should not be considered
nonqualified preferred stock. If, however, Music Series A Preferred Stock were
determined to be nonqualified preferred stock, the Merger should continue to
qualify as a reorganization under Section 368(a)(1) of the Code but Music Series
A Preferred Stock would be treated as "boot," or nonqualifying property,
received by the BOX shareholders pursuant to the Merger. Consequently BOX
shareholders would recognize gain (but not loss) to the extent of the value of
the Music Series A Preferred Stock (plus any other consideration) they receive.
1. If the Merger qualifies as a reorganization under Section 368(a)(1) of
the Code (and assuming Music Series A Preferred Stock is not treated as
nonqualified preferred stock), the following federal income tax consequences to
holders of BOX Common Stock will result:
(i) No gain or loss will be recognized by a holder of BOX Common Stock
as a result of the receipt solely of Music Series A Preferred Stock
pursuant to the Merger. A holder of BOX Common Stock, however, will
recognize gain upon the receipt of cash in lieu of fractional shares of
Music Series A Preferred Stock, as described in (ii) and (iii) below.
Likewise, a holder of BOX Common Stock that dissents to the Merger and
receives cash as a result of the exercise of the rights described in the
Appraisal Sections (the "Appraisal Rights") will recognize gain as
described in (v) below.
(ii) Any cash received by a holder of BOX Common Stock in lieu of a
fractional share of Music Series A Preferred Stock will generally be
treated as having been received in exchange for such fractional share of
Music Series A Preferred Stock and not as a dividend. Any gain or loss
recognized as a result of the receipt of such cash should be capital gain
or loss (assuming that holder's shares of BOX Common Stock were held as
capital assets immediately prior to the Merger) equal to the difference
between the
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amount of cash received and the portion of the shareholder's basis in BOX
Common Stock allocable to such fractional share. The capital gain or loss
will be long term capital gain or loss if the BOX Common Stock allocable to
such fractional share was held for more than 18 months. Special capital
gain rules apply if the holding period of BOX Common Stock was more than 12
months but not more than 18 months.
(iii) The tax basis for the shares of Music Series A Preferred Stock
received by each holder of BOX Common Stock will equal the tax basis of
such holder's shares of BOX Common Stock (reduced by any amount allocable
to fractional share interests for which cash is received).
(iv) Assuming that the shares of BOX Common Stock are held as capital
assets immediately prior to the Merger, a shareholder's holding period for
the shares of Music Series A Preferred Stock received in the Merger will
include the period during which the shares of BOX Common Stock were held.
(v) Cash received by a holder of BOX Common Stock as a result of that
holder's exercise of Appraisal Rights will generally be treated as having
been received in exchange for that holder's BOX Common Stock. Any gain or
loss recognized as a result of the receipt of such cash should be capital
gain or loss (assuming that the shares of BOX Common Stock were held as
capital assets immediately prior to the Merger) equal to the difference
between the amount of cash received and the shareholder's basis in the BOX
Common Stock. The capital gain or loss will be long-term capital gain or
loss if the BOX Common Stock was held for more than 18 months. Special
capital gain rules apply if the holding period of BOX Common Stock was more
than 12 months but not more than 18 months.
2. If the Merger does not qualify as a reorganization under Section
368(a)(1) of the Code, the following federal income tax consequences to holders
of BOX Common Stock will result:
(i) Assuming that the shares of BOX Common Stock are held as capital
assets immediately prior to the Merger, each BOX shareholder who receives
shares of Music Series A Preferred Stock would recognize capital gain or
loss equal to the difference between the fair market value of the Music
Series A Preferred Stock received (and cash received in lieu of fractional
shares) and the shareholder's tax basis in the shares of BOX Common Stock
surrendered. Such capital gain or loss would be long-term capital gain or
loss if the shares of BOX Common Stock were held for longer than 18 months.
Special capital gain rules apply if the holding period of BOX Common Stock
was more than 12 months but not more than 18 months.
(ii) The holding period for Music Series A Preferred Stock received in
the Merger would commence as of the day after the Effective Time.
(iii) Each former BOX shareholder would have a tax basis in the shares
of Music A Preferred Stock received in the Merger equal to the fair market
value of such shares of Music Series A Preferred Stock.
(iv) Cash received by a holder of BOX Common Stock pursuant to the
exercise of Appraisal Rights would be treated as described in paragraph
1(v) above.
THE FEDERAL INCOME TAX DISCUSSION SET FORTH ABOVE IS INCLUDED HERE FOR
GENERAL INFORMATION ONLY. THE BOX SHAREHOLDERS ARE ADVISED TO CONSULT THEIR OWN
TAX ADVISORS REGARDING THE TAX CONSEQUENCES OF THE MERGER, INCLUDING THE
APPLICATION AND EFFECT OF STATE, LOCAL AND FOREIGN TAX LAWS, IF ANY.
ACCOUNTING TREATMENT
The Merger will be accounted for using the purchase method of accounting
except that any Music Series A Preferred Stock issued to entities controlled by
TCI will be recorded at carryover basis. See the condensed pro forma combined
financial statements and notes thereto of TCI Music appearing under the heading
"INDEX TO FINANCIAL STATEMENTS."
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THE MERGER AGREEMENT
GENERAL; EFFECTIVE TIME
The Merger Agreement provides for the merger of Acquisition Sub with and
into the BOX. As a result of the Merger, the separate corporate existence of
Acquisition Sub will cease and the BOX will be the Surviving Corporation. In the
Merger, shareholders of BOX Common Stock will receive the consideration
described below and shareholders of BOX Preferred Stock will retain such shares.
The Merger will become effective upon the filing of Articles of Merger with the
Secretary of State of the State of Florida. Such filing is anticipated to take
place as soon as practicable after the last of the conditions precedent to the
Merger set forth in the Merger Agreement have been satisfied or, where
permissible, waived. The following description of the Merger Agreement is
qualified in its entirety by reference to the complete text of the Merger
Agreement which is incorporated by reference herein and a copy of which
(exclusive of exhibits and schedules) is included in this Proxy
Statement/Prospectus as Appendix I.
CONSIDERATION TO BE RECEIVED IN THE MERGER
General. Upon consummation of the Merger, (a) each share of BOX Common
Stock outstanding immediately prior to the Merger (other than shares held
directly or indirectly by the BOX and shares held by holders who elect appraisal
rights with respect to their shares in accordance with applicable law) will be
converted into the right to receive (i) a fraction of a share of Music Series A
Preferred Stock equal to the quotient (rounded to the nearest hundredth) of
$1.50 divided by three times the average of the average daily closing bid and
asked prices of one share of Series A Common Stock for a period of 20
consecutive trading days ending on the third trading day prior to the Closing as
reported on the Nasdaq SmallCap Market and (ii) cash in lieu of fractional
shares of Music Series A Preferred Stock and (b) each share of Box Preferred
Stock outstanding immediately prior to the Merger (other than shares used by
holders who elect appraisal rights with respect to their shares in accordance
with applicable law) will remain an outstanding share of the Surviving
Corporation with all of the rights, privileges and preferences set forth in the
BOX Charter and the FBCA. TCI Music has entered into discussions with the holder
of all of the outstanding shares of BOX Preferred Stock to purchase such shares
prior to the consummation of the Merger for cash in the amount of $2,500,000
(the equivalent of $1.50 per share), plus accrued but unpaid dividends. If the
Merger had been consummated on November 10, 1997, based on a calculation of the
average of the average daily closing bid and asked prices of one share of Series
A Common Stock for a period of 20 consecutive trading days ending November 5,
1997 ($7.58), the Merger Conversion Ratio would be .07 of a share of Music
Series A Preferred Stock for one share of BOX Common Stock. The foregoing
example is for illustrative purposes only. The actual number of shares of TCI
Music Preferred Stock into which the BOX Common Stock will be calculated will be
based on the market price of the TCI Music Common Stock prior to the Merger and
accordingly, the actual conversion ratio may be higher or lower than that
presented in the example. See "The Merger Agreement -- Consideration to be
Received in the Merger." Each share of Music Series A Preferred Stock will be
convertible at the option of the holder initially into three shares of Series A
Common Stock. Each share of Music Series A Preferred Stock will be entitled to
vote on all matters submitted to a vote of the holders of the Series A Common
Stock and to the number of votes equal to the number of shares of Series A
Common Stock into which such share is convertible as of the Record Date for the
matter to be voted upon. Each share of Series A Common Stock currently
outstanding trades together with a TCI Right, which entitles the holder to
require TCI to purchase from such holder one share of Series A Common Stock for
$8.00, if prior to July 11, 1998, the price of one share of Series A Common
Stock does not equal or exceed $8.00 per share for at least 20 consecutive
trading days. If the TCI Rights have not terminated prior to July 11, 1997, they
will become exercisable for a 30-day period following such date and will expire
on the last day of such 30-day period unless extended by their terms. The market
price of one share of Series A Common Stock, with reference to which the number
of shares of Music Series A Preferred Stock to be issued in the Merger will be
determined, includes the value, if any, ascribed by the market to a TCI Right.
The shares of Series A Common Stock into which the shares of Music Series A
Preferred Stock issuable in the Merger will be convertible will not have any
such associated TCI Rights, and if conversion occurs prior to the termination or
expiration of the TCI Rights, the Series A Common Stock without the TCI Rights
received upon conversion will not be tradable
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on the Nasdaq SmallCap Market under the symbol "TUNE" with the Series A Common
Stock including the TCI Rights until the TCI Rights terminate or expire. See
"THE MERGER -- Interests of Certain Persons in the Merger," "CONTROL BY TCI;
ARRANGEMENTS BETWEEN TCI AND TCI MUSIC -- TCI Rights," "THE MERGER -- Opinion of
Financial Advisor Retained by the BOX Board," "RISK FACTORS -- Termination of
TCI Rights; Potential Decrease in Price of Series A Common Stock" and "-- Nasdaq
Listing and Maintenance Requirements; Absence of Trading Market." For a
description of the Music Series A Preferred Stock, see "DESCRIPTION OF TCI MUSIC
CAPITAL STOCK -- Music Series A Preferred Stock" and the Certificate of
Designations included as Appendix II to this Proxy Statement/Prospectus. For a
summary of differences between the rights of holders of Music Series A Preferred
Stock, BOX Common Stock and BOX Preferred Stock, see "COMPARISON OF
SHAREHOLDERS' RIGHTS."
Fractional shares of Music Series A Preferred Stock will not be issued in
the Merger. Holders of BOX Common Stock otherwise entitled to a fractional share
of Music Series A Preferred Stock will be paid cash in an appropriate amount
based upon the value of Series A Common Stock as described above.
As a condition to the Merger, the number of shares of BOX Common Stock
authorized under the BOX Charter will be increased prior to the Merger from
40,000,000 shares to 100,000,000 shares pursuant to the Capitalization
Amendment. Each share of common stock, par value $0.01 per share, of Acquisition
Sub outstanding immediately prior to the Merger will be converted into and will
thereafter evidence a number of shares of common stock of the Surviving
Corporation equal to the quotient (rounded down to the nearest whole number) of
the number of shares of BOX Common Stock outstanding immediately prior to the
Merger divided by the number of shares of common stock of Acquisition Sub
outstanding immediately prior to the Merger.
Consideration to be Received by TCI Affiliates. As a holder of shares of
BOX Common Stock, Liberty VJN, Inc., an indirect wholly-owned subsidiary of TCI,
will receive Music Series A Preferred Stock in exchange for its shares of BOX
Common Stock owned at the Effective Time, which will represent approximately
4.8% of the outstanding shares of TCI Music Series A Preferred Stock. Following
the Merger, TCI will beneficially own approximately 4.8% of the outstanding
shares of Music Series A Preferred Stock, 45.7% of the outstanding shares of
Series A Common Stock and 100% of the outstanding shares of Series B Common
Stock, which will collectively represent approximately 98.0% of the voting power
of the outstanding shares of TCI Music Voting Stock. Following the Merger, TCI
Music will also own all of the issued and outstanding shares of common stock of
the Surviving Corporation, which will represent approximately 93.7% of the
voting power of the outstanding shares of voting stock of the Surviving
Corporation. TCI has entered into discussions with the holder of all of the
outstanding shares of BOX Preferred Stock to purchase such shares prior to the
Effective Time for cash in the aggregate amount of $2,500,000 (the equivalent of
$1.50 per share), plus accrued but unpaid dividends. If such purchase is
consummated prior to the Effective Time, the BOX will be a wholly-owned
subsidiary of TCI Music immediately after the Effective Time. See "SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT OF TCI MUSIC AND THE BOX."
Exchange of Shares. As soon as practicable after the Effective Time,
transmittal forms will be mailed to each holder of record of shares of BOX
Common Stock to be used in forwarding his or her certificates evidencing such
shares for surrender and exchange for certificates evidencing the shares of
Music Series A Preferred Stock represented thereby to which he or she has become
entitled and, if applicable, cash in lieu of fractional shares of such Music
Series A Preferred Stock. After receipt of such transmittal form, each holder of
certificates formerly representing BOX Common Stock should surrender such
certificates to The Bank of New York, as exchange agent (the "Exchange Agent"),
and each such holder will receive in exchange therefor certificates evidencing
the whole number of shares of Music Series A Preferred Stock represented thereby
to which he or she is entitled and a check for any cash that may be payable in
lieu of a fractional share of such Music Series A Preferred Stock. Such
transmittal forms will be accompanied by instructions specifying other details
of the exchange.
SHAREHOLDERS OF BOX COMMON STOCK SHOULD NOT SEND IN THEIR CERTIFICATES
UNTIL THEY RECEIVE A TRANSMITTAL FORM.
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SHAREHOLDERS OF BOX PREFERRED STOCK WILL NOT RECEIVE A TRANSMITTAL FORM AND
SHOULD NOT SEND IN THEIR CERTIFICATES BECAUSE THEIR SHARES WILL NOT BE EXCHANGED
PURSUANT TO THE MERGER.
After the Effective Time, each certificate evidencing shares of BOX Common
Stock (other than certificates evidencing shares held directly or indirectly by
the BOX (which will be canceled)), until so surrendered and exchanged, will be
deemed, for all purposes, to evidence only the right to receive the number of
shares of Music Series A Preferred Stock that the holder of such certificate is
entitled to receive and the right to receive any cash payment in lieu of
fractional shares of Music Series A Preferred Stock. The holder of such
unexchanged certificate will not be entitled to receive any dividends or other
distributions, if any, payable by TCI Music until the certificate is
surrendered. Subject to applicable laws, such dividends and distributions, if
any, will be accumulated and, at the time of such surrender, all such unpaid
dividends and distributions, together with any cash payment in lieu of a
fractional share will be paid, without interest.
For a discussion of the procedures that will be followed with respect to
holders of BOX Common Stock who may be subject to the notification and reporting
requirements of the HSR Act, see "-- Governmental Approvals" below.
CONDITIONS TO THE MERGER
The respective obligations of the BOX, TCI Music and Acquisition Sub to
effect the Merger are subject to the satisfaction of certain conditions,
including (i) the Merger Agreement and the transactions contemplated by the
Merger Agreement shall have been duly approved by the holders of BOX Voting
Stock; (ii) no governmental entity shall have enacted, issued, promulgated,
enforced or entered any legal requirement that remains in effect and has the
effect of making the transactions contemplated by the Merger Agreement illegal
or otherwise prohibiting the transactions contemplated by the Merger Agreement
and that could reasonably be expected to materially and adversely affect the
value of the BOX; and (iii) the Registration Statement shall have become
effective in accordance with the provisions of the Act and any necessary state
securities law approvals shall have been obtained and no stop order suspending
the effectiveness of the Registration Statement shall have been issued by the
Commission and remain in effect.
The obligations of the BOX to consummate the transactions contemplated by
the Merger Agreement are subject to the satisfaction or waiver of the following
conditions: (i) the execution by TCI and TCI Music of the Amended Contribution
Agreement and the execution by DMX and the TCI Affiliate of the Affiliation
Agreement, providing, among other things, for the payment of the Annual TCI
Payments to TCI Music or DMX in the aggregate amount of approximately $26.5
million; (ii) the Extension of TCI Music Note pursuant to which the maturity
date of the TCI Music Note will be extended for a period not to exceed 18
months; (iii) the performance by TCI Music and Acquisition Sub, in all material
respects, of their respective agreements in the Merger Agreement to be performed
prior to the Effective Time and the accuracy of the representations and
warranties of each of them in all material respects; (iv) the receipt by the BOX
of an opinion of counsel to the effect that the Merger, when completed in
accordance with the Merger Agreement, will be treated for federal income tax
purposes as a reorganization within the meaning of Section 368(a) of the Code or
other evidence reasonably satisfactory to the BOX that the Merger will qualify
for such treatment; and (v) no material adverse change in the financial
condition, results of operations, assets, liabilities or business of TCI Music
occurred since the date of the Merger Agreement. See "CONTROL BY TCI;
ARRANGEMENTS BETWEEN TCI AND TCI MUSIC -- Amended Contribution Agreement,"
"-- Affiliation Agreement" and "-- Extension of TCI Music Note."
The respective obligations of TCI Music and Acquisition Sub to consummate
the transactions contemplated by the Merger Agreement are also subject to the
satisfaction or waiver of the following conditions: (i) the performance by the
BOX, in all material respects, of its agreements in the Merger Agreement to be
performed by the Effective Time and the accuracy of the BOX's representations
and warranties in all material respects; (ii) the BOX shareholders have not
demanded appraisal rights in accordance with Sections 607.1301, 607.1302 and
607.1320 of the FBCA with respect to more than 15% of the issued and outstanding
shares of BOX Voting Stock; (iii) receipt of all consents, orders or approvals
of governmental
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entities and third parties, to the extent required to be obtained under the
Merger Agreement; and (iv) no material adverse change in the financial
condition, results of operations, assets, liabilities or business of the BOX has
occurred since the date of the Merger Agreement.
GOVERNMENTAL APPROVALS
The consent of the Federal Communications Commission to the acquisition by
TCI Music of an indirect interest in VJN LPTV Corp., a wholly-owned subsidiary
of the BOX, which engages in the operation of low power television stations in
the United States, must be obtained in connection with the consummation of the
Merger. TCI Music and the BOX are not aware of any other governmental consents
and governmental filings that must be obtained or made in connection with the
consummation of the Merger (other than in connection with compliance with
federal and state securities laws).
Certain shareholders of the BOX may be individually subject to the
notification and waiting-period requirements of the HSR Act if as a result of
the Merger they will hold Music Series A Preferred Stock (or a combination of
Music Series A Preferred Stock and other voting securities of TCI) having a
value of more than $15 million. Determination of whether notification is
required in a particular case will necessitate, among other things,
consideration of potentially applicable exemptions and application of a
jurisdictional test relating to such holder's revenue and assets. Persons whom
the BOX and TCI Music expect to hold as a result of the Merger shares of Music
Series A Preferred Stock (or a combination of Music Series A Preferred Stock and
other voting securities of TCI Music or any of its affiliates) having a value in
excess of $15 million will be required, as a precondition to receiving such
shares, to provide TCI Music with evidence of compliance with the HSR Act,
satisfactory in form and substance to TCI Music and its counsel. If necessary,
TCI Music will deposit into escrow the shares of Music Series A Preferred Stock
issuable to any shareholder obligated to file a pre-merger notification and
report form under the HSR Act and will instruct the Exchange Agent to hold such
shares pending the expiration or termination of the applicable waiting period.
COVENANTS
The BOX has agreed to conduct, and to cause each of its subsidiaries to
conduct, its business in the ordinary course and to use, and to cause each of
its subsidiaries to use, its reasonable best efforts to preserve intact its
present business organization, and to preserve its relationships with customers,
suppliers and others having business dealings with it. The BOX has agreed that,
except as required or permitted by the Merger Agreement or consented to in
writing by TCI Music, it will not, and it will not permit any of its
subsidiaries to, prior to the Effective Time, (i) sell or pledge or agree to
sell or pledge any capital stock or other ownership interest in any of its
subsidiaries, (ii) amend or propose to amend the BOX Charter or BOX Bylaws or
the charter or bylaws of any of its subsidiaries, (iii) split, combine or
reclassify its outstanding capital stock or issue or authorize or propose the
issuance of any other securities in respect of, in lieu of or in substitution
for shares of capital stock of, or other ownership interests in, the BOX or any
of its subsidiaries, or declare, set aside or pay any dividend or other
distribution to shareholders of the BOX or any of its subsidiaries, (iv)
directly or indirectly redeem, purchase or otherwise acquire any shares of
capital stock of, or other ownership interests in, the BOX or any of its
subsidiaries; (v) (a) issue, deliver or sell any shares of capital stock of, or
other ownership interests in, the BOX or any of its subsidiaries, or any option,
warrant or other right to acquire, or any security convertible into shares of
capital stock of, or other ownership interests in, the BOX or any of its
subsidiaries except as required or permitted by the Merger Agreement, (b)
acquire, lease or dispose of any assets, other than in the ordinary course of
business consistent with past practice, (c) create, assume or incur any
indebtedness for borrowed money exceeding $200,000, other than indebtedness
incurred to refinance outstanding indebtedness in an amount not exceeding the
principal amount of the indebtedness being refinanced and indebtedness owed by
the BOX to any of its subsidiaries or by way of such subsidiaries to the BOX or
any other subsidiary of the BOX, (d) mortgage, pledge or subject to any lien any
of its assets except to secure indebtedness permitted by the foregoing clause
(c) and certain other permitted liens described in the Merger Agreement or (e)
enter into any other material transaction, in each case other than in the
ordinary course of business consistent with past practice, (vi) make any
payments with respect to any indebtedness of the BOX or any of its subsidiaries
except for such payments that are scheduled to come due
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prior to the Effective Time, (vii) acquire any business or business organization
or division thereof that is material, individually or in the aggregate to the
BOX taken as a whole or (viii) agree to do any of the foregoing.
The BOX further agreed that except as consented to in writing by TCI Music
or required to comply with applicable law or existing company benefit plans it
will not permit any of its subsidiaries to (i) adopt, terminate or amend any
bonus, profit sharing, compensation, severance, termination, stock option,
pension, retirement, deferred compensation, employment or other benefit plan,
agreement, trust, fund or other arrangement for the benefit or welfare of any
director, officer or current or former employee, (ii) increase in any manner the
compensation or benefits of any director, officer or employee (except for normal
increases in the ordinary course of business consistent with past practice),
(iii) grant any awards under any bonus, incentive, performance or other
compensation plan or arrangement or benefit plan, (iv) take any action to fund
or in any other way secure the payment of compensation or benefits under any
employee plan, agreement, contract or arrangement or benefit plan (except for
such actions made in the ordinary course of business consistent with past
practice) or (v) agree to do any of the foregoing.
The BOX has further agreed that it will not take, or agree to take, and
will cause its subsidiaries not to take or agree to take, any actions that would
(i) make any representation or warranty of the BOX contained in the Merger
Agreement untrue or incorrect so as to cause the condition with respect to the
BOX's representations and warranties not to be fulfilled as of the Effective
Time or (ii) result in any of the other conditions to the obligations of TCI,
TCI Music and Acquisition Sub in the Merger Agreement not being satisfied as of
the Effective Time.
NO SOLICITATION OF TRANSACTIONS
The Merger Agreement provides that, subject to the fiduciary duties of the
BOX Board, none of the BOX or any of its subsidiaries or any of their respective
officers, directors, representatives or agents will take any action to initiate
the submission of any Acquisition Proposal (defined below), enter into any
agreement with respect to any Acquisition Proposal or participate in
negotiations with, or provide information concerning, the BOX or its assets,
liabilities or business to, any person in connection with any Acquisition
Proposal.
The BOX will promptly communicate to TCI Music any solicitation or inquiry
received by the BOX and the terms of any proposal or inquiry that it may receive
in respect of any Acquisition Proposal, or of any such information requested
from it or of any such negotiations or discussions being sought to be initiated
with it. The BOX Board is not prohibited from (i) making any disclosure to the
BOX's shareholders or (ii) responding to any unsolicited proposal or inquiry by
advising the person making such proposal or inquiry of the terms of its
obligations regarding an Acquisition Proposal. "Acquisition Proposal" is defined
in the Merger Agreement to mean any proposed (i) merger, consolidation or
similar transaction involving the BOX, (ii) sale, lease or other disposition
directly or indirectly by merger, consolidation, share exchange or otherwise of
all or any substantial part of the assets of the BOX or its subsidiaries, (iii)
issue, sale or other disposition of securities representing 25% or more of the
voting power of BOX Voting Stock or (iv) transaction in which any person
proposes to acquire beneficial ownership (within the meaning of Rule 13d-3 under
the Exchange Act) of, or the right to acquire beneficial ownership of, or any
"group" (as such term is defined under the Exchange Act) shall have been formed
which beneficially owns or has the right to acquire beneficial ownership of, 25%
or more of the outstanding BOX Voting Stock.
Pursuant to the Voting Agreement, the Voting Shareholders, who collectively
own approximately 56.4% of BOX Voting Stock, have agreed to vote all of their
beneficially owned shares against any proposal that would in any way inhibit the
timely consummation of the Merger and the other transactions contemplated by the
Merger Agreement; thus any Acquisition Proposal described above (other than the
Merger) could not be approved by a majority of the BOX shareholders.
CERTAIN PERSONNEL MATTERS
The terms of the BOX Plan do not address the rights of option holders in
the case of a merger such as the Merger. However, the BOX Stock Option
Agreements provide, in most cases, that, in the case of a merger
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such as the Merger, all outstanding options automatically vest and are
exercisable on the closing date of the merger and are exercisable in accordance
with their terms. The terms of the BOX Director Option Agreements provide that
the options must be exercised by the Effective Time or they will be canceled.
Pursuant to the Merger Agreement, the BOX agreed to take all actions
necessary to cause any outstanding stock options, warrants or other right to
acquire any capital stock of the BOX to be canceled if not exercised prior to
the Effective Time, except for shares of BOX Preferred Stock; provided, however,
that the BOX will not pay or agree to pay or deliver any cash or other
consideration to the holder of any such option, warrant or other right in
consideration of the cancellation or termination thereof except as follows:
- Offer to former employees of the BOX who hold options for an aggregate of
201,334 shares of BOX Common Stock and a former director who holds
options for 45,000 shares of BOX Common Stock that, to the extent such
employees and director exercise such options prior to the Effective Time,
the shares of BOX Common Stock will be converted into Music Series A
Preferred Stock at the Effective Time on the same basis as all other BOX
Common Stock, but to the extent those options are not exercised prior to
the Effective Time, they will expire at the Effective Time.
- Offer to enter into agreements with current employees and one former
employee of the BOX who hold an aggregate of 381,666 vested options
exercisable for shares of BOX Common Stock at $2.00 per share and current
directors of the BOX who hold an aggregate of 90,000 vested options
exercisable at $1.75 per share which provide, at the Effective Time,
their options will be canceled in exchange for options to purchase Series
A Common Stock. Pursuant to such agreements, for each share of BOX Common
Stock subject to options held by such option holders, the holders will
receive options entitling them to purchase 0.214 shares of Series A
Common Stock at the exercise price per share of $6.25. The new options
will be issued under, and subject to, the provisions of the TCI Music,
Inc. 1997 Stock Incentive Plan (the "1997 TCI Music Plan"). The new
options will have the same vesting schedules as the existing BOX options
(and credit toward vesting will be given for past service), but the new
options will not be exercisable until expiration of the TCI Rights unless
TCI Music is successful in having its Series A Common Stock, without the
TCI Rights, quoted on Nasdaq. If any of those BOX options are exercised
prior to the Effective Time, the shares of BOX Common Stock issued upon
such exercise will be converted into Music Series A Preferred Stock on
the same basis as all other BOX Common Stock.
- Offer to pay to current employees at the Effective Time, in cancellation
of 211,668 vested options exercisable for shares of BOX Common Stock at
$1.00 per share, the sum of $0.50 cash per option share.
- Offer to the BOX's current outside directors who hold vested options for
an aggregate of 30,000 shares of BOX Common Stock, exercisable at $1.00
per share that such directors exercise those options prior to the
Effective Time or they will expire at the Effective Time in accordance
with their terms. Any shares of BOX Common Stock issued upon such
exercise will be converted to Music Series A Preferred Stock at the
Effective Time on the same basis as all other BOX Common Stock.
- Offer to current employees of the BOX who hold non-vested options for
303,334 shares of BOX Common Stock that such employees exercise those
options before the Effective Time or such options will be canceled.
Pursuant to the Merger Agreement, each employee of the Surviving
Corporation who was an employee of the BOX immediately prior to the Effective
Time, to the extent permitted by TCI Music's employee benefit plans (as defined
in Section 3(b) of ERISA) (i) will receive credit for past service with the BOX
for purposes of eligibility and vesting under the Surviving Corporation's
employee benefit plans (as defined in Section 3(3) of ERISA) to the extent such
service was credited under the BOX benefit plans on the date of the Closing,
(ii) will not be subject to any waiting periods or limitations on benefits for
pre-existing conditions under the Surviving Corporation's employee benefit
plans, including any group health and disability plans, except to the extent
such employees were subject to such limitations under the BOX benefit plans and
(iii) will receive credit for past service with the BOX for purposes of
eligibility and vesting under the Surviving Corporation's
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plans and policies with respect to seniority benefits, including vacation and
sick leave. Current employees of the BOX who continue as employees of TCI Music
will be considered for the grant of options under the 1997 TCI Music Plan on the
same basis as employees of TCI Music and its subsidiaries.
INDEMNIFICATION
The Merger Agreement provides that after the Effective Time TCI Music will
cause the Surviving Corporation to indemnify, defend and hold harmless, and,
should the Surviving Corporation fail or be unable to do so, TCI Music will
indemnify, defend and hold harmless the officers and directors of the BOX to the
fullest extent permitted by applicable law, the BOX Charter, the BOX Bylaws and
the BOX Indemnification Agreements. See "THE MERGER--Interests of Certain
Persons in the Merger."
TERMINATION; AMENDMENT AND WAIVER
The Merger Agreement may be terminated and the Merger abandoned at any time
prior to the Effective Time, whether before or after approval by the BOX's
shareholders, (i) by mutual consent of the BOX Board and the TCI Music Board,
(ii) by either the BOX or TCI Music (A) if the Merger has not been consummated
on or before July 11, 1998, so long as the party seeking to terminate the Merger
Agreement has not breached its obligations under the Merger Agreement in any
material respect as of the time such party gives notice of its election to
terminate the Merger Agreement and, if the BOX is the terminating party, so long
as none of the Voting Shareholders is in breach of any obligations under the
Voting Agreement as of the time the BOX gives notice of its election to
terminate the Merger Agreement, or (B) if the shareholders of the BOX shall not
have approved and adopted the Merger Agreement, the Merger and the transactions
contemplated by the Merger Agreement at the Special Meeting, (iii) by the BOX,
provided the BOX is not in breach of any of its obligations thereunder in any
material respect and none of the Voting Shareholders is in breach of any
obligations under the Voting Agreement, in each case as of the time that the BOX
gives notice of its election to terminate the Merger Agreement, if any of the
conditions to its obligations to consummate the Merger have not been satisfied
or waived at such time as such condition is no longer capable of satisfaction,
(iv) by the BOX, provided the BOX is not, in any material respect, in breach of
any of its obligations not to solicit any Acquisition Proposal or any other
provision of the Merger Agreement and none of the Voting Shareholders is in
breach of any obligations under the Voting Agreement, in each case as of the
time that the BOX gives notice of its election to terminate the Merger
Agreement, if the BOX is presented with an unsolicited Acquisition Proposal
that, taking into account all relevant factors (including the nature and amount
of consideration to the BOX shareholders and the certainty of, and time
requirement for, completion of the transactions proposed in such Acquisition
Proposal), is more favorable to the BOX's shareholders from a financial point of
view than the transactions contemplated by the Merger Agreement, or (v) by TCI
Music, provided TCI Music and Acquisition Sub have not breached any of their
obligations thereunder in any material respect, if any of the conditions to
their obligations to consummate the Merger have not been satisfied or waived at
such time as such condition is no longer capable of satisfaction. See
"-- Conditions to the Merger."
In the event of termination of the Merger Agreement by either the BOX or
TCI Music as provided above, the Merger Agreement will become void and (except
for the willful breach of the Merger Agreement by any party to the Merger
Agreement) there will be no liability or obligation on the part of any of the
BOX, TCI Music or Acquisition Sub, other than as provided by the BOX Services
Agreement. See "THE MERGER -- Background of the Merger."
The BOX, TCI Music and Acquisition Sub may amend the Merger Agreement in
writing by or pursuant to action taken by all of their respective boards of
directors, at any time before or after approval by the shareholders of the BOX
of the Merger Agreement and prior to the Effective Time, but after such approval
by the shareholders of the BOX, no amendment may be made that alters the
indemnification provisions of the Merger Agreement, changes the ratio at which
BOX Common Stock is to be converted into Music Series A
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Preferred Stock, or changes, in any way adverse to such shareholders, the terms
of the Music Series A Preferred Stock, or that in any other way materially
adversely affects the rights of such shareholders, without the further approval
of such shareholders. At any time prior to the Effective Time, the BOX, TCI
Music and Acquisition Sub, by or pursuant to action taken by their respective
boards of directors, may agree to extend the time specified in the Merger
Agreement for performance of any of the obligations or other acts of the other
parties to the Merger Agreement, waive any inaccuracies in the representations
and warranties contained in the Merger Agreement or in any document delivered
pursuant to the Merger Agreement or waive compliance with any of the agreements
or conditions contained in the Merger Agreement.
CERTAIN RESTRICTIONS ON RESALE OF MUSIC SERIES A PREFERRED STOCK
The issuance of all shares of Music Series A Preferred Stock issuable in
the Merger will be registered under the Act and such shares will be freely
transferable, except that any such shares received by persons who are deemed
"affiliates" (as such term is defined for purposes of Rule 145 under the Act) of
the BOX prior to the Merger may be resold by them only in transactions permitted
by the resale provisions of Rule 145 under the Act (or Rule 144 in the case of
such persons who become affiliates of TCI) or as otherwise permitted under the
Act. Persons who may be deemed to be affiliates of the BOX generally include
individuals or entities that control, are controlled by, or are under common
control with, the BOX and may include certain officers and directors of the BOX
as well as principal shareholders of the BOX.
EXPENSES
The Merger Agreement provides that each party will pay its own costs and
expenses in connection with the transactions contemplated by the Merger
Agreement.
ARRANGEMENTS BETWEEN THE BOX AND TCI MUSIC
VOTING AGREEMENT
Pursuant to the Voting Agreement, the Voting Shareholders agreed to vote
all of the shares of BOX Voting Stock beneficially owned by them in favor of the
adoption and approval of the Merger Agreement and the Merger at every meeting of
the BOX shareholders at which such matters are considered and at every
adjournment or postponement thereof. The Voting Shareholders have further agreed
to vote all of their beneficially owned shares against any proposal that would
in any way inhibit the timely consummation of the Merger and the other
transactions contemplated by the Merger Agreement. Under the Voting Agreement,
the Voting Shareholders may not deposit any shares of BOX Voting Stock
beneficially owned by them in a voting trust or subject any of such shares to
any arrangement with respect to the voting of such shares other than the Voting
Agreement or any other agreement entered into in furtherance of the Merger. The
Voting Shareholders may not sell, assign, pledge or grant a lien on or otherwise
transfer any of their interests in any of their shares of BOX Voting Stock to
any person unless such transferee agrees in writing to be bound by the Voting
Agreement to the same extent as the Voting Shareholder.
SERVICES AGREEMENT
In connection with the Merger, the parties agreed to enter into the BOX
Services Agreement, pursuant to which the BOX will provide services to TCI Music
necessary to develop, market and manage the Music Multiplex. On August 12, 1997,
TCI Music entered into a binding term sheet setting forth certain terms of the
BOX Services Agreement, which term sheet will operate as such services agreement
until a definitive agreement is executed. Pursuant to the BOX Services
Agreement, TCI Music will pay the BOX an hourly rate for certain services (at
rates from $150 to $200 per hour) and will reimburse the BOX for certain costs
and expenses incurred in connection with such services. Payment for development
services in excess of
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$44,000 and reimbursement for any expense paid to an outside vendor in excess of
$10,000 are subject to the prior approval of TCI Music. In connection with the
development of the Music Multiplex, the BOX will install digital boxes at NDTC's
facility in Colorado. The reimbursable costs of materials and installation of
each such box are estimated to be $40,000. The monthly costs of operational
support provided by the BOX for the Music Multiplex to be reimbursed by TCI
Music are estimated to be approximately $13,000, excluding any external costs.
TCI Music advanced approximately $250,000 to the Box in the form of a promissory
note dated October 3, 1997, which amount has been offset in full against amounts
payable by TCI Music for goods and services under the BOX Services Agreement.
The BOX Services Agreement has initial term of one year beginning July 28,
1997 and will automatically terminate at the Effective Time. The BOX Services
Agreement will be automatically extended for successive six-month periods,
provided the Merger Agreement has not been terminated, unless the BOX terminates
the BOX Services Agreement at the end of any additional six-month term by
providing notice to TCI Music at least 60 days prior to the commencement of such
term. TCI Music may terminate the BOX Services Agreement at any time by
providing notice to the BOX at least 60 days prior to such termination. As of
the date of this Prospectus/Proxy Statement, the parties have not entered into a
definitive services agreement.
If the Merger Agreement is terminated pursuant to (i) Section 9.1(d)
thereof (based upon the receipt of an unsolicited acquisition proposal that is
more favorable to shareholders of the BOX from a financial point of view), (ii)
Section 9.1(b) thereof (based upon the failure of shareholders of the BOX to
approve the Merger Proposals or the failure to consummate the Merger on or
before July 11, 1998) or (iii) Section 9.1(e) thereof (based upon the failure of
certain conditions precedent to the obligations of the parties to effect the
Merger, if such condition is no longer capable of satisfaction), then TCI Music,
at its sole election, may either terminate the BOX Services Agreement or extend
the BOX Services Agreement for a period of three years (the "Initial Extension")
from such date of termination of the Merger Agreement, provided that the BOX
Services Agreement has not been previously terminated. At the end of the Initial
Extension, TCI Music may renew the BOX Services Agreement for an additional two
years. The BOX will have no right to terminate the BOX Services Agreement during
the Initial Extension or any renewal thereof, but TCI Music may terminate the
BOX Services Agreement by providing 60 days' prior notice to the BOX during the
Initial Extension or any renewal thereof. Further, during the Initial Extension
and any renewal thereof, the compensation payable to the BOX for services
pursuant to the BOX Services Agreement will be the BOX's cost to provide such
services plus 20%.
BOX AFFILIATION AGREEMENT
The BOX has entered into an Affiliation Agreement dated February 27, 1997
with Satellite Services, Inc. ("SSI"), an affiliate of TCI Music, which provides
for distribution of the BOX Service to approximately 1.8 million subscribers.
Such agreement has an initial term of seven years, is renewable for successive
five-year terms, and is terminable by SSI upon 45 days' prior written notice to
the BOX. Revenue derived from music video requests made by subscribers of
SSI-affiliated systems represent approximately 27% of the BOX's domestic net
viewer revenue.
CONTROL BY TCI; ARRANGEMENTS BETWEEN TCI AND TCI MUSIC
GENERAL
The outstanding shares of Series A Common Stock represent approximately
19.25% of, and 2.3% of the voting power related to, the total outstanding shares
of the TCI Music Common Stock; and the outstanding shares of 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 Series A Common Stock and
all of the outstanding shares of Series B Common Stock, which collectively
represent approximately 89.6% of the outstanding shares of TCI Music Common
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Stock. Since holders of shares of Series A Common Stock are entitled to one vote
per share and holders of shares of Series B Common Stock are entitled to ten
votes per share on each matter presented to a vote of the holders of TCI Music
Common Stock, TCI currently controls approximately 98.7% of the voting power of
the outstanding shares of TCI Music Common Stock. See "DESCRIPTION OF TCI MUSIC
CAPITAL STOCK." In connection with the Merger, shares of Music Series A
Preferred Stock will be issued to affiliates of TCI representing approximately
4.8% of the Music Series A Preferred Stock and 0.04% of the voting power of the
TCI Music Voting Stock, resulting in beneficial ownership by TCI of
approximately 98.0% of the total voting power of the outstanding TCI Music
Voting Stock following the Merger. Thus, TCI currently has, and will continue to
have after the Merger, the voting power to control all matters requiring
approval of TCI Music's shareholders voting as a single class, including the
election of directors, the adoption of amendments to the TCI Music Charter and
the approval of mergers and sales of TCI Music's assets. See "THE
MERGER -- Interest of Certain Persons in the Merger," "THE MERGER
AGREEMENT -- Consideration to be Received in the Merger," and "SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT OF TCI MUSIC AND THE BOX."
TCI Music and TCI have entered into a number of intercompany agreements
more fully described below covering matters such as the provision of services
and allocation of tax liabilities. TCI also provides certain administrative,
financial, legal, treasury, accounting, tax and other services to TCI Music and
makes available certain of its employee benefit plans to TCI Music's employees.
The terms of these arrangements were established by TCI in consultation with TCI
Music and are not the result of arm's-length negotiations. Accordingly, although
TCI Music believes that the terms of these arrangements are reasonable, there is
no assurance that the terms and conditions of these agreements, or the terms of
any future arrangements between TCI and TCI Music, are as favorable to TCI Music
as could be obtained from unaffiliated third parties. In addition, TCI Music and
TCI and their respective subsidiaries and affiliates may from time to time do
business with one another following the Merger, in areas not governed by any of
the following agreements.
If TCI were to seek to acquire the shares of TCI Music held by the public,
it would likely have the power to do so over the objection of other
stockholders, subject to any applicable provisions of Delaware law requiring
such a transaction to be "fair" to minority stockholders.
Conflicts of interest between TCI Music and TCI could arise with respect to
business dealings between them, including potential acquisitions of businesses
or properties, the issuance of additional securities, the election of new or
additional directors, and the payment of dividends by TCI Music. A conflict of
interest could also arise from TCI's position as the sole and exclusive agent
for TCI Music in any and all matters relating to TCI Music's federal income tax
liability, which includes the sole and exclusive responsibility for the
preparation and filing of consolidated federal and consolidated or combined
state income tax returns (or amended returns), to contest or compromise any
asserted tax adjustment or deficiency and to file, litigate or compromise any
claim for refund on behalf of TCI Music. TCI Music has not instituted any formal
plan or arrangement to address potential conflicts of interest that may arise
between TCI Music and TCI. However, the directors of TCI Music intend to
exercise reasonable judgment and take such steps as they deem necessary under
all of the circumstances in resolving any specific conflict of interest that may
occur and will determine what, if any, specific measures, such as retention of
an independent advisor or independent counsel or appointment of a special
committee, may be necessary or appropriate. There can be no assurance that any
conflicts will be resolved in favor of TCI Music.
AMENDED CONTRIBUTION AGREEMENT
In connection with the DMX Merger, TCI Music and TCI entered into the
Contribution Agreement dated July 11, 1997, pursuant to which TCI agreed to
cause certain of its affiliates to assign and contribute to TCI Music the right
to receive the revenue from sales of the DMX Service net of an amount equal to
10% of the revenue from such sales to residential subscribers and net of license
fees otherwise payable to DMX for a 10-year period beginning July 1, 1997 and to
transfer certain equipment to DMX useful in DMX's business. In consideration of
such agreement, in connection with the consummation of the DMX Merger, TCI Music
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delivered to TCI, as designee for certain TCI affiliates, 62,500,000 shares of
Series B Common Stock and the TCI Music Note. Pursuant to the Merger Agreement,
TCI Music and TCI entered into the Amended Contribution Agreement effective as
of July 1, 1997, which provides, among other things, for TCI 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 Conbribution
Agreement described above, to TCI Music the Annual TCI Payments aggregating $18
million annually (adjusted annually by the CPI for the prior year) for a term of
20 years. The Annual TCI Payments represent (i) revenue of subsidiaries of TCI
that is attributable to the distribution and sale of the DMX Service to cable
subscribers who receive the DMX Service via Tuner Distribution (rather than
Digital Distribution) (net of an amount equal to 10% of such revenues 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
certain other rights.
AFFILIATION AGREEMENT
In connection with the Merger Agreement, the TCI Affiliate will enter into
the Affiliation Agreement, for a 10-year period effective as of July 1, 1997,
pursuant to which DMX will grant to the TCI Affiliate and certain affiliates of
the TCI Affiliate 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 the TCI Affiliate to DMX.
Under the Affiliation Agreement, the annual fee paid by the TCI Affiliate
to DMX will be $8,500,000 for the initial three years, subject to adjustment
annually (beginning July 1, 1998) by the percentage change in the CPI for the
prior year and for subscribers served by certain divested systems and acquired
systems. 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 in wholly owned and operated systems above or below (i)
the number of commercial cable accounts in wholly owned and operated TCIC cable
systems on July 1, 1997 (for commercial fees) and (ii) the baseline number of
two million (for residential fees), 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. The TCI Affiliate fees will also be
adjusted upward or downward to reflect actual DMX licensing fees payable to
ASCAP, BMI, and SESAC.
The Affiliation Agreement between DMX and SSI dated July 6, 1989 (the "Old
Affiliation Agreement") provides for distribution by SSI-affiliated cable
systems of the DMX Service and the Superaudio service (a basic analog music
service provided through a joint venture between DMX and an affiliate of Jones
Intercable, Inc.). Although the Affiliation Agreement supersedes the Old
Affiliation Agreement with respect to the DMX Service, the Old Affiliation
Agreement remains in effect through June 30, 1999 with respect to the Superaudio
service. SSI and DMX expect to extend the Old Affiliation Agreement with respect
to the Superaudio service for an additional five years. For additional
information regarding the Superaudio service, see the Transition Report of TCI
Music on Form 10-K, included as Appendix V to this Proxy Statement/Prospectus.
EXTENSION OF TCI MUSIC NOTE
In connection with the closing of the DMX Merger, TCI Music issued to TCI
the TCI Music Note dated July 11, 1997 in the principal amount of $40,000,000
payable to the order of TCI in full on January 10, 1998, bearing interest at 10%
per annum, which interest will be waived by TCI if the principal is paid in full
at or before maturity. TCI Music expects to refinance the TCI Music Note,
although no assurance can be given that TCI Music will be able to obtain such
financing on terms acceptable to TCI Music. At or prior to the Effective Time,
TCI will enter into the Extension of TCI Music Note, extending the maturity date
of the TCI Music Note for a period, not to exceed 18 months, as may be
reasonably required to permit TCI Music to obtain other financing sufficient to
repay the loan.
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TCI RIGHTS
In connection with the DMX Merger, pursuant to the Rights Agreement dated
July 11, 1997 by and among TCI Music, TCI and the Bank of New York, as rights
agent, TCI issued one TCI Right in connection with each share of Series A Common
Stock issued to DMX shareholders who exchanged their shares of common stock of
DMX for shares of Series A Common Stock. Each TCI Right entitles the holder to
require TCI to purchase from such holder the related share of Series A Common
Stock for $8.00 per share (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) payable at the election of TCI in cash, a number of shares
of Series A TCI Group Common Stock having an equivalent value or a combination
thereof, if prior to July 11, 1998, the price of Series A Common Stock does not
equal or exceed $8.00 per share for a period of at least 20 consecutive trading
days. If the TCI Rights have not terminated prior to July 11, 1997, they will
become exercisable for a 30-day period following such date and will expire on
the last day of such 30-day period, unless extended by their terms. The TCI
Rights are evidenced by a legend on the certificates for shares of Series A
Common Stock issued in the DMX Merger and trade together with the Series A
Common Stock. The current trading price of the Series A Common Stock includes
the market's estimation of the value, if any, of the TCI Right attached to the
Series A Common Stock. The shares of Series A Common Stock into which the Music
Series A Preferred Stock issuable in the Merger are convertible do not have any
such associated TCI Rights, and if conversion occurs prior to the termination or
expiration of the TCI Rights, the Series A Common Stock without the TCI Rights
received upon conversion of the Music Series A Preferred Stock will not be
tradable on the Nasdaq SmallCap Market under the symbol "TUNE" with the Series A
Common Stock that includes the TCI Rights until such TCI Rights terminate or
expire. Further, no assurances can be made that the trading price of the Series
A Common Stock will be maintained or that Nasdaq's maintenance standards will
continue to be satisfied with respect to the Series A Common Stock after the TCI
Rights terminate. See "RISK FACTORS -- Termination of TCI Rights; Potential
Decrease in Price of Series A Common Stock," "-- Nasdaq Listing and Maintenance
Requirements; Absence of Trading Market," and "THE MERGER -- Opinion of
Financial Advisor Retained by the BOX Board."
TCI LOAN
TCI made loans in the aggregate principal amount of $3,500,000 to DMX in
connection with the DMX Merger. Such loans are due on or before June 1, 2000,
and accrues interest at a rate of 12.5% per annum.
SERVICES AGREEMENT
Pursuant to the Services Agreement between TCI and TCI Music, TCI provides
to TCI Music certain services and other benefits, including certain
administrative and other services that were provided by TCI prior to the Merger.
Such services include (i) tax reporting, financial reporting, payroll, employee
benefit administration, workers' compensation administration, telephone, package
delivery, management information systems, billing, lock box, remittance
processing and risk management services, (ii) other services typically performed
by TCI's accounting, finance, treasury, corporate, legal, tax, benefits,
insurance, facilities, purchasing, and advanced information technology
department personnel, (iii) use of telecommunications and data facilities and of
systems and software developed, acquired or licensed by TCI from time to time
for financial forecasting, budgeting and similar purposes, including without
limitation any such software for use on personal computers, in any case to the
extent available under copyright law or any applicable third-party contract,
(iv) technology support and consulting services and (v) such other management,
supervisory, strategic planning or other services as TCI Music may from time to
time request. Pursuant to the Services Agreement, TCI also provides TCI Music
access to any volume discounts that may be available to TCI for purchase of
certain equipment.
The Services Agreement also provides that TCI, for so long as TCI continues
to beneficially own at least a majority of the voting power of the outstanding
shares of TCI Music Voting Stock, will continue to provide in the same manner,
and on the same basis as generally provided from time to time to other
participating TCI subsidiaries, benefits and administrative services to TCI
Music's employees. In this regard, TCI Music will be
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allocated that portion of TCI's compensation expense attributable to benefits
extended to employees of TCI Music.
Pursuant to the Services Agreement, TCI Music from time to time will
reimburse TCI for all direct expenses incurred by TCI in providing such services
and a pro rata share of all indirect expenses incurred by TCI in connection with
the rendering of such services, including a pro rata share of the salary and
other compensation of TCI employees performing services for TCI Music, general
overhead expenses and rental expense for any physical facilities of TCI utilized
by TCI Music. In this regard, it is anticipated that TCI Music will, for the
foreseeable future, share office space with, or sublease office space from, TCI.
The Services Agreement will continue in effect until terminated by (i) TCI
Music upon 60 days' prior written notice to TCI, (ii) TCI at any time after
three years upon not less than six months' prior notice to TCI Music, and (iii)
either party if the other party is the subject of certain bankruptcy or
insolvency-related events.
TAX SHARING AGREEMENTS
TCI common stock is comprised of six series: Tele-Communications, Inc.
Series A TCI Group Common Stock, Tele-Communications, Inc. Series B TCI Group
Common Stock (collectively, the "TCI Group Common Stock"), Tele-Communications,
Inc. Series A Liberty Media Group Common Stock, Tele-Communications, Inc. Series
B Liberty Media Group Common Stock (collectively, the "Liberty Media Group
Common Stock"), Tele-Communications, Inc. Series A TCI Ventures Group Common
Stock and Tele-Communications, Inc. Series B TCI Ventures Group Common Stock
(collectively, the "TCI Ventures Group Common Stock"). The TCI Group Common
Stock is intended to reflect the separate performance of the TCI Group, which is
comprised of TCI's domestic distribution and communications businesses (other
than the investments attributed to the TCI Ventures Group), and any other
businesses and assets of TCI not attributed to either the Liberty Media Group or
the TCI Ventures Group. The Liberty Media Group Common Stock is intended to
reflect the separate performance of the Liberty Media Group, which is comprised
of TCI's businesses, and investments in entities, that are engaged in the
production, acquisition and distribution through all available formats and media
of branded entertainment, educational and informational programming and
software, including multimedia products, and its investments in entities engaged
in electronic retailing, direct marketing, advertising sales relating to
programming services, informercials and transaction processing, and the
operation of UHF television stations. The TCI Ventures Group Common Stock is
intended to reflect the separate performance of the TCI Ventures Group, which is
comprised of TCI's principal international assets and businesses and
substantially all of TCI's non-cable and non-programming domestic assets and
businesses.
A tax sharing agreement (the "Old Tax Sharing Agreement") among TCI and
certain subsidiaries of TCI was implemented effective July 1, 1995. The Old Tax
Sharing Agreement formalized certain of the 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. Under the Old
Tax Sharing Agreement, TCI Music was responsible to TCI for its share of
consolidated income tax liabilities (computed as if TCI were not liable for the
alternative minimum tax) determined in accordance with the Old Tax Sharing
Agreement, and TCI was responsible to TCI Music to the extent that the income
tax attributes generated by TCI Music and its subsidiaries were utilized by TCI
to reduce its consolidated income tax liabilities (computed as if TCI were not
liable for the alternative minimum tax). The tax liabilities and benefits of
such entities so determined are charged or credited to an intercompany account
between TCI and TCI Music. 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 and has the right to receive
the tax benefits from an 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 the TCI Ventures
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Group (each a "Group"). TCI Music and its subsidiaries are members of the
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. Tax attributes and tax basis in assets would be inventoried and
tracked for ultimate credit to or charged against each Group. Similarly, in each
taxable period that TCI pays alternative minimum tax, the federal income tax
benefits of each Group, computed as if such Group were subject to regular tax,
would be inventoried and tracked for payment to or payment by each Group in
years that TCI utilizes the alternative minimum tax credit associated with such
taxable period. The Group generating the utilized tax benefits would receive a
cash payment only if, and when, the unutilized taxable losses of the other Group
are actually utilized. If the unutilized taxable losses expire without ever
being utilized, the Group generating the utilized tax benefits will never
receive payment for such benefits. 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.
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BUSINESS OF THE BOX
GENERAL
The BOX (formerly Video Jukebox Network, Inc. and Cable Video Jukebox,
Inc.) is primarily engaged in programming, distributing and marketing an
interactive music video television programming service known as THE BOX(R) (the
"BOX Service"), operating 24 hours per day, seven days a week. The BOX currently
exhibits its television programming through 102 box units installed in cable
television systems, 44 box units installed in low power television stations and
eight boxes installed in full power broadcast stations. The BOX Service is
available to approximately 35.3 million subscribers in 137 cities located in 34
states and in Washington, D.C., Puerto Rico, Argentina, Aruba, Chile, Holland,
Italy, New Zealand, Peru, and Venezuela.
The BOX also broadcasts a national satellite version of the BOX Service via
Transponder 13 on the Hughes satellite Galaxy 7. An additional estimated 2.1
million households are presently receiving the BOX Service through its digital
satellite delivery. Transponder and uplink services are provided by NDTC. See
"RISK FACTORS -- Dependence on Satellite Delivery Capabilities."
Viewers of the BOX Service can passively watch the BOX programming or can
actively participate in determining its programming by selecting specific music
videos. Viewers make their selections by dialing a 900 telephone number (or
comparable telephone technology) and entering, via touch-tone telephone, a
three-digit code assigned to the music video. This allows the viewer to directly
communicate with the Company's local box computer. When the computer receives
the viewer's request, an acknowledgment appears on all television screens in the
local system tuned to the BOX. Viewers selecting music videos aired on the BOX
Service are charged a fee. Viewers who watch the BOX Service passively pay no
charges above their cost for cable service. The BOX presents approximately eight
minutes of advertising each hour integrated between videos.
Transmission of the BOX programming can be accomplished through the use of
only one cable television channel, one broadcast television channel or through
satellite delivery, none requiring addressable technology. Viewers do not need
additional hardware to watch the BOX Service or to select music videos
interactively. The one exception is a digital receiver necessary for home
satellite dishes to pick up the satellite transmission.
The BOX is one of the only companies to deliver an interactive television
product to millions of homes in the United States and around the globe. The BOX
has advanced the original analog technology to a new digital format and has
converted all U.S. boxes to this format except for low performing boxes which
were switched to the BOX's satellite feed. This new digital technology allows
the Company to further localize all programming, deliver an improved on-air
look, expand advertising inventory due to random access of digital files,
eliminate significant operating expenditures and provide refurbished analog
boxes necessary for the international expansion.
The BOX and TCI Music have entered into the BOX Services Agreement
(currently embodied in a binding term sheet) pursuant to which TCI Music will
pay the BOX for services performed in connection with the development of the
Music Multiplex. The BOX Services Agreement could remain in effect even if the
Merger is not consummated. See "THE MERGER -- Background of the Merger."
Additional information concerning the BOX is included in the information
filed by the BOX with the Commission incorporated by reference in this Proxy
Statement/Prospectus. See "INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE" and
"AVAILABLE INFORMATION."
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BUSINESS OF TCI MUSIC
GENERAL
TCI Music was incorporated in Delaware in January 1997. TCI Music's
business consists principally of the business of DMX and, after the Merger, will
include the business conducted by the BOX prior to the Merger. See "BUSINESS OF
THE BOX" and "-- DMX Music Services." TCI Music intends to evaluate the
operations of the BOX to determine what actions, if any, should be taken to
improve the BOX's operations. See "CONTROL BY TCI; ARRANGEMENTS BETWEEN TCI AND
TCI MUSIC -- Amended Contribution Agreement," "-- Affiliation Agreement" and
"-- Extension of TCI Music Note." The executive offices of TCI Music are located
at 8101 East Prentice Avenue, Suite 500, Englewood, Colorado 80111, telephone
(303) 721-5400.
TCI Music entered into the Paradigm Agreement pursuant to which a newly
created wholly-owned subsidiary of TCI Music will merge with and into Paradigm.
The acquisition is expected to be consummated prior to the Effective Time. See
"-- Proposed Paradigm Acquisition." TCI Music anticipates that it will evaluate
additional acquisitions of interests in, or joint ventures or similar
arrangements with, other companies engaged in the audio or video music business
as suitable opportunities become available. No assurance can be given that any
such acquisition or other transaction, if any is effected, will be beneficial to
TCI Music.
DMX MUSIC SERVICES
DMX Music Services and Distribution. DMX 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 Service is currently delivered
primarily through two distribution methods: (i) directly to cable operators by
C-band satellite for distribution to residential and commercial cable
subscribers through a separate tuner (Tuner Distribution) and (ii) via DBS
dishes to residential and commercial subscribers either directly or as part of a
package delivered by DBS distributors, such as PrimeStar and Alpha Star
("Satellite Distribution"). Revenues to DMX from Tuner Distribution and
Satellite Distribution are generated by license fees paid to DMX by the cable
and DBS operators pursuant to so-called "affiliation" agreements between DMX and
such operators. For the 12-month period ended December 31, 1996, revenues from
Tuner Distribution represented approximately 75% of subscription fee revenues,
with approximately 53% of such amount derived from residential Tuner
Distribution subscribers. At or prior to the Effective Date of the Merger, DMX
and the TCI Affiliate will enter into the Affiliation Agreement for the
distribution of the DMX Music services by TCI cable system operators. See
"CONTROL BY TCI; ARRANGEMENTS BETWEEN TCI AND TCI MUSIC -- Affiliation
Agreement."
In Tuner Distribution, cable operators generally offer the DMX Service to
their subscribers for a separate a la carte fee. Customers who subscribe to the
DMX Service receive the DMX signal through the same coaxial cable used to
distribute video cable signals, which is connected through a separate DMX tuner
to a customer's stereo system. In order to receive the DMX Service via Tuner
Distribution, residential subscribers must subscribe to video programming from
their cable operator; commercial subscribers may, but do not need to, subscribe
to video programming to receive the DMX Service. Under DMX's affiliation
agreements with cable operators, the operators generally have the right, but not
the obligation, to distribute the DMX Service to subscribers, and pay a per
subscriber license fee to DMX for each paying subscriber receiving the DMX
Service. The cable operator sets the fees charged to its commercial and
residential subscribers, which are generally higher than the corresponding
license fees paid by the cable operator to DMX. License fees vary depending on
whether the subscriber is a commercial establishment or a private residence.
For example, a cable operator might charge a residential DMX subscriber
$9.00 per month for DMX music service and, pursuant to its affiliation agreement
with DMX, pay DMX $3.00 per paying subscriber as a license fee. A similar fee
structure exists with cable operators with respect to commercial subscribers,
but both subscriber fees and license fees are significantly higher than for
residential subscribers, with DMX's license fee often based on the greater of a
minimum fee or a percentage of the fee charged to the commercial subscriber.
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In Satellite Distribution, the DMX Service is generally provided as part of
a package of video and music programming offered to the DBS operator's
subscribers, who pay a single rate for the package of video and music services.
DMX's affiliation agreements with the DBS operators generally provide for a
relatively small per subscriber license fee attributable to the DMX Service and
payable to DMX for each subscriber that purchases a package of video and music
services.
Effect of Launch of Digital Compression Technology. Cable operators have
recently begun to launch a new method of distributing video and other
programming using digital compression technology. Digital compression technology
can compress, on average, as many as 14 of the current analog video signals into
the space normally occupied by one. Such technology improves picture quality and
allows for carriage of significantly more video product offerings (Digital
Distribution) without cable operators having to build new cable plant. The
technology is distributed through TCI's "Headend in the Sky" ("HITS"), that
enables TCI and each other participating cable operator to increase their
program offerings and create new packages that could include, if they so choose,
the DMX Service as part of a package of video and music services. Digital
Distribution permits subscribers to receive video and music signals through a
single standard set-top-tuner or "box" without the use of a separate tuner for
music, as is currently the case with Tuner Distribution. TCI conducted a beta
test of its Digital Distribution in late 1996 and began offering such service to
selected markets during 1997.
The launch of digital compression technology has the potential to provide
an additional distribution market for the DMX Service. If cable operators
utilizing Digital Distribution, such as TCI, elect to offer DMX Services as part
of one or more digital video programming packages, the DMX Service will be
provided to customers who might not otherwise elect to subscribe to DMX music
services on an a la carte basis. However, the launch of and the transition to
Digital Distribution may also have the effect of materially reducing DMX's
residential subscriber fee revenues from Tuner Distribution as a result of the
expected change from the a la carte fee structure currently in effect for Tuner
Distribution to a fee structure similar to that in effect for Satellite
Distribution. TCI Music expects that license fees paid by cable operators for
Digital Distribution that include DMX Services in their digital packages will be
in the range of $.25 to $.50 per subscriber, which are much lower than the a la
carte fees now paid to DMX under affiliation agreements currently in effect.
While a substantial increase in the overall number of residential subscribers
purchasing digital packages that include the DMX Service could result in
revenues equal to or exceeding the revenues from residential subscribers
currently electing to purchase the DMX Service for a separate a la carte fee,
such a result depends on a number of factors over which TCI Music has no
control, including whether cable operators elect to include the DMX Service as
part of their digital packages, the acceptance by consumers of the digital
products and whether those electing to purchase the digital packages are already
DMX subscribers. Neither TCI nor TCI Music can predict the number of DMX
residential subscribers that will elect to receive a digital package that
includes DMX when it is offered.
The new license fee structure for Digital Distribution will not affect the
Annual TCI Payments that TCI will pay to TCI Music or DMX under the Amended
Contribution Agreement. TCI Music does not expect the launch of Digital
Distribution to affect the current rate structure for commercial cable
subscribers or Satellite Distribution.
TCI Music expects that Tuner Distribution will continue to be available in
markets where Digital Distribution has not been introduced. However, because
Tuner Distribution utilizes more of the cable spectrum than is currently used to
deliver one video channel, it is likely that some cable operators, including
TCI, may determine to eliminate Tuner Distribution of DMX music services in
certain markets to recover or maintain channel capacity for Digital
Distribution. If TCI or any other cable operator other than TCI, which pays DMX
a flat fee for distribution of the DMX Service, terminates Tuner Distribution in
any market, all revenues from residential and commercial subscribers receiving
the DMX Service via Tuner Distribution in such market would terminate, unless
such residential subscribers elect to purchase a video and music programming
package through Digital Distribution, and Digital Distribution and other
distribution means were made available to commercial subscribers. Accordingly,
DMX's and TCI Music's revenues could be materially adversely affected if Tuner
Distribution were terminated by cable operators.
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Likewise, although cable operators may not as readily terminate Tuner
Distribution to commercial DMX subscribers, because they generally enter into
short term written contracts with commercial subscribers that obligate them to
provide such services, they may still choose to recover channel capacity by
terminating such agreements. In such a case, all revenues from commercial
subscribers receiving the DMX Service would also be eliminated unless
alternative delivery means such as Satellite Distribution or Digital
Distribution were made available and accepted by the commercial subscriber. If
Tuner Distribution were to be eliminated, TCI Music expects that substantial
additional expenses would be incurred to retain such commercial subscribers,
such as marketing and equipment expenses, which could offset the revenues
retained. In addition, an available alternative distribution method may result
in increased costs to the subscriber in monthly fees and/or equipment. As a
result, there would be a substantial risk that some commercial subscribers would
choose to terminate the DMX Service. Accordingly, DMX's and TCI Music's revenues
could be materially adversely affected if Tuner Distribution were terminated by
cable operators.
THE BOX SERVICES AND DISTRIBUTION
The BOX and TCI Music have entered into the BOX Services Agreement
(currently embodied in a binding term sheet) pursuant to which TCI Music will
pay the BOX for services performed in connection with the development of the
Music Multiplex. The BOX Services Agreement could remain in effect even if the
Merger is not consummated. See "ARRANGEMENTS BETWEEN THE BOX AND TCI MUSIC" and
"THE MERGER -- Background of the Merger."
PARADIGM SERVICES AND DISTRIBUTION
TCI Music and Paradigm entered into the Paradigm Agreement pursuant to
which TCI Music will acquire all of the issued and outstanding shares of
Paradigm Common Stock, in a merger of a newly created wholly-owned subsidiary of
TCI Music with and into Paradigm. See "-- Terms of Proposed Paradigm Merger." If
the Paradigm Merger is consummated, the business of TCI Music will also include
the business of Paradigm. Paradigm's business includes the businesses of its
wholly-owned subsidiaries, SonicNet, Inc., a Delaware corporation, and Purple
Demon, Inc., a New York corporation. Paradigm operates music-related World Wide
Web sites accessible through the Internet known as SonicNet and Addicted to
Noise, distributes new artist and catalog releases of established artists
through its record label businesses (including distribution through the
Internet) and is involved in the creation and distribution of syndicated radio
and on-line music programming. See "RISK FACTORS."
TERMS OF PROPOSED PARADIGM MERGER
Pursuant to the Paradigm Agreement, TCI Music will deliver consideration in
connection with the Paradigm Merger by (a) exchanging that number of shares of
Series A Common Stock determined by dividing $24,000,000 (less the amount equal
to the number of dissenters' shares multiplied by the portion of $24,000,000
allocable to each share of Paradigm Common Stock assuming no dissenters' shares)
by the average of the mean daily closing bid and asked prices of Series A Common
Stock for a period of 20 consecutive trading days ending on the third trading
day prior to the effective time of the merger as quoted on the Nasdaq SmallCap
Market and (b) paying the amount of $4,970,831 in cash or as a purchase or
assumption by TCI Music of debt owed by Paradigm. The issuance of the Series A
Common Stock in connection with the Paradigm Merger will not have a significant
effect on the voting power related to the Music Series A Preferred Stock to be
issued in the Merger.
The consummation of the Paradigm Merger is subject to certain conditions
including, but not limited to, (a) the exercise of statutory dissenters' rights
by stockholders of Paradigm owning no more than 15% of outstanding shares of all
classes of Paradigm Common Stock, (b) the unanimous consent of (i) the holders
of Paradigm's warrants, options and any other rights to acquire capital stock of
Paradigm to the cancellation of such warrants, options and rights and (ii) the
holders of registration rights with respect to Paradigm warrants or capital
stock to the termination of such registration rights, (c) the release from
escrow of all shares of Class A, Class B and Class E Paradigm Common Stock
currently held in escrow pursuant to a stock escrow agreement dated November 21,
1995 among Paradigm, certain of its stockholders and American Stock Transfer and
Trust Company (the "Paradigm Escrow Agreement"), and (d) the agreement by TCI
that TCI
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or one or more of its affiliates will maintain beneficial ownership of shares of
TCI Music Common Stock representing at least one-third of the total voting power
of TCI Music for a specified period of time.
Contemporaneously with the execution of the Paradigm Agreement, TCI Music,
Paradigm and the Paradigm Voting Stockholders (collectively beneficially owning
70.3% of the voting power related to the total outstanding shares of Paradigm
Common Stock) entered into the Paradigm Voting Agreement whereby each of the
Paradigm Voting Stockholders agreed to vote, or cause to be voted, all of the
shares of Paradigm Common Stock that are beneficially owned by each such
stockholder in favor of, and to cause any holder of record of shares of Paradigm
Common Stock to vote such holder's shares in favor of, the adoption and approval
of the Paradigm Merger at every meeting of the stockholders at which the
Paradigm Merger is considered. Further, the Paradigm Voting Shareholders agreed
to vote, or cause to be voted, all of the shares of Paradigm Common Stock
beneficially owned by them, and to cause any holder of record of shares of
Paradigm Common Stock to vote such holder's shares, against any proposal that
would compete or interfere with, delay or otherwise inhibit the timely
consummation of the Paradigm Merger and in favor of the release of all such
shares of Class A, Class B and Class E Paradigm Common Stock held in escrow
pursuant to the Paradigm Escrow Agreement.
In connection with the execution of the Paradigm Agreement, TCI Music
agreed to loan Paradigm an amount not to exceed $2,183,169 plus amounts
sufficient to permit Paradigm to pay its normal operating expenses (not to
exceed $550,000 for any month) in the aggregate amount of up to $3,833,169 for
the months of October, November and December, 1997 (unless the consummation of
the Paradigm Merger occurs prior to the scheduled date of any such advance)
pursuant to a Loan and Security agreement dated as of September 18, 1997 entered
into by the parties. All advances under such loan will bear interest at 10% per
annum and all principal and interest will be payable on the earlier of (a) June
30, 1998 or (b) December 31, 1997 if the Paradigm Merger is not consummated by
such date.
In connection with the Paradigm Agreement, Paradigm will enter into an
agreement to purchase all of the assets of the business of Addicted to Noise for
consideration not to exceed $220,000 in cash and promissory notes and 75,000
shares of Class A Paradigm Common Stock (or such Series A Common Stock into
which such shares will be converted upon the consummation of the Paradigm
Merger). Thomas McPartland, President of Paradigm, will be elected as a director
and appointed as President and Chief Executive Officer of TCI Music upon the
consummation of the Paradigm Merger. Pursuant to the Paradigm Agreement, Mr.
McPartland will receive an annual salary of at least $375,000. If the Paradigm
Merger is consummated, TCI Music believes that it may be consummated prior to
the Effective Time; however no assurances can be given that the Paradigm Merger
will be consummated prior to such time or at all. See "RISK FACTORS."
DETAILED INFORMATION CONCERNING DMX IS SET FORTH IN THE TRANSITION REPORT
OF TCI MUSIC ON FORM 10-K FOR THE TRANSITION PERIOD FROM OCTOBER 1, 1996 TO JUNE
30, 1997 INCLUDED AS APPENDIX V TO THIS PROXY STATEMENT/PROSPECTUS. ADDITIONAL
INFORMATION CONCERNING DMX AND TCI MUSIC IS INCLUDED IN THE INFORMATION FILED BY
TCI MUSIC WITH THE COMMISSION INCORPORATED BY REFERENCE IN THIS PROXY STATEMENT/
PROSPECTUS. SEE "INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE" AND "AVAILABLE
INFORMATION."
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CERTAIN LITIGATION
DMX Shareholder Litigation. In September 1996, after the announcement of
TCI's proposal to merge with DMX, certain DMX shareholders filed a putative
class action lawsuit in the Delaware Court of Chancery on behalf of a purported
class consisting of all public shareholders of DMX (other than the directors of
DMX and TCI) captioned Brickell Partners v. Jerold H. Rubinstein, Donne F.
Fisher, Leo J. Hindery, Jr., James R. Shaw, Sr., Kent Burkhart, J. C. Sparkman,
Bhaskar Menon, DMX, Inc. and Tele-Communications, Inc. (Civil Action No. 15206).
The complaint seeks, as relief, among other things, an injunction preventing
consummation of the DMX Merger as well as unspecified compensatory damages.
Neither TCI Music nor DMX can estimate, based on facts available as of the date
of this Proxy Statement/Prospectus, the possible adverse effects of such a
result, which could include the rescission of the DMX Merger and monetary
damages. TCI Music does not believe that if such plaintiffs are successful,
their success would materially adversely affect the ability of the parties to
consummate the Merger.
Additional DMX Litigation. Jeri L. Amstutz v. DMX Inc., Otis Smith, Jerold
Rubinstein and Does 1 to 100. On January 23, 1997, Jeri L. Amstutz, a former
employee of DMX, filed a complaint in Superior Court of California, County of
Los Angeles seeking compensatory damages for lost wages and benefits,
foreseeable consequential and incidental damages in an unspecified amount, as
well as attorneys' fees, costs and prejudgment interest in connection with
alleged wrongful employment practices. The plaintiff also seeks punitive damages
and damages for emotional distress (and similar harm) in unspecified amounts
which the plaintiff claims to believe will exceed $2,000,000.
Marnie Tenden v. DMX Inc., Otis Smith, Jerold Rubinstein and Does 1 to
100. On November 27, 1996, Marnie Tenden, a former employee of DMX, filed a
complaint in Superior Court of California, County of Los Angeles, which alleges
sex discrimination and retaliatory harassment. The plaintiff seeks compensatory
damages for lost wages and benefits, foreseeable consequential and incidental
damages, as well as attorneys' fees, costs and prejudgment interest. The
plaintiff also seeks punitive damages and damages for emotional distress (and
similar harm) in unspecified amounts which the plaintiff claims to believe will
exceed $500,000.
Other. DMX has received a letter from counsel for Selco Servicegesellschaft
fur elektronische Kommunikation mbH ("Selco") requesting that DMX make a
proposal to settle claims alleged by Selco for damages in the amount of
approximately $3.5 million with respect to a guaranty by DMX of obligations of
DMX Europe N.V. under a Subscriber Management Services Agreement between DMX
Europe N.V. and Selco. TCI Music and DMX do not believe that DMX has any
liability to Selco under that guaranty. Nevertheless, neither TCI Music nor DMX
can estimate, based on the facts available as of the date of this Proxy
Statement/Prospectus, whether Selco will continue to pursue its claims and, if
Selco elects to initiate formal legal proceedings, whether DMX will be held
liable for any material amount.
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DESCRIPTION OF TCI MUSIC CAPITAL STOCK
TCI MUSIC COMMON STOCK
TCI Music's authorized common stock consists of 295,000,000 shares of
Series A Common Stock and 200,000,000 shares of Series B Common Stock. As of the
date of this Proxy Statement/Prospectus, there were 14,896,648 shares of Series
A Common Stock issued and outstanding and 62,500,000 shares of Series B Common
Stock issued and outstanding.
The rights of holders of Series A Common Stock and Series B Common Stock
are identical except for voting and conversion rights. The 14,896,648
outstanding shares of Series A Common Stock were issued in connection with the
DMX Merger and are tradable with an associated TCI Right issued by TCI in
connection with the DMX Merger on the Nasdaq SmallCap Market under the symbol
"TUNE.". The certificates for such shares bear a legend evidencing the TCI
Rights. The shares of Series A Common Stock issuable upon conversion of the
shares of Music Series A Preferred Stock issuable in the Merger will not have
associated TCI Rights and the certificates for such shares will bear a legend
indicating that they are not tradable on the Nasdaq SmallCap Market under the
symbol "TUNE" until the TCI Rights terminate or expire. The following
description does not include a description of the TCI Rights. See "CONTROL BY
TCI; ARRANGEMENTS BETWEEN TCI AND TCI MUSIC -- TCI Rights," "THE MERGER
AGREEMENT -- Consideration to be Received in the Merger," "RISK
FACTORS -- Termination of TCI Rights; Potential Decrease in Price of Series A
Common Stock" and "-- Nasdaq Listing and Maintenance Requirements; Absence of
Trading Market."
Voting. Each share of Series A Common Stock entitles the holder to one vote
and each share of Series B Common Stock entitles the holder to ten votes on each
matter to be voted upon by the holders of Common Stock. Except as may otherwise
be required by the Delaware General Corporation Law ("DGCL") or, with respect to
any series of preferred stock, as otherwise provided in any resolution of the
TCI Music Board providing for the establishment of such series of TCI Music
Preferred Stock, the holders of the Series A Common Stock and the holders of the
Series B Common Stock and the holders of each series of TCI Music Preferred
Stock entitled to vote thereon will vote as one class on all matters to be voted
on by such shareholders of TCI Music. Neither the holders of Series A Common
Stock nor the holders of Series B Common Stock have any rights to vote as a
separate class or series on any matter coming before the shareholders of TCI
Music, except for certain limited series voting rights provided under the DGCL.
Under the DGCL, the approval of the holders of a majority of the outstanding
shares of any class of capital stock of a corporation, voting separately as a
class, is required to approve any amendment to the charter that would alter or
change the powers, preferences or special rights of the shares of such class so
as to affect them adversely, provided that, if any amendment would alter or
change the powers, preferences or special rights of one or more series of the
class so as to affect them adversely, but would not so affect the entire class,
then only the shares of the series so affected by the amendment would be
entitled to vote thereon separately as a class. The TCI Music Charter does not
provide for cumulative voting in elections of directors of TCI Music. Under the
TCI Music Bylaws directors may be elected by a plurality of the votes of shares
present in person or represented by proxy at the meeting and entitled to vote on
the election of directors.
Conversion. Each share of Series B Common Stock is convertible at any time,
at the option of its holder, into one share of Series A Common Stock. The Series
A Common Stock is not convertible into TCI Music Series B Common Stock.
Dividends. Subject to the preferential rights of the holders of outstanding
shares of any series of TCI Music Preferred Stock, dividends may be paid on TCI
Music Common Stock as determined by the TCI Music Board out of funds of TCI
Music legally available therefor under the DGCL. Except for dividends declared
or paid as described below under "--Share Distributions," any dividends paid on
the Series A Common Stock or the Series B Common Stock will be paid only on both
series, in equal amounts per share.
The TCI Music Board will determine its dividend policy with respect to TCI
Music Common Stock based on TCI Music's results of operations, financial
condition, capital requirements and other circumstances, including restrictions
that may be contained in agreements pursuant to which TCI Music may borrow
funds. It
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is the TCI Music Board's present intention to retain cash for the operations of
TCI Music and it is not anticipated that cash dividends will be paid on TCI
Music Common Stock in the foreseeable future.
Share Distributions. If at any time a distribution paid in Series A Common
Stock or Series B Common Stock or any other securities of TCI Music or of any
other corporation, partnership, limited liability company, trust or other legal
entity ("Person") (hereinafter sometimes called a "share distribution") is to be
made with respect to the Series A Common Stock or Series B Common Stock, such
share distribution will be declared and paid only as follows:
(a) a share distribution consisting of shares of Series A Common Stock
(or Convertible Securities that are convertible into, exchangeable for or
evidence the right to purchase shares of Series A Common Stock) to holders
of Series A Common Stock and Series B Common Stock, on an equal per share
basis; or consisting of shares of Series B Common Stock (or Convertible
Securities that are convertible into, exchangeable for or evidence the
right to purchase shares of Series B Common Stock) to holders of Series A
Common Stock and Series B Common Stock, on an equal per share basis; or
consisting of shares of Series A Common Stock (or Convertible Securities
that are convertible into, exchangeable for or evidence the right to
purchase shares of Series A Common Stock) to holders of Series A Common
Stock and, on an equal per share basis, shares of Series B Common Stock (or
Convertible Securities that are convertible into, exchangeable for or
evidence the right to purchase shares of Series B Common Stock) to holders
of Series B Common Stock; or
(b) a share distribution consisting of shares of any class or series
of security of TCI Music or any other Person other than Series A Common
Stock or Series B Common Stock (or Convertible Securities that are
convertible into, exchangeable for or evidence the right to purchase shares
of Series A Common Stock or Series B Common Stock), either on the basis of
a distribution of identical securities, on an equal per share basis, to
holders of Series A Common Stock and Series B Common Stock or on the basis
of a distribution of one class or series of securities to holders of Series
A Common Stock and another class or series of securities to holders of
Series B Common Stock, provided that the securities so distributed (and, if
applicable, the securities into which the distributed securities are
convertible, or for which they are exchangeable, or which the distributed
securities evidence the right to purchase) do not differ in any respect
other than their relative voting rights and related differences in
designation, conversion and share distribution provisions, with holders of
shares of Series B Common Stock receiving the class or series having the
higher relative voting rights (without regard to whether such rights differ
to a greater or lesser extent than the corresponding differences in voting
rights and related differences in designation, conversion and share
distribution provisions between Series A Common Stock and Series B Common
Stock), provided that if the securities so distributed constitute capital
stock of a Subsidiary of TCI Music, such rights shall not differ to a
greater extent than the corresponding differences in voting rights,
designation, conversion and share distribution provisions between Series A
Common Stock and Series B Common Stock, and provided in each case that such
distribution is otherwise made on an equal per share basis.
The term "Convertible Securities" is defined in the TCI Music Charter as
any securities of TCI Music (other than any series of TCI Music Common Stock)
that are convertible into, exchangeable for or evidence the right to purchase
any shares of any series of TCI Music Common Stock, whether upon conversion,
exercise, exchange, pursuant to anti-dilution provisions of such securities or
otherwise. As used in the TCI Music Charter, the term "Subsidiary" means, when
used with respect to any Person, (i) a corporation in which such Person and/or
one or more Subsidiaries of such Person, directly or indirectly, owns capital
stock having a majority of the voting power of such corporation's capital stock
to elect directors under ordinary circumstances, and (ii) any other Person
(other than a corporation) in which such Person and/or one or more Subsidiaries
of such Person, directly or indirectly, has (x) a majority ownership interest or
(y) the power to elect or direct the election of a majority of the members of
the governing body of such first-named Person. The TCI Music Charter provides
that TCI Music shall not reclassify, subdivide or combine the Series A Common
Stock without reclassifying, subdividing or combining the Series B Common Stock,
on an equal per share basis, and TCI Music shall not reclassify, subdivide or
combine Series B Common Stock without reclassifying, subdividing or combining
the Series A Common Stock, on an equal per share basis.
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Liquidation Rights. In the event of a liquidation, dissolution or winding
up of TCI Music, whether voluntary or involuntary, after payment or provision
for payment of the debts and other liabilities of TCI Music and subject to the
preferential rights, if any, of holders of any then outstanding shares of any
series of TCI Music preferred stock, holders of shares of Series A Common Stock
and holders of shares of Series B Common Stock would be entitled to share
ratably in all assets of TCI Music available for distribution to holders of TCI
Music Common Stock. Neither a consolidation, merger, nor sale of assets will be
construed to be a "liquidation," "dissolution" or "winding up" of TCI Music.
No Preemptive Rights. Holders of TCI Music Common Stock have no preemptive
rights to subscribe for or purchase additional shares of capital stock or other
obligations or securities convertible into or exercisable for shares of capital
stock that may hereafter be issued by TCI Music.
The Series A Common Stock is currently quoted on the Nasdaq SmallCap
Market; however no assurances can be made with respect to its continued
quotation. The Bank of New York is the transfer agent for each class of TCI
Music capital stock.
TCI MUSIC PREFERRED STOCK
TCI Music is authorized to issue up to 5,000,000 shares of preferred stock,
par value $.01 per share ("TCI Music Preferred Stock"). The TCI Music Preferred
Stock may be divided and issued in one or more series from time to time as
determined by the TCI Music Board, without further shareholder approval. The TCI
Music Board is authorized to establish, by resolution, the number of shares of
each series, the powers, designations, preferences and relative, participating,
optional or other rights of each such series, and the qualifications,
limitations, or restrictions thereof. All shares of any one series of TCI Music
Preferred Stock are required to be alike in every particular. Except to the
extent otherwise provided in the resolution or resolutions providing for the
issue of any series of TCI Music Preferred Stock, the holders of shares of such
series will have no voting rights except as may be required by Delaware law.
As of the date of this Proxy Statement/Prospectus no shares of TCI Music
Preferred Stock have been issued; however the TCI Music Board has authorized the
creation of the Music Series A Preferred Stock and the issuance of an amount
estimated to not exceed 2,250,000 shares of Music Series A Preferred Stock to
holders of BOX Common Stock in connection with the Merger. The certificates for
the shares of Music Series A Preferred Stock issued in the Merger will bear a
legend indicating that shares of Series A Common Stock issued upon conversion of
shares of Music Series A Preferred Stock will not be tradable on the Nasdaq
SmallCap Market under the symbol "TUNE" until the TCI Rights terminate or
expire. See "CONTROL BY TCI; ARRANGEMENTS BETWEEN TCI AND TCI MUSIC -- TCI
Rights." A summary of the rights, privileges and preferences of the Music Series
A Preferred Stock follows.
MUSIC SERIES A PREFERRED STOCK
Dividends. Subject to the rights of holders of senior securities and to any
restrictions set forth in any security or debt instrument, the holders of Music
Series A Preferred Stock will be entitled to receive cash dividends on each
share of Music Series A Preferred Stock in an amount equal to the product of (i)
the amount of the cash dividend declared on one share of Series A Common Stock
or any other security into which the shares of Music Series A Preferred Stock
are then convertible and (ii) the number of shares of Series A Common Stock or
other security into which one share of Music Series A Preferred Stock may be
converted as of the date such dividend is declared. Such dividends shall be
payable to holders of Music Series A Preferred Stock only if, as and when the
TCI Music Board declares cash dividends on Series A Common Stock. If TCI Music
is prohibited from paying the full dividends which have been declared to holders
of Music Series A Preferred Stock, the amount that is available will be
distributed among the holders of Music Series A Preferred Stock ratably in
proportion to the full amounts to which they would otherwise be entitled.
Liquidation. Upon any liquidation, dissolution or winding up (or a deemed
liquidation by virtue of a change in control or a sale of all or substantially
all of the assets of TCI Music) of TCI Music, subject to the prior payment in
full of amounts to which any senior securities are entitled, holders of Music
Series A
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Preferred Stock are entitled only to the liquidation value of their shares to be
paid pari passu with payments to holders of parity securities. The liquidation
value per share of Music Series A Preferred Stock will be equal to three times
the average of the average daily bid and asked prices of one share of Series A
Common Stock for a period of 20 consecutive trading days ending on the third
trading day prior to the Closing, to be increased each year by the greater of
(i) the percentage increase in the CPI over the prior year (but not to exceed
5%) and (ii) 3%. If upon liquidation the assets of TCI Music to be distributed
among the holders of the Music Series A Preferred Stock and of parity securities
are insufficient to permit payment in full, then the entire assets of TCI Music
to be distributed to such holders will be distributed ratably among such holders
based upon the amounts to which such holders would otherwise be entitled. TCI
Music shall mail written notice of any liquidation to each record holder of
Music Series A Preferred Stock not less than 20 days prior to the payment date
stated in such written notice. Holders of Music Series A Preferred Stock shall
have the right to convert their shares to Series A Common Stock on the business
day immediately preceding the date of liquidation.
Conversion. Shares of Music Series A Preferred Stock may be converted by
the holder thereof at any time in whole or in part, in the manner described
below, into shares of Series A Common Stock at the conversion rate of three
shares of Series A Common Stock for one share of Music Series A Preferred Stock,
subject to certain anti-dilution adjustments and adjustments for dividends and
distributions, if any (the "Conversion Rate"). The Conversion Rate in effect
immediately prior to the opening of business on the Record Date for a dividend
or distribution or the effective date of a subdivision, combination or
reclassification will be adjusted so that the holder of each share of Music
Series A Preferred Shares thereafter surrendered for conversion will be entitled
to receive the number and kind of shares of capital stock of TCI Music that each
such holder would have owned or been entitled to receive immediately following
such action had such shares of Music Series A Preferred Stock been converted
immediately prior to such time. In case of any reclassification or change in the
Series A Common Stock or in case of any consolidation or merger of TCI Music,
TCI Music will provide each holder of a share of Music Series A Preferred Stock
with the right thereafter to convert such share into the kind and amount of
consideration that such holder would have owned immediately after such
reclassification, consolidation or merger, and the holders of Music Series A
Preferred Stock will then have no other conversion rights. The Series A Common
Stock into which the Music Series A Preferred Stock issuable in the Merger is
convertible will not have associated TCI Rights. See "THE MERGER
AGREEMENT -- Consideration to be Received in the Merger," "CONTROL BY TCI;
ARRANGEMENTS BETWEEN TCI AND TCI MUSIC -- TCI Rights," "RISK
FACTORS -- Termination of TCI Rights; Potential Decrease in Price of Series A
Common Stock" and "-- Nasdaq Listing and Maintenance Requirements; Absence of
Trading Market."
Whenever the Conversion Rate is adjusted, TCI Music must mail a notice to
all holders of Music Series A Preferred Shares describing the adjustment and the
reasons for it. TCI Music may, but is not required to, adjust the Conversion
Rate if such adjustment would require an increase or decrease of less than 1% in
the conversion rate; provided, however, that any adjustments like these which
are not made shall be carried forward and taken into account in any subsequent
adjustment. TCI Music will give notice to the holders of Music Series A
Preferred Stock at least 20 days prior to the Record Date for any dissolution,
capital reorganization or reclassification of the Series A Common Stock, any
consolidation or merger to which TCI Music is a party, any sale or other
transfer of all or substantially all of the assets of TCI Music, or any action
taken by TCI Music which would require an adjustment in the Conversion Rate.
In order to convert Music Series A Preferred Stock, a holder must surrender
the certificate for such stock to TCI Music or its transfer agent, endorse the
certificate if TCI Music so requests, make a written request that it elects to
convert the shares represented by the certificate, and state the name in which
the holder wishes the certificates for Series A Common Stock to be issued. TCI
Music will, as soon as practicable following such notice of election to convert
Music Series A Preferred Stock, issue and deliver to the holder a certificate or
certificates for the number of full shares of Series A Common Stock to which
such holder shall be entitled, together with cash in lieu of any fraction of a
share. If surrendered certificates for Music Series A Preferred Stock are
converted only in part, TCI Music will issue and deliver to the holder a new
certificate representing the unconverted shares. TCI Music is not required to
convert any Music Series A Preferred Shares while its corporate transfer books
are closed for any purpose.
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TCI Music is obligated to keep on reserve such number of shares of Series A
Common Stock as would be issuable upon the conversion of all outstanding shares
of Music Series A Preferred Stock. Upon conversion and receipt of the Music
Series A Preferred Stock, TCI Music will retire such shares and restore them to
the status of authorized and unissued shares of preferred stock.
Redemption. TCI Music may, at its option, redeem, at the liquidation value,
all or part of the shares of Music Series A Preferred Stock ratably among the
holders of such shares by giving written notice to such holders (i) during the
30 day periods immediately following the fourth, sixth and eighth anniversaries
of the issue date of the Music Series A Preferred Stock, (ii) at any time after
the closing price of the Series A Common Stock exceeds 125% of the purchase
price benchmark for a period of at least 30 consecutive business days and (iii)
at any time after the tenth anniversary of the issue date. Holders of Music
Series A Preferred Stock may require TCI Music to redeem, at the liquidation
value, all or part of their shares at any time after the tenth anniversary of
the issue date by giving written notice to TCI Music stating the number of
shares such holder elects to redeem. If there are insufficient funds available
for redemption purposes, all available funds will be used to redeem the maximum
possible number of shares ratably among those holders requiring shares to be
redeemed, including shares of parity securities required to be redeemed.
If a holder mails the stipulated written notice and the consideration
necessary for redemption is available for the redemption, then on and after the
close of business on the redemption date, the shares called for redemption and
all rights with respect to the shares of Music Series A Preferred Stock will
cease. Shares of TCI Music redeemed by TCI Music will then be retired and
restored to the status of authorized and unissued shares.
If TCI Music fails to redeem all shares of Music Series A Preferred Stock
required by the holders to be redeemed on a certain date, TCI Music will not
redeem, or discharge any sinking fund obligation with respect to, any parity
securities or junior securities, until all outstanding shares of Music Series A
Preferred Stock and parity securities are redeemed, and shall not purchase or
otherwise acquire any Music Series A Preferred Stock, parity securities or
junior securities.
Voting Rights. Holders of Music Series A Preferred Stock are entitled to
vote on all matters submitted to a vote of the holders of Series A Common Stock.
Each share of Music Series A Preferred Stock entitles the holder to a number of
votes equal to the number of shares of Series A Common Stock into which such
share is convertible as of the Record Date for the matter to be voted upon.
Amendment. Consent of the holders of shares of Music Series A Preferred
Stock representing a majority of the voting power of all such outstanding shares
is required to amend or modify the designation and rights of such shares.
Preemptive Rights. Holders of Music Series A Preferred Stock will not have
any preemptive right to purchase any class of securities issued by TCI Music
after the Music Series A Preferred Stock issue date.
TCI Music has applied for quotation of the Music Series A Preferred Stock
on the Nasdaq SmallCap Market and has received conditional approval for such
listing. Although TCI Music believes that it will receive final approval from
Nasdaq, no assurances can be given that such final approval will be obtained or
that an active trading market will develop or, if one does develop, that it will
be maintained. For a complete description of the Music Series A Preferred Stock,
see the Certificate of Designations included as Appendix II to this Proxy
Statement/Prospectus.
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COMPARISON OF SHAREHOLDERS' RIGHTS
Upon consummation of the Merger, shareholders of BOX Common Stock will
become stockholders of TCI Music, a Delaware corporation, which will result in
their rights as stockholders being governed by the DGCL, the TCI Music Charter
and the TCI Music Bylaws. The holders of BOX Preferred Stock will remain
shareholders of the Surviving Corporation. Their rights as shareholders will
continue to be governed by the FBCA and the BOX Charter, the bylaws of
Acquisition Sub will become the bylaws of the Surviving Corporation and no
material changes are expected to occur in the rights of holders of BOX Preferred
Stock. Accordingly, the description under the subheading "The BOX" under each of
the headings below will continue to apply to BOX stockholders after the Merger.
See "SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT OF TCI MUSIC
AND THE BOX -- Security Ownership of the BOX."
The following is a summary of certain provisions affecting, and significant
differences between the rights of holders of BOX Common Stock and those of
holders of Music Series A Preferred Stock. The following summary of the TCI
Music Charter and the TCI Music Bylaws is qualified in its entirety by reference
to such documents and to the DGCL and the FBCA. See "AVAILABLE INFORMATION."
AUTHORIZED CAPITAL STOCK
The BOX. The BOX's authorized capitalization consists of 40,000,000 shares
of BOX Common Stock, 200,000 shares of 8% convertible preferred stock, $1.00 par
value per share (the "BOX 8% Preferred Stock"), and 1,800,000 shares of BOX
Preferred Stock. As of the date of this Proxy Statement/Prospectus, no shares of
BOX 8% Preferred Stock had been issued. Pursuant to the Capitalization
Amendment, the number of authorized shares of BOX Common Stock will be increased
from 40,000,000 shares to 100,000,000 shares.
TCI Music. TCI Music's authorized capitalization consists of a total of
495,000,000 shares of Common Stock, 295,000,000 of which are Series A Common
Stock and 200,000,000 of which are Series B Common Stock, and 5,000,000 shares
of TCI Music Preferred Stock, of which an amount estimated not to exceed
2,250,000 shares will be designated as Music Series A Preferred Stock in
connection with the Merger.
VOTING
The BOX. Each share of BOX Common Stock, BOX 8% Preferred Stock and BOX
Preferred Stock entitles the holder to one vote on each matter presented to
shareholders for vote. Except as required by the FBCA, the holders of BOX Common
Stock, BOX 8% Preferred Stock and BOX Preferred Stock vote together as a single
class. The BOX Bylaws provide that the presence, in person or by proxy, of the
holders of a majority of the shares entitled to be cast by the shareholders
entitled to vote shall constitute a quorum for the transaction of business.
TCI Music. Each share of Series B Common Stock entitles the holder to ten
votes and each share of Series A Common Stock entitles the holder to one vote on
each matter presented to stockholders. Each share of TCI Music Preferred Stock
entitles the holder to one vote for each share of Series A Common Stock into
which such share of TCI Music Preferred Stock is convertible. Accordingly, each
share of Music Series A Preferred Stock entitles the holder to three votes on
each matter presented to shareholders, subject to certain antidilution
adjustments. Except as required by the DGCL, the holders of Series A Common
Stock, Series B Common Stock and Music Series A Preferred Stock vote together as
a single class. The TCI Music Bylaws provide that, subject to the rights of the
holders of any class or series of TCI Music Preferred Stock and except as
otherwise provided by law or in the TCI Music Charter, the presence, in person
or by proxy, of the holders of a majority of the total voting power of the
outstanding shares of capital stock of TCI Music Voting Stock entitled to vote
at the meeting is necessary to constitute a quorum at such meeting for the
transaction of any business.
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SPECIAL MEETING OF SHAREHOLDERS
The BOX. The BOX Bylaws provide that a special meeting of shareholders may
be called at any time by the President of the BOX or the BOX Board, and shall be
called by the President of the BOX upon the written request of the holders of
not less than 10% of the BOX Voting Stock.
TCI Music. The TCI Music Charter and TCI Music Bylaws provide that a
special meeting of stockholders shall be held at any time, subject to the rights
of the holders of any series of TCI Music Preferred Stock, upon the call of the
Secretary of TCI Music (a) upon the written request of the holders of not less
than 66 2/3% of the total voting power of the TCI Music Voting Stock or (ii) at
the request of at least 75% of the members of the TCI Music Board then in
office.
DIRECTORS
The BOX. The BOX Charter and BOX Bylaws provide that the BOX Board shall
consist of not less than three directors elected for a one-year term at each
annual meeting of shareholders. The number of directors shall be determined from
time to time by resolution of the BOX Board. The BOX Board is currently
comprised of 10 directors. Shareholders of the BOX do not have cumulative voting
rights.
TCI Music. The TCI Music Charter provides for a Board of Directors of not
less than three members, divided into three classes of approximately equal size,
with each class to be elected for a three-year term at each annual meeting of
stockholders. The TCI Music Charter provides that the exact number of directors
shall be fixed by the Board of Directors by resolution. The TCI Music Bylaws
provide that the Board of Directors, by resolution adopted by the affirmative
vote of at least 75% of the members of the Board of Directors then in office,
may increase or decrease the number of directors, provided that any decrease in
the number of directors shall not shorten the term of any incumbent director.
The current number of directors comprising the TCI Music Board is seven.
Stockholders of TCI Music do not have cumulative voting rights.
REMOVAL OF DIRECTORS
The BOX. The BOX Charter provides that directors may only be removed for
cause within one year of the event constituting cause by the affirmative vote of
(i) the holders of at least a majority of the then outstanding shares of BOX
Voting Stock; or (ii) at least a majority of the total number of directors. The
BOX Charter provides that "cause" for removal exists, except as may be provided
by law, only if: (i) the director whose removal is proposed has been convicted
of a felony by a court of competent jurisdiction; or (ii) such director has been
adjudicated by a court of competent jurisdiction to be liable for negligence or
misconduct in the performance of his duty to the BOX in a matter of substantial
importance to the BOX and such adjudication is no longer subject to direct
appeal.
TCI Music. The TCI Music Charter provides that, subject to the rights of
the holders of any series of TCI Music Preferred Stock, directors may be removed
only for cause upon the affirmative vote of the holders of at least 66 2/3% of
the total voting power of the outstanding shares of TCI Music Voting Stock,
voting together as a single class. The TCI Music Charter provides that "cause"
for removal exists if: (i) the director whose removal is proposed has been
convicted, or has been granted immunity to testify where another has been
convicted, of a felony, by a court of competent jurisdiction and such conviction
is no longer subject to direct appeal; (ii) such director has become mentally
incompetent, whether or not so adjudicated, which mental incompetence directly
affects his ability as a director, as determined by at least 66 2/3% of the
members of the TCI Music Board then in office (other than such director); or
(iii) such director's actions or failure to act have been determined by 66 2/3%
of the members of the TCI Music Board then in office (other than such director)
to be in derogation of such director's duties.
VACANCIES ON THE BOARD OF DIRECTORS
The BOX. The BOX Charter and BOX Bylaws provide that any vacancies on the
BOX Board resulting from death, resignation, retirement, removal or otherwise
may be filled by the affirmative vote of a majority of the remaining directors
then in office, though less than a quorum of the BOX Board, or by the
affirmative vote
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of the holders of at least a majority of the shares present and entitled to vote
at any meeting held during the existence of such vacancy, provided the filling
of such vacancy is included in the BOX's proxy material for the meeting. The BOX
Charter and BOX Bylaws provide that newly created directorships resulting from
any increase in the number of directors may be filled by the affirmative vote of
a majority of the directors then in office. Such directors will serve until the
next annual meeting of shareholders and until his successor shall have been
elected and qualified, or his death, resignation or removal.
TCI Music. The TCI Music Charter provides that any newly created
directorship resulting from an increase in the number of directors and any
vacancies on the TCI Music Board caused by death, resignation, removal,
disqualification or other cause, may be filled by the affirmative vote of a
majority of the remaining directors then in office, although less than a quorum,
or by the sole remaining director. Such directors will serve for the remainder
of the full term of the class for which such director was chosen and until his
successor shall have been elected and qualified.
ANTI-TAKEOVER STATUTE; MERGERS, CONSOLIDATIONS AND SALES OF ASSETS
FBCA Anti-Takeover Statute. FBCA Section 607.0901, in general, requires an
"affiliated transaction" with an "interested shareholder" to be approved by the
affirmative vote of the holders of two-thirds of the voting shares other than
the shares beneficially owned by the interested shareholder, unless (i) the
affiliated transaction has been approved by a majority of the disinterested
directors; (ii) the corporation has not had more than 300 shareholders of record
at any time during the 3 years preceding the announcement date; (iii) the
interested shareholder has been the beneficial owner of at least 80% of the
corporation's outstanding voting shares for at least 5 years preceding the
announcement date; (iv) the interested shareholder is the beneficial owner of at
least 90% of the outstanding voting shares of the corporation, exclusive of
shares acquired directly from the corporation in a transaction not approved by a
majority of the disinterested directors; (v) the corporation is an investment
company registered under the Investment Company Act of 1940; or (vi) in the
affiliated transactions, consideration shall be paid to the holders of each
class or series of voting shares and certain conditions are met, as set forth in
Section 607.0901(4)(f).
The term "affiliated transaction" is defined to include, among other
transactions between the interested shareholder or any affiliate or associate of
the interested shareholder and the corporation or any director or indirect
majority-owned subsidiary thereof: (i) any merger or consolidation; (ii) any
sale, lease, exchange, mortgage, pledge, transfer, or other disposition (in one
transaction or a series of transactions) of assets having: (a) an aggregate fair
market value equal to 5% or more of the aggregate fair market value of all
assets, determined on a consolidated basis, of the corporation; (b) an aggregate
fair market value equal to 5% or more of the aggregate fair market value of all
the outstanding shares of the corporation; or (c) 5% or more of the earning
power or net income, determined on a consolidated basis, of the corporation;
(iii) the issuance or transfer by the corporation or any subsidiary of the
corporation of any shares of the corporation or any subsidiary of the
corporation, which have an aggregate fair market value equal to 5% or more of
the aggregate fair market value of all the outstanding shares of the corporation
to the interested shareholder or an affiliate or associate of the interested
shareholder except pursuant to the exercise of warrants or rights to purchase
stock offered, or a dividend or distribution paid or made, pro rata to all
shareholders of the corporation; (iv) the adoption of any plan or proposal for
the liquidation or dissolution of the corporation proposed by or with the
interested shareholder or any affiliate or associate of the interested
shareholder; (v) certain transactions that would increase the interested
shareholder's proportionate share ownership of the outstanding voting shares of
the corporation or such subsidiary by more than 5%; or (vi) any receipt by the
interested shareholder or any affiliate or associate of the interested
shareholder of the benefit, directly or indirectly (except proportionately as a
shareholder of the corporation), of any loans, advances, guaranties, pledges, or
other financial assistance or any tax credits or other tax advantages provided
by or through the corporation. An "interested shareholder" of a corporation is
defined, subject to certain exceptions, as any person who is the beneficial
owner of more than 10% of the outstanding shares of the corporation. An
"affiliate" is defined as a person who directly, or indirectly through one or
more intermediaries, controls or is controlled by, or is under common control
with, a specified person. The term "associate" means any entity, other than the
corporation or any of its subsidiaries, of which such person is an officer,
director, or partner or is, directly or indirectly, the beneficial owner of 10%
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or more of any class of voting shares; any trust or other estate in which such
person has a substantial beneficial interest or as to which such person serves
as trustee or in a similar fiduciary capacity; and any relative or spouse of
such person, or any relative of such spouse, who has the same home as such
person or who is an officer or director of the corporation or any of its
affiliates. A person is deemed to be a "beneficial owner" of voting shares as to
which such person and such person's affiliates and associates, individually or
in the aggregate, have or share directly or indirectly: (i) voting power, which
includes the power to vote or to direct the voting of the voting shares; (ii)
investment power, which includes the power to dispose of or to direct the
disposition of the voting shares; or (iii) the right to acquire the voting power
or investment power, whether such right is exercisable immediately or only after
the passage of time, pursuant to any contract, arrangement, or understanding,
upon the exercise of conversion rights, exchange rights, warrants, or options,
or otherwise; however, in no case shall a director of the corporation be deemed
to be the beneficial owner of voting shares beneficially owned by another
director of the corporation solely by reason of actions undertaken by such
persons in their capacity as directors of the corporation.
Section 607.0901 does not apply to a Florida corporation which has, through
its original articles of incorporation, expressly elected not to be governed by
Section 607.0901 or "opted out" of coverage under Section 607.0901 by amending
its articles of incorporation or bylaws to that effect in accordance with
Section 607.0901. Section 607.0901 also does not apply to any affiliated
transaction of the corporation with an interested shareholder which became an
interested shareholder inadvertently, if such interested shareholder, as soon as
practicable, divests itself of a sufficient amount of the voting shares of the
corporation so that it no longer is the beneficial owner of 10% or more of the
outstanding voting shares of the corporation, and would not at any time within
the 5-year period preceding the announcement date with respect to such
affiliated transaction have been an interested shareholder but for such
inadvertent acquisition. Any corporation that elected not to be governed by
Section 607.0901, either through a provision in its original articles of
incorporation or through an amendment to its articles of incorporation or bylaws
may elect to be bound by Section 607.0901 by adopting an amendment to its
articles of incorporation or bylaws that repeals the original article or the
amendment.
DGCL Anti-Takeover Statute. DGCL Section 203, in general, prohibits certain
forms of "business combinations" with an "interested shareholder" within three
years of the date such person became an "interested shareholder," unless (i)
prior to such date the board of directors of the corporation approved either the
business combination or the transaction which resulted in the shareholder
becoming an interested shareholder, (ii) upon consummation of the transaction
which resulted in the shareholder becoming an interested shareholder, the
interested shareholder owned at least 85% of the voting stock of the corporation
outstanding at the time the transaction commenced, exclusive of shares owned by
officers, directors and by certain employee stock plans, or (iii) on or after
such date, the business combination is approved by the board of directors and
authorized at a shareholders' meeting by the affirmative vote of at least
66 2/3% of the outstanding voting stock that is not owned by the interested
shareholder.
An "interested shareholder" of a corporation is defined, subject to certain
exceptions, as any person or entity (and any affiliate or associate of such
person or entity) that (i) is the owner (as defined in Section 203) of 15% or
more of the outstanding voting stock of the corporation; or (ii) is an affiliate
or associate of the corporation and, at any time within the three-year period
immediately prior to the date of determination, was the owner of 15% or more of
the outstanding shares of voting stock of the corporation. The term "business
combination" is defined to include, among other transactions between the
interested shareholder and the corporation or any direct or indirect
majority-owned subsidiary thereof: a merger or consolidation; a sale, pledge,
transfer or other disposition (including as part of a dissolution) of assets
having an aggregate market value equal to 10% or more of either the aggregate
market value of all assets of the corporation on a consolidated basis or the
aggregate market value of all the outstanding stock of the corporation; certain
transactions that would increase the interested shareholder's proportionate
share ownership of the stock of any series of the corporation or such
subsidiary; and any receipt by the interested shareholder of the benefit of any
loans, advances, guarantees, pledges or other financial benefits provided by or
through the corporation or any such subsidiary. The term "owner" is broadly
defined to include any person that individually or with or through his or its
affiliates or associates, among other things, beneficially owns such stock, or
has the right to
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acquire such stock (whether such right is exercisable immediately or only after
the passage of time) pursuant to any agreement or understanding or upon the
exercise of warrants or options or otherwise or has the right to vote or direct
the vote of such stock pursuant to any agreement or understanding, or has an
agreement or understanding with the beneficial owner of such stock for the
purpose of acquiring, holding, voting or disposing of such stock.
Section 203 applies automatically to Delaware corporations (other than
corporations which do not have a class of voting stock that is listed on a
national securities exchange, authorized for quotation with a registered
national securities association, or held of record by more than 2,000
shareholders) unless the corporation's original certificate of incorporation
contains a provision expressly electing not to be governed by Section 203 or the
corporation has "opted out" of coverage under Section 203 by amending its
certificate of incorporation or bylaws to that effect in accordance with Section
203. A Delaware corporation which is not automatically covered by Section 203
may, however, "opt in" to such coverage by including in its original certificate
of incorporation or any amendment thereto a provision in which the corporation
elects to be governed by Section 203.
The BOX. Section 607.0901 of the FBCA automatically applies to the BOX,
since neither the BOX Charter nor the BOX Bylaws contains any provision "opting
out" of the application of FBCA Section 607.0901. As a result, the provisions of
Section 607.0901 apply to transactions between the BOX and any of its respective
"interested shareholders." In addition, the BOX Charter requires the affirmative
vote of the holders of at least 75% of the then-outstanding shares of capital
stock of the BOX entitled to vote generally in the election of directors, voting
together as a single class, to approve (i) any sale, lease, exchange, mortgage,
pledge, transfer or other disposition by the BOX of all or substantially all of
its assets; (ii) the adoption of any plan or proposal for the liquidation,
dissolution or winding up of the BOX; or (iii) any reclassification of
securities or recapitalization of the BOX, or any merger or consolidation of the
BOX.
TCI Music. Section 203 of the DGCL applies to TCI Music, since the TCI
Music Charter does not contain any provision "opting out" of the application of
DGCL Section 203. As a result, the provisions of Section 203 are applicable to
transactions between TCI Music and any of its respective "interested
shareholders."
The TCI Music Charter requires, subject to the rights, if any, of any
series of preferred stock of TCI Music, the affirmative vote of the holders of
at least 66 2/3% of the total voting power of the then outstanding shares of TCI
Music Voting Stock, voting together as a single class, to approve (i) a merger
or consolidation of TCI Music with, or into, another corporation, other than a
merger or consolidation which does not require the consent of shareholders under
the DGCL or a merger or consolidation which has been approved by at least 75% of
the members of the TCI Music Board (in which case, in accordance with the DGCL,
the affirmative vote of a majority of the total voting power of the outstanding
TCI Music Voting Stock would be required for approval), (ii) the sale, lease or
exchange of all or substantially all of the property and assets of TCI Music or
(iii) the dissolution of TCI Music.
AMENDMENTS TO CERTIFICATE OF INCORPORATION
The BOX. The BOX Charter provides that the affirmative vote of the holders
of at least 67% of the shares of the BOX capital stock then entitled to vote in
the election of directors is required to amend, alter or repeal or to adopt any
provision inconsistent with Article VI of the BOX Charter. The BOX Charter also
provides that the affirmative vote of the holders of at least 75% of the shares
of the BOX capital stock then entitled to vote in the election of directors is
required to amend, alter or repeal, or to adopt any provision inconsistent with
Article IX of the BOX Charter. The FBCA provides that, except in certain
circumstances, a class vote will be required if such amendment would adversely
affect the rights of the holders of such class.
TCI Music. The TCI Music Charter requires the affirmative vote of 66 2/3%
of the total voting power of the outstanding shares of TCI Music Voting Stock,
voting together as a single class, to approve any amendment, alteration or
repeal of any provision of the TCI Music Charter or the addition or insertion of
other provisions therein.
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AMENDMENTS TO BYLAWS
The BOX. The BOX Bylaws provide that they may be repealed, altered or
amended by the affirmative vote of a majority of the BOX Board to the full
extent permitted by law or by the affirmative vote of a majority of the holders
of outstanding BOX Voting Stock present in person or by proxy at any meeting of
the shareholders called for that purpose.
TCI Music. The TCI Music Charter and TCI Music Bylaws require (a) the
affirmative vote of 66 2/3% of the total voting power of the outstanding TCI
Music Voting Stock, voting together as a single class, or (b) the affirmative
vote of not less than 75% of the members of the TCI Music Board then in office,
to approve the adoption, amendment or repeal of any provisions of the TCI Music
Bylaws.
LIMITATION OF LIABILITY OF DIRECTORS
The BOX. Neither the BOX Charter nor the BOX Bylaws contains a provision
that limits a director's liability. The FBCA provides that a director is not
personally liable for monetary damages to the corporation or any other person
unless (i) the director breached or failed to perform his duties as director;
and (ii) the director's breach of, or failure to perform, those duties
constitutes: (a) a criminal violation; (b) a transaction resulting in the
derivation by such person of an improper personal benefit; (c) a circumstance
under which such person is liable for unlawful distributions; (d) conscious
disregard for the best interest of the corporation, or willful misconduct; or
(e) recklessness or an act or omission which was committed in bad faith or with
malicious purpose or in a manner exhibiting wanton and willful disregard of
human rights, safety or property.
TCI Music. The TCI Music Charter contains a provision that limits a
director's liability to the full extent permitted by Delaware law. Under
Delaware law, a corporation may include in its certificate of incorporation a
provision that would, subject to the limitations described below, eliminate or
limit the personal liability of directors to the corporation or its stockholders
for monetary damages for breach of fiduciary duty as a director, provided that
such provision may not eliminate or limit the liability of a director (i) for
any breach of a director's duty of loyalty to the corporation or its
stockholders, (ii) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) for unlawful payment
of a dividend or an unlawful stock purchase or redemption, or (iv) resulting in
the receipt by such person of an improper personal benefit.
APPRAISAL RIGHTS
Any shareholder of record of the BOX entitled to vote on the Merger
Agreement who objects to the Merger may, as an alternative to receiving the
Merger Consideration in the case of holders of BOX Common Stock or as an
alternative to becoming a shareholder of the Surviving Corporation in the case
of holders of BOX Preferred Stock, demand appraisal of his or her BOX Voting
Stock pursuant to Sections 607.1301, 607.1302 and 607.1320 of the FBCA (the
"Appraisal Sections") (a copy of which is included as Appendix IV hereto) by
demanding in writing that he or she be paid, in cash, the fair value of his or
her BOX Voting Stock.
Any shareholder contemplating the exercise of such right to demand
appraisal should carefully review the Appraisal Sections, particularly the
procedural steps required to perfect the right of appraisal. A shareholder who
fails to comply with these procedural requirements may lose his or her right of
appraisal. A BOX shareholder who loses his or her right of appraisal will
receive the Merger Consideration for his or her BOX Voting Stock.
Set forth below, to be read in conjunction with the full text of the
Appraisal Sections included as Appendix IV hereto, is a summary of the
procedures relating to the exercise of a right of appraisal. The following
summary does not purport to be complete and is qualified in its entirety by
reference to Appendix IV. For purposes of the following summary, references to
the "Company" in this section only, mean the BOX before the Merger and the
Surviving Corporation after the Merger.
A shareholder of record who desires to exercise his or her appraisal rights
under the Appraisal Sections must satisfy all of the conditions. A written
intent to demand payment for his or her shares if the
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proposed Merger Agreement is consummated must be delivered to the Company before
the taking of the vote on the Merger Agreement. This demand must be in addition
to and separate from any proxy or vote against the Merger Agreement. Voting
against or failing to vote on the Merger Agreement will not constitute a demand
for appraisal under the Appraisal Sections. The FBCA defines "shareholder" as
one who is a holder of record of shares in a corporation or the beneficial owner
of shares to the extent of the rights granted by a nominee certificate on file
with a corporation.
Shareholders electing to exercise their appraisal rights under the
Appraisal Sections must not vote for adoption of the Merger Agreement.
Within 10 days after the shareholders' authorization date, the Surviving
Corporation (as successor to the BOX following the Merger) will give written
notice of such adoption of the Merger Agreement to each shareholder of the BOX
who has filed such a written intent to demand payment for his or her shares.
Within 20 days after the giving of notice to him or her, any shareholder
who elects to dissent must file with the Company a notice of such election,
stating his or her name and address, the number, classes, and series of shares
as to which he or she dissents, and a demand for payment of the fair value of
his or her shares. Any shareholder failing to file such election to dissent
within the period set forth shall be bound by the terms of the proposed Merger
Agreement.
Any shareholder filing an election to dissent shall deposit his or her
certificates for certificated shares with the Company simultaneously with the
filing of the election to dissent. The Company may restrict the transfer of
uncertificated shares from the date the shareholder's election to dissent is
filed with the Company.
Upon filing a notice of election to dissent, the shareholder shall
thereafter be entitled only to payment as provided under the Appraisal Sections
and shall not be entitled to vote or to exercise any other rights of a
shareholder. A notice of election may be withdrawn in writing by the shareholder
at any time before an offer is made by the Company to pay for his or her shares.
After such offer, no such notice of election may be withdrawn unless the Company
consents thereto. However, the right of such shareholder to be paid the fair
value of his or her shares shall cease, and he or she shall be reinstated to
have all the rights as a shareholder as of the filing of his or her notice of
election.
Within 10 days after the expiration of the period in which shareholders may
file their notices of election to dissent, or within 10 days after the Merger
Agreement is adopted, whichever is later, the Company shall make a written offer
to each dissenting shareholder who has made demand as provided under the
Appraisal Sections to pay an amount the Company estimates to be the fair value
for such shares.
If within 30 days after the making of such offer any shareholder accepts
the same, payment for his or her shares shall be made within 90 days after the
making of such offer or the consummation of the proposed Merger Agreement,
whichever is later. Upon payment of the agreed value, the dissenting shareholder
shall cease to have any interest in such shares.
If the Company fails to make such an offer within the period specified
under the Appraisal Sections or if it makes the offer and any dissenting
shareholder or shareholders fail to accept the same within 30 days thereafter,
then the corporation, within 30 days after receipt of written demand from any
dissenting shareholder given within 60 days after the date on which such
corporate action was effected, shall, or at its election at any time within such
period of 60 days may, file an action in any Florida court in the county where
the registered office of the corporation is located requesting that the fair
value of such shares be determined. The court shall also determine whether each
dissenting shareholder, as to whom the corporation requests the court to make
such determination, is entitled to receive payment for his or her shares. All
dissenting shareholders, other than shareholders who have agreed with the
Company as to the value of their shares, shall be made parties to the proceeding
as an action against their shares.
All shareholders who are proper parties to the proceeding are entitled to
judgment against the Company for the amount of the fair value of their shares.
The court may, if it so elects, appoint one or more persons as appraisers to
receive evidence and recommend a decision on the question of fair value. The
Company shall pay each dissenting shareholder the amount found to be due him or
her within 10 days after final determination of
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the proceedings. Upon payment of the judgment, the dissenting shareholder shall
cease to have any interest in such shares. The judgment may, at the discretion
of the court, include a fair rate of interest, to be determined by the court.
The costs and expenses of any such proceeding shall be determined by the
court and shall be assessed against the Company, but all or any part of such
costs and expenses may be apportioned and assessed as the court deems equitable
against any or all of the dissenting shareholders who are parties to the
proceeding, to whom the Company has made an offer to pay for the shares, if the
court finds that the action of such shareholders in failing to accept such offer
was arbitrary, vexatious, or not in good faith. If the fair value of the shares,
as determined, materially exceeds the amount which the Company offered to pay
therefor or if no offer was made, the court in its discretion may award to any
shareholder who is a party to the proceeding such sum as the court determines to
be reasonable compensation to any attorney or expert employed by the shareholder
in the proceeding.
Shareholders considering seeking appraisal should bear in mind that the
fair value of their BOX Voting Stock determined under the Appraisal Sections
could be more than, the same as or less than the value of the Series A Common
Stock or the BOX Preferred Stock when the BOX becomes a subsidiary of TCI Music
if they do not seek appraisal of their stock, and that investment banking
opinions as to fairness are not necessarily opinions as to fair value under the
Appraisal Sections.
The statements made in this summary are qualified in their entirety by
reference to Sections 607.1301, 607.1302 and 607.1320 of the FBCA; the
provisions of such sections are technical in nature and complex. IT IS SUGGESTED
THAT ANY HOLDER OF BOX COMMON STOCK OR BOX PREFERRED STOCK WHO DESIRES TO AVAIL
HIMSELF OR HERSELF OF HIS OR HER RIGHT TO DISSENT CONSULT HIS OR HER COUNSEL
BECAUSE FAILURE TO COMPLY STRICTLY WITH THE PROVISIONS OF SECTIONS 607.1301,
607.1302 AND 607.1320 MAY DEFEAT DISSENTERS' RIGHTS.
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MANAGEMENT OF TCI MUSIC
DIRECTORS AND EXECUTIVE OFFICERS
Information regarding each person who is a director or executive officer of
TCI Music is set forth below.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Leo J. Hindery, Jr. ................. 50 Chairman of the Board
Robert R. Bennett.................... 39 Director
Donne F. Fisher...................... 59 Director
Peter M. Kern........................ 30 Director
J.C. Sparkman........................ 65 Director
David B. Koff........................ 38 Director, President and Chief Executive Officer
Lon A. Troxel........................ 50 Director
Stephen M. Brett..................... 57 Vice President and Secretary
</TABLE>
Leo J. Hindery, Jr. was appointed Chairman of the Board of TCI Music
effective January 1997. He was appointed as a director of TCI in May 1997 and
President and Chief Operating Officer of TCI effective March 1, 1997, and was
appointed Director and President of TCIC in March 1997. From 1988 until March
1997, he was the managing general partner, director and Chief Executive Officer
of InterMedia Partners and its affiliated entities. InterMedia Partners is a
multi-system cable television operator. Mr. Hindery was a director of DMX from
May 1996 to July 1997.
Robert R. Bennett was appointed a director of TCI Music effective January
1997 and served as acting Chief Financial Officer from June 1997 until July 11,
1997. He has been an Executive Vice President of TCI and President, Chief
Executive Officer and a director of Liberty since April 1997. From June 1995
through March 1997, he was Executive Vice President, Chief Financial Officer,
Secretary, Treasurer and a director of Liberty. He was Senior Vice President of
Liberty from September 1991 to June 1995 and Vice President of TCIC from 1990
through March 1991 while also holding the titles of Treasurer, Secretary and
Chief Financial Officer of Liberty. Mr. Bennett also serves as a director of BET
Holdings, Inc., a Delaware corporation, which is engaged in the distribution of
certain programming.
Peter M. Kern was appointed a director of TCI Music effective January 1997.
Mr. Kern has served as President of Gemini Associates LLC, a firm that provides
strategic advisory services primarily to media companies, since April 1996. From
December 1993 to January 1996 he served as Senior Vice President of Strategic
Development and Corporate Finance of Home Shopping Network, Inc. and served as
its Vice President of Strategic Development and Assistant to the CEO from March
1993 to December 1993. Prior to joining Home Shopping Network, Inc., he served
as Vice President of Corporate Finance and Strategic Development for Whittle
Communications, L.P. and worked at the New York investment banking firm, Bear,
Stearns & Co., Inc.
Donne F. Fisher was appointed a director of TCI Music effective January
1997. He has served as a director of TCI since 1994 and a director of TCIC since
1980. He served as a director of DMX from May 1996 to July 1997. Mr. Fisher was
Executive Vice President and Treasurer of TCI from January 1994 until January 1,
1996; served as Executive Vice President of TCIC from December 1991 to October
1994; and was previously Senior Vice President of TCIC since 1982 and Treasurer
since 1970. Since January 1, 1996, he has provided consulting services to TCI.
Mr. Fisher also serves as a director of General Communication, Inc. and United
Video Satellite Group, Inc.
J.C. Sparkman was appointed a director of TCI Music effective May 1997. He
has been a director of TCI since December 1996. He served as Executive Vice
President of TCI from January 1994 through March 1995. Mr. Sparkman retired in
March of 1995 and has provided consulting services to TCI since March 1995. He
served as Executive Vice President of TCIC from 1987 to October 1995 and as a
director of DMX from 1989 to July 1997. He also serves as a director of Shaw
Communications, Inc. and United Video Satellite Group, Inc.
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David B. Koff was appointed a director, President and Chief Executive
Officer of TCI Music effective May 1997. He has been Vice President - Corporate
Development of Liberty since August 1994. From March 1993 to August 1994, he was
special counsel to Liberty. From August 1992 to March 1993, he was special
counsel at Brownstein Hyatt Farber & Strickland in Denver. Prior to that, Mr.
Koff was an associate in the Los Angeles office of Latham & Watkins.
Lon A. Troxel was appointed a director of TCI Music effective May 1997. He
was appointed Chief Operating Officer of DMX in April 1997 and served as
Executive Vice President, Commercial Division from April 1994 to April 1997. Mr.
Troxel served as Vice President, U.S./Canada Dealer Sales of AEI Music Networks,
Inc. during 1991. Mr. Troxel was appointed President and Chief Executive Officer
of DMX upon consummation of the DMX Merger on July 11, 1997.
Stephen M. Brett was appointed Vice President, General Counsel and
Secretary of TCI Music in January 1997 and has been a director, Vice President
and Secretary of DMX since July 1997. Mr. Brett has served as Executive Vice
President and Secretary of TCI since January 27, 1994, and as Senior Vice
President and General Counsel of TCIC since December of 1991.
BOARD COMPOSITION
The TCI Music Charter provides for a classified Board of Directors
consisting of not less than three members, with the exact number of directors to
be fixed by resolution of the TCI Music Board from time to time. The TCI Music
Board currently consists of seven members.
Members of the TCI Music Board are elected to staggered three-year terms,
with approximately one-third elected annually. Mr. Fisher, Mr. Sparkman and Mr.
Troxel are the Class I Directors whose terms expire in 1998, Mr. Kern and Mr.
Bennett are the Class II Directors whose terms expire in 1999 and Mr. Koff and
Mr. Hindery are the Class III Directors whose terms expire in 2000. Executive
officers of TCI Music are appointed by and serve at the discretion of the TCI
Music Board. There are no family relations, of first cousin or closer, among the
above named individuals, by blood, marriage or adoption.
COMMITTEES OF THE BOARD
TCI Music has established an Executive Committee comprised of three
directors: Mr. Kern, Mr. Bennett and Mr. Hindery. Subject to the limitations of
the DGCL and the TCI Music Charter and TCI Music Bylaws, the Executive Committee
may exercise all powers and authority of the TCI Music Board in the management
of the business and affairs of TCI Music, including, but not limited to, the
power and authority to authorize the issuance of shares of common stock in an
amount not in excess of such number of shares as shall be specifically
authorized from time to time by the TCI Music Board in respect of a particular
transaction. In compliance with the Nasdaq Stock Market corporate governance
standards, the TCI Music Board has established an Audit Committee comprised of
three directors: Mr. Bennett, Mr. Kern and Mr. Fisher. The duties of the Audit
Committee include, but are not limited to, conducting reviews of potential
conflicts of interest situations where appropriate. TCI Music has also
established a Compensation Committee in accordance with the 1997 TCI Music Plan
comprised of two members, Mr. Kern and Mr. Fisher, for the purpose of performing
certain duties to the extent required under the 1997 TCI Music Plan, including,
but not limited to, granting and ratifying certain options under the 1997 TCI
Music Plan to persons subject to Section 162(m) of the Code and rules and
regulations promulgated thereunder. No other committees of the TCI Music Board
have been established.
COMPENSATION OF DIRECTORS
Members of the TCI Music Board who are also full-time employees of TCI
Music or TCI, or any of their respective subsidiaries, will not receive any
additional compensation for their services as directors. TCI Music has not
established any fees for Directors who are not full-time employees of TCI or any
of its subsidiaries. All members of the TCI Music Board will be reimbursed for
expenses incurred to attend any meetings of the TCI Music Board or any committee
thereof.
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COMPENSATION OF EXECUTIVE OFFICERS
All of the executive officers of TCI Music are currently employees of TCI
or its affiliates. TCI Music has no current arrangements with such persons to
provide compensation in connection with their services as executive officers of
TCI Music. Information regarding the compensation of executive officers of DMX
is set forth in the Transition Report on Form 10-K of TCI Music for the
transition period from October 1, 1996 to June 30, 1997, included in this Proxy
Statement/Prospectus as Appendix V.
TCI MUSIC, INC. 1997 STOCK INCENTIVE PLAN
General. TCI Music Board has adopted, and TCI, as the sole shareholder of
TCI Music prior to the DMX Merger, approved the 1997 TCI Music Plan. The 1997
TCI Music Plan provides for awards to be made in respect of a maximum of
4,000,000 shares of Series A Common Stock (subject to certain anti-dilution
adjustments). Awards may be made as grants of stock options ("Options"), stock
appreciation rights ("SARs"), restricted shares ("Restricted Shares"), Stock
Units (as defined below), performance awards ("Performance Awards") or any
combination thereof (collectively, "Awards"). Awards may be made to employees
and to consultants and advisors to TCI Music who are not employees. No TCI
Rights can be issued in connection with any Awards under the 1997 TCI Music
Plan. Shares of Series A Common Stock that are subject to Awards that expire,
terminate or are annulled for any reason without having been exercised (or
deemed exercised, by virtue of the exercise of a related SAR), or are forfeited
prior to becoming vested, will return to the pool of such shares available for
grant under the 1997 TCI Music Plan.
The 1997 TCI Music Plan is administered by the TCI Music Board, the
Compensation Committee, or such other committee as the TCI Music Board may in
the future appoint, which shall consist of at least two persons (the
"Committee"). With respect to Awards granted to a person subject to Rule 16b-3
of the Exchange Act (or any successor rule), unless otherwise determined by the
TCI Music Board, the Committee granting such Award (a) will be the entire TCI
Music Board or (b) will be comprised solely of two or more "non-employee
directors" as defined by Rule 16b-3. With respect to Awards granted to a
"covered employee" under Section 162(m) of the Code (or any successor statute)
and the duties and regulations promulgated thereunder, unless otherwise
determined by the TCI Music Board, the Committee granting such Award will be
comprised solely of two or more "outside directors" as defined by Section
162(m). With respect to Awards granted to a person subject to both Rule 16b-3
and Section 162(m), unless otherwise determined by the Board, all grants will be
made in a manner that complies with both Rule 16b-3 and Section 162(m).
The Committee has broad discretion in administering the 1997 TCI Music
Plan, and is authorized, subject only to the express provisions of the 1997 TCI
Music Plan, to determine the eligible persons to whom Awards may be made, to
determine the terms and conditions (which need not be identical) of each Award
(including the timing of the grant, the type of Award granted, the pricing and
the amount of the Award and terms related to vesting, exercisability, forfeiture
and termination), and to interpret the provisions of the 1997 TCI Music Plan and
each agreement relating to Awards granted under the 1997 TCI Music Plan. The
determinations of the Committee are final and binding upon all participants.
Stock Options. Options granted pursuant to the 1997 TCI Music Plan may be
either incentive stock options ("Incentive Options") within the meaning of
Section 422 of the Code, or nonqualified stock options ("Nonqualified Options"),
which do not qualify under Section 422. The Committee is authorized to determine
whether an Option is an Incentive Option or a Nonqualified Option.
The exercise price of all Options granted under the 1997 TCI Music Plan
will be fixed by the Committee, and may be more than, less than or equal to the
fair market value of the Series A Common Stock on the date the Option is
granted. However, TCI Music does not have any current intention to grant Options
with an exercise price less than the fair market value of the Series A Common
Stock on the date of grant.
Subject to the provisions of the 1997 TCI Music Plan relating to death,
retirement and termination of employment, the term of each Option will be fixed
by the Committee at the time of grant. Options may be exercised in whole or in
part at any time or only after a period of time or in installments, as
determined by the Committee at the time of grant, and the exercisability of
Options may be accelerated by the Committee.
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An Option shall be exercised by written notice to the Committee upon the
terms set forth in the agreement relating thereto and in accordance with such
other procedures as the Committee may establish.
The method of payment of the exercise price of an Option will be determined
by the Committee and may consist of cash, a check, a promissory note, the
surrender of already owned shares of Series A Common Stock or Series B Common
Stock, the withholding of shares of Series A Common Stock issuable upon exercise
of such Option, delivery of a properly executed exercise notice and irrevocable
instructions to a broker to deliver promptly to TCI Music the amount of sale or
loan proceeds required to pay the exercise price, any combination of the
foregoing methods of payment or such other consideration and method of payment
as may be permitted for the issuance of shares under Delaware law, subject, in
the case of any permitted method of payment other than cash, to such conditions
as the Committee deems appropriate. By way of example, if a holder is permitted
to elect to pay such exercise price by the withholding of shares of Series A
Common Stock, the Committee may reserve the discretion to approve or disapprove
such election.
Unless otherwise determined by the Committee, Options and SARs are not
transferable other than by will or the laws of descent and distribution or
pursuant to a domestic relations order, and, except as otherwise required by a
domestic relations order, Options and SARs may be exercised during the lifetime
of the holder thereof only by such holder.
Stock Appreciation Rights. An SAR may be granted under the 1997 TCI Music
Plan to the holder of an Option (a "Related Option") with respect to all or a
portion of the shares of Series A Common Stock subject to the Related Option (a
"Tandem SAR") or may be granted separately to an eligible participant (a "Free
Standing SAR"). A Tandem SAR may be granted either concurrently with the grant
of the Related Option or, if the Related Option is a Nonqualified Option, at any
time thereafter and prior to the complete exercise, termination, expiration or
cancellation of the Related Option. A Tandem SAR will be exercisable only at the
time and to the extent that the Related Option is exercisable and may be subject
to such additional limitations on exercisability as the Committee may determine.
Upon exercise of a Tandem SAR, the Related Option will be deemed to have been
exercised to the extent of the number of shares of Series A Common Stock with
respect to which such Tandem SAR is exercised. Conversely, upon the exercise or
termination of the Related Option, the Tandem SAR will be canceled automatically
to the extent of the number of shares of Series A Common Stock with respect to
which the Related Option was so exercised or terminated. Free Standing SARs will
be exercisable at the time, to the extent and upon the terms and conditions
determined by the Committee and set forth in the agreement relating to the
Award.
The base price of a Tandem SAR will be the same as the exercise price of
the Related Option unless the Committee provides for a higher base price. The
base price of a Free Standing SAR will not be less than the fair market value of
the Series A Common Stock on the date of grant of the Free Standing SAR. Upon
exercise of an SAR, the holder will be entitled to receive from TCI Music, for
each share of Series A Common Stock with respect to which the SAR is exercised,
an amount equal to the excess of the fair market value of a share of Series A
Common Stock on the date of exercise over the base price per share of such SAR.
Such amount shall be paid in cash, shares of Series A Common Stock (valued at
their fair market value on the date of exercise of the SAR) or a combination
thereof as specified in the agreement relating to the Award. Unless the
Committee shall otherwise determine, to the extent a Free Standing SAR is
exercisable, it will be exercised automatically for a cash settlement on its
expiration date.
The agreement relating to an Award of SARs may provide for a limit on the
amount payable to a holder upon exercise of SARs at any time or in the
aggregate, for a limit on the number of SARs that may be exercised by the holder
in whole or in part for cash during any specified period, for a limit on the
time periods during which a holder may exercise SARs and for such other limits
on the rights of the holder and other terms and conditions as the Committee may
determine.
Restricted Shares. At the time of any Award of Restricted Shares, the
Committee will designate a period of time that must elapse (the "Restriction
Period") and may impose such other restrictions, terms and conditions that must
be fulfilled, before the Restricted Shares will become vested. The Committee may
determine that (a) Restricted Shares will be issued at the beginning of the
Restriction Period, in which case, such shares will constitute issued and
outstanding shares of Series A Common Stock for all corporate purposes
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<PAGE> 87
or (b) Restricted Shares will not be issued until the end of the Restriction
Period, in which case the participant receiving the Award will have none of the
rights of a shareholder with respect to the shares of Series A Common Stock
covered by such Award until such shares shall have been issued to such
participant at the end of the Restriction Period. The participant will have the
right to vote Restricted Shares issued at the beginning of the Restriction
Period and to receive such dividends and other distributions as the Committee
may, in its sole discretion, designate that are paid or distributed on such
Restricted Shares, and generally to exercise all other rights as a holder of
Series A Common Stock, except that, until the end of the Restriction Period: (i)
such participant will not be entitled to take possession of the stock
certificates representing the Restricted Shares; (ii) such participant may not
sell, transfer or otherwise dispose of the Restricted Shares; and (iii) other
than such dividends and other distributions as the Committee may designate, TCI
Music will retain custody of all dividends and distributions made or declared
with respect to the Restricted Shares ("Retained Distributions") and such
Retained Distributions shall not bear interest or be segregated in a separate
account. In the case of Restricted Shares issued at the end of the Restriction
Period, the participant will be entitled to receive, to the extent specified by
the Committee only, cash or property corresponding to all dividends and other
distributions (or the economic equivalent thereof) that would have been paid,
made or declared on such Restricted Shares had such shares been issued at the
beginning of the Restriction Period (collectively, "Dividend Equivalents"), and
such Dividend Equivalents will be paid as specified by the Committee in the
applicable Award agreement. A breach of any restrictions, terms or conditions
established by the Committee with respect to any award of Restricted Shares will
cause a forfeiture of such Restricted Shares and any Retained Distributions
(including any unpaid Dividend Equivalents) with respect thereto. The 1997 TCI
Music Plan also provides that the Committee may authorize awards of cash to a
holder of Restricted Shares, payable at any time after the Restricted Shares
become vested.
Upon expiration of the applicable Restriction Period and the satisfaction
of any other applicable conditions, all or part of the Restricted Shares and any
Retained Distributions thereon (including any unpaid Dividend Equivalents) will
become vested and all or part of any cash amount awarded will become payable.
Any Restricted Shares and Retained Distributions thereon (including any unpaid
Dividend Equivalents) which do not so vest will be forfeited.
Stock Units. The 1997 TCI Music Plan also authorizes the Committee to grant
to eligible participants, either alone or in addition to Options, SARs and
Restricted Shares, awards of Series A Common Stock and other awards that are
valued in whole or in part by reference to, or are otherwise based on, the value
of the Series A Common Stock ("Stock Units"). The Committee will determine all
terms and conditions of such Awards, including any restrictions (including
restrictions on transfer), vesting requirements, payment rules or performance
requirements. The provisions of any Award of Stock Units need not be the same
with respect to each recipient and are subject to such rules as the Committee
may establish at the time of grant.
Performance Awards. Performance Awards consist of grants made to an
eligible person subject to the attainment of one or more performance goals. A
Performance Award will be paid, vested or otherwise deliverable solely upon the
attainment of one or more pre-established, objective performance goals
established by the Committee prior to the earlier of (i) 90 days after the
commencement of the period of service to which the performance goals relate, and
(ii) the passage of 25% of the period of service, and in any event while the
outcome is substantially uncertain. A performance goal may be based upon one or
more business criteria that apply to the eligible person, one or more business
units of TCI Music or TCI Music as a whole, and may include any of the
following: revenue, net income, cash flow (as defined for such purpose by the
Committee), stock price, market share, earnings per share, return on equity,
return on assets or decrease in costs. A Performance Award may be payable in
cash, property or securities of TCI Music, including, without limitation,
Options, SARs, Restricted Shares and/or Stock Units. Subject to the foregoing,
the terms, conditions and limitations applicable to any Performance Award will
be determined by the Compensation Committee.
Effect of Termination of Employment. Under the terms of the 1997 TCI Music
Plan, if the employment of the holder of an Award (which for this purpose
includes the engagement of the holder of an Award as a nonemployee consultant or
advisor) terminates by reason of death or total disability, then, unless the
agreement relating to such Award provides otherwise, (a) all outstanding Options
and SARs granted in such
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<PAGE> 88
Award will become immediately exercisable in full in respect of the aggregate
number of shares covered thereby, (b) the Restriction Period for all Restricted
Shares granted in such Award will be deemed to have expired and all such
Restricted Shares, any related Retained Distributions and any unpaid Dividend
Equivalents will become vested and any cash amounts payable pursuant to the
related agreement will be adjusted in such manner as may be provided in such
agreement, and (c) all Stock Units granted in such Award will become vested in
full.
Under the terms of the 1997 TCI Music Plan, if the employment of the holder
of an Award is terminated during the Restriction Period with respect to any
Restricted Shares, or prior to the complete exercise of any Option or SAR or the
vesting or complete exercise of any Stock Units or Performance Awards, granted
in such Award, then such Options, SARs, Stock Units and Performance Awards will
thereafter be exercisable, and the holder's rights to any such unvested
Restricted Shares, Retained Distributions, unpaid Dividend Equivalents and cash
amounts and any such unvested Stock Units will thereafter vest, only to the
extent provided by the Committee in the agreement relating to such Award, except
that (a) if the holder's employment terminates by reason of death or total
disability then any Option or SAR granted in the Award will remain exercisable
for a period of at least one year after such termination (but not later than the
scheduled expiration of such Option or SAR), (b) no Option or SAR may be
exercised after the scheduled expiration date thereof, and (c) if the holder's
employment is terminated for cause (as defined) then (i) such participant's
rights to all Restricted Shares, Retained Distributions, unpaid Dividend
Equivalents and any cash amounts covered by such Award will be forfeited
immediately, (ii) all Options and SARs and all unvested or unexercised Stock
Units granted in such Award will immediately terminate and (iii) such
participant's interest in all unvested Performance Awards shall be forfeited
immediately.
Additional Provisions. Unless otherwise required by the Committee in the
agreement relating to an Award, each Award will vest and become exercisable in
full upon the occurrence of any of the following change in control transactions:
(a) the TCI Music Board (or shareholders, if TCI Music Board approval is not
required by law) approves any of the following transactions (each an "Approved
Transaction"): (i) a merger, consolidation or binding share exchange to which
TCI Music is a party (x) pursuant to which shares of Series A Common Stock would
be converted into or exchanged for cash, securities or other property (other
than a transaction in which the common shareholders of TCI Music prior to such
transaction have the same proportionate ownership of the common stock of, and
voting power with respect to, the surviving corporation immediately after such
transaction) or (y) as a result of which the persons who are common shareholders
of TCI Music prior to such transaction would have less than a majority of the
combined voting power of the outstanding capital stock of TCI Music immediately
following such transaction; (ii) the sale of substantially all of the assets of
TCI Music; or (iii) the liquidation or dissolution of TCI Music; (b) any person,
corporation or other entity (other than TCI, TCI Music, any subsidiary, any
employee benefit plan sponsored by TCI Music or any subsidiary or any
Controlling Person (as defined)) purchases any common stock of TCI Music
pursuant to a tender or exchange offer, without the prior consent of the TCI
Music Board, or any person, corporation or other entity (other than TCI, TCI
Music, any subsidiary, any employee benefit plan sponsored by TCI Music or any
subsidiary or any Controlling Person) becomes the beneficial owner of securities
of TCI Music representing 20% or more of the combined voting power of TCI
Music's outstanding securities, other than in a transaction (or series of
related transactions) approved by the TCI Music Board; or (c) during any
two-year period, individuals who at the beginning of such period constitute the
entire TCI Music Board cease to constitute a majority of the TCI Music Board,
unless the election, or nomination for election, of each new director is
approved by at least two-thirds of the directors then still in office who were
directors at the beginning of the period. "Controlling Person" is defined in the
1997 TCI Music Plan to include: (1) the Chairman of the Board, the President and
each of the directors of TCI Music as of the effective date of the 1997 TCI
Music Plan, (2) John C. Malone, (3) Bob Magness and (4) the respective family
members, estates and heirs of each of the persons referred to in clauses (1),
(2) and (3) and any trust or other investment vehicle for the primary benefit of
any of such persons or their respective family members or heirs. Options, SARs,
or, if applicable, Stock Units not theretofore exercised will terminate upon
consummation of an Approved Transaction. The Committee will have the discretion,
unless otherwise provided in the agreement relating to a particular Award, to
determine that any or all outstanding Awards of any or all types granted
pursuant to the 1997 TCI Music Plan will not vest or become exercisable on an
accelerated basis in
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<PAGE> 89
connection with an Approved Transaction or will not terminate if not exercised
prior to consummation of the Approved Transaction, if action that, in the
opinion of the Committee, is equitable and appropriate is taken by the TCI Music
Board or by the surviving or acquiring corporation, as the case may be, to
assume such Award or substitute a new award therefor that is, as nearly as may
be practicable, equivalent to the old Award.
The Committee may require in the agreement relating to an Award that if the
holder acquires any shares of Series A Common Stock through the exercise of
Options or SARs or through the vesting of Restricted Shares or Stock Units
granted in the Award, then prior to selling or otherwise transferring any such
shares to a third party, such holder must offer to sell such shares to TCI
Music, at their fair market value, pursuant to a right of first refusal.
No Awards may be granted under the 1997 TCI Music Plan on or after the
tenth anniversary of its effective date. The TCI Music Board or the Committee
may at any time terminate the 1997 TCI Music Plan and may from time to time
suspend or amend the 1997 TCI Music Plan. No modification or amendment may be
effective prior to approval by TCI Music's stockholders to the extent such
approval is then required pursuant to Section 162(m) of the Code in order to
preserve the deductibility to TCI Music of any compensation expense that may be
incurred by TCI Music with respect to any Award then outstanding (unless TCI
Music waives such condition with respect to any such amendment and/or any such
Award) or to the extent stockholder approval is otherwise required by applicable
legal requirements. Termination or amendment of the 1997 TCI Music Plan may not
adversely affect the rights of any holder of an Award without his or her
consent. Subject to the specific terms of the 1997 TCI Music Plan, the Committee
may accelerate any Award or waive any conditions or restrictions pertaining to
such Award at any time.
OTHER ARRANGEMENTS
The TCI Music Board granted effective as of July 11, 1997, (i) to each of
Messrs. Hindery, Kern and Fisher, options to purchase 833,334 shares of Series A
Common Stock at a price of $6.25 per share, (ii) to Messrs. Sparkman and Troxel,
options to purchase 100,000 and 200,000 shares, respectively, of Series A Common
Stock at a price of $6.25 per share and (iii) to each of Messrs. Bennett and
Koff, options to purchase 100,000 shares of Series A Common Stock at a price of
$6.25 per share. All such persons are directors of TCI Music, and Mr. Troxel
currently is Chief Executive Officer and President of DMX. Such options will
vest in 20% cumulative increments, with the first increment vesting as of July
11, 1997, and each additional increment vesting on each anniversary date
thereafter and will be exercisable for up to ten years following July 11, 1997.
No TCI Rights will be issued in connection with any Series A Common Stock issued
upon exercise of any such option. The options granted to Mr. Koff and Mr. Troxel
were granted pursuant to the 1997 TCI Music Plan.
Upon consummation of the Paradigm Merger, Thomas McPartland, President and
Chief Executive Officer of Paradigm, will be elected as a director and will
replace Mr. Koff as President and Chief Executive Officer of TCI Music. Pursuant
to the Paradigm Agreement, Mr. McPartland will receive annual compensation of at
least $375,000. See "BUSINESS OF TCI MUSIC -- Terms of Proposed Paradigm
Merger."
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<PAGE> 90
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT OF
TCI MUSIC AND THE BOX
SECURITY OWNERSHIP OF TCI MUSIC
The following table sets forth information with respect to the beneficial
ownership of the common and preferred stock of TCI Music as of September 30,
1997 by: (a) each person who is known by TCI Music to be the beneficial owner of
more than 5% of either class of the outstanding shares of Music Voting Stock;
(b) each director of TCI Music; (c) the chief executive officer and the four
other most highly compensated executive officers of TCI Music ("Named Executives
Officers"); and (d) all of TCI Music's directors and executive officers as a
group; and the pro forma number of shares and ownership percentages of TCI Music
Common Stock and Music Series A Preferred Stock to be owned by such persons and
groups of persons immediately following the Effective Time, assuming such
persons do not acquire, or dispose of, any shares of BOX Common Stock during the
period commencing September 30, 1997 and ending on the Effective Time. Shares
issuable upon exercise or conversion of convertible securities are deemed to be
outstanding for the purpose of computing the percentage ownership of persons
beneficially owning such convertible securities, but have not been deemed to be
outstanding for the purpose of computing the percentage ownership of any other
person. Voting power in the table is computed with respect to a general election
of directors. So far as is known to TCI Music, the persons indicated below have
sole voting and investment power with respect to the shares indicated as owned
by them except as otherwise stated in the notes to the table. The address of the
directors and Named Executive Officers of TCI Music is 8101 East Prentice
Avenue, Suite 500, Englewood, Colorado 80111.
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1997 AS OF THE EFFECTIVE TIME
------------------------------------ ----------------------------------
AMOUNT AND AMOUNT AND
NATURE OF PERCENT OF NATURE OF
NAME AND ADDRESS OF BENEFICIAL PERCENT OF VOTING BENEFICIAL PERCENT OF VOTING
TITLE OF CLASS BENEFICIAL OWNER OWNERSHIP CLASS (1) POWER(1) OWNERSHIP CLASS(2) POWER(2)
-------------- ------------------- ---------- ---------- ---------- ---------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Series A Common Tele-Communications, Inc. 6,812,393 45.7 98.7 6,812,393(3) 45.7 98.0
Series B Common 5619 DTC Parkway 62,500,000 100 62,500,000(3) 100
Series A Preferred Englewood, CO 80111 -- -- 84,242 4.8
Series A Common Shaw Communications, Inc. 1,900,000 12.8 * 1,900,000 12.8 *
Series B Common 630 Third Avenue -- -- -- --
Series A Preferred Suite 900 -- -- -- --
Calgary, Alberta
CANADA T2P 4L4
Series A Common JR Shaw 2,095,125 14.1 * 2,095,125 14.1 *
Series B Common c/o Shaw Communications, Inc. -- -- -- --
Series A Preferred -- -- -- --
Series A Common H.F. Lenfest -- -- -- -- -- *
Series B Common c/o The Box Worldwide, Inc. -- -- -- --
Series A Preferred 1221 Collins Avenue -- -- 501,292(2) 28.8
Miami Beach, FL 33139
Series A Common J. Patrick Michaels, Jr. -- -- -- -- -- *
Series B Common c/o The Box Worldwide, Inc. -- -- -- --
Series A Preferred 1221 Collins Avenue -- -- 321,379(2) 18.4
Miami Beach, FL 33139
Series A Common Louis Wolfson, III -- -- -- -- -- *
Series B Common c/o The Box Worldwide, Inc. -- -- -- --
Series A Preferred 1221 Collins Avenue -- -- 96,651(2) 5.5
Miami Beach, FL 33139
Series A Common CEA Investors, Inc. -- -- -- -- -- *
Series B Common c/o Communications Equity -- -- -- --
Series A Preferred Associates -- -- 321,379(2) 18.4
101 E. Kennedy Blvd.
Suite 3300
Tampa, FL 33602
</TABLE>
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<PAGE> 91
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1997 AS OF THE EFFECTIVE TIME
------------------------------------ ----------------------------------
AMOUNT AND AMOUNT AND
NATURE OF PERCENT OF NATURE OF
NAME AND ADDRESS OF BENEFICIAL PERCENT OF VOTING BENEFICIAL PERCENT OF VOTING
TITLE OF CLASS BENEFICIAL OWNER OWNERSHIP CLASS (1) POWER(1) OWNERSHIP CLASS(2) POWER(2)
-------------- ------------------- ---------- ---------- ---------- ---------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Series A Common StarNet Interactive -- -- -- -- -- *
Series B Common Entertainment, Inc. -- -- -- --
Series A Preferred 1332 Enterprise Drive -- -- 501,292(2) 28.8
Suite 200
West Chester, PA 19380
Series A Common StarNet, Inc. -- -- -- -- -- *
Series B Common 1332 Enterprise Drive -- -- -- --
Series A Preferred Suite 200 -- -- 501,292(2) 28.8
West Chester, PA 19380
Series A Common Lenfest Communications, Inc. -- -- -- -- -- *
Series B Common 202 Shoemaker Road -- -- -- --
Series A Preferred Pottstown, PA 19464 -- -- 501,292(2) 28.8
Series A Common Island Trading Company -- -- -- -- -- *
Series B Common 400 Lafayette Street -- -- -- --
Series A Preferred New York, NY 10003 -- -- 175,000(2) 10.0
Series A Common Chris Blackwell -- -- -- -- -- *
Series B Common c/o Island Trading Company -- -- -- --
Series A Preferred -- -- 175,000(2) 10.0
Series A Common Leo J. Hindery, Jr. 833,334(4) 5.3 * 833,334(4) 5.3 *
Series B Common -- -- -- --
Series A Preferred -- -- -- --
Series A Common Robert R. Bennett 100,000(5) * * 100,000(5) * *
Series B Common -- -- -- --
Series A Preferred -- -- -- --
Series A Common Donne F. Fisher 833,334(4) 5.3 * 833,334(4) 5.3 *
Series B Common (individually and as Co- -- -- -- --
Series A Preferred Personal Representative to -- -- -- --
the Estate of Bob Magness)
Series A Common Peter M. Kern 833,334(4) 5.3 * 833,334(4) 5.3 *
Series B Common -- -- -- --
Series A Preferred -- -- -- --
Series A Common David B. Koff 100,000(5) * * 100,000(5) * *
Series B Common -- -- -- --
Series A Preferred -- -- -- --
Series A Common J.C. Sparkman 137,500(5) * * 137,500(5) * *
Series B Common -- -- -- --
Series A Preferred -- -- -- --
Series A Common Lon A. Troxel 200,000(6) * * 200,000(6) * *
Series B Common -- -- -- --
Series A Preferred -- -- -- --
Series A Common Stephen M. Brett -- -- -- -- -- --
Series B Common -- -- -- --
Series A Preferred -- -- -- --
ALL DIRECTORS AND
EXECUTIVE OFFICERS
AS A GROUP
(8 PERSONS)
Series A Common 3,037,502(7) 17.0 * 3,037,502(7) 17.0 *
Series B Common -- -- -- --
Series A Preferred -- -- -- --
</TABLE>
- ---------------
* Less than 1%
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<PAGE> 92
(1) Based upon 14,896,648 shares of Series A Common Stock, 62,500,000 shares of
Series B Common Stock and 1,742,483 shares of Series A Preferred Stock
outstanding.
(2) The pro forma beneficial ownership of Music Series A Preferred Stock after
the Effective Time assumes a Merger Conversion Ratio of .07.
(3) Effective July 11, 1997, TCI transferred 2,587,222 shares of Series A Common
Stock and 62,500,000 shares of Series B Common Stock (all the shares of
Series A Common Stock and Series B Common Stock beneficially owned by TCI,
excluding 1,514,766 shares of Series A Common Stock indirectly owned by
Liberty and 2,710,406 shares of Series A Common Stock indirectly owned by a
TCI subsidiary, Tele-Communications International, Inc.) to Liberty. In
exchange for the Series A Common Stock and Series B Common Stock acquired
from TCI, Liberty (i) agreed to reimburse TCI for all amounts paid by TCI to
holders of TCI Rights to the extent that TCI Rights are exercised and (ii)
issued a promissory note to TCI in the amount of $80,000,000. Of the total
consideration, $21,000,000 was allocable to the Series A Common Stock (with
associated TCI Rights) acquired by Liberty. The note may be reduced by the
value of shares of Liberty Media Group common stock issued by TCI for the
benefit of any TCI entity other than an entity within the Liberty Media
Group. Liberty also may elect to pay $50,000,000 of that note by delivery of
a Stock Appreciation Rights Agreement that will give TCI the right to
receive 20% of the appreciation in value of Liberty's investment in TCI
Music, to be determined as of July 11, 2002. The Stock Appreciation Rights
Agreement will provide that TCI will receive at least $73,500,000 if
Liberty's investment in TCI Music is to be valued on that date; if by mutual
agreement of TCI and Liberty, such investment is to be valued (and payment
made to TCI) before July 11, 2002, the minimum amount payable to TCI will be
$50,000,000, plus an accretion to the agreed upon valuation date equal to 8%
per annum, compounded annually.
(4) Assumes the exercise in full of stock options to acquire 833,334 shares of
Series A Common Stock, 166,667 of which are currently exercisable.
(5) Assumes the exercise in full of stock options to acquire 100,000 shares of
Series A Common Stock, 20,000 of which are currently exercisable.
(6) Assumes the exercise in full of options to acquire 200,000 shares of Series
A Common Stock, 40,000 of which are currently exercisable.
(7) Assumes the exercise in full of options held by such persons to acquire
3,000,002 shares of Series A Common Stock, 600,001 of which are currently
exercisable.
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<PAGE> 93
SECURITY OWNERSHIP OF TCI
The following table sets forth the ownership of Series A TCI Group Common
Stock, Series B TCI Group Common Stock, Series A Liberty Media Group Common
Stock and Series B Liberty Media Group Common Stock, Class B 6% Cumulative
Redeemable Exchangeable Junior Preferred Stock, par value $.01 per share, of TCI
("Class B Preferred Stock"), Series C Preferred Stock, Redeemable Convertible
TCI Group Preferred Stock, Series G, par value $.01 per share, of TCI ("Series G
Preferred Stock") and Redeemable Convertible Liberty Media Group Preferred
Stock, Series H, par value $.01 per share, of TCI ("Series H Preferred Stock"),
held as of March 1, 1997 by each person who is a director or Named Executive
Officer of TCI Music and all of the directors and executive officers of TCI
Music as a group. Effective January 13, 1997, TCI paid a dividend of one share
of Series A Liberty Media Group Common Stock for each two shares of Series A
Liberty Media Group Common Stock held and one share of Series A Liberty Media
Group Common Stock for each two shares of Series B Liberty Media Group Common
Stock held (the "Liberty Stock Distribution"). The numbers of shares (and
corresponding percentages of series) of the Series A Liberty Media Group Common
Stock in the following table and in the footnotes to the table have been
adjusted for the Liberty Stock Distribution. Shares issuable upon exercise or
conversion of convertible securities are deemed to be outstanding for the
purpose of computing the percentage ownership of persons beneficially owning
such convertible securities, but have not been deemed to be outstanding for the
purpose of computing the percentage ownership of any other person. Voting power
in the table is computed with respect to a general election of directors and,
therefore, the Class B Preferred Stock, the Series G Preferred Stock and the
Series H Preferred Stock are included in the calculation notwithstanding the
fact that the Class B Preferred Stock, the Series G Preferred Stock and the
Series H Preferred Stock do not generally vote with respect to matters submitted
to a vote of stockholders. So far as is known to TCI Music, the persons
indicated below have sole voting and investment power with respect to the shares
indicated as owned by them except as otherwise stated in the notes to the table.
<TABLE>
<CAPTION>
AMOUNT AND NATURE PERCENT VOTING
NAME OF OF BENEFICIAL OF CLASS POWER
TITLE OF CLASS BENEFICIAL OWNER OWNERSHIP (1) (1)
-------------- ------------------------------------- ----------------- -------- ------
<S> <C> <C> <C> <C>
TCI Group Common Stock Leo J. Hindery, Jr.
Series A 1,000,000(2) * *
Series B -- --
Liberty Media Group Common Stock
Series A 250,000(2) *
Series B -- --
TCI Preferred Stock
Class B -- --
Series C -- --
Series G -- --
Series H -- --
TCI Group Common Stock Robert R. Bennett
Series A 74,157(3) * *
Series B -- --
Liberty Media Group Common Stock
Series A 777,707(3) *
Series B -- --
TCI Preferred Stock
Class B 482 *
Series C -- --
Series G -- --
Series H -- --
TCI Group Common Stock Donne F. Fisher
Series A (individually and as Co-Personal 4,110,680(4)(5) * 20.8
Series B Representative to 31,034,936(4) 36.7
the Estate of Bob Magness)
</TABLE>
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<PAGE> 94
<TABLE>
<S> <C> <C> <C> <C>
Liberty Media Group Common Stock
Series A 5,423,725(4)(5) 2.4
Series B 7,758,734(4) 36.6
TCI Preferred Stock
Class B 129,299(4) 8.0
Series C -- --
Series G -- --
Series H -- --
TCI Group Common Stock Peter M. Kern
Series A -- -- --
Series B -- --
Liberty Media Group Common Stock
Series A -- --
Series B -- --
TCI Preferred Stock
Class B -- --
Series C -- --
Series G -- --
Series H -- --
TCI Group Common Stock David B. Koff
Series A 25,983(6) * *
Series B -- --
Liberty Media Group Common Stock
Series A 159,718(6) *
Series B -- --
TCI Preferred Stock
Class B -- --
Series C -- --
Series G -- --
Series H -- --
TCI Group Common Stock J.C. Sparkman
Series A 279,472(7) * *
Series B -- --
Liberty Media Group Common Stock
Series A 112,001(7) *
Series B -- --
TCI Preferred Stock
Class B -- --
Series C -- --
Series G -- --
Series H -- --
TCI Group Common Stock Lon A. Troxel
Series A -- -- --
Series B -- --
Liberty Media Group Common Stock
Series A -- --
Series B -- --
TCI Preferred Stock
Class B -- --
Series C -- --
Series G -- --
Series H -- --
TCI Group Common Stock Stephen M. Brett
Series A 749,745(8) * *
Series B -- --
</TABLE>
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<PAGE> 95
<TABLE>
<CAPTION>
AMOUNT AND NATURE PERCENT VOTING
NAME OF OF BENEFICIAL OF CLASS POWER
TITLE OF CLASS BENEFICIAL OWNER OWNERSHIP (1) (1)
-------------- ------------------------------------- ----------------- -------- ------
<S> <C> <C> <C> <C>
Liberty Media Group Common Stock
Series A 281,120(8) *
Series B -- --
TCI Preferred Stock
Class B -- --
Series C -- --
Series G -- --
Series H -- --
All Directors and Executive
Officers
as a Group (8 persons)
TCI Group Common Stock
Series A 6,240,037(2-8) 1.0 20.9
Series B 31,034,936(4) 36.7
Liberty Media Group Common Stock
Series A 7,004,271(2-8) 2.9
Series B 7,758,734(4) 36.6
TCI Preferred Stock
Class B 129,299(4) 8.0
Series C -- --
Series G -- --
Series H -- --
</TABLE>
- ---------------
* Less than 1%
(1) Based on 597,497,573 shares of Series A TCI Group Common Stock (after
elimination of shares held by subsidiaries of TCI), 84,647,065 shares of
Series B TCI Group Common Stock, 228,558,926 shares of Series A Liberty
Media Group Common Stock, 21,187,969 shares of Series B Liberty Media Group
Common Stock, 1,620,026 shares of Class B Preferred Stock, 70,575 shares of
Series C Preferred Stock, 6,693,177 shares of Series G Preferred Stock and
6,693,177 shares of Series H Preferred Stock outstanding at March 1, 1997,
which does not give effect to the Exchange Offer consummated September 10,
1997, pursuant to which certain shares of TCI Group Common Stock were
exchanged for shares of TCI Ventures Group Common Stock.
(2) Assumes the exercise in full of stock options granted in tandem with stock
appreciation rights in February 1997 to acquire 1,000,000 shares of Series A
TCI Group Common Stock and 250,000 shares of Series A Liberty Media Group
Common Stock, none of which were exercisable as of March 1, 1997.
(3) Assumes the exercise in full of stock options granted in tandem with stock
appreciation rights in November 1994 to acquire 50,000 shares of Series A
TCI Group Common Stock and 18,750 shares of Series A Liberty Media Group
Common Stock, 20,000 shares and 7,500 shares of which, respectively, were
exercisable as of March 1, 1997. Additionally assumes the exercise in full
of stock options granted in tandem with stock appreciation rights in
December 1995 to acquire 750,000 shares of Series A Liberty Media Group
Common Stock, 150,000 shares of which were exercisable as of March 1, 1997.
Does not include stock appreciation rights with respect to 300,000 shares of
Series A TCI Group Common Stock or 137,111 shares of Series A Liberty Media
Group Common Stock. Upon exercise, such stock appreciation rights are
payable, at TCI's election, in cash or in shares of Series A TCI Group
Common Stock or Series A Liberty Media Group Common Stock, as applicable.
(4) Includes 1,524,315 shares of Series A TCI Group Common Stock, 30,785,864
shares of Series B TCI Group Common Stock, 4,419,304 shares of Series A
Liberty Media Group Common Stock, 7,696,466 shares of Series B Liberty Media
Group Common Stock and 125,000 shares of Class B Preferred Stock held by the
Estate of Bob Magness. Mr. Fisher is deemed to have beneficial ownership
over such shares as a Co-Personal Representative to the Estate of Bob
Magness. Included in such beneficial ownership is the assumed exercise in
full of stock options granted in tandem with stock appreciation rights in
November 1992 to Bob Magness to acquire 1,000,000 shares of Series A TCI
Group Common Stock and
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<PAGE> 96
375,000 shares of Series A Liberty Media Group Common Stock. Additionally
assumes the exercise in full of stock options granted in tandem with stock
appreciation rights in December 1995 to Bob Magness to acquire 1,000,000
shares of Series A TCI Group Common Stock and 375,000 shares of Series A
Liberty Media Group Common Stock. All such options were exercisable as of
March 1, 1997.
(5) Assumes the exercise in full of stock options granted in tandem with stock
appreciation rights in November 1994 to acquire 200,000 shares of Series A
TCI Group Common Stock and 75,000 shares of Series A Liberty Media Group
Common Stock, 80,000 shares and 30,000 shares of which, respectively, were
exercisable as of March 1, 1997. Additionally assumes the exercise of stock
options granted in January 1996 to acquire 50,000 shares of Series A TCI
Group Common Stock and 18,750 shares of Series A Liberty Media Group Common
Stock, 10,000 shares and 3,750 shares of which, respectively, were
exercisable as of March 1, 1997.
(6) Assumes the exercise in full of stock options granted in tandem with stock
appreciation rights in November 1994 to acquire 25,000 shares of Series A
TCI Group Common Stock and 9,375 shares of Series A Liberty Media Group
Common Stock, 10,000 shares and 3,750 shares of which, respectively, were
exercisable as of March 1, 1997. Additionally assumes the exercise of stock
options granted in tandem with stock appreciation rights in December 1995 to
acquire 150,000 shares of Series A Liberty Media Group Common Stock, 30,000
of which were exercisable as of March 1, 1997. Excludes 1,312 shares of
Series A Liberty Media Group Common Stock and 200 shares of TCI Class B
Preferred Stock beneficially owned by Judith R. Koff, Mr. Koff's wife, of
which Mr. Koff disclaims beneficial ownership.
(7) Assumes the exercise in full of stock options granted in tandem with stock
appreciation rights in November 1992 to acquire 100,000 shares of Series A
TCI Group Common Stock and 37,500 shares of Series A Liberty Media Group
Common Stock 80,000 shares and 30,000 shares of which, respectively, were
exercisable as of March 1, 1997. Additionally assumes the exercise in full
of stock options granted in tandem with stock appreciation rights in
November 1993 to acquire 100,000 shares of Series A TCI Group Common Stock
and 37,500 shares of Series A Liberty Media Group Common Stock, 75,000
shares and 28,125 shares, respectively, were exercisable as of March 1,
1997. Also assumes the exercise in full of stock options granted in tandem
with stock appreciation rights in November 1994 to acquire 200,000 shares of
Series A TCI Group Common Stock and 75,000 shares of Series A Liberty Media
Group Common Stock, 80,000 shares and 30,000 shares of which, respectively,
were exercisable as of March 1, 1997. Also assumes the exercise in full of
stock options granted in tandem with stock appreciation rights in December
1995 to acquire 300,000 shares of Series A TCI Group Common Stock and
112,500 shares of Series A Liberty Media Group Common Stock, 60,000 shares
and 22,500 shares of which, respectively, were exercisable as of March 1,
1997. Additionally assumes the vesting in full of 40,000 restricted shares
of Series A TCI Group Common Stock and 15,000 restricted shares of Series A
Liberty Media Group Common Stock, none of which was vested as of March 1,
1997.
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<PAGE> 97
SECURITY OWNERSHIP OF THE BOX
The following table sets forth information with respect to the beneficial
ownership of BOX Common Stock and BOX Preferred Stock as of October 31, 1997 by:
(a) each person who is known by the BOX to be the beneficial owner of 5% or more
of the outstanding shares of any class of BOX Voting Stock; (b) each director of
the BOX; (c) the chief executive officer and the four other most highly
compensated executive officers of the BOX; and (d) all of the BOX's directors
and executive officers as a group; and the pro forma information with respect to
the beneficial ownership of Music Series A Preferred Stock by such persons after
the Effective Time, assuming that none of such persons acquires or disposes of
any shares of BOX Common Stock at any time after October 31, 1997 and prior to
the Effective Time. The address of the directors and Named Executive Officers of
the BOX is 1221 Collins Avenue, Miami Beach, Florida 33139.
<TABLE>
<CAPTION>
POST-MERGER MUSIC SERIES A
BOX COMMON STOCK(1) PREFERRED STOCK(2)
-------------------------------- --------------------------------
AMOUNT AND AMOUNT AND
NATURE OF NATURE OF
NAME AND ADDRESS OF BENEFICIAL PERCENT OF VOTING BENEFICIAL PERCENT OF VOTING
BENEFICIAL OWNER OWNERSHIP CLASS POWER OWNERSHIP CLASS POWER
------------------- ---------- ---------- ------ ---------- ---------- ------
<S> <C> <C> <C> <C> <C> <C>
H.F. Lenfest................................... 14,981,261(3) 60.2 56.4 501,292 28.8 *
J. Patrick Michaels, Jr........................ 14,981,261(3) 60.2 56.4 321,379 18.4 *
Alan R. McGlade................................ 551,000(4) 2.2 2.1 3,570 * *
Stanley H. Greene.............................. 10,550(5) * * 39 * *
Luann M. Hoffman............................... 100,000(6) * * -- -- --
E. Paul Sartain................................ 48,000(7) * * 560 * *
Gino Natalicchio............................... 50,000(8) * * -- -- --
David Burns.................................... 10,000 * * 700 * *
Chris Innis.................................... 0 * * -- -- --
Robert Puck.................................... 20,000 * * 1,400 * *
Joel S. Rudich................................. 55,000(9) * * 0 -- --
Leonard J. Sokolow............................. 90,000(10) * * 2,450 * *
Louis Wolfson, III............................. 1,380,725(11) 5.5 5.2 96,651 5.5 *
StarNet/CEA II Partners........................ 14,981,261(3) 60.2 56.4 -- -- --
c/o Communications Equity Associates
101 E. Kennedy Blvd.
Suite 3300
Tampa, FL 33602
CEA Investors, Inc............................. 14,981,261(3) 60.2 56.4 321,379 18.4 *
c/o Communications Equity Associates
101 E. Kennedy Blvd.
Suite 3300
Tampa, FL 33602
StarNet Interactive............................ 14,981,261(3) 60.2 56.4 501,292 28.8 *
Entertainment, Inc.
1332 Enterprise Drive
Suite 200
West Chester, PA 19380
StarNet, Inc................................... 14,981,261(3) 60.2 56.4 501,292 28.8 *
1332 Enterprise Drive
Suite 200
West Chester, PA 19380
Lenfest Communications, Inc.................... 14,981,261(3) 60.2 56.4 501,292 28.8 *
202 Shoemaker Road
Pottstown, PA 19464
Island Trading Company, Inc.................... 2,500,000(12) 10.0 9.4 175,000 10.0 *
400 Lafayette Street
New York, NY 10003
</TABLE>
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<PAGE> 98
<TABLE>
<CAPTION>
POST-MERGER MUSIC SERIES A
BOX COMMON STOCK(1) PREFERRED STOCK(2)
-------------------------------- --------------------------------
AMOUNT AND AMOUNT AND
NATURE OF NATURE OF
NAME AND ADDRESS OF BENEFICIAL PERCENT OF VOTING BENEFICIAL PERCENT OF VOTING
BENEFICIAL OWNER OWNERSHIP CLASS POWER OWNERSHIP CLASS POWER
------------------- ---------- ---------- ------ ---------- ---------- ------
<S> <C> <C> <C> <C> <C> <C>
Chris Blackwell................................ 2,500,000(12) 10.0 9.4 175,000 10.0 *
c/o Island Trading Company, Inc.
400 Lafayette Street
New York, NY 10003
EMAP, Plc...................................... 1,666,667(13) 6.3 6.3 -- -- --
1 Lincoln Court
Lincoln Road
Peterborough, PE1 2RF
All directors and executive officers as a group
(14 persons) (2) through (12)................ 15,801,381 61.9 58.1 928,040 53.3 *
</TABLE>
- ---------------
* Indicates a percentage ownership of less than one percent.
** The information contained in the preceding table and the footnotes thereto
is derived in part from Statements on Schedule 13D filed with the
Securities and Exchange Commission by the following persons: H.F. Lenfest,
J. Patrick Michaels, Jr., StarNet/CEA II Partners, CEA Investors
Partnership II, Ltd., CEA Investors, Inc., StarNet Interactive
Entertainment, Inc., StarNet, Inc., Lenfest Communications, Inc., Louis
Wolfson, III, and Liberty VJN, Inc. The BOX expresses no opinion as to the
completeness or accuracy of the information contained in such documents or
as to such reporting persons' compliance with the Securities Exchange Act
of 1934 and the rules and regulations promulgated thereunder.
(1) On October 31, 1997, the Company had 24,892,623 shares of BOX Common Stock
issued and outstanding and 1,666,667 shares of BOX Preferred Stock issued
and outstanding. Any shares of BOX Common Stock that a person or entity had
the right to acquire within 60 days upon exercise of options, warrants,
conversion privileges or other rights will be deemed outstanding for the
purpose of computing the percentage ownership of the person or entity
holding such options, warrants, conversion privileges or other rights, but
will not be deemed outstanding for the purpose of computing the percentage
ownership of any other person or entity.
(2) The pro forma beneficial ownership of Music Series A Preferred Stock after
the Effective Time assumes a Merger Conversion Ratio of .07.
(3) StarNet/CEA II Partners ("StarNet/CEA") is a Delaware general partnership,
consisting of CEA Investors Partnership II, Ltd., a Florida limited
partnership ("CEA Investors II"), and StarNet Interactive Entertainment,
Inc., a Delaware corporation ("StarNet Interactive"). StarNet/CEA will be
dissolved upon consummation of the Merger, as described below. J. Patrick
Michaels, Jr., the Company's Acting Chief Operating Officer, is the sole
director, President and sole stockholder of CEA Investors, Inc. ("CEA
Investors"), which is the sole general partner of CEA Investors II. StarNet
Interactive is a wholly-owned subsidiary of StarNet, Inc. ("StarNet"),
which is a wholly-owned subsidiary of Lenfest Communications, Inc. ("LCI").
H. F. Lenfest (together with his children) and Liberty Cable, Inc.
("Liberty Cable"), an affiliate of Liberty Program Investments, Inc.
("Liberty Program"), and Liberty Media Corporation ("Liberty Media"), each
beneficially owns 50% of the common stock of LCI. Mr. Lenfest is the sole
director of StarNet and StarNet Interactive and President, Chief Executive
Officer and a director of LCI. Through contractual arrangements among the
stockholders of LCI, Mr. Lenfest has the exclusive right to control a
majority of the Board of Directors of LCI and the management and business
affairs of LCI, StarNet and StarNet Interactive. J. Patrick Michaels, Jr.
has sole voting power as to 71,584 shares of BOX Common Stock, shared
voting power as to 12,255,280 shares, sole dispositive power as to 71,584
shares, and shared dispositive power as to 9,026,470 shares. StarNet/CEA,
CEA Investors II, CEA Investors and StarNet Interactive each has sole
voting power as to no shares, shared voting power as to 12,242,655 shares,
sole dispositive power as to no shares and shared dispositive power as to
9,013,845 shares. StarNet has sole voting power as to
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<PAGE> 99
1,883,555 shares, shared voting power as to 12,242,655 shares, sole
dispositive power as to 1,883,555 shares, and shared dispositive power as
to 9,013,845 shares. Suburban Cable TV Co. Inc. ("Suburban"), a
wholly-owned subsidiary of LCI, has sole voting power as to 770,842 shares,
shared voting power as to no shares, sole dispositive power as to 770,842
shares, and shared dispositive power as to no shares. LCI and Mr. Lenfest
each has sole voting power as to 2,654,397 shares, shared voting power as
to 12,242,655 shares, sole dispositive power as to 2,654,397 shares, and
shared dispositive power as to 12,242,655 shares. LMC Lenfest, Inc.,
Liberty Program and Liberty Media (the "Liberty Group") and David Burns
have disclaimed any beneficial interest in the shares of BOX Common Stock
beneficially owned by StarNet/CEA, CEA Investors II, CEA Investors, StarNet
Interactive, StarNet, LCI, Suburban, Mr. Michaels and Mr. Lenfest (the
"StarNet/CEA Group"). The StarNet/CEA Group have disclaimed any beneficial
interest in the shares of BOX Common Stock beneficially owned by The
Liberty Group. The shares beneficially owned by the StarNet/CEA Group
includes: 2,834,908 shares transferred by CEA Investors II to StarNet/CEA
as a capital contribution, 2,014,520 shares acquired by StarNet/CEA from
New Vision Music, 5,967,972 shares acquired by StarNet/CEA from the BOX,
voting rights with respect to 1,647,647 shares acquired by CEA Investors II
from Louis and Lynn Wolfson, voting rights with respect to 1,581,163 shares
acquired by CEA Investors II from Andrew, Mark and Tony Blank, 80,000
shares acquired from Louis Wolfson and 84,209 shares beneficially owned by
Mr. Michaels. The shares of the BOX Common Stock beneficially owned by Mr.
Lenfest and LCI include 770,842 shares of the BOX Common Stock issued to
Suburban, a company controlled by Mr. Lenfest, which shares were issued
pursuant to a Cable Service Affiliation Agreement with the BOX, dated
August 4, 1997. StarNet/CEA will be dissolved upon the consummation of the
Merger. Shares of Music Series A Preferred Stock issuable with respect to
the 9,013,845 shares of BOX Common Stock held of record by StarNet/CEA will
be issued directly to CEA Investors II and StarNet Interactive,
respectively, such that each will be issued 303,766 shares of Music Series
A Preferred Stock. Irrevocable proxies given to CEA Investors II by Louis
and Lynn Wolfson with respect to an aggregate of 1,647,647 shares of BOX
Common Stock, and by Andrew, Mark and Tony Blank with respect to an
aggregate of 1,581,163 shares of BOX Common Stock, will in each case be
revoked upon consummation of the Merger. Includes 200,000 shares of BOX
Common Stock owned by StarNet that are subject to an option granted by
StarNet to Mr. McGlade to purchase such shares at a price of $1.25 per
share.
(4) Includes an option granted by StarNet to purchase 200,000 shares of BOX
Common Stock from StarNet at a price of $1.25 per share. Also includes
options to purchase 300,000 shares of BOX Common Stock currently
exercisable at a price of $2.00 per share. TCI Music and the BOX have
agreed to grant options to acquire shares of TCI Music Series A Common
Stock in exchange for cancellation of such options to acquire 300,000
shares of BOX Common Stock, at the rate of .214 of a share of Series A
Common Stock per share of BOX Common Stock. See "THE MERGER -- Interests of
Certain Persons in the Merger."
(5) Includes options to purchase 10,000 shares of BOX Common Stock currently
exercisable at a price of $1.00 per share and excludes 150,000 shares
underlying an option which vests more than 60 days from October 31, 1997.
(6) Represents options to purchase 100,000 shares of BOX Common Stock currently
exercisable at a price of $1.00 per share. The BOX has agreed, pursuant to
the Merger Agreement, to pay $0.50 per share for the cancellation of such
options, being the difference in the exercise price and the value of a
share of BOX Common Stock for purposes of the Merger. See "THE
MERGER -- Interests of Certain Persons in the Merger." Does not include
1,000 shares of common stock owned by Ms. Hoffman's husband, as to which
she disclaims beneficial ownership.
(7) Includes options to purchase 40,000 shares of BOX Common Stock currently
exercisable at a price of $1.00 per share. The BOX has agreed, pursuant to
the Merger Agreement, to pay $0.50 per share for the cancellation of such
options, being the difference in the exercise price and the value of a
share of BOX Common Stock for purposes of the Merger.
(8) Represents options to purchase 50,000 shares of BOX Common Stock currently
exercisable at a price of $2.00 per share. TCI Music and the BOX have
agreed to grant options to acquire shares of Series A Common Stock in
exchange for cancellation of such options, at the rate of .214 of a share
of Series A
89
<PAGE> 100
Common Stock per share of BOX Common Stock. In connection with the
termination of Mr. Natalicchio's employment with the BOX, the BOX has
offered to pay Mr. Natalicchio $10,000 for the cancellation of such options
to acquire BOX Common Stock in lieu of the options to acquire shares of
Series A Common Stock to otherwise be granted for such cancellation. See
"THE MERGER -- Interests of Certain Persons in the Merger." Excludes
options to purchase 25,000 shares of BOX Common Stock which vest more than
60 days from October 31, 1997.
(9) Includes options to purchase 45,000 shares of BOX Common Stock currently
exercisable at a price of $1.75 per share. TCI Music and the BOX have
agreed to grant options to acquire shares of Series A Common Stock in
exchange for cancellation of such options, at the rate of .214 of a share
of Series A Common Stock per share of BOX Common Stock. Also includes
options to acquire 10,000 shares of BOX Common Stock currently exercisable
at a price of $1.00 per share. See "THE MERGER -- Interests of Certain
Persons in the Merger."
(10) Includes options to acquire 45,000 shares of BOX Common Stock currently
exercisable at a price of $1.75 per share. TCI Music and the BOX have
agreed to grant options to acquire shares of Series A Common Stock in
exchange for cancellation of such options, at the rate of .214 of a share
of Series A Common Stock per share of BOX Common Stock. Also includes
options to acquire 10,000 shares of BOX Common Stock currently exercisable
at a price of $1.00 per share. See "THE MERGER -- Interests of Certain
Persons in the Merger."
(11) 1,320,155 shares of those beneficially owned by Mr. Wolfson are subject to
an irrevocable proxy granted by him to CEA Investors II. Such irrevocable
proxy will be revoked upon consummation of the Merger.
(12) Island is a wholly-owned subsidiary of Island International Limited
("Island International"), the capital stock of which is held in trust by
The Island Settlement ("Island Trust"). Island International and Island
Trust have disclaimed beneficial ownership of the shares of common stock
beneficially owned by Island. Mr. Blackwell has shared voting power and
shared dispositive power with respect to such shares.
(13) Represents 1,666,667 shares of the Company's 6% Convertible Redeemable
Preferred Stock, which are immediately convertible into 1,666,667 shares of
BOX Common Stock. Such stock will not be converted into shares of Music
Series A Preferred Stock pursuant to the Merger and will remain outstanding
after the Effective Time, and will continue to represent 6.3% of the
combined voting power of the BOX Voting Stock. TCI Music has entered into
discussions with the holder of all of the outstanding shares of BOX
Preferred Stock to purchase such shares prior to the consummation of the
Merger for cash in the amount of $2,500,000 (the equivalent of $1.50 per
share), plus accrued but unpaid dividends.
CERTAIN TRANSACTIONS
TCI beneficially owns approximately 45.7% of the outstanding shares of
Series A Common Stock and 100% of the outstanding shares of Series B Common
Stock, collectively representing 98.7% of the voting power related to the
outstanding shares of TCI Music Common Stock. TCI acquired such shares upon the
consummation of the DMX Merger on July 11, 1997.
DMX under an agreement with NDTC has a capital lease to lease equipment for
its studio and uplinking facility in Littleton, Colorado. The obligation under
the capital lease at June 30, 1997 was $1,386,000 with terms which extend to
2000 at an interest rate of 9.5%. DMX is also obligated to NDTC under various
operating leases for uplinking and satellite services. The total expense under
those leases for the nine months ended June 30, 1997 and the fiscal years ended
September 30, 1996 and 1995 were $3,358,000, $4,831,000 and $4,489,000,
respectively.
Total subscriber fee revenue from TCI and its affiliates represented
approximately 50%, 57%, 56% and 61% of total subscriber fee revenue of DMX for
the nine months ended June 30, 1997 and 1996 and the fiscal years ended
September 30, 1996 and 1995, respectively, with accounts receivable due from TCI
and its affiliates at June 30, 1997 and September 30, 1996 totaling
approximately $1,482,000 and $1,829,000, respectively.
90
<PAGE> 101
On December 10, 1996, DMX entered into a letter agreement with Sky
Entertainment Services in Latin America ("Sky-LA") pursuant to which Sky-LA was
granted the right to carry up to 40 DMX music formats on the Mexican, Brazilian,
North South American and South American platforms of Sky-LA. 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 News Corporation, Limited; and
Tele-Communications International, Inc. Tele-Communications International, Inc.
is a subsidiary of TCI.
Shaw Communications Inc. ("Shaw"), beneficially owns approximately 12.8% of
the outstanding shares of Series A Common Stock, which it acquired upon the
consummation of the DMX Merger on July 11, 1997 in exchange for the shares of
common stock of DMX it owned prior to the DMX Merger. JR Shaw, President and
Chief Executive Officer of Shaw was a director of DMX prior to the DMX Merger.
Mr. Shaw beneficially owns 14% of Series A Common Stock, which he acquired upon
the consummation of the DMX Merger in exchange for the shares of common stock of
DMX he beneficially owned prior to the DMX Merger. Mr. Sparkman, former director
of DMX and a director of TCI Music, is a director of Shaw. In March 1992, Shaw,
the second largest cable operator in Canada, entered into a licensing and
distribution agreement with DMX which grants to DMX-Canada Ltd. the exclusive
license and right to distribute DMX's premium service in Canada, and was amended
on November 1, 1994 by the Commercial License and Distribution Agreement and was
amended on April 14, 1997 by the Residential License and Distribution Agreement.
Such licensing and distribution agreement, as amended, provides DMX with a
monthly, per subscriber programming royalty for both residential and commercial
distribution. In addition, Shaw formed DMX-Canada Ltd., a partner in a
partnership with 450714 B.C. Ltd., a subsidiary of DMX.
During 1995, DMX 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
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 April 1996, DMX entered into two capital leases with DMX-Canada the
proceeds of which were used to purchase DMX Disc equipment leased to two DMX
customers, Nine West and Coach. The obligation under the capital lease was for a
term which extended to May 2001 at an effective interest rate of 27.21%. In May
1997, the lease balance of $268,625 was paid in full through an offset of
license fees due to DMX totaling $220,714 and cash for the balance of $47,911.
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 and requires a one to one ratio of Canadian content to
non Canadian content. DMX-Canada and DMX have negotiated an agreement to
distribute the DMX Service to the Canadian residential cable market. The service
will include a total of 30 formats and will be distributed through Shaw Cable
Systems and their affiliates. DMX-Canada will also license other Canadian third
party distributors such as Star Choice. The launch of the DMX service for
residential distribution was July 1997.
The CRTC does not regulate programming delivered to commercial
establishments by direct broadcast satellite and DMX-Canada has been
distributing the DMX service to the commercial sector since 1994. DMX and
DMX-Canada have negotiated a new license and distribution agreement which grants
an exclusive license and right to distribute the DMX service to commercial
establishments in Canada. The term of the new agreement coincides with the
original agreement dated March 9, 1992, and terminates March 31, 2012. DMX
received total license fees of approximately $370,000 for the nine months ended
June 30, 1997 under the agreements.
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<PAGE> 102
Stephen A. Wynn, Chairman of the Board, President and Chief Executive
Officer, Mirage Resorts, Incorporated, resigned as a director of DMX in May 1996
concurrently with his sale of 5,700,000 shares of the Common Stock of DMX 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, DMX
entered into a five year commercial music service agreement with Mirage Resorts,
Inc. where DMX provides its DMX for Business music service for a monthly fee.
DMX entered into definitive agreements dated December 18, 1996 with Jerold
H. Rubinstein (Chairman of the Board and Chief Executive Officer of DMX prior to
the DMX Merger), which provided for Mr. Rubinstein to either (1) purchase a 90%
interest in DMX-Europe N.V. and its subsidiary DMX-Europe (UK) Limited
(collectively, "DMX-E") in a transaction referred to as the "Reorganization
Plan," or (2) if agreement could not be reached with the creditors of DMX-E,
then Mr. Rubinstein would organize a new company that would distribute DMX
Service in Europe and DMX would receive a 10% interest in the new company and
DMX-E would be placed in the hands of a receiver. In July 1997, DMX-E was placed
in receivership and the definitive agreement related to option 1 was terminated.
The definitive agreement related to option 2 was effected in July 1997 whereby
DMX obtained a 10% interest in a new company, XTRA Music Limited ("XTRA"), and a
Channel Distribution Agreement was executed between XTRA and DMX providing XTRA
with an exclusive, five-year, royalty-free license to distribute the DMX Service
in Europe, the former Soviet Union and the Middle East and the right to use
DMX's trade marks for two years. DMX Service is currently not being distributed
by XTRA as Mr. Rubinstein is seeking financial partners.
See "CONTROL BY TCI; ARRANGEMENTS BETWEEN TCI AND TCI MUSIC" and
"MANAGEMENT OF TCI MUSIC." Additional information regarding transactions
involving DMX and its officers, directors or affiliates (including former
officers and directors) is described in the Transition Report on Form 10-K of
TCI Music, Appendix V to this Proxy Statement/Prospectus.
LEGAL MATTERS
The validity of the Music Series A Preferred Stock to be issued in
connection with the Merger and the federal income tax consequences of the Merger
will be passed upon by Sherman & Howard L.L.C., 633 Seventeenth Street, Denver,
Colorado. Certain members of Sherman & Howard L.L.C. serve as Assistant
Secretaries of TCI.
EXPERTS
The consolidated balance sheets of DMX and its subsidiaries as of June 30,
1997 and September 30, 1996 and 1995, and the related consolidated statements of
operations, stockholders' deficit, and cash flows for each of the years in the
two-year period ended September 30, 1996 and the nine months ended June 30,
1997, have been incorporated by reference herein and in the registration
statement in reliance upon the report of KPMG Peat Marwick LLP, independent
certified public accountants, incorporated by reference herein, and upon the
authority of said firm as experts in accounting and auditing.
The consolidated financial statements of The Box Worldwide, Inc. (formerly
Video Jukebox Network, Inc.) at December 31, 1996, and for each of the two years
in the period ended December 31, 1996, incorporated by reference in the Proxy
Statement of The Box Worldwide, Inc., which is referred to and made a part of
this Prospectus and Registration Statement, have been audited by Ernst & Young
LLP, independent auditors, as set forth in their report thereon incorporated
herein by reference, and are included in reliance upon such report given upon
the authority of such firm as experts in accounting and auditing.
The financial statements of Paradigm as of December 31, 1996 and for each
of the periods from November 21, 1995 (inception) through December 31, 1995 and
December 31, 1996, included in this Proxy Statement/Prospectus and in the
Registration Statement, have been audited by Janover Rubinroit, LLC, independent
auditors, and are included in reliance upon such reports given on the authority
of that firm as experts in accounting and auditing.
92
<PAGE> 103
Representatives of Ernst & Young, LLP, the BOX's independent auditors, are
expected to be present at the Special Meeting and will have the opportunity to
make a statement if they desire to do so. Such representatives are also expected
to be available to respond to appropriate questions.
SHAREHOLDER PROPOSALS
For proposals of shareholders of the BOX to be considered for inclusion in
the proxy statement of the 1998 Annual Meeting of Shareholders of the BOX (if
the Merger is not consummated), such proposals must be received by the corporate
secretary no later than December 31, 1997.
93
<PAGE> 104
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
TCI Music, Inc.
Independent Auditors' Report.............................. F-2
Consolidated Balance Sheet, June 30, 1997................. F-3
Notes to Consolidated Balance Sheet....................... F-4
TCI Music, Inc.
Condensed Pro Forma Combined Financial Statements
(unaudited)............................................ F-7
Condensed Pro Forma Combined Balance Sheet, June 30, 1997
(unaudited)............................................ F-8
Condensed Pro Forma Combined Statements of Operations:
Six months ended June 30, 1997......................... F-9
Year ended December 31, 1996........................... F-10
Notes to Condensed Pro Forma Combined Financial Statements
(unaudited)............................................ F-11
Paradigm Music Entertainment Company
Report of Independent Auditors............................ F-15
Balance Sheets, June 30, 1997 (unaudited) and December 31,
1996................................................... F-16
Statements of Operations, Six months ended June 30, 1997
and 1996 (unaudited), November 14, 1995 (date of
inception) through June 30, 1997 (unaudited), year
ended December 31, 1996, and November 14, 1995 (date of
inception) through December 31, 1995................... F-17
Statements of Stockholders' Equity, Six months ended June
30, 1997 (unaudited), year ended December 31, 1996, and
November 14, 1995 (date of inception) through
December 31, 1995...................................... F-18
Statements of Cash Flows, Six months ended June 30, 1997
and 1996 (unaudited), November 14, 1995 (date of
inception) through June 30, 1997 (unaudited), year
ended December 31, 1996, and November 14, 1995 (date of
inception) through
December 31, 1995...................................... F-19
Notes to Financial Statements............................. F-20
</TABLE>
F-1
<PAGE> 105
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholder
TCI Music, Inc.:
We have audited the accompanying consolidated balance sheet of TCI Music,
Inc. (a subsidiary of Tele-Communications, Inc.) and subsidiary as of June 30,
1997. This financial statement is the responsibility of the Company's
management. Our responsibility is to express an opinion on this financial
statement based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the balance sheet is free of material
misstatement. An audit of a balance sheet includes examining, on a test basis,
evidence supporting the amounts and disclosures in that balance sheet. An audit
of a balance sheet also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
balance sheet presentation. We believe that our audit of the balance sheet
provides a reasonable basis for our opinion.
In our opinion, the consolidated balance sheet referred to above presents
fairly, in all material respects, the financial position of TCI Music, Inc. and
subsidiary as of June 30, 1997, in conformity with generally accepted accounting
principles.
KPMG Peat Marwick LLP
Los Angeles, California
October 24, 1997
F-2
<PAGE> 106
TCI MUSIC, INC. AND SUBSIDIARY
(A SUBSIDIARY OF TELE-COMMUNICATIONS, INC.)
CONSOLIDATED BALANCE SHEET
JUNE 30, 1997
ASSETS
<TABLE>
<S> <C>
Cash........................................................ $ 1
Other assets (note 2)....................................... 809,165
--------
$809,166
========
STOCKHOLDER'S EQUITY
Preferred stock, $.01 par value.
Authorized 5,000,000 shares; no shares issued............. $ --
Series A common stock, $.01 par value
Authorized 295,000,000 shares; no shares issued........... --
Series B common stock, $.01 par value.
Authorized 200,000,000 shares; issued and outstanding 1
share.................................................. --
Additional paid-in capital.................................. 809,166
--------
$809,166
========
</TABLE>
See accompanying notes to consolidated balance sheet.
F-3
<PAGE> 107
TCI MUSIC, INC. AND SUBSIDIARY
(A SUBSIDIARY OF TELE-COMMUNICATIONS, INC.)
NOTES TO CONSOLIDATED BALANCE SHEET
JUNE 30, 1997
(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 was issued to
Tele-Communications, Inc. ("TCI") for a capital contribution of $1. Since its
formation, TCI Music has not conducted any significant activities other than
those incident to its formation, the Contribution Agreement, the DMX Merger
Agreement, the Box Merger Agreement and the Paradigm Agreement (all as defined
below). The accompanying consolidated balance sheet includes the accounts of TCI
Music and its wholly-owned subsidiary TCI Merger Sub.
Effective July 11, 1997 and pursuant to an Agreement and Plan of Merger,
dated as of February 6, 1997, as amended by Amendment One to Merger Agreement
dated May 29, 1997 (the "DMX Merger Agreement"), by and among TCI Music, TCI
Merger Sub, a wholly owned subsidiary of TCI Music ("Merger Sub") and DMX Inc.
("DMX"), Merger Sub was merged with and into DMX, with DMX as the surviving
corporation (the "DMX Merger"). As a result of the DMX Merger, stockholders of
DMX became stockholders of TCI Music. In connection with the DMX Merger, and
pursuant to the terms and conditions of a Contribution Agreement by and between
TCI and TCI Music (the "Contribution Agreement"), effective as of the closing,
TCI and TCI Music effected certain other transactions that are collectively
referred to herein as the "Contribution."
In connection with the DMX Merger, TCI and TCI Music entered into the
Contribution Agreement. Pursuant to the Contribution Agreement, effective as of
the closing of the DMX Merger: (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 and a promissory note in the amount of $40 million, (ii) until
December 31, 2006, 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 revenue
from such sales to residential subscribers and net of the revenue otherwise
payable to DMX (which is a wholly-owned subsidiary of TCI Music following the
DMX Merger) as license fees for DMX music services under affiliation agreements
currently in effect (the "Contributed Net DMX Revenue") (see discussion below
regarding amendment of the Contribution Agreement); (iii) TCI contributed to TCI
Music certain commercial digital DMX tuners that were not in service as of the
effective date of the DMX Merger, and (iv) TCI granted to each stockholder who
became a stockholder of TCI Music pursuant to the DMX Merger, one right (a
"Right") with respect to each whole share of Series A Common Stock, $.01 par
value per share, of TCI Music ("Series A Common Stock") acquired by such
stockholder in the DMX Merger pursuant to the terms of a Rights Agreement among
TCI, TCI Music and the rights agent.
Upon consummation of the DMX Merger, each outstanding share of common stock
of DMX ("DMX Common Stock") was converted into the right to receive (i)
one-quarter of a share of Series A Common Stock, (ii) one Right with respect to
each whole share of Series A Common Stock and (iii) cash in lieu of the issuance
of fractional shares of Series A Common Stock and Rights. Each Right entitles
the holder to require TCI to purchase from such holder one share of Series A
Common Stock for $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, and payable at the election of TCI, in cash, a number of shares of
TeleCommunications, Inc. Series A TCI Group Common Stock, par value $1.00 per
share, having an equivalent value or a combination thereof, if during the
one-year period beginning on the effective date of the DMX Merger, the price of
Series A Common Stock does not equal or exceed $8.00 per share for a period of
at least 20 consecutive trading days.
In connection with the BOX Merger, (defined below), TCI Music and TCI
entered into the Amended and Restated Contribution Agreement effective as of
July 1, 1997 (the "Amended Contribution Agreement") which provides, among other
things, for TCI to deliver, or cause certain of its wholly-owned subsidiaries to
F-4
<PAGE> 108
TCI MUSIC, INC. AND SUBSIDIARY
(A SUBSIDIARY OF TELE-COMMUNICATIONS, INC.)
NOTES TO CONSOLIDATED BALANCE SHEET -- (CONTINUED)
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 $18,000,000 annually (adjusted
annually for inflation) for a term of 20 years (the "Annual TCI Payments").
Pursuant to the Amended Contribution Agreement, the Annual TCI Payments
represent (i) revenue of wholly-owned subsidiaries of TCI that are 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.
In connection with the BOX Merger (defined below), an affiliate of TCI (the
"TCI Affiliate") will enter into an affiliation agreement (the "Affiliation
Agreement") for a 10-year period effective as of July 1, 1997, pursuant to which
DMX will grant to the TCI Affiliate and certain affiliates of the TCI Affiliate
the non-exclusive right to distribute and subdistribute DMX's service to
commercial and residential customers for a 10-year period in exchange for
licensing fees paid by the TCI Affiliate to DMX. Under the Affiliation
Agreement, the annual fee paid by the TCI Affiliate to DMX will be $8,500,000
for the initial three years, subject to adjustment annually (beginning July 1,
1998) for inflation, for subscribers served by certain divested systems and
acquired systems, and certain other matters.
Pursuant to an Agreement and Plan of Merger, dated as of August 12, 1997
(the "Box Merger Agreement"), by and among 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"), Acquisition Sub will be merged (the "Box Merger") with and into the Box
with the Box as the surviving corporation (the "Surviving Corporation").
Outstanding shares of common stock of the Box ("Box Common Stock") will be
converted into a number of shares of TCI Music Series A Convertible Preferred
Stock ("Music Series A Preferred Stock") as 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 1,666,667 shares of 6% Convertible Redeemable Preferred Stock of the Box
will remain outstanding after the Box Merger.
Upon consummation of the Box Merger, (a) each share of Box Common Stock
outstanding immediately prior to the Box Merger (other than shares held directly
or indirectly by the Box and dissenting shares) will be converted into the right
to receive a fraction of a share of Music Series A Preferred Stock equal to the
quotient (rounded to the nearest hundredth) of $1.50 divided by three times the
average of the average daily closing bid and asked prices of one share of Series
A Common Stock for a period of 20 consecutive trading days ending on the third
trading day prior to the closing of the Box Merger as reported on the Nasdaq
SmallCap Market, (b) cash will be paid in lieu of fractional shares of Music
Series A Preferred Stock and (c) each share of the Box's 6% Convertible
Redeemable Preferred Stock, par value $.15 per share and stated value of $1.50
per share outstanding immediately prior to the Box Merger (other than dissenting
shares) will remain an outstanding share of the Surviving Corporation. Each
share of Music Series A Preferred Stock will be convertible at the option of the
holder into three shares of Series A Common Stock, subject to certain
antidilution adjustments. Each share of Music Series A Preferred Stock will be
entitled to vote on all matters submitted to a vote of the holders of the Series
A Common Stock and to the number of votes equal to the number of shares of
Series A Common Stock into which such share is convertible as of the record date
for the matter to be voted upon. Unlike the shares of Series A Common Stock
issued to former stockholders of DMX, the shares of Series A Common Stock into
which the Music Series A 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 share of Series A Common Stock.
F-5
<PAGE> 109
TCI MUSIC, INC. AND SUBSIDIARY
(A SUBSIDIARY OF TELE-COMMUNICATIONS, INC.)
NOTES TO CONSOLIDATED BALANCE SHEET -- (CONTINUED)
TCI Music and Paradigm Music Entertainment Company, a Delaware corporation
("Paradigm") entered into a binding letter agreement dated September 18, 1997
(the "Paradigm Agreement") pursuant to which TCI Music will acquire all of the
issued and outstanding shares of the stock of Paradigm, par value $.01 per share
("Paradigm Common Stock"), in a merger of a newly created wholly-owned
subsidiary of TCI Music with and into Paradigm (the "Paradigm Merger"). TCI
Music will deliver consideration in connection with the Paradigm Merger by (a)
exchanging that number of shares of Series A Common Stock determined by dividing
$24,000,000 (less the amount equal to the number of dissenters' shares
multiplied by the portion of $24,000,000 allocable to each share of Paradigm
Common Stock assuming no dissenters' shares) by the average of the mean daily
closing bid and asked prices of Series A Common Stock for a period of 20
consecutive trading days ending on the third trading day prior to the effective
time of the Paradigm Merger as quoted on the Nasdaq SmallCap Market and (b)
paying the amount of approximately $5,000,000 in cash or as a purchase or
assumption by TCI Music of debt owed by Paradigm.
(2) OTHER ASSETS
Other assets represent pre-acquisition costs related to the DMX Merger.
F-6
<PAGE> 110
TCI MUSIC, INC. AND SUBSIDIARY
(A SUBSIDIARY OF TELE-COMMUNICATIONS, INC.)
CONDENSED PRO FORMA COMBINED FINANCIAL STATEMENTS
JUNE 30, 1997
(UNAUDITED)
Effective July 11, 1997 and pursuant to an Agreement and Plan of Merger,
dated as of February 6, 1997, as amended by Amendment One to Merger Agreement
dated May 29, 1997 (the "DMX Merger Agreement"), by and among
Tele-Communications, Inc. ("TCI"), TCI Music, Inc., a wholly-owned subsidiary of
TCI ("TCI Music"), TCI Merger Sub, a wholly owned subsidiary of TCI Music
("Merger Sub") and DMX Inc. ("DMX"), Merger Sub was merged with and into DMX,
with DMX as the surviving corporation (the "DMX Merger"). As a result of the DMX
Merger, stockholders of DMX became stockholders of TCI Music. In connection with
the DMX Merger, and pursuant to the terms and conditions of a Contribution
Agreement, as amended, by and between TCI and TCI Music (the "Contribution
Agreement"), effective as of the closing, TCI and TCI Music effected certain
other transactions that are collectively referred to herein as the
"Contribution." See note 1.
Prior to the consummation of the DMX Merger and Contribution, TCI
beneficially owned approximately 45.7% of the outstanding DMX common stock,
$0.01 par value ("DMX Common Stock"). Immediately following consummation of the
DMX Merger and Contribution, TCI beneficially owns approximately 45.7% of the
outstanding shares of TCI Music Series A common stock $.01 par value per share
("Series A Common Stock"), 100% of the outstanding TCI Music Series B common
stock, par value $.01 per share, (the "TCI Music Series B Common Stock," and
together with the Series A Common Stock, the "TCI Music Common Stock") and 89.6%
of the TCI Music Common Stock.
TCI Music and Paradigm Music Entertainment Company, a Delaware corporation
("Paradigm") entered into a binding letter agreement dated September 18, 1997
(the "Paradigm Agreement") pursuant to which TCI Music will acquire all of the
issued and outstanding shares of the stock of Paradigm, par value $.01 per share
("Paradigm Common Stock"), in a merger of a newly created wholly-owned
subsidiary of TCI Music with and into Paradigm (the "Paradigm Merger"). See note
2.
Pursuant to an Agreement and Plan of Merger, dated as of August 12, 1997
(the "Box Merger Agreement"), by and among 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"), Acquisition Sub will be merged (the "Box Merger") with and into the Box
with the Box as the surviving corporation (the "Surviving Corporation").
Outstanding shares of common stock of the Box will be converted into a number of
shares of TCI Music Series A Convertible Preferred Stock ("Music Series A
Preferred Stock") as described in note 3, 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 1,666,667
shares of 6% Convertible Redeemable Preferred Stock of the Box will remain
outstanding after the Box Merger.
The following unaudited condensed pro forma combined balance sheet of TCI
Music, dated as of June 30, 1997, assumes that the DMX Merger and Contribution,
the Box Merger and the Paradigm Merger were effective as of such date.
The following unaudited condensed pro forma combined statements of
operations of TCI Music for the six months ended June 30, 1997 and the year
ended December 31, 1996 assume that the DMX Merger and Contribution, the Box
Merger and the Paradigm Merger were effective as of January 1, 1996.
The unaudited pro forma results do not purport to be indicative of the
results of operations that would have been obtained if the DMX Merger and
Contribution, the Box Merger and the Paradigm Merger were effective as of
January 1, 1996. These condensed pro forma combined financial statements of TCI
Music should be read in conjunction with the historical consolidated financial
statements and the related notes thereto of DMX, the Box and Paradigm.
F-7
<PAGE> 111
TCI MUSIC, INC. AND SUBSIDIARY
(A SUBSIDIARY OF TELE-COMMUNICATIONS, INC.)
CONDENSED PRO FORMA COMBINED BALANCE SHEET
(UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30, 1997
-----------------------------------------------------------------------------
TCI MUSIC
PRO FORMA --
TCI MUSIC DMX PARADIGM PRO FORMA BEFORE
HISTORICAL HISTORICAL(1) HISTORICAL(2) ADJUSTMENTS BOX MERGER
---------- ------------- ------------- ------------ -------------
<S> <C> <C> <C> <C> <C>
ASSETS
Cash -- continuing operations........... $ 1 664,340 11,082 -- 675,423
Other current assets -- continuing
operations............................. -- 5,353,685 623,357 -- 5,977,042
-------- ------------ ---------- ------------ -----------
Total current assets --continuing
operations...................... 1 6,018,025 634,439 -- 6,652,465
Current assets -- DMX-Europe N.V........ -- 168,427 -- -- 168,427
-------- ------------ ---------- ------------ -----------
Total current assets............. 1 6,186,452 634,439 -- 6,820,892
-------- ------------ ---------- ------------ -----------
Property and equipment, net:
Continuing operations.................. -- 3,968,053 498,235 5,600,000(4) 10,066,288
DMX-Europe N.V......................... -- 164,120 -- -- 164,120
-------- ------------ ---------- ------------ -----------
-- 4,132,173 498,235 5,600,000 10,230,408
-------- ------------ ---------- ------------ -----------
Intangible assets, net.................. -- -- 1,581,851 93,796,570(5) 120,452,243
24,264,657(6)
809,165(7)
Other assets............................ 809,165 667,270 1,125,032 (809,165)(7) 1,792,302
-------- ------------ ---------- ------------ -----------
$809,166 10,985,895 3,839,557 123,661,227 139,295,845
======== ============ ========== ============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
(DEFICIT)
Current liabilities -- continuing
operations............................. $ -- 13,469,029 5,540,333 -- 19,009,362
Current liabilities -- DMX-Europe
N.V.................................... -- 9,130,484 -- -- 9,130,484
-------- ------------ ---------- ------------ -----------
Total current liabilities........ -- 22,599,513 5,540,333 -- 28,139,846
Note payable to TCI..................... -- 1,784,889 -- (1,784,889)(8) --
Capital lease obligation................ -- 821,548 13,455 -- 835,003
Deferred income taxes................... -- -- -- 3,583,400(5) 3,583,400
Other liabilities....................... -- 2,082,170 210,000 -- 2,292,170
-------- ------------ ---------- ------------ -----------
Total liabilities................ -- 27,288,120 5,763,788 1,798,511 34,850,419
-------- ------------ ---------- ------------ -----------
Minority interest in equity of
consolidated subsidiary................ -- -- -- -- --
Redeemable preferred stock.............. -- -- -- -- --
Stockholders' equity (deficit):
TCI Music Series A Common Stock........ -- -- -- 180,881(5)(6) 180,881
TCI Music Series B Common Stock........ -- -- -- 625,000(4) 625,000
Common Stock........................... -- 596,722 38,234 (634,956)(5)(6) --
Additional paid-in capital............. 809,166 136,895,686 4,118,310 4,975,000(4) 61,854,656
(141,013,996)(5)(6)
96,070,490(5)(6)
(40,000,000)(9)
Accumulated deficit.................... -- (152,786,657) (6,080,775) 158,867,432(5)(6) --
Foreign currency translation reserve... -- (429,973) -- 429,973(5) --
Treasury stock......................... -- (578,003) -- 578,003(5) --
-------- ------------ ---------- ------------ -----------
809,166 (16,302,225) (1,924,231) 80,077,827 62,660,537
Due to TCI............................. -- -- -- 1,784,889(8) 41,784,889
40,000,000(9)
-------- ------------ ---------- ------------ -----------
Total stockholders' equity
(deficit)....................... 809,166 (16,302,225) (1,924,231) 121,862,716 104,445,426
-------- ------------ ---------- ------------ -----------
$809,166 10,985,895 3,839,557 123,661,227 139,295,845
======== ============ ========== ============ ===========
<CAPTION>
JUNE 30, 1997
--------------------------------------------
BOX
BOX PRO FORMA TCI MUSIC
HISTORICAL(3) ADJUSTMENTS PRO FORMA
------------- ----------- -----------
<S> <C> <C> <C>
ASSETS
Cash -- continuing operations........... 2,345,293 -- 3,020,716
Other current assets -- continuing
operations............................. 3,384,240 -- 9,361,282
----------- ----------- -----------
Total current assets --continuing
operations...................... 5,729,533 -- 12,381,998
Current assets -- DMX-Europe N.V........ -- -- 168,427
----------- ----------- -----------
Total current assets............. 5,729,533 -- 12,550,425
----------- ----------- -----------
Property and equipment, net:
Continuing operations.................. 8,852,102 -- 18,918,390
DMX-Europe N.V......................... -- -- 164,120
----------- ----------- -----------
8,852,102 -- 19,082,510
----------- ----------- -----------
Intangible assets, net.................. -- 25,564,091(14) 146,016,334
Other assets............................ 2,097,145 -- 3,889,447
----------- ----------- -----------
16,678,780 25,564,091 181,538,716
=========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
(DEFICIT)
Current liabilities -- continuing
operations............................. 4,586,495 -- 23,595,857
Current liabilities -- DMX-Europe
N.V.................................... -- -- 9,130,484
----------- ----------- -----------
Total current liabilities........ 4,586,495 -- 32,726,341
Note payable to TCI..................... -- -- --
Capital lease obligation................ -- -- 835,003
Deferred income taxes................... -- -- 3,583,400
Other liabilities....................... -- -- 2,292,170
----------- ----------- -----------
Total liabilities................ 4,586,495 -- 39,436,914
----------- ----------- -----------
Minority interest in equity of
consolidated subsidiary................ -- 2,373,758(15) 2,373,758
Redeemable preferred stock.............. 2,373,758 (2,373,758)(15) 35,282,618
35,282,618(14)
Stockholders' equity (deficit):
TCI Music Series A Common Stock........ -- -- 180,881
TCI Music Series B Common Stock........ -- -- 625,000
Common Stock........................... 24,002 (24,002)(14) --
Additional paid-in capital............. 30,238,761 (30,238,761)(14) 61,854,656
Accumulated deficit.................... (20,490,833) 20,490,833(14) --
Foreign currency translation reserve... (53,403) 53,403(14) --
Treasury stock......................... -- -- --
----------- ----------- -----------
9,718,527 (9,718,527) 62,660,537
Due to TCI............................. -- -- 41,784,889
----------- ----------- -----------
Total stockholders' equity
(deficit)....................... 9,718,527 (9,718,527) 104,445,426
----------- ----------- -----------
16,678,780 25,564,091 181,538,716
=========== =========== ===========
</TABLE>
See accompanying notes to unaudited condensed pro forma combined financial
statements.
F-8
<PAGE> 112
TCI MUSIC, INC. AND SUBSIDIARY
(A SUBSIDIARY OF TELE-COMMUNICATIONS, INC.)
CONDENSED PRO FORMA COMBINED STATEMENT OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, 1997
--------------------------------------------------------------------------
TCI MUSIC
PRO FORMA --
TCI MUSIC DMX PARADIGM PRO FORMA BEFORE BOX
HISTORICAL HISTORICAL(1) HISTORICAL(2) ADJUSTMENTS MERGER
---------- ------------- ------------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Revenue:
Continuing operations... $ -- 9,913,395 975,762 8,732,600(11) 19,621,757
DMX-Europe N.V.......... -- 1,526,559 -- -- 1,526,559
---- ----------- ---------- ---------- -----------
-- 11,439,954 975,762 8,732,600 21,148,316
---- ----------- ---------- ---------- -----------
Continuing operations... -- (13,059,848) (4,221,751) (845,448)(11) (18,127,047)
DMX-Europe N.V.......... -- (5,412,101) -- -- (5,412,101)
Depreciation and
amortization............ -- (1,197,555) (313,030) (5,943,520)(12) (7,454,105)
Loss on disposal -- DMX-
Europe N.V.............. -- (1,737,554) -- -- (1,737,554)
---- ----------- ---------- ---------- -----------
-- (21,407,058) (4,534,781) (6,788,968) (32,730,807)
---- ----------- ---------- ---------- -----------
Operating loss........ -- (9,967,104) (3,559,019) 1,943,632 (11,582,491)
Interest expense:
Continuing operations... -- (189,151) -- (2,000,000)(13) (2,189,151)
DMX-Europe N.V.......... -- (129,794) -- -- (129,794)
Interest income........... -- 14,260 9,457 -- 23,717
Other expense, net........ -- (103,365) -- -- (103,365)
---- ----------- ---------- ---------- -----------
Net loss.......... -- (10,375,154) (3,549,562) (56,368) (13,981,084)
Dividend requirement on
preferred stock......... -- -- -- -- --
---- ----------- ---------- ---------- -----------
Net loss
attributable to
common
shareholders.... $ -- (10,375,154) (3,549,562) (56,368) (13,981,084)
==== =========== ========== ========== ===========
Loss attributable to
common shareholders per
share:
Historical............ $ (.17) (1.73)
=========== ==========
Pro forma.............
<CAPTION>
SIX MONTHS ENDED JUNE 30, 1997
--------------------------------------------
BOX
BOX PRO FORMA TCI MUSIC
HISTORICAL(3) ADJUSTMENTS PRO FORMA
------------- ----------- -----------
<S> <C> <C> <C>
Revenue:
Continuing operations... 9,619,075 -- 29,240,832
DMX-Europe N.V.......... -- -- 1,526,559
----------- ---------- -----------
9,619,075 -- 30,767,391
----------- ---------- -----------
Continuing operations... (11,171,583) -- (29,298,630)
DMX-Europe N.V.......... -- -- (5,412,101)
Depreciation and
amortization............ (1,102,818) (1,278,205)(16) (9,835,128)
Loss on disposal -- DMX-
Europe N.V.............. -- -- (1,737,554)
----------- ---------- -----------
(12,274,401) (1,278,205) (46,283,413)
----------- ---------- -----------
Operating loss........ (2,655,326) (1,278,205) (15,516,022)
Interest expense:
Continuing operations... -- -- (2,189,151)
DMX-Europe N.V.......... -- -- (129,794)
Interest income........... 237,628 -- 261,345
Other expense, net........ (316,737) (75,000)(15) (495,102)
----------- ---------- -----------
Net loss.......... (2,734,435) (1,353,205) (18,068,724)
Dividend requirement on
preferred stock......... (75,000) 75,000(15) --
----------- ---------- -----------
Net loss
attributable to
common
shareholders.... (2,809,435) (1,278,205) (18,068,724)
=========== ========== ===========
Loss attributable to
common shareholders per
share:
Historical............ (.12)
===========
Pro forma............. $ (.22)(17)
===========
</TABLE>
See accompanying notes to unaudited condensed pro forma combined financial
statements.
F-9
<PAGE> 113
TCI MUSIC, INC. AND SUBSIDIARY
(A SUBSIDIARY OF TELE-COMMUNICATIONS, INC.)
CONDENSED PRO FORMA COMBINED STATEMENT OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
-----------------------------------------------------------------------------------------
TCI MUSIC
DMX PRO FORMA --
TCI MUSIC HISTORICAL PARADIGM PRO FORMA BEFORE BOX BOX
HISTORICAL (1)(10) HISTORICAL(2) ADJUSTMENTS MERGER HISTORICAL(3)
---------- ------------ ------------- ----------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Revenue:
Continuing
operations........... $ -- 17,280,729 31,114 17,167,868(11) 34,479,711 20,263,311
DMX-Europe N.V......... -- 1,529,730 -- -- 1,529,730 --
---- ------------ ---------- ----------- ----------- -----------
-- 18,810,459 31,114 17,167,868 36,009,441 20,263,311
---- ------------ ---------- ----------- ----------- -----------
Operating, selling,
general and
administrative
expenses:
Continuing
operations........... -- (24,399,774) (2,446,827) (1,652,153)(11) (28,498,754) (23,133,619)
DMX-Europe N.V......... -- (8,818,462) -- -- (8,818,462) --
Depreciation and
amortization........... -- (2,094,558) (43,168) (11,887,040)(12) (14,024,766) (1,433,698)
Loss on disposal -- DMX-
Europe N.V............. -- (7,153,278) -- -- (7,153,278) --
---- ------------ ---------- ----------- ----------- -----------
-- (42,466,072) (2,489,995) (13,539,193) (58,495,260) (24,567,317)
---- ------------ ---------- ----------- ----------- -----------
Operating loss....... -- (23,655,613) (2,458,881) 3,628,675 (22,485,819) (4,304,006)
Equity in loss of DMX-
Europe N.V............. -- (7,345,149) -- -- (7,345,149) --
Interest expense:
Continuing
operations........... -- (200,051) -- (4,000,000)(13) (4,200,051) --
DMX-Europe N.V......... -- (97,789) -- -- (97,789) --
Interest income.......... -- -- 59,417 -- 59,417 351,295
Gain on sale of equity
investment............. -- -- -- -- -- 5,758,940
Other, net............... -- 483,631 -- -- 483,631 (616,239)
---- ------------ ---------- ----------- ----------- -----------
Earnings (loss)
before income tax
expense............ (30,814,971) (2,399,464) (371,325) (33,585,760) 1,189,990
Income tax expense....... -- -- -- -- -- (14,576)
---- ------------ ---------- ----------- ----------- -----------
Net earnings
(loss)......... (30,814,971) (2,399,464) (371,325) (33,585,760) 1,175,414
Dividend requirement on
preferred stock........ -- -- -- -- -- (8,630)
---- ------------ ---------- ----------- ----------- -----------
Net earnings
(loss)
attributable to
common
shareholders... $ -- (30,814,971) (2,399,464) (371,325) (33,585,760) 1,166,784
==== ============ ========== =========== =========== ===========
Earnings (loss)
attributable to common
shareholders per share:
Historical........... $ (.57) (1.32) .05
============ ========== ===========
Pro forma............
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
-----------------------------
BOX
PRO FORMA TCI MUSIC
ADJUSTMENTS PRO FORMA
----------- ------------
<S> <C> <C>
Revenue:
Continuing
operations........... -- 54,743,022
DMX-Europe N.V......... -- 1,529,730
---------- ------------
-- 56,272,752
---------- ------------
Operating, selling,
general and
administrative
expenses:
Continuing
operations........... -- (51,632,373)
DMX-Europe N.V......... -- (8,818,462)
Depreciation and
amortization........... (2,556,091)(16) (18,014,555)
Loss on disposal -- DMX-
Europe N.V............. -- (7,153,278)
---------- ------------
(2,556,091) (85,618,668)
---------- ------------
Operating loss....... (2,556,091) (29,345,916)
Equity in loss of DMX-
Europe N.V............. -- (7,345,149)
Interest expense:
Continuing
operations........... -- (4,200,051)
DMX-Europe N.V......... -- (97,789)
Interest income.......... -- 410,712
Gain on sale of equity
investment............. -- 5,758,940
Other, net............... (8,630)(15) (141,238)
---------- ------------
Earnings (loss)
before income tax
expense............ (2,564,721) (34,960,491)
Income tax expense....... -- (14,576)
---------- ------------
Net earnings
(loss)......... (2,564,721) (34,975,067)
Dividend requirement on
preferred stock........ 8,630(15) --
---------- ------------
Net earnings
(loss)
attributable to
common
shareholders... (2,556,091) (34,975,067)
========== ============
Earnings (loss)
attributable to common
shareholders per share:
Historical...........
Pro forma............ $ (.44)(17)
============
</TABLE>
See accompanying notes to unaudited condensed pro forma combined financial
statements.
F-10
<PAGE> 114
TCI MUSIC, INC. AND SUBSIDIARY
(A SUBSIDIARY OF TELE-COMMUNICATIONS, INC.)
NOTES TO CONDENSED PRO FORMA COMBINED FINANCIAL STATEMENTS
JUNE 30, 1997
(UNAUDITED)
(1) In connection with the DMX Merger, TCI and TCI Music entered into the
Contribution Agreement. Pursuant to the Contribution Agreement, effective as of
the closing of the DMX Merger: (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 and a promissory note in the amount of $40 million (the "TCI Music
Note"), (ii) until December 31, 2006, 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 revenue from such sales to residential subscribers and net of the revenue
otherwise payable to DMX (which is a wholly-owned subsidiary of TCI Music
following the DMX Merger) as license fees for DMX music services under
affiliation agreements currently in effect (the "Contributed Net DMX Revenue")
(see discussion below regarding amendment of the Contribution Agreement); (iii)
TCI contributed to TCI Music certain commercial digital DMX tuners that were not
in service as of the effective date of the DMX Merger (the "Contributed
Tuners"), and (iv) TCI granted to each stockholder who became a stockholder of
TCI Music pursuant to the DMX Merger, one right (a "Right") with respect to each
whole share of Series A Common Stock acquired by such stockholder in the DMX
Merger. The foregoing transactions are collectively referred to herein as the
"Contribution."
Upon consummation of the DMX Merger, each outstanding share of DMX Common
Stock was converted into the right to receive (i) one-quarter of a share of
Series A Common Stock, (ii) one Right with respect to each whole share of Series
A Common Stock and (iii) cash in lieu of the issuance of fractional shares of
Series A Common Stock and Rights. Each Right entitles the holder to require TCI
to purchase from such holder one share of Series A Common Stock for $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 (the "Put Price"),
and, payable at the election of TCI, in cash, a number of shares of
TeleCommunications, Inc. Series A TCI Group Common Stock, par value $1.00 per
share, having an equivalent value or a combination thereof, if during the
one-year period beginning on the effective date of the DMX Merger (the "Put
Period"), the price of Series A Common Stock does not equal or exceed $8.00 per
share for a period of at least 20 consecutive trading days.
In connection with the BOX Merger, (defined below), TCI Music and TCI
entered into the Amended and Restated Contribution Agreement effective as of
July 1, 1997 (the "Amended Contribution Agreement") which provides, among other
things, for TCI 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 $18,000,000 annually (adjusted annually for inflation) for
a term of 20 years (the "Annual TCI Payments"). Pursuant to the Amended
Contribution Agreement, the Annual TCI Payments represent (i) revenue of
subsidiaries of TCI that are 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.
In connection with the BOX Merger (defined below), an affiliate of TCI (the
"TCI Affiliate") will enter into an affiliation agreement (the "Affiliation
Agreement") for a 10-year period effective as of July 1, 1997, pursuant to which
DMX will grant to the TCI Affiliate and certain affiliates of the TCI Affiliate
the non-exclusive right to distribute and subdistribute DMX's service to
commercial and residential customers for a 10-year period in exchange for
licensing fees paid by the TCI Affiliate to DMX. Under the Affiliation
Agreement, the annual fee paid by the TCI Affiliate to DMX will be $8,500,000
for the initial three years, subject to adjustment annually (beginning July 1,
1998) for inflation, for subscribers served by certain divested systems and
acquired systems, and certain other matters.
F-11
<PAGE> 115
TCI MUSIC, INC. AND SUBSIDIARY
(A SUBSIDIARY OF TELE-COMMUNICATIONS, INC.)
NOTES TO CONDENSED PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(2) TCI Music will deliver consideration in connection with the Paradigm
Merger by (a) exchanging that number of shares of Series A Common Stock
determined by dividing $24,000,000 (less the amount equal to the number of
dissenters' shares multiplied by the portion of $24,000,000 allocable to each
share of Paradigm Common Stock assuming no dissenters' shares) by the average of
the mean daily closing bid and asked prices of Series A Common Stock for a
period of 20 consecutive trading days ending on the third trading day prior to
the effective time of the Paradigm Merger as quoted on the Nasdaq SmallCap
Market and (b) paying approximately $5,000,000 in cash (the "Cash
Consideration") or as a purchase or assumption by TCI Music of debt owed by
Paradigm. Unlike the shares of Series A Common Stock issued to former
stockholders of DMX, the shares of Series A Common Stock to be issued to
Paradigm stockholders will not have any Rights associated therewith.
(3) Upon consummation of the Box Merger, (a) each share of common stock of
the Box outstanding immediately prior to the Box Merger (other than shares held
directly or indirectly by the Box and dissenting shares) will be converted into
the right to receive a fraction (the "Merger Conversion Ratio") of a share of
Music Series A Preferred Stock equal to the quotient (rounded to the nearest
hundredth) of $1.50 divided by three times the average of the average daily
closing bid and asked prices of one share of Series A Common Stock for a period
of 20 consecutive trading days ending on the third trading day prior to the
closing of the Box Merger as reported on the Nasdaq SmallCap Market, (b) cash
will be paid in lieu of fractional shares of Music Series A Preferred Stock, and
(c) each share of the Box's 6% Convertible Redeemable Preferred Stock, par value
$.15 per share and stated value of $1.50 per share ("Box Preferred Stock")
outstanding immediately prior to the Box Merger (other than dissenting shares)
will remain an outstanding share of the Surviving Corporation. Each share of
Music Series A Preferred Stock will be convertible at the option of the holder
into three shares of Series A Common Stock, subject to certain antidilution
adjustments. Each share of Music Series A Preferred Stock will be entitled to
vote on all matters submitted to a vote of the holders of the Series A Common
Stock and to the number of votes equal to the number of shares of Series A
Common Stock into which such share is convertible as of the record date for the
matter to be voted upon. Unlike the shares of Series A Common Stock issued to
former stockholders of DMX, the shares of Series A Common Stock into which the
Music Preferred Stock is convertible will not have any Rights associated
therewith.
(4) Represents the issuance of TCI Music Series B Common Stock pursuant to
the Contribution Agreement. Such issuance results in an increase in TCI Music's
assets only to the extent of TCI's historical cost basis in the Contributed
Tuners (approximately $5,600,000 at June 30, 1997) since TCI's historical cost
basis in the Annual TCI Payments is zero. See note 1.
(5) Represents the issuance of Series A Common Stock pursuant to the DMX
Merger Agreement and the issuance of associated Rights (collectively, the "DMX
Merger Consideration"). The estimated aggregate fair value of the DMX Merger
Consideration issued to entities not controlled by TCI (the "Unaffiliated
Stockholders") and the carryover basis of the DMX Merger Consideration issued to
entities controlled by TCI(the "TCI Stockholders") has been allocated to
goodwill as the net book values of DMX's assets and liabilities are assumed to
approximate their respective fair values. The estimated aggregate fair value of
the DMX Merger Consideration, and the estimated fair values of DMX's assets and
liabilities are based on information available at the date of the preparation of
these condensed pro forma combined financial statements, and will be adjusted
upon final appraisal of the DMX Merger Consideration, and such DMX assets and
liabilities. Although management is not presently aware of any circumstances
which would cause the final purchase price allocation to be significantly
different from that which is reflected in the accompanying condensed pro forma
combined balance sheet, actual valuations and allocations may differ from those
reflected herein. The number of shares and Rights assumed to be issued is based
upon DMX Common Stock ownership as of June 30, 1997. The estimated fair value of
the DMX Merger Consideration issued to Unaffiliated Stockholders will be
accreted to the Put Price during the Put Period and such accretion will be
F-12
<PAGE> 116
TCI MUSIC, INC. AND SUBSIDIARY
(A SUBSIDIARY OF TELE-COMMUNICATIONS, INC.)
NOTES TO CONDENSED PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
reflected as an increase in goodwill with a corresponding increase to additional
paid-in capital. Additional information concerning the assumed valuation of the
Series A Common Stock is set forth below:
<TABLE>
<S> <C>
Shares to be issued to TCI Stockholders, valued at carryover
basis at June 30, 1997 (6,812,393 shares)................. $14,087,458
Shares to be issued to Unaffiliated Stockholders, valued at
estimated fair value of $7.40 per share (8,084,255
shares)................................................... 59,823,487
-----------
Total value assigned to Series A Common Stock..... 73,910,945
Deferred income tax effect of purchase price allocation..... 3,583,400
Elimination of DMX historical stockholders' deficit at June
30, 1997.................................................. 16,302,225
-----------
Increase to intangible assets............................... $93,796,570
===========
</TABLE>
None of DMX's outstanding stock options were "in-the-money" at the date of
the DMX Merger. As such, DMX's outstanding stock options did not have any impact
on the purchase consideration. See note 1.
(6) Represents the issuance of Series A Common Stock and the elimination
of Paradigm's historical stockholders' deficit in connection with the Paradigm
Merger. The adjustment assumes an estimated fair value of $7.00 per share for
the shares of Series A Common Stock to be issued in the Paradigm Merger. The
fair value of the Series A Common Stock to be issued to the Paradigm
stockholders will be allocated to the assets and liabilities acquired based upon
the estimated fair values of such assets and liabilities. The estimated fair
value of the Series A Common Stock to be issued to the Paradigm stockholders and
the estimated fair values of the assets and liabilities acquired, as reflected
in the accompanying condensed pro forma combined financial statements, are based
upon information available at the date of the preparation of these condensed pro
form combined financial statements, and will be adjusted upon the final
determination of such fair values. Although management is not presently aware of
any circumstances which would cause the final purchase price allocation to be
significantly different from that which is reflected in the accompanying
condensed pro forma combined balance sheet, actual valuations and allocations
may differ from those reflected herein. The Cash Consideration received by
Paradigm will be used by Paradigm to repay certain notes payable prior to the
Paradigm Merger. As TCI Music did not have sufficient cash to fund the payment
of the Cash Consideration at June 30, 1997, the payment of the Cash
Consideration and the associated repayment of Paradigm's notes payable have not
been reflected in the accompanying condensed pro forma combined financial
statements. See note 2.
(7) Represents the reclassification of DMX Merger pre-acquisition costs to
intangible assets.
(8) Due to TCI's controlling interest in TCI Music, amounts due to TCI
have been reclassified to a component of stockholders' equity.
(9) Represents the issuance of the TCI Music Note. The TCI Music Note, as
extended, will bear interest at 10% per annum, payable semiannually, and will
provide for the payment of unpaid principal and accrued interest within 18
months of the consummation of the Contribution. Due to TCI's controlling
interest in TCI Music, such issuance has been treated as a distribution to TCI.
See note 1.
(10) The fiscal year end of DMX is September 30. The amounts reported in
the "DMX historical" column of the condensed pro forma combined statement of
operations for the year ended December 31, 1996 represent the sum of DMX's
operating results for the three months ended December 31, 1996 and the fiscal
year ended September 30, 1996, less DMX's operating results for the three months
ended December 31, 1995.
(11) Represents the additional revenue earned and expense incurred by TCI
Music pursuant to the Affiliation Agreement and Contribution Agreement, as
amended. See note 1.
F-13
<PAGE> 117
TCI MUSIC, INC. AND SUBSIDIARY
(A SUBSIDIARY OF TELE-COMMUNICATIONS, INC.)
NOTES TO CONDENSED PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(12) Represents amortization of the goodwill recorded in connection with
the DMX Merger and the Paradigm Merger. Such amortization is calculated using an
estimated useful life of ten years. See notes 1 and 2.
(13) Represents interest expense on the TCI Music Note. The pro forma
adjustment has been calculated using the 10% interest rate stipulated by the
terms of the TCI Music Note. Interest on the TCI Music Note will be waived by
TCI if principal is paid in full within 180 days of the closing of the DMX
Merger.
(14) Represents the issuance of the Music Series A Preferred Stock and the
elimination of the Box's historical stockholders' equity in connection with the
Box Merger. The adjustment assumes an estimated fair value of $21.00 per share
for the shares of Music Series A Preferred Stock to be issued in the Box Merger.
The fair value of the Music Series A Preferred Stock to be issued to the Box
shareholders will be allocated to the assets and liabilities acquired based upon
the estimated fair values of such assets and liabilities. The estimated fair
value of the Music Series A Preferred Stock to be issued to the Box shareholders
and the estimated fair values of the assets and liabilities acquired, as
reflected in the accompanying condensed pro forma combined financial statements,
are based upon information available at the date of the preparation of these
condensed pro forma combined financial statements, and will be adjusted upon the
final determination of such fair values. Although management is not presently
aware of any circumstances which would cause the final purchase price allocation
to be significantly different from that which is reflected in the accompanying
condensed pro forma combined balance sheet, actual valuations and allocations
may differ from those reflected herein. The numbers of shares of Music Series A
Preferred Stock issuable in the Box Merger, as reflected in the accompanying
condensed pro forma combined financial statements, assumes a Merger Conversion
Ratio (.07). So long as the per share price of Series A Common Stock is between
$6.66 and $7.70, the Merger Conversion Ratio would remain at .07.
(15) Represents the reclassification of the Box's preferred stock to
minority interest in equity of consolidated subsidiary, and the reclassification
of Box preferred stock dividends to other expense, net.
(16) Represents amortization of the goodwill recorded in connection with
the Box Merger. Such amortization is calculated using an estimated useful life
of ten years.
(17) Represents pro forma loss per share assuming 80,631,150 and
79,158,330 weighted average shares of TCI Music were outstanding during the six
months ended June 30, 1997 and the year ended December 31, 1996, respectively.
Such amounts represent the approximate number of weighted average shares of TCI
Music that would have been outstanding if the DMX Merger and Contribution, the
Paradigm Merger and the Box Merger had occurred on January 1, 1996.
F-14
<PAGE> 118
REPORT OF INDEPENDENT AUDITORS
To the Stockholders' of
Paradigm Music Entertainment Company:
We have audited the accompanying balance sheet of Paradigm Music
Entertainment Company (a developmental stage company) as at December 31, 1996,
and the related statements of operations, stockholders' equity and cash flows
for the year ended December 31, 1996 and for the period November 14, 1995 (date
of inception) through December 31, 1995. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits 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 overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Paradigm Music Entertainment
Company (a developmental stage company) as of December 31, 1996, and the results
of its operations and its cash flows for the year then ended, and the period
November 14, 1995 (date of inception) through December 31, 1995, in conformity
with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note A to the
financial statements, the Company has sustained recurring losses from operations
that raise substantial doubt about its ability to continue as a going concern.
Management's plans in regard to these matters are also described in Note A. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
JANOVER RUBINROIT, LLC
February 11, 1997
(Except for Note J as to which the
date is February 14, 1997)
F-15
<PAGE> 119
PARADIGM MUSIC ENTERTAINMENT COMPANY
(A DEVELOPMENTAL STAGE COMPANY)
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1996 1997
------------ -----------
(UNAUDITED)
<S> <C> <C>
Current assets:
Cash...................................................... $ 125,201 $ 11,082
Accounts receivable....................................... 27,621 347,006
Inventories............................................... 25,431 115,303
Other current assets...................................... 40,894 161,048
----------- -----------
Total current assets.............................. 219,147 634,439
----------- -----------
Fixed assets................................................ 225,262 836,775
Less accumulated depreciation............................. (43,168) (338,540)
----------- -----------
182,094 498,235
----------- -----------
Investments................................................. 80,000 315,000
Notes receivable -- officer/stockholder..................... 50,000 50,000
Deferred registration costs................................. 60,000 459,715
Deferred financing fees..................................... 288,222
Costs in excess of fair value of net assets acquired........ 1,581,851
Other assets................................................ 36,350 12,095
----------- -----------
$ 627,591 $ 3,839,557
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 135,254 $ 963,239
Accrued expenses and other current liabilities............ 155,756 649,511
Bridge Notes................................................ 3,217,702
Notes payable............................................... 50,000
Unearned revenues -- former parent.......................... 60,000
Unearned revenues........................................... 158,459
Leases payable -- current................................... 12,897
Due to directors and stockholders........................... 240,000 428,525
----------- -----------
Total current liabilities......................... 531,010 5,540,333
Unearned revenues -- former parent.......................... 210,000
Leases payable.............................................. 13,455
Stockholders' equity:
Preferred Stock, $.01 par value -- shares authorized
5,000,000; none issued
Class A Common Stock, $.01 par value -- shares authorized
31,999,900; issued and outstanding 1,596,704 and
1,363,371 at June 30, 1997 and December 31, 1996,
respectively........................................... 13,634 15,967
Class B Common Stock, $.01 par value -- shares authorized
1,000,100; issued and outstanding 1,000,005............ 10,000 10,000
Class E Common Stock, $.01 par value -- shares authorized
2,000,000, issued and outstanding 1,226,716............ 12,267 12,267
Additional paid-in-capital................................ 2,591,893 4,118,310
Deficit accumulated during the developmental stage........ (2,531,213) (6,080,775)
----------- -----------
96,581 (1,924,231)
----------- -----------
$ 627,591 $ 3,839,557
=========== ===========
</TABLE>
The foregoing accountants' report and accompanying notes are an integral part of
the financial statements.
F-16
<PAGE> 120
PARADIGM MUSIC ENTERTAINMENT COMPANY
(A DEVELOPMENTAL STAGE COMPANY)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
NOV. 14, 1995 SIX MONTHS ENDED NOV. 14, 1995
(DATE OF INCEPTION) JUNE 30, (DATE OF INCEPTION)
YEAR ENDED THROUGH ------------------------- THROUGH
DEC. 31, 1996 DEC. 31, 1995 1996 1997 JUNE 30, 1997
------------- ------------------- ----------- ----------- -------------------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
Sales, net............... $ 31,114 $ -- $ -- $ 831,381 $ 862,495
Fee income -- Former
Parent................ 27,500 27,500
Advertising, commission
and subscription
income................ 116,881 116,881
Interest income.......... 59,417 7,268 43,565 9,457 76,142
----------- --------- --------- ----------- -----------
90,531 7,268 43,565 985,219 1,083,018
----------- --------- --------- ----------- -----------
Expenses:
Cost of goods sold....... 12,097 -- -- 190,303 202,400
Advances and recording
costs................. 628,099 10,000 152,163 816,972 1,455,071
Production expenses...... -- -- -- 117,274 117,274
General and
administrative
expenses.............. 1,551,158 129,017 787,048 2,154,099 3,834,274
Selling, marketing and
expenses.............. 298,641 -- -- 1,256,133 1,554,774
----------- --------- --------- ----------- -----------
2,489,995 139,017 939,211 4,534,781 7,163,793
----------- --------- --------- ----------- -----------
Net loss................... $(2,399,464) $(131,749) $(895,646) $(3,549,562) $(6,080,775)
=========== ========= ========= =========== ===========
Loss per share of common
stock.................... $ (1.32) $ (.07) $ (.50) $ (1.73)
----------- --------- --------- -----------
Weighted average number of
shares outstanding....... 2,074,039 1,790,706 1,790,706 2,054,625
=========== ========= ========= ===========
</TABLE>
The foregoing accountants' report and accompanying notes are an integral part of
the financial statements.
F-17
<PAGE> 121
PARADIGM MUSIC ENTERTAINMENT COMPANY
(A DEVELOPMENTAL STAGE COMPANY)
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
$.01 PAR VALUE $.01 PAR VALUE $.01 PAR VALUE
CLASS A COMMON CLASS B COMMON CLASS E COMMON
STOCK STOCK STOCK
---------------------- ---------------------- ---------------------
NUMBER NUMBER NUMBER ADDITIONAL
OF SHARES PAR VALUE OF SHARES PAR VALUE OF SHARES PAR VALUE PAID-IN CAPITAL
---------- --------- ---------- --------- --------- --------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
Issuance of common stock to
officers and underwriters for
cash in November, 1995 ($.01 per
share)........................... 1,040,000 $10,400 3,000,000 $30,000 $ --
Issuance of stock for cash in
November 1995 at $1.00 per share
in connection with private
placement, less expense of
$463,656......................... 3,000,000 30,000 -- -- 2,506,344
Warrants issued in connection with
private placement................ -- -- -- -- 1,050
Net loss for the period November
14, 1995 (date of inception)
through December 31, 1995)....... -- -- -- -- --
Balance -- December 31, 1995....... 4,040,000 40,400 3,000,000 30,000 2,507,394
Issuance of Class A Common Stock to
Directors........................ 50,000 500 49,500
To give retroactive effect to the 1
for 3 reverse stock split and
Dividend of Class E Common Stock
(Note A)......................... (2,726,629) (27,266) (1,999,995) (20,000) 1,226,716 $12,267 34,999
Net loss for the year ended
December 31, 1996
---------- ------- ---------- ------- --------- ------- -----------
Balance -- December 31, 1996....... 1,363,371 13,634 1,000,005 10,000 1,226,716 12,267 2,591,893
Issuance of Class A Common Stock
and warrants in exchange for
outstanding Capital Stock of
SonicNet, Inc. -- (unaudited).... 200,000 2,000 723,000
Issuance of Warrants to Bridge Note
holders and underwriter
(unaudited)...................... 453,750
Issuance of Class A Common Stock
and Warrants in exchange for
outstanding Capital Stock of
Purple Demon, Inc. (unaudited)... 33,333 333 349,667
Net loss for the six months ended
June 30, 1997 (unaudited)........
---------- ------- ---------- ------- --------- ------- -----------
Balance -- June 30, 1997........... 1,596,704 $15,967 1,000,005 $10,000 1,226,716 $12,267 $ 4,118,310
========== ======= ========== ======= ========= ======= ===========
<CAPTION>
DEFICIT
ACCUMULATED
IN THE
DEVELOPMENTAL
STAGE TOTAL
------------- -----------
<S> <C> <C>
Issuance of common stock to
officers and underwriters for
cash in November, 1995 ($.01 per
share)........................... $ -- $ 40,400
Issuance of stock for cash in
November 1995 at $1.00 per share
in connection with private
placement, less expense of
$463,656......................... -- 2,536,344
Warrants issued in connection with
private placement................ -- 1,050
Net loss for the period November
14, 1995 (date of inception)
through December 31, 1995)....... (131,749) (131,749)
Balance -- December 31, 1995....... (131,749) 2,446,045
Issuance of Class A Common Stock to
Directors........................ 50,000
To give retroactive effect to the 1
for 3 reverse stock split and
Dividend of Class E Common Stock
(Note A)......................... -- --
Net loss for the year ended
December 31, 1996 (2,399,464) (2,399,464)
----------- -----------
Balance -- December 31, 1996....... (2,531,213) 96,581
Issuance of Class A Common Stock
and warrants in exchange for
outstanding Capital Stock of
SonicNet, Inc. -- (unaudited).... 725,000
Issuance of Warrants to Bridge Note
holders and underwriter
(unaudited)...................... 453,750
Issuance of Class A Common Stock
and Warrants in exchange for
outstanding Capital Stock of
Purple Demon, Inc. (unaudited)... 350,000
Net loss for the six months ended
June 30, 1997 (unaudited)........ (3,549,562) (3,549,562)
----------- -----------
Balance -- June 30, 1997........... $(6,080,775) $(1,924,231)
=========== ===========
</TABLE>
The foregoing accountants' report and accompanying notes are an integral part of
the financial statements.
F-18
<PAGE> 122
PARADIGM MUSIC ENTERTAINMENT COMPANY
(A DEVELOPMENTAL STAGE COMPANY)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NOV. 14, 1995 SIX MONTHS ENDED NOV. 14, 1995
(DATE OF INCEPTION) JUNE 30, (DATE OF INCEPTION)
YEAR ENDED THROUGH ------------------------- THROUGH
DEC. 31, 1996 DEC. 31, 1995 1997 1996 JUNE 30, 1997
------------- ------------------- ----------- ----------- -------------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss................................ $(2,399,464) $ (131,749) $(3,549,562) $ (909,693) $(6,080,775)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization......... 43,168 -- 313,030 14,046 356,198
Accrued interest...................... -- (2,950) 330,202 -- 327,252
Changes in assets and liabilities:
Accounts receivable................. (27,621) -- (297,385) -- (325,006)
Inventories......................... (25,431) -- (38,221) -- (63,652)
Other current assets................ (40,894) -- (25,111) (500) (66,005)
Notes receivable --
officers/stockholders............. -- (50,000) -- (27,917) (50,000)
Deferred registration costs......... (60,000) -- (399,715) -- (459,715)
Other assets........................ (18,550) (17,800) 45,855 (550) 9,505
Accounts payable, accrued expenses
and other current liabilities..... 248,829 42,181 1,078,062 19,721 1,369,072
----------- ----------- ----------- ----------- -----------
Net cash used in operating activities..... (2,279,963) (160,318) (2,542,845) (904,893) (4,983,126)
----------- ----------- ----------- ----------- -----------
Cash flows from investing activities:
Acquisitions, net of cash acquired...... -- -- (190,948) -- (190,948)
Purchase of treasury notes.............. (493,838) (999,598) -- -- (1,493,436)
Purchase of fixed assets................ (173,932) (51,330) (153,695) (98,911) (378,957)
Maturity of treasury notes.............. 1,496,386 -- -- -- 1,496,386
Investments............................. (80,000) -- (235,000) -- (315,000)
----------- ----------- ----------- ----------- -----------
Net cash provided by (used in) investing
activities.............................. 748,616 (1,050,928) (579,643) 409,799 (881,955)
----------- ----------- ----------- ----------- -----------
Cash flows from financing activities:
Bridge notes, net of costs of
issuance.............................. -- -- 2,819,844 -- 2,819,844
Issuance of Class A Common Stock........ 50,000 -- -- -- 50,000
Issuance of warrants.................... -- 1,050 -- -- 1,050
Net proceeds from sale of Common
Stock................................. -- 2,576,744 -- -- 2,576,744
Repayments to director.................. -- -- (240,000) -- (240,000)
Borrowings from
directors/stockholders................ 240,000 -- 428,525 -- 668,525
----------- ----------- ----------- ----------- -----------
Net cash provided by financing
activities.............................. 290,000 2,577,794 3,008,369 -- 5,876,163
----------- ----------- ----------- ----------- -----------
Increase (decrease) in cash............... (1,241,347) 1,366,548 (114,119) (495,094) 11,082
Cash -- beginning of period............... 1,366,548 -- 125,201 1,366,548 1,491,749
----------- ----------- ----------- ----------- -----------
Cash -- end of period..................... $ 125,201 $ 1,366,548 $ 11,082 $ 871,454 $ 1,502,831
=========== =========== =========== =========== ===========
Acquisitions, net of cash acquired:
Working capital deficit, other than
cash.................................. $ (262,885) $ (262,885)
Property, plant and equipment........... 199,469 199,469
Excess of costs of assets acquired over
fair value............................ 1,624,674 1,624,674
Other assets............................ 21,600 21,600
Debt and other liabilities.............. (316,910) (316,910)
----------- -----------
1,265,948 1,265,948
Less: Class A Common Stock issued......... (1,075,000) (1,075,000)
----------- -----------
Acquisitions, net of cash acquired........ $ 190,948 $ 190,948
=========== ===========
</TABLE>
The foregoing accountants' report and accompanying notes are an integral part of
the financial statements.
F-19
<PAGE> 123
PARADIGM MUSIC ENTERTAINMENT COMPANY
(A DEVELOPMENTAL STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
(INFORMATION AT JUNE 30, 1997 IS UNAUDITED)
(NOTE A) -- THE COMPANY AND BASIS OF PRESENTATION:
Paradigm Music Entertainment Company (the "Company") a developmental stage
company incorporated in Delaware, was formed to enter the music entertainment
business. The Company's objective is to become a broad based music entertainment
company utilizing traditional and non-traditional marketing and distribution
channels to exploit music entertainment products.
As shown in the accompanying financial statements, the Company has incurred
losses from operations since inception, resulting in a substantial working
capital deficiency and capital deficiency. The Company has no current source of
material revenues, and therefore, such losses are expected to continue during
the Company's development stage. These factors raise substantial doubt about the
Company's ability to continue as a going concern. The Company is planning an
initial public offering of common stock and warrants which will enable it to
continue its development (see Note J). Specifically, the proceeds from the
proposed public offering will provide adequate working capital for the Company
to remain viable for at least the twelve months following the date of these
financial statements. However, there is no assurance that the proposed public
offering will be successful. If the offering is not successful, the current
operations of the entity are not expected to generate adequate revenues for the
entity to remain a going concern. The financial statements do not include any
adjustment that might be necessary if the Company is unable to continue as a
going concern.
In January 1997, the Company effected a 1 for 3 reverse stock split and a
stock dividend of Class E Common Stock (see Note J). The financial statements
give retroactive effect to this transaction as if it occurred on November 14,
1995 (date of inception).
(NOTE B) -- SIGNIFICANT ACCOUNTING POLICIES:
(1) Property and equipment
Property and equipment are carried at cost, less accumulated depreciation.
Depreciation is provided using the straight-line method over the estimated
useful life of the assets.
(2) Impairment of long-lived assets
As per Statement of Financial Accounting Standards ("SFAS") No. 121 ("SFAS
No. 121"), the Company periodically assesses the recoverability of the carrying
amount of long-lived assets, including intangible assets. A loss is recognized
when expected future cash flows (undiscounted and without interest) are less
than the carrying amount of the asset. The impairment loss is determined as the
difference by which the carrying amount of the asset exceeds its fair value.
Through December 31, 1996, no material adjustments to comply with SFAS No. 121
have been required.
(3) Advances
In accordance with FASB Statement No. 50, "Financial Reporting in the
Record and Music Industry," advances to artists and producers are capitalized as
an asset when the current popularity and past performance of the artist or
producer provides a sound basis for estimating the probable future recoupment of
such advances from earnings otherwise payable to the artist or producer. Any
portion of such advances not deemed to be recoupable from future royalties is
expensed at the balance sheet date. All other significant advances which do not
meet the above criteria are fully reserved when paid. As of December 31, 1996,
all advances have been expensed.
F-20
<PAGE> 124
PARADIGM MUSIC ENTERTAINMENT COMPANY
(A DEVELOPMENTAL STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AT JUNE 30, 1997 IS UNAUDITED)
(4) Inventories
Inventories are valued at the lower of cost or market determined on the
first in, first out (FIFO) method of accounting. Inventories consist primarily
of finished goods.
(5) Revenue recognition
Net product sales represent revenues derived from sales of records, net of
actual returns, and reserves for estimated future returns. In addition,
estimated unrecoupable costs are included in advances and recording costs.
(6) Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
(7) Income Taxes
The Company accounts for income taxes in accordance with statement of
Financial Accounting Standards ("SFAS") No. 109, "Accounting for income taxes".
Under SFAS No. 109, a deferred tax liability or asset is recognized for the
estimated future tax consequences of temporary differences between the carrying
amounts of assets and liabilities in the financial statements and their
respective tax bases. A valuation allowance has been established to offset any
asset resulting from the tax benefit related to the cumulative net operating
loss due to an inability to determine the probability of future income to
utilize the net operating loss.
(8) Loss per share of common stock
Net loss per share of common stock is based on the weighted average number
of shares outstanding during each period, as modified in accordance with certain
rules of the Securities and Exchange Commission. Accordingly, the weighted
average number of shares outstanding during each period includes options and
warrants issued within twelve months of the Company's initial public offering
using the treasury stock method as if they were outstanding for all periods,
excluding Class A Common Stock and Class B Common Stock in escrow, and Class E
Common Stock not yet converted to Class A Common Stock because they are anti-
dilutive (see Note H).
(9) Concentration of credit risk
The Company maintains cash accounts with balances in excess of the FDIC
insurance limit of $100,000.
(10) Reclassifications
Certain amounts in the year ended December 31, 1995 financial statements
have been reclassified to conform with the year ended December 31, 1996
presentation.
(11) Fair values of financial instruments
Statement of Financial Accounting Standards No. 107, "Disclosures about
Fair Value of Financial Instruments," requires the Company to disclose estimated
fair values for its financial instruments. The carrying amounts of cash, other
current assets, trade accounts payable, and accrued expenses approximate fair
value because of the short maturity of those instruments.
F-21
<PAGE> 125
PARADIGM MUSIC ENTERTAINMENT COMPANY
(A DEVELOPMENTAL STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AT JUNE 30, 1997 IS UNAUDITED)
(12) Investments
Investments in marketable equity securities, other than investments
accounted for by the equity method, do not have readily determinable fair values
and are stated at cost, adjusted for impairments, if applicable. All investments
are classified as long-term. Management determines the appropriate
classification of its investments at the time of acquisition and re-evaluates
such determination at each balance sheet date.
(13) Accounting for Stock Based Compensation
The Company has adopted SFAS No. 123, "Accounting for Stock Based
Compensation" ("SFAS No. 123"). This standard encourages, but does not require,
recognition of compensation expense for all stock-based awards granted to
employees.
Although the Company has established a Stock Option Plan (see Note I), no
stock based compensation has been issued since inception through December 31,
1996 or inception through June 30, 1997. If stock based compensation is granted
to employees, the Company does not plan to record the compensation, but rather,
expects to implement the disclosure-only provisions of SFAS No. 123.
(14) Unaudited Interim Financial Information
The financial statements for the six-month periods ended June 30, 1996 and
1997 are unaudited. In the opinion of management, the statements have been
prepared on the same basis as the audited financial statements and include all
adjustments, consisting only of normal recurring adjustments, necessary for the
fair statement of the results of interim periods. Operating results for the
six-month periods ended June 30, 1996 and 1997 are not necessarily indicative of
the results that may be expected for any future periods.
(15) Recent Accounting Pronouncements
In February 1997, the Financial Accounting Standards Board released
Statement of Financial Accounting Standards No. 128. "Earnings Per Share" ("SFAS
128"). SFAS 128 changes the computational guidelines for earnings per share
information. Paradigm will adopt the provisions of SFAS 128 in their December
31, 1997 consolidated financial statements. SFAS 128 will eliminate the
presentation of primary earnings per share and replace it with basic earnings
per share. Basic earnings per share differs from primary earnings per share
because common stock equivalents are not considered in computing basic earnings
per share. Fully diluted earnings per share will be replaced with diluted
earnings per share. Diluted earnings per share is similar to fully diluted
earnings per share, except in determining the number of dilutive shares
outstanding for options and warrants. The proceeds that would be received upon
the conversion of all dilutive options and warrants are assumed to be used to
repurchase the Company's common stock at the average market price of such stock
during the period. For fully diluted earnings per share, the higher of the
average market price or ending market priced is used. If SFAS 128 had been in
effect, the Company would have reported basic earnings per share and diluted
earnings per share equal to the earnings per share presented on the statement of
operations for the six months ended June 30, 1997.
F-22
<PAGE> 126
PARADIGM MUSIC ENTERTAINMENT COMPANY
(A DEVELOPMENTAL STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AT JUNE 30, 1997 IS UNAUDITED)
(NOTE C) -- INVESTMENT:
The Company's investments at June 30, 1997 and December 31, 1996 are as
follows:
<TABLE>
<CAPTION>
METHOD OF
APPROXIMATE ACCOUNTING
PERCENTAGE OF (SEE
COMPANY OWNERSHIP NOTE B (12))
------- ------------- ----------------
<S> <C> <C>
Wingnut Records, Inc. ("Wingnut")....................... 25% Cost
DTL Systems, Inc. ("DTL")............................... 5% Cost
</TABLE>
Although the equity method of accounting is typically used if an investee
is 20% or more owned, Wingnut is accounted for under the cost method (See Note
B(12)) because Paradigm has no ability to influence the investee.
In addition to owning a percentage of the outstanding stock of DTL,
Paradigm owns 4,000 warrants which are convertible into common stock of DTL.
(NOTE D) -- PROPERTY AND EQUIPMENT:
Property and equipment consist of the following:
<TABLE>
<CAPTION>
AS AT AS AT
DECEMBER 31, JUNE 30, ESTIMATED
1996 1997 USEFUL LIVES
------------ --------- ------------
<S> <C> <C> <C>
Furniture and fixtures.......................... $ 40,135 $ 68,306 3-7 years
Computer equipment.............................. 130,003 617,748 3-7 years
Leasehold improvements.......................... 55,124 150,721 5 years
-------- ---------
225,262 836,775
Less accumulated depreciation................... (43,168) (338,540)
-------- ---------
$182,094 $ 498,235
======== =========
</TABLE>
Property and equipment was not placed in service during 1995, therefore no
depreciation expense was taken for that year.
(NOTE E) -- RELATED PARTY TRANSACTIONS:
Included in other assets is a loan to the president/stockholder of the
Company at December 31, 1996. The loan is for $50,000 and is non-interest
bearing.
The Company paid consulting fees of approximately $300,000 and $69,000 to
officers/stockholders of the Company for the year ended December 31, 1996 and
for the period November 14, 1995 (date of inception) through December 31, 1995,
respectively.
In April, May and July 1997, the Company borrowed an aggregate of $425,000
from two directors, which loans are payable, together with accrued interest at
the rate of 10% per annum, upon the earlier of the closing of the contemplated
public offering, the receipt by the Company of gross proceeds of $1 million in a
private placement or February 1, 1998.
In June and August 1997, the Company borrowed an aggregate of $450,000 from
a limited partnership whose limited partners consist of the grandchildren of the
sole stockholder of the Underwriter of the Company's proposed public offering,
which loans are payable, together with accrued interest at the rate of 10%
F-23
<PAGE> 127
PARADIGM MUSIC ENTERTAINMENT COMPANY
(A DEVELOPMENTAL STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AT JUNE 30, 1997 IS UNAUDITED)
per annum, upon the earlier of the closing of the contemplated public offering,
the receipt by the Company of gross proceeds of $1 million in a private
placement or February 1, 1998.
(NOTE F) -- INCOME TAXES (CREDITS):
At December 31, 1996 the Company has available net operating loss
carryforwards of approximately $2,480,000 which expire in 2010.
The principal components of deferred tax assets and the valuation allowance
are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1996 1995
------------ ------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards......................... $ 798,308 $ 44,795
Valuation allowance...................................... (798,308) (44,795)
--------- --------
Net deferred tax................................. $ -- $ --
========= ========
</TABLE>
The following reconciles the computed income tax credit at the federal
statutory rate to the provision for income taxes:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1996 1995
------------ ------------
<S> <C> <C>
Computed tax expense (credit) at federal statutory rate.... (34)% (34)%
State provision less federal benefit....................... (5) (5)
Valuation allowance........................................ 39 39
---- ----
$ -- $ --
==== ====
</TABLE>
(NOTE G) -- COMMITMENTS AND CONTINGENCIES:
Lease
The Company was a lessee at December 31, 1996. The first lease commenced on
December 1, 1995 and terminates on May 31, 2001. An additional lease commenced
on August 1, 1996 and also terminates on May 31, 2001. Approximate minimum
annual lease commitments for both leases for the five years ended December 31
are as follows:
<TABLE>
<S> <C>
1997...................................................... $136,000
1998...................................................... $142,000
1999...................................................... $142,000
2000...................................................... $136,000
2001...................................................... $ 30,000
</TABLE>
Rent expense for the year ended December 31, 1996 and for the period
November 14, 1995 (date of inception) through December 31, 1995 was $61,975 and
$5,853, respectively.
Employment and consulting agreements
The Company entered into a three-year employment agreement with the
president/stockholder providing for him to serve as Chairman of the Board,
President and Chief Executive Officer at a base annual salary of $375,000. The
Company also entered into two three-year consulting agreements providing for the
payment of
F-24
<PAGE> 128
PARADIGM MUSIC ENTERTAINMENT COMPANY
(A DEVELOPMENTAL STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AT JUNE 30, 1997 IS UNAUDITED)
an annual consulting fee of $150,000 per agreement to two
stockholders/directors. All agreements commenced November 1995.
(NOTE H) -- CAPITALIZATION:
Stockholders' equity
The Company has the authority to issue 40,000,000 shares of Capital Stock
consisting of (i) 31,999,900 shares of Class A Common Stock, $.01 par value,
(ii) 1,000,100 shares of Class B Common Stock, $.01 par value, (iii) 2,000,000
shares of Class E Common Stock, $.01 par value (see Note J), and (iv) 5,000,000
shares of Preferred Stock, $.01 par value. The Class A Common Stock and Class B
Common Stock are essentially identical, except that the Class B Common Stock has
five votes per share and the Class A Common Stock has one vote per share.
In November 1995, the Company issued 1,000,027 shares of its Class A Common
Stock at $3.00 per share in a private placement. Proceeds from the private
placement as of December 31, 1995, net of commissions and other related expenses
totaling approximately $464,000, were approximately $2,536,000.
In connection with the Company's private placement in 1995, an aggregate of
566,670 shares of Class B Common Stock outstanding and 6,000 shares of Class A
Common Stock are held in escrow. Fifty percent (50%) of the shares will be
released based on obtaining certain net earning levels ranging from $1,700,000
for 1997 to $2,900,000 through December 1999. These shares will also be released
if the bid price of the Company's Class A Common Stock averages in excess of
$9.00 or $12.00 per share for 30 consecutive business days ending on or before
December 31, 1997 or 1998, respectively, or if there is a merger or sale that
results in stockholders receiving at least $9.00 or $12.00 per share in cash or
marketable securities on or before December 31, 1997 or 1998, respectively. The
remaining fifty percent (50%) of the shares will be released based on net
earning levels ranging from $2,100,000 for 1997 to $3,500,000 through December
1999. These shares will also be released if the bid price of the Company's
Common Stock averages in excess of $13.50 or $19.50 for 30 consecutive business
days ending on or before December 31, 1997 or 1998, respectively, or if there is
a sale of the Company that results in stockholders receiving at least $13.50 or
$19.50 per share on or before December 31, 1997 or 1998, respectively.
On March 31, 2000 all Class A and Class B escrow shares still held in
escrow will be forfeited, which shares will then be placed in the Company's
treasury for cancellation thereof as a contribution to capital.
Included in Class A Common Stock authorized are 333,333 shares reserved for
issuance to certain directors, consultants and employees of the Company of which
94,000 will be placed in escrow upon issuance. In addition, 350,004 shares of
Class A Common Stock and 175,006 shares of Class E Common Stock are reserved for
exercise of the warrants held by the underwriter and its designees (see
Warrants), and 300,000 shares of Class A Common Stock are reserved for the stock
incentive plan (see Note I).
Upon the release of any of the Class B shares held in escrow, and
conversion of the Class E shares (see Note J) held by officers, directors, and
consultants of the Company to Class A shares, the Company will incur a
reportable earnings charge for compensation expense in the amount of the then
fair value of the shares released. Such charge is not deductible for income tax
purposes.
Warrants
As part of the compensation for the private placement, the Company has
warrants outstanding in the amount of $1,050 which permit the underwriter and
its designees to purchase an aggregate of 350,004 shares of Class A Common Stock
at an exercise price of $3 per share. These warrants may be exercised in whole
or in
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PARADIGM MUSIC ENTERTAINMENT COMPANY
(A DEVELOPMENTAL STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AT JUNE 30, 1997 IS UNAUDITED)
part at any time or from time to time until the earlier of the fifth anniversary
of the closing of an IPO of the Company's securities or November 21, 2005.
Subsequent to December 31, 1996, the Company issued an additional 1,650,000 and
165,000 warrants as compensation for the Bridge Notes holders and the
underwriter, respectively (see Note J).
(NOTE I) -- STOCK OPTION PLAN:
In December 1996, the Company adopted a stock incentive plan which permits
the issuance of options to selected directors and employees of, and consultants
to the Company. The plan reserves 300,000 shares of Class A Common Stock for
grant and provides that the term of each award be determined by the committee of
the Board of Directors (the "Committee") charged with administering the plan. As
of June 30, 1997 and December 31, 1996, no options have been issued under the
plan.
Under the terms of the plan, options are both qualified and non-qualified
and are granted at an exercise price determined by the Committee, which are not
to be less than fair value for qualified options.
(NOTE J) -- SUBSEQUENT EVENTS:
Bridge Notes
In January 1997, the Company completed closings on $1,962,500 and
$1,337,500 in Bridge Notes, respectively. The notes bear interest at 10% per
annum and are payable upon the earlier of (i) one year after the date of
issuance, or (ii) the completion of the contemplated public offering.
In connection with the above financing, the Company issued warrants (the
"Bridge Warrants") to purchase an aggregate of 981,250 and 668,750 shares,
respectively, of Class A Common Stock exercisable at $3.00 per share until
completion of the public offering, at which time the terms will be identical to
the warrants included in units expected to be sold in the public offering. Such
warrants are exercisable for a period of five years from the date upon which the
Company commences its initial public offering. The Company's underwriter acted
as placement agent in connection with the Bridge Notes and received fees of
$255,125 and $173,875, respectively, as well as 165,000 warrants which have been
valued at approximately $41,000. Such fees and warrants will be capitalized as
deferred financing fees. The Bridge Warrants, which have been valued at $412,500
(or $.25 each) and which value is based upon the Company's estimation of the
typical trading price of similar publicly traded securities, will be recorded as
debt discount. Debt discount and deferred financing costs are being amortized
over the life of the loan. In addition, the Company incurred approximately
$51,000 in legal expenses in connection with the Bridge Notes which will also be
included in deferred financing fees.
The 165,000 warrants issued to the underwriter as compensation for the
Bridge Notes will be forfeited in the event that a successful initial public
offering is consummated.
Upon completion of the proposed initial public offering the Bridge Notes
will be repaid and the unamortized balance of debt issuance costs will be
charged to operations.
Proposed public offering
The Company has signed a letter of intent with respect to a proposed public
offering of the Company's securities. There is no assurance that such offering
will be consummated. In connection therewith the Company anticipates incurring
substantial expenses which, if the offering is not consummated, will be charged
to expense.
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PARADIGM MUSIC ENTERTAINMENT COMPANY
(A DEVELOPMENTAL STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AT JUNE 30, 1997 IS UNAUDITED)
Acquisition of SonicNet, Inc.
In January 1997, the Company acquired all of the issued and outstanding
capital stock of SonicNet, Inc. ("SonicNet"), a New York-based Internet music
company, from Prodigy Service Corporation and Sunshine Interactive Network, Inc.
(the "Sellers") for a purchase price consisting of 200,000 shares of the
Company's Class A Common Stock, 100,000 warrants, and $100,000 in cash. The
Company has granted the Sellers certain "piggyback" registration rights after
the proposed public offering. The Company has agreed to provide SonicNet with up
to $2,000,000 in working capital in 1997. Availability of these funds is
contingent upon completion of the proposed public offering. The acquisition will
be accounted for using the purchase method. The results of operations of
Paradigm at June 30, 1997 include the operations of SonicNet for approximately
five and one-half months. For purposes of this acquisition, the shares and
options, which are subject to restriction, are valued at $3.50 and $.25,
respectively, based upon the Company's estimation of the value of restricted
securities of similarly valued companies with publicly traded securities. The
related goodwill is being amortized over a period of five years.
Borrowings from directors/stockholders
Subsequent to year end the Company repaid the $240,000 with proceeds from
the Bridge Notes. During the six months ended June 30, 1997, the Company
borrowed an aggregate of $275,000 from two directors and $150,000 from a limited
partnership whose limited partners are the grandchildren of the sole stockholder
of the underwriter of the proposed initial public offering. See Note C.
Reverse stock split and stock dividend
In January 1997, the Company effected a reverse stock split such that every
three shares of Common Stock outstanding was converted to one share of Common
Stock of the same respective class. In connection with this reverse stock split,
the Company paid a dividend of one share of Class E Common Stock for each two
shares of Common Stock or warrants to purchase Common Stock. This resulted in
the issuance of 1,226,716 shares of Class E Common Stock.
Each share of Class E Common Stock will automatically be converted into one
share of Class A Common Stock in the event that the Company obtains certain
minimum pre-tax income ranging from $7,500,000 in 1997 to $12,500,000 through
December, 2001. These shares will also be converted if the bid price of the
Company's Class A Common Stock shall average in excess of $12.50 or $16.75 per
share for 30 consecutive business days ending on or before 18 months after the
proposed public offering, or 18 to 36 months after the proposed public offering,
respectively. On March 31, 2002 all Class E Shares not previously converted into
Class A Common Stock will be redeemed by the Company for $0.00001 per share.
Acquisition of Purple Demon, Inc.
On February 14, 1997, the Company acquired all of the outstanding common
stock of Purple Demon, Inc., in exchange for 100,000 shares of Class A Common
Stock of the Company. 33,333 shares were issued at closing and the remaining
66,667 shares are to be issued on the earlier of 90 days after the proposed
public offering or December 31, 1997. The acquisition will be accounted for
using the purchase method. The results of operations of Paradigm at June 30,
1997 include the operations of Purple Demon for approximately five and one-half
months. For purposes of this acquisition, the shares, which are subject to
restriction, are valued at $3.50, based upon the Company's estimation of the
value of restricted securities of similarly valued Companies with publicly
traded securities. The related goodwill is being amortized over a period of five
years.
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PARADIGM MUSIC ENTERTAINMENT COMPANY
(A DEVELOPMENTAL STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AT JUNE 30, 1997 IS UNAUDITED)
Investment in Supersound Music Productions, Inc.
Subsequent to year-end the Company transferred $150,000 into the business
account of a partnership formed with Supersound Music Productions, Inc. The
Company's investment represents fifty percent of the partnership. The
partnership was formed to develop and promote artists for the Asian market. The
investment will be accounted for under the equity method of accounting. (See
Note B).
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APPENDIX I
AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER (this "Agreement") dated as of August 12,
1997, is entered into by and among TCI Music, Inc., a Delaware corporation ("TCI
Music"), TCI Music Acquisition Sub, Inc., a Florida corporation and wholly owned
subsidiary of TCI Music ("Acquisition Sub"), and The Box Worldwide, Inc.
(formerly known as Video Jukebox Network, Inc.), a Florida corporation (the
"Company").
RECITALS
A. TCI Music has proposed that it will acquire the Company in a transaction
in which Acquisition Sub will merge with and into the Company, as a result of
which TCI Music will become the holder of all the outstanding shares of common
stock of the Company and the holders of shares of common stock of the Company
outstanding immediately prior to such merger will become holders of shares of
convertible preferred stock of TCI Music.
B. The Boards of Directors of TCI Music, Acquisition Sub and the Company
have each determined that the Merger is in the best interests of their
respective corporations and shareholders.
NOW, THEREFORE, in consideration of the foregoing premises and the
representations, warranties and agreements contained in this Agreement, the
parties to this Agreement agree as follows:
ARTICLE I
DEFINITIONS
SECTION 1.1 Definitions. As used in this Agreement, the following terms
with initial capital letters will have the meanings set forth below:
"Affiliate" means, as to any Person, any other Person which, directly or
indirectly, controls, is under common control with, or is controlled by, such
Person. As used in this definition, "control" (including, with correlative
meaning, "controlling," "controlled by" and "under common control with") means
possession, directly or indirectly, of the power to direct or cause the
direction of the management and policies of a Person (whether through the
ownership of voting securities, by contract or otherwise).
"Certificate of Designations" means the Certificate of Designations in the
form attached as Exhibit A.
"Company Shareholders" means certain shareholders of the Company as defined
in the Voting Agreement.
"Company Common Stock" means the shares of common stock, par value $.001
per share, of the Company.
"Company Preferred Stock" means the shares of 6% Convertible Redeemable
Preferred Stock, par value $.15 per share and stated value $1.50 per share, of
the Company.
"Company Stock" means shares of Company Common Stock and shares of Company
Preferred Stock.
"Contribution Agreement" means the Contribution Agreement dated July 11,
1997, by and between TCI and TCI Music.
"Code" means the Internal Revenue Code of 1986, as amended.
"Environmental Law" means any applicable Legal Requirement relating to the
protection, preservation or restoration of the environment (including, air,
water vapor, surface water, ground water, drinking water supply, surface land,
subsurface land, plant and animal life or any other natural resource).
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"Equity Affiliate" means, as to any Person, any other Person in which such
Person or any of its Subsidiaries holds a five percent or greater equity
interest.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"ERISA Affiliate" means, as to any Person, any trade or business (whether
or not incorporated) that is treated as a single employer with such Person under
Section 414(b), (c), (m) or (o) or the Code.
"GAAP" means generally accepted accounting principles as in effect from
time to time in the United States of America.
"Knowledge" means the actual present knowledge of a Person that is a human
being and, in the case of a Person that is not a human being, the present actual
knowledge of any director or officer (or any human being having duties
comparable to those of a director or officer) of such Person.
"Legal Requirement" means any statute, ordinance, code, law, rule,
regulation, order or other requirement, standard or procedure enacted, adopted
or applied by any Governmental Entity, including judicial decisions applying
common law or interpreting any other Legal Requirement or any agreement entered
into with a Governmental Entity in resolution of a dispute or otherwise.
"Lien" means any lien, security interest, pledge, charge, claim, option,
right to acquire, restriction on transfer, voting restriction or encumbrance of
any nature.
"Material Adverse Effect" means a material adverse effect on the business,
properties, assets, condition (financial or otherwise), liabilities or
operations of a Person and its Subsidiaries, taken as a whole, or on the ability
of such Person to perform its obligations under this Agreement.
"NASDAQ" means the over-the-counter market of the National Association of
Securities Dealers, Inc.
"PBGC" means the Pension Benefit Guaranty Corporation.
"Person" means any human being or any partnership, limited liability
company, corporation, business trust, joint stock company, trust, unincorporated
association, joint venture, Governmental Entity or other entity.
"SEC" means the United States Securities and Exchange Commission.
"Subsidiary" means, with respect to any Person, any other Person more than
50% of whose outstanding voting securities or partnership or other equity
interests, as the case may be, are directly or indirectly owned by such Person.
"TCI" means Tele-Communications, Inc.
"TCI Music Preferred Stock" means the Series A Convertible Preferred Stock
of TCI Music, par value $.01 per share, having the powers, designations, rights,
qualifications and restrictions set forth in the Certificate of Designations in
the form attached as Exhibit A.
"TCI Music Series A Common Stock Value" means the average of the average
daily closing bid and asked prices of one share of TCI Music Series A Common
Stock for a period of 20 consecutive trading days ending on the third trading
day prior to the Closing, as reported on the NASDAQ SmallCap Market.
"Voting Agreement" means the Voting Agreement dated as of the date hereof
by and among TCI Music and the Company Shareholders (as defined therein).
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SECTION 1.2 Other Definitions. The following terms are defined in the
Sections indicated:
<TABLE>
<CAPTION>
TERM SECTION
---- --------
<S> <C>
Acquisition Proposal........................................ 7.12
Acquisition Sub............................................. Preamble
Articles of Incorporation................................... 2.1(a)
Agreement................................................... Preamble
Antitrust Division.......................................... 7.9
Articles of Merger.......................................... 2.2
Capitalization Amendment.................................... 2.1(a)
Closing..................................................... 3.13
Closing Date................................................ 3.13
Company..................................................... Preamble
Company Benefit Plans....................................... 5.11(a)
Company Permits............................................. 5.8(a)
Company SEC Reports......................................... 5.7(a)
Company Stock Certificates.................................. 3.3(a)
Dissenting Shares........................................... 3.8
Effective Time.............................................. 2.2
Exchange Act................................................ 4.6
Exchange Agent.............................................. 3.3(a)
Exchange Rate............................................... 3.2
Executive................................................... 7.13(a)
FBCA........................................................ 2.1
FTC......................................................... 7.9
Governmental Entity......................................... 4.8(a)
HSR Act..................................................... 4.6
Indemnified Party........................................... 7.2(h)(iii)
Indemnifying Party.......................................... 7.2(h)(iii)
Joint Proxy Statement/Prospectus............................ 7.2(a)
Losses...................................................... 7.2(h)(i)
Meeting..................................................... 7.3
Merger...................................................... 2.1
Merger Consideration........................................ 3.1
Most Recent Company Balance Sheet........................... 5.7(c)
Most Recent TCI Music Balance Sheet......................... 4.7(c)
Other Filings............................................... 7.2(b)
Preliminary Joint Proxy Statement/Prospectus................ 7.2(a)
SEC Filings................................................. 7.2(c)
Securities Act.............................................. 4.6
Surviving Corporation....................................... 2.1
Tax......................................................... 4.14
TCI Music................................................... Preamble
TCI Music Certificates...................................... 3.3(a)
TCI Music Permits........................................... 4.8(a)
TCI Music SEC Reports....................................... 4.7(a)
</TABLE>
SECTION 1.3 Use of Terms. Terms used with initial capital letters will
have the meanings specified, applicable to both singular and plural forms, for
all purposes of this Agreement. All pronouns (and any variations) will be deemed
to refer to the masculine, feminine or neuter, as the identity of the Person may
require. The singular or plural includes the other, as the context requires or
permits. The word include (and any variation) is used in an illustrative sense
rather than a limiting sense. The word day means a calendar day. All accounting
terms not otherwise defined in this Agreement will have the meanings ascribed to
them under GAAP.
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<PAGE> 135
ARTICLE II
THE MERGER AND RELATED MATTERS
SECTION 2.1 The Merger. Subject to the terms and conditions of this
Agreement, and the Florida Business Corporation Act ("FBCA"), at the Effective
Time: (i) Acquisition Sub will be merged with and into the Company (the
"Merger"); (ii) the separate existence of Acquisition Sub will cease and the
Company will continue as the surviving corporation in the Merger (the "Surviving
Corporation"); and (iii) the name of the Surviving Corporation will be The Box
Worldwide, Inc. From and after the Effective Time, and without any further
action on the part of any Person, the Merger will have all the effects provided
by applicable Legal Requirements, including Sections 607.1302 and 607.1320 of
the FBCA, the effects described in Section 3.1 with respect to the capital stock
of Acquisition Sub and the Company and, subject to applicable Legal
Requirements, the following additional effects:
(a) Articles of Incorporation. The Fourth Amended and Restated Articles of
Incorporation of the Company, as amended, as in effect on the date of this
Agreement, will be amended (the "Capitalization Amendment") to increase the
authorized number of shares of Company Common Stock from 40,000,000 shares to
100,000,000 shares. At the Effective Time, the Fourth Amended and Restated
Articles of Incorporation of the Company, as so amended (the "Articles of
Incorporation"), will become the Articles of Incorporation of the Surviving
Corporation, and such Articles of Incorporation may thereafter be amended and/or
restated as provided therein and by the FBCA.
(b) Bylaws. At the Effective Time, the Bylaws of Acquisition Sub, as in
effect immediately prior to the Effective Time, will become the Bylaws of the
Surviving Corporation, and such Bylaws may thereafter be amended or repealed in
accordance with their terms and the Articles of Incorporation of the Surviving
Corporation and as provided by the FBCA.
(c) Directors. At the Effective Time, the directors of Acquisition Sub
immediately prior to the Effective Time will become the directors of the
Surviving Corporation, each to hold office in accordance with the Articles of
Incorporation and Bylaws of the Surviving Corporation and the FBCA and until the
earlier of such director's resignation or removal or such director's successor
is duly elected and qualified, as the case may be.
(d) Officers. At the Effective Time, the officers of Acquisition Sub
immediately prior to the Effective Time will become the officers of the
Surviving Corporation, each to hold office in accordance with the Articles of
Incorporation and Bylaws of the Surviving Corporation and the FBCA and until the
earlier of such officer's resignation or removal or such officer's successor is
duly appointed and qualified, as the case may be.
(e) Properties and Liabilities. At the Effective Time, all the properties,
rights, privileges, powers and franchises of the Company and Acquisition Sub
will vest in the Surviving Corporation, and all debts, liabilities and duties of
the Company and Acquisition Sub will become the debts, liabilities and duties of
the Surviving Corporation.
SECTION 2.2 Effective Time of the Merger. Subject to the terms and
conditions in this Agreement, the parties will prepare, sign and acknowledge, in
accordance with the FBCA, articles of merger (the "Articles of Merger") and
deliver the Articles of Merger to the Secretary of State of the State of Florida
for filing pursuant to the FBCA on the Closing Date. The Merger will become
effective upon the filing of the Articles of Merger with the Secretary of State
of the State of Florida. As used in this Agreement, the "Effective Time" means
the time at which the Articles of Merger are filed with the Secretary of State
of the State of Florida.
ARTICLE III
CONVERSION OF CAPITAL STOCK
SECTION 3.1 Merger Consideration and Conversion of Stock. The aggregate
consideration deliverable by TCI Music in the Merger (the "Merger
Consideration") will be equal to (a) the sum of (i) $38,502,672 and (ii) $1.50
times the number of shares of Company Common Stock issued prior to the Effective
Time upon the exercise or conversion of options, warrants, convertible
securities or other rights to acquire Company
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Common Stock that are outstanding as of the date of this Agreement minus (b) the
sum of (i) $1.50 times the number of Dissenting Shares (as defined in Section
3.8), (ii) $1.50 times the number of shares of Company Preferred Stock
outstanding at the Effective Time that are not Dissenting Shares and (iii) all
accrued and unpaid dividends on shares of Company Preferred Stock as of the
Effective Time, whether or not such shares are Dissenting Shares. The Merger
Consideration will be deliverable at the Effective Time, by virtue of the Merger
and without any action on the part of the holders of any shares of capital stock
of any corporation as follows:
(a) Each share of Company Common Stock outstanding immediately prior to the
Effective Time (except shares subject to Section 3.1(b) and Dissenting Shares)
will be converted into and will thereafter evidence and become (i) a fraction
(rounded to the nearest one-hundredth), representing the Exchange Rate
calculated in accordance with Section 3.2, of one share of TCI Music Preferred
Stock and (ii) as to any holder of shares of Company Common Stock, if the total
number of shares of Company Common Stock of such holder is not convertible into
a whole number of shares of TCI Music Preferred Stock, the right to receive cash
in lieu of any fractional share of TCI Music Preferred Stock as provided in
Section 3.5.
(b) Each share of the capital stock of the Company issued and outstanding
immediately prior to the Effective Time and owned directly or indirectly by the
Company, if any, will be canceled and retired, and no TCI Music Preferred Stock
or other consideration will be delivered in exchange therefor.
(c) Each share of common stock, par value $.01 per share, of Acquisition
Sub issued and outstanding immediately prior to the Effective Time (except
shares subject to Section 3.1(d)) will be converted into and will thereafter
evidence and become that number of validly issued, fully paid, and nonassessable
shares of common stock, par value $.001 per share, of the Surviving Corporation
equal to the quotient of (a) the number of shares of Company Common Stock
outstanding immediately prior to the Effective Time divided by (b) the number of
shares of common stock of Acquisition Sub outstanding immediately prior to the
Effective Time rounded, in the case of any fractional share, down to the nearest
whole number.
(d) Each share of the capital stock of Acquisition Sub issued and
outstanding immediately prior to the Effective Time and owned directly or
indirectly by Acquisition Sub, if any, will be canceled and retired, and no
common stock of the Surviving Corporation or other consideration will be
delivered in exchange therefor.
(e) Each share of Company Preferred Stock outstanding immediately prior to
the Effective Time will continue to be outstanding with all the rights,
privileges and preferences set forth in the Articles of Incorporation and the
FBCA, unless such share is a Dissenting Share, in which case such share only
will have the rights prescribed by Sections 607.1302 and 607.1320 of the FBCA.
SECTION 3.2 Calculation of Exchange Rate. For purposes of this Agreement,
the "Exchange Rate" will be the quotient (rounded to the nearest hundredth) of
(a) the quotient (rounded to the nearest hundredth) of the Merger Consideration
divided by three times the TCI Music Series A Common Stock Value, divided by (b)
the number of shares of Company Common Stock outstanding immediately prior to
the Effective Time, less the number of shares of Company Common Stock that are
Dissenting Shares.
SECTION 3.3 Exchange of Certificates.
(a) Exchange Agent. The Bank of New York (or, if The Bank of New York is
unable or unwilling to serve in such capacity, another bank or trust company
selected by TCI Music and reasonably acceptable to the Company) will act as
exchange agent (the "Exchange Agent") in connection with the surrender of
certificates that, prior to the Effective Time, evidenced outstanding shares of
Company Common Stock ("Company Stock Certificates"). Prior to the Closing Date,
TCI Music will deposit with the Exchange Agent for exchange in accordance with
this Section 3.3 certificates evidencing the shares of TCI Music Preferred Stock
to be issued in the Merger ("TCI Music Certificates"), which shares of TCI Music
Preferred Stock will be deemed to be issued at the Effective Time. At and
following the Effective Time, TCI Music will deliver to the Exchange Agent such
cash as may be required from time to time to make payments of cash in lieu of
fractional shares of TCI Music Preferred Stock in accordance with Section 3.5.
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(b) Exchange. As soon as practicable after the Effective Time, but subject
to the provisions of Section 3.8 regarding Dissenting Shares, TCI Music will
cause the Exchange Agent to mail to each Person who was a holder of record of
Company Common Stock at the Effective Time: (i) a letter of transmittal (which
will specify that delivery will be effective, and risk of loss and title to any
Company Stock Certificates will pass, only upon delivery of the Company Stock
Certificates to the Exchange Agent and will be in such form and will have such
other provisions that are specified by TCI Music and reasonably acceptable to
the Company); and (ii) instructions for use in effecting the surrender of
Company Stock Certificates in exchange for TCI Music Certificates (together with
any dividend or distribution with respect thereto made after the Effective Time
and any cash to be paid in lieu of fractional shares of TCI Music Preferred
Stock pursuant to Section 3.5). Upon surrender of a Company Stock Certificate
for cancellation to the Exchange Agent or to such other agent or agents as may
be appointed by TCI Music, together with such letter of transmittal, duly
executed, and such other documents as may be required by the Exchange Agent or
such other agent, the holder of such Company Stock Certificate will be entitled
to receive in exchange therefor TCI Music Certificates representing the number
of whole shares of TCI Music Preferred Stock that such holder has the right to
receive pursuant to this Agreement (together with any dividend or distribution
with respect thereto made after the Effective Time and any cash to be paid in
lieu of fractional shares of TCI Music Preferred Stock pursuant to Section 3.5)
and the Company Stock Certificate so surrendered will be canceled. In the event
of a transfer of ownership of Company Common Stock that is not registered in the
transfer records of the Company, TCI Music Certificates representing the proper
number of shares of TCI Music Preferred Stock may be issued to a Person other
than the Person in whose name the surrendered Company Stock Certificate is
registered if the Company Stock Certificate representing such Company Common
Stock is presented to the Exchange Agent accompanied by all documents required
to evidence and effect such transfer and by evidence reasonably satisfactory to
TCI Music that any applicable stock transfer tax has been paid. TCI Music will
not directly or indirectly pay or reimburse any Person for any transfer taxes of
the type referred to in the preceding sentence. If any TCI Music Certificates
are to be delivered to a Person other than the Person in whose name the Company
Stock Certificates surrendered in exchange therefor are registered, it will be a
condition to the delivery of such TCI Music Certificates that the Company Stock
Certificates so surrendered are properly endorsed or accompanied by appropriate
stock powers and otherwise in proper form for transfer, that such transfer
otherwise is proper and that the Person requesting such transfer pay to the
Exchange Agent any transfer or other taxes payable by reason of the foregoing or
establishes to the satisfaction of the Exchange Agent that such taxes have been
paid or are not required to be paid.
(c) Certificates Not Exchanged. After the Effective Time, each outstanding
Company Stock Certificate will, until surrendered for exchange in accordance
with this Section 3.3, be deemed for all purposes to evidence ownership of the
number of whole shares of TCI Music Preferred Stock into which the shares of
Company Common Stock (which, prior to the Effective Time, were represented
thereby) are converted in accordance with Section 3.1, together with the right
to receive any dividend or distribution with respect thereto made after the
Effective Time and any cash to be paid in lieu of fractional shares of TCI Music
Preferred Stock pursuant to Section 3.5.
(d) Expenses. Except as otherwise expressly provided in this Agreement, TCI
Music will pay all charges and expenses, including those of the Exchange Agent,
in connection with the exchange of shares of TCI Music Preferred Stock for
shares of Company Common Stock, except any charges or expenses that are
otherwise solely the liability of one or more holders of Company Common Stock.
Any TCI Music Certificates deposited with the Exchange Agent that remain
unclaimed by the former shareholders of the Company after six months following
the Effective Time will be delivered to TCI Music upon its demand, and any
former shareholders of the Company who have not then complied with the
instructions for exchanging their Company Stock Certificates will thereafter
look only to TCI Music for exchange of Company Stock Certificates and for any
dividend or distribution with respect thereto made after the Effective Time and
any cash to be paid in lieu of fractional shares of TCI Music Preferred Stock
pursuant to Section 3.5.
SECTION 3.4 Dividends and Other Distributions. No dividends or other
distributions declared or made after the Effective Time with respect to shares
of TCI Music Preferred Stock with a record date after the Effective Time will be
paid to the holder of any unsurrendered Company Stock Certificate with respect
to the
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shares of TCI Music Preferred Stock issuable upon surrender thereof until the
holder of such Company Stock Certificate surrenders such Company Stock
Certificate in accordance with Section 3.3. Subject to the effect of applicable
Legal Requirements, following surrender of any such Company Stock Certificate,
TCI Music will pay or cause to be paid, without interest, to the record holder
of TCI Music Certificates issued in exchange therefor, (a) at the time of such
surrender, the amount of cash in lieu of fractional shares of TCI Music
Preferred Stock to which such holder is entitled pursuant to Section 3.5 and the
amount, if any, of dividends or other distributions by TCI Music with a record
date after the Effective Time theretofore paid with respect to such whole shares
of TCI Music Preferred Stock and (b) at the appropriate payment date, the amount
of dividends or other distributions (if any) by TCI Music with a record date
after the Effective Time but prior to surrender of such Company Stock
Certificate and a payment date subsequent to such surrender payable with respect
to such whole shares of TCI Music Preferred Stock.
SECTION 3.5 No Fractional Shares.
(a) Cash Payment in Lieu of Fractional Shares. No certificates or scrip
representing fractional shares of TCI Music Preferred Stock will be issued upon
the surrender of Company Stock Certificates pursuant to Section 3.3. No such
fractional interest will entitle the owner thereof to any rights as a security
holder of TCI Music. In lieu of any such fractional shares of TCI Music
Preferred Stock, each holder of Company Common Stock entitled to receive shares
of TCI Music Preferred Stock in the Merger, upon surrender of such Person's
Company Stock Certificates for exchange pursuant to Section 3.3, will be
entitled to receive an amount in cash (without interest), rounded to the nearest
cent, determined by multiplying three times the TCI Music Series A Common Stock
Value by the fractional share interest in TCI Music Preferred Stock to which
such holder would otherwise be entitled (after taking into account all shares of
Company Common Stock held of record by such holder immediately prior to the
Effective Time).
(b) Deposit with Exchange Agent. As soon as practicable after the
determination of the amount of cash, if any, to be paid to holders of shares of
TCI Music Preferred Stock in lieu of any fractional unit interests, TCI Music
will promptly deposit with the Exchange Agent cash in the required amounts and
the Exchange Agent will mail such amounts without interest to such holders;
provided however, that no such amount will be paid to any holder with respect to
any Company Stock Certificate prior to the surrender by such holder of such
Company Stock Certificate.
SECTION 3.6 No Liability. None of TCI Music, Acquisition Sub, the Company,
the Surviving Corporation or the Exchange Agent will be liable to any holder of
shares of Company Common Stock for any shares of TCI Music Preferred Stock,
dividends or distributions with respect thereto or cash payable in lieu of
fractional shares of TCI Music Preferred Stock delivered to a state abandoned
property administrator or other public official pursuant to any applicable
abandoned property, escheat or similar law.
SECTION 3.7 Lost Certificates. If any Company Stock Certificate is lost,
stolen or destroyed, the Exchange Agent will issue in exchange for such lost,
stolen or destroyed Company Stock Certificate the shares of TCI Music Preferred
Stock (and any dividend or distribution with respect thereto made after the
Effective Time and any cash payable in lieu of fractional shares of TCI Music
Preferred Stock pursuant to Section 3.5) deliverable in respect thereof as
determined in accordance with the terms of this Agreement, subject to the
condition that the Person to whom the TCI Music Preferred Stock (and any
dividend or distribution with respect thereto made after the Effective Time and
any cash payable in lieu of fractional shares pursuant to Section 3.5) are to be
issued, shall have (a) delivered to TCI Music an affidavit claiming such Company
Stock Certificate to be lost, stolen, or destroyed and (b) if required by TCI
Music, given TCI Music an indemnity satisfactory to TCI Music against any claim
that may be made against TCI Music with respect to the Company Stock Certificate
alleged to have been lost, stolen or destroyed.
SECTION 3.8 Dissenting Shares. Notwithstanding anything in this Agreement
to the contrary, shares of Company Stock outstanding immediately prior to the
Effective Time that are held by holders of such shares who have not voted in
favor of the Merger or consented thereto in writing and who have demanded
appraisal rights with respect thereto in accordance with Sections 607.1302 and
607.1320 of the FBCA (the "Dissenting Shares") will not be converted into or be
exchangeable for the right to receive shares of TCI Music Preferred Stock or any
dividend or distribution with respect thereto made after the Effective Time or
any cash payable in
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lieu of fractional shares of TCI Music Preferred Stock pursuant to Section 3.5,
but holders of Dissenting Shares will be entitled to receive payment of the fair
value of their Dissenting Shares in accordance with the provisions of the FBCA
and this Section 3.8. Any shares of Company Stock held by a shareholder who,
prior to the Effective Time, withdraws a demand for appraisal of such shares or
loses the right to appraisal as provided in the FBCA will not be considered
Dissenting Shares. The Company will give TCI Music prompt notice of any written
demands for appraisal of any shares of Company Stock, attempted withdrawals of
such demand and any other notices or other documents received by the Company
pursuant to the FBCA relating to shareholders' rights of appraisal. The Company
will make all payments required by the FBCA to be made in respect of Dissenting
Shares, including any costs assessed against the Company pursuant to Sections
607.1302 and 607.1320 of the FBCA, and TCI Music or any of its Affiliates will
directly or indirectly reimburse or otherwise provide funds to the Company with
respect to such payments.
SECTION 3.9 Treatment of Stock Options, Etc. The Company will take all
action necessary to cause any outstanding stock options, warrants or other
rights to acquire any capital stock of the Company to be canceled if not
exercised prior to or at the Effective Time, except for shares of Company
Preferred Stock; provided, however, that, except as provided in Schedule 3.9,
the Company will not pay or agree to pay or deliver any cash or other
consideration to the holder of any such option, warrant or other right in
consideration of the cancellation or termination thereof.
SECTION 3.10 Shareholders' Approval. Subject to fiduciary duty obligations
of the Board of Directors of the Company under applicable Legal Requirements,
the Company will use its best efforts, in accordance with applicable Legal
Requirements and the Articles of Incorporation and Bylaws of the Company, to
have this Agreement, the Merger, the Capitalization Amendment and the
transactions contemplated by this Agreement approved by the holders of capital
stock of the Company entitled to vote thereon. The Company will notify TCI Music
of the date set for any shareholder action to be taken in connection with
approval of the Merger not later than 30 days prior to such date. The Board of
Directors of the Company will, subject to fiduciary duty obligations under
applicable Legal Requirements, recommend that holders of Company Stock vote to
adopt this Agreement and approve the Merger, the Capitalization Amendment and
the transactions contemplated by this Agreement and will use best efforts to
solicit from such holders proxies in favor of such approval and adoption and
take all other action necessary or helpful to secure such favorable vote. Such
efforts will include causing the Joint Proxy Statement/Prospectus to include the
recommendation of the Board of Directors of the Company that its shareholders
approve the Merger and related transactions, including the Capitalization
Amendment; provided however, that the Board of Directors of the Company may
modify or withdraw its recommendation if it determines, with the advice of
outside counsel, that it may be required to do so in the exercise of its
fiduciary duties. Unless the Company's Board of Directors releases TCI Music and
Acquisition Sub from such obligation, each of TCI Music and Acquisition Sub will
use its best efforts to cause all shares of Company Stock beneficially owned
(within the meaning of Rule 13d-3 under the Exchange Act) by Liberty VJN, Inc.
and any Affiliate of TCI Music and Acquisition Sub, on the record date for the
Meeting, to be voted in favor of the Merger.
SECTION 3.11 Closing of the Company's Transfer Books. At the Effective
Time, the stock transfer books of the Company will be closed and no transfer of
shares of Company Common Stock will be made thereafter. In the event that, after
the Effective Time, Company Stock Certificates are presented to the Surviving
Corporation, they will be canceled and exchanged for the TCI Music Certificates
(and, if required, cash) as provided in Section 3.3(b) and Section 3.5.
SECTION 3.12 Assistance in Consummation of the Merger. Each of TCI Music,
Acquisition Sub and the Company will provide all reasonable assistance to, and
will cooperate with, each other to bring about the consummation of the Merger as
soon as possible in accordance with the terms and conditions of this Agreement.
SECTION 3.13 Closing. The closing of the transactions contemplated by this
Agreement (the "Closing") will take place (i) at the offices of Sherman & Howard
L.L.C., 633 Seventeenth Street, Suite 3000, Denver, Colorado, at 9:00 A.M. local
time on the date that is the first business day after the day on which the last
of the conditions set forth in Article VIII (excluding delivery of opinions and
certificates) is fulfilled or
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waived or (ii) at such other place and time as TCI Music and the Company agree
in writing. The date on which the Closing occurs is referred to in this
Agreement as the "Closing Date."
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF TCI MUSIC AND ACQUISITION SUB
TCI Music and Acquisition Sub jointly and severally represent and warrant
to the Company as follows:
SECTION 4.1 Organization and Qualification. TCI Music is a corporation
duly organized, validly existing and in good standing under the laws of the
State of Delaware, Acquisition Sub is a corporation duly organized, validly
existing and in good standing under the laws of the State of Florida, and each
has all requisite corporate power and authority to carry on its business as it
is now being conducted. Each of TCI Music and Acquisition Sub is duly qualified
as a foreign corporation to do business, and is in good standing, in each
jurisdiction where the character of its properties owned or held under lease or
the nature of its activities make such qualification necessary, except where the
failure to be so qualified will not, individually or in the aggregate, have a
Material Adverse Effect on it.
SECTION 4.2 Capitalization.
(a) As of the date of this Agreement, the authorized capital stock of TCI
Music consists of: (i) 495,000,000 shares of common stock, par value $.01 per
share, divided into the following classes: 295,000,000 shares of common stock
designated as Series A Common Stock of which 14,896,649 shares are issued and
outstanding and 200,000,000 shares of common stock, designated as Series B
Common Stock of which 62,500,000 shares are issued and outstanding; and (ii)
5,000,000 shares of preferred stock, par value $.01 per share, none of which are
issued and outstanding.
(b) All shares of TCI Music Preferred Stock to be issued in connection with
the Merger, when issued in accordance with this Agreement, will be duly
authorized, validly issued, fully paid and nonassessable.
(c) As of the date of this Agreement, the authorized capital stock of
Acquisition Sub consists of 1,000 shares of common stock, par value $.01 per
share, of which 1,000 shares are issues and outstanding, all of which are owned
beneficially and of record by TCI Music.
SECTION 4.3 Subsidiaries. All Equity Affiliates of TCI Music are listed on
Schedule 4.3 to this Agreement, which Schedule reflects the percentage and
nature of TCI Music's ownership of each Subsidiary and Equity Affiliate of TCI
Music. Each of TCI Music's Subsidiaries is a corporation or partnership duly
organized, validly existing and in good standing under the laws of its
jurisdiction of incorporation or formation and has the corporate or partnership
power to carry on its business as it is now being conducted or currently
proposed to be conducted. Each of TCI Music's Subsidiaries is duly qualified as
a foreign corporation or partnership to do business, and is in good standing, in
each jurisdiction where the character of its properties owned or held under
lease or the nature of its activities makes such qualification necessary except
where the failure to be so qualified will not have a Material Adverse Effect on
TCI Music. All the outstanding shares of capital stock of each of TCI Music's
Subsidiaries that is a corporation are validly issued, fully paid and
nonassessable. Except as set forth on Schedule 4.3, the shares of capital stock
or partnership or other ownership interests in each of TCI Music's Subsidiaries
or Equity Affiliates that are owned by TCI Music or by a Subsidiary of TCI Music
are owned free and clear of any Liens, are not subject to and have not been
issued in violation of any preemptive rights and have not been issued in
violation of any federal or state securities laws or any other Legal
Requirement. Except as set forth on Schedule 4.3, there are not, as of the date
hereof, and at the Effective Time there will not be, any outstanding options,
warrants, calls or other rights, agreements or commitments of any character, to
which TCI Music or any of its Subsidiaries is a party, relating to the issued or
unissued capital stock, other securities or partnership or other ownership
interests in any of the Subsidiaries or Equity Affiliates of TCI Music.
SECTION 4.4 Authority Relative to this Agreement. Each of TCI Music and
Acquisition Sub has all requisite corporate power and authority to execute and
deliver this Agreement and to consummate the transactions contemplated by this
Agreement. The execution and delivery of this Agreement and the
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consummation of the transactions contemplated by this Agreement by TCI Music and
Acquisition Sub have been duly authorized by the Boards of Directors of TCI
Music and Acquisition Sub and by TCI Music as the sole stockholder of
Acquisition Sub, and no other corporate proceedings on the part of TCI Music or
Acquisition Sub are necessary to authorize this Agreement and the transactions
contemplated by this Agreement. This Agreement constitutes a valid and binding
obligation of each of TCI Music and Acquisition Sub enforceable against each of
them in accordance with its terms, except (i) as enforcement may be limited by
bankruptcy, insolvency or other similar Legal Requirements affecting the
enforcement of creditors' rights generally, (ii) as the availability of
indemnification and other remedies may be limited by federal and state
securities laws and (iii) for limitations imposed by general principles of
equity.
SECTION 4.5 No Breach; Required Consents. The execution and delivery of
this Agreement by TCI Music and Acquisition Sub do not, and the consummation of
the transactions contemplated by this Agreement by TCI Music and Acquisition Sub
will not: (a) violate or conflict with the Certificate or Articles of
Incorporation or Bylaws of TCI Music or Acquisition Sub; (b) constitute a breach
or default (or an event that with notice or lapse of time or both would become a
breach or default) or give rise to any Lien, third-party right of termination,
cancellation, modification or acceleration under any agreement or undertaking to
which TCI Music or Acquisition Sub is a party or by which any of them is bound,
except where such breach, default, Lien, third-party right of termination,
cancellation, modification or acceleration would not have a Material Adverse
Effect on TCI Music or Acquisition Sub; or (c) subject to obtaining the
approvals and making the filings described in Section 4.6, constitute a
violation of any applicable Legal Requirement, except where such violation would
not have a Material Adverse Effect on TCI Music or Acquisition Sub.
SECTION 4.6 Consents and Approvals. Except as set forth on Schedule 4.6,
neither the execution and delivery of this Agreement by TCI Music and
Acquisition Sub nor the consummation of the transactions contemplated by this
Agreement by TCI Music and Acquisition Sub will require TCI Music or Acquisition
Sub to make any filing or registration with, or obtain any authorization,
consent or approval of, any Governmental Entity, except those required in
connection, or in compliance, with the provisions of (i) the Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as amended (the "HSR Act"), (ii) the
Communications Act of 1934, as amended, (iii) the Securities Act of 1933, as
amended (the "Securities Act"), (iv) the Securities Exchange Act of 1934, as
amended (the "Exchange Act") and (v) the corporation, securities or blue sky
laws or regulations, or similar Legal Requirements, of various states of the
United States, and other than such filings, registrations, authorizations,
consents or approvals the failure of which to make or obtain would not have a
Material Adverse Effect on TCI Music or Acquisition Sub or prevent the
consummation of the transactions contemplated by this Agreement.
SECTION 4.7 Reports and Financial Statements.
(a) SEC Reports. TCI Music has filed all required forms, reports and
documents required to be filed with the SEC since TCI Music was incorporated
(collectively, the "TCI Music SEC Reports"). As of their respective dates or
effective dates and except as the same may have been corrected, updated or
superseded by means of a subsequent filing with the SEC prior to the date of
this Agreement, none of the TCI Music SEC Reports, including any financial
statements or schedules included or incorporated by reference therein, contained
any untrue statement of a material fact or omitted to state a material fact
required to be stated or incorporated by reference therein or necessary in order
to make the statements therein, in light of the circumstances under which they
were made, not misleading. TCI Music has delivered to the Company, in the forms
filed with the SEC, all the TCI Music SEC Reports.
(b) Financial Statements. The audited consolidated financial statements of
TCI Music contained in the TCI Music SEC Reports comply in all material respects
with applicable accounting requirements and with the published rules and
regulations of the SEC with respect thereto, were prepared in accordance with
GAAP applied on a consistent basis during the periods involved (except as may be
indicated in the notes thereto) and present fairly TCI Music's consolidated
financial condition and the results of its operations as of the relevant dates
thereof and for the periods covered thereby. The unaudited consolidated interim
financial statements of TCI Music contained in the TCI Music SEC Reports comply
in all material respects with applicable accounting requirements and with the
published rules and regulations of the SEC with respect thereto, were
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prepared on a basis consistent with prior interim periods (except as required by
applicable changes in GAAP or in SEC accounting policies) and include all
adjustments (consisting only of normal recurring accruals) necessary for a fair
presentation of TCI Music's consolidated financial condition and results of
operations for such periods.
(c) Absence of Certain Changes. Except as disclosed in the TCI Music SEC
Reports, since the date of the most recent balance sheet of TCI Music included
in TCI Music's Amendment No. 1 to Registration Statement on Form S-4 filed with
the SEC on June 12, 1997 (the "Most Recent TCI Music Balance Sheet"), there has
not been any: (i) transaction, commitment, dispute or other event or condition
(financial or otherwise) of any character (whether or not in the ordinary course
of business) that, individually or in the aggregate, has had, or would have, a
Material Adverse Effect on TCI Music (other than as a result of changes in laws
or regulations of general applicability or any changes resulting from general
economic, financial, market or industry-wide conditions); (ii) any declaration,
setting aside or payment of any dividend or other distribution (whether in cash,
stock or property) with respect to the capital stock of TCI Music; or (iii)
entry into any commitment or transaction material to TCI Music and its
Subsidiaries taken as a whole (including any borrowing or sale of assets) except
in the ordinary course of business consistent with past practice.
(d) Absence of Undisclosed Liabilities. Except as disclosed in the TCI
Music SEC Reports, TCI Music does not have any indebtedness, liability or
obligation required by GAAP to be reflected on a balance sheet that is not
reflected or reserved against in the Most Recent TCI Music Balance Sheet other
than liabilities, obligations and contingencies that (i) were incurred after the
date of the Most Recent TCI Music Balance Sheet in the ordinary course of
business or (ii) would not, in the aggregate, have a Material Adverse Effect on
TCI Music.
SECTION 4.8 Compliance with Law; Litigation.
(a) Except as disclosed in the TCI Music SEC Reports, TCI Music and its
Subsidiaries hold all permits, licenses, franchises, variances, exemptions,
concessions, leases, instruments, orders and approvals (the "TCI Music Permits")
of all courts, administrative agencies or commissions or other governmental
authorities or instrumentalities, domestic or foreign (each, a "Governmental
Entity") required to be held under applicable Legal Requirements, except for
such TCI Music Permits the failure of which to hold, individually or in the
aggregate, does not have and, in the future is not likely to have, a Material
Adverse Effect on TCI Music. To TCI Music's Knowledge, TCI Music and its
Subsidiaries are in compliance with the terms of the TCI Music Permits, except
for such failures to comply that, individually or in the aggregate, would not
have a Material Adverse Effect on TCI Music. To TCI Music's Knowledge, the
businesses of TCI Music and its Subsidiaries are not being conducted in
violation of any Legal Requirement, except for such violations which,
individually or in the aggregate, would not have a Material Adverse Effect on
TCI Music. No investigation or review by any Governmental Entity with respect to
TCI Music or any of its Subsidiaries is pending, or, to the Knowledge of TCI
Music, threatened, nor has any Governmental Entity indicated to TCI Music in
writing an intention to conduct the same, other than those the outcome of which
would not have a Material Adverse Effect on TCI Music.
(b) Except as disclosed in the TCI Music SEC Reports or on Schedule 4.8(b),
there is no suit, action or proceeding pending or, to the Knowledge of TCI
Music, threatened, against or affecting TCI Music or any of its Subsidiaries
that has had or is likely to have a Material Adverse Effect on TCI Music nor is
there any judgment, decree, injunction, rule or order of any Governmental Entity
or arbitrator outstanding against TCI Music or any of its Subsidiaries that has
had or is likely to have a Material Adverse Effect on TCI Music.
SECTION 4.9 Title to Assets. Except as disclosed in the TCI Music SEC
Reports, TCI Music and its Subsidiaries have good and merchantable title to all
material assets reflected on the unaudited pro forma combined balance sheet as
of March 31, 1997, included in TCI Music's Amendment No. 1 to Registration
Statement on Form S-4 filed with the SEC on June 12, 1997, free and clear of any
Lien except: (a) landlord's Liens and Liens for property taxes not delinquent;
(b) statutory Liens that were created in the ordinary course of business and do
not materially detract from the value of such assets or materially impair the
use thereof in the operation of TCI Music's business; (c) the Liens listed on
Schedule 4.3 or Schedule 4.9; (d) leased interests in property owned by others
and leased interests in property leased to others; and (e) zoning, building
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or similar restrictions, easements, rights-of-way, reservations of rights,
conditions, or other restrictions or encumbrances relating to or affecting real
property that do not, individually or in the aggregate, materially interfere
with the use of such real property in the operation of TCI Music's business.
SECTION 4.10 Labor and Employee Matters. TCI Music is not a party to any
contract with any labor organization and has not agreed to recognize any union
or other collective bargaining unit. As of the date of this Agreement, no union
or other collective bargaining unit has been certified as representing any of
TCI Music's employees. To TCI Music's Knowledge, as of the date of this
Agreement, there is no representation or organizing effort pending or threatened
against or affecting or involving TCI Music. TCI Music and its Subsidiaries are
in compliance with all applicable Legal Requirements relating to the employment
of employees, including any obligations relating to employment standards
legislation, pay equity, occupational health and safety, labor relations and
human rights legislation except for such failures to comply as do not have, and
are not likely to have, a Material Adverse Effect on TCI Music. Schedule 4.10
sets forth all agreements or arrangements with any employee of TCI Music,
whether oral or in writing, with respect to such employee's employment with TCI
Music other than agreements or arrangements otherwise disclosed on Schedule
4.11(a).
SECTION 4.11 ERISA.
(a) Schedule 4.11(a) sets forth all "employee benefit plans," as defined in
ERISA, and all other material employee benefit arrangements, programs or payroll
practices, including severance pay, sick leave, vacation pay, salary
continuation for disability, deferred compensation, bonus, stock purchase,
hospitalization, medical insurance, life insurance, tuition reimbursement,
employee assistance and employee discounts, that TCI Music or any of its ERISA
Affiliates maintains or has an obligation to make contributions (the "TCI Music
Benefit Plans").
(b) Neither TCI Music nor any of its ERISA Affiliates has incurred any
unsatisfied withdrawal liability, as defined in Section 4201 of ERISA, with
respect to any multiemployer plan, nor has any of them incurred any liability
due to the termination or reorganization of any multiemployer plan, except any
such liability that would not have a Material Adverse Effect on TCI Music. To
the Knowledge of TCI Music, neither TCI Music nor any of its ERISA Affiliates
reasonably expects to incur any liability due to a withdrawal from or
termination or reorganization of a multiemployer plan, except any such liability
that would not have a Material Adverse Effect on TCI Music.
(c) Each TCI Music Benefit Plan that is intended to qualify under Section
401 of the Code and the trust maintained pursuant thereto has been determined to
be exempt from federal income taxation under Section 501 of the Code by the
Internal Revenue Service, and to the Knowledge of TCI Music, nothing has
occurred with respect to any such plan since such determination that is likely
to result in the loss of such exemption or the imposition of any material
liability, penalty or tax under ERISA or the Code. Each TCI Music Benefit Plan
has at all times been maintained in all material respects, by its terms and in
operation, in accordance with all applicable Legal Requirements.
(d) All contributions (including all employer contributions and employee
salary reduction contributions) required to have been made under the TCI Music
Benefit Plans or pursuant to applicable Legal Requirements (without regard to
any waivers granted under Section 412 of the Code) to any funds or trusts
established thereunder or in connection therewith have been made by the due date
thereof (including any valid extension or grace period) and no accumulated
funding deficiency exists with respect to any of the TCI Music Benefit Plans
subject to Section 412 of the Code.
(e) To the Knowledge of TCI Music, there have been no violations of ERISA
or the Code with respect to the filing of applicable reports, documents and
notices regarding the TCI Music Benefit Plans with the Secretary of Labor and
the Secretary of the Treasury or the furnishing of such reports, documents and
notices to the participants or beneficiaries of the TCI Music Benefit Plans,
except such violations that, individually or in the aggregate, would not have a
Material Adverse Effect on TCI Music.
(f) There are no pending actions, claims or lawsuits that have been
asserted or instituted against the TCI Music Benefit Plans, the assets of any of
the trusts under such plans or the plan sponsor or the plan
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administrator, or against any fiduciary of the TCI Music Benefit Plans, with
respect to the operation of such plans (other than routine benefit claims), nor
does TCI Music have Knowledge of facts that reasonably could be expected to form
the basis for any such action, claim or lawsuit, except any such actions, claims
or lawsuits that, individually or in the aggregate, would not have a Material
Adverse Effect on TCI Music.
(g) Except as provided in Schedule 4.11(g) and as may be required under
Section 4980B of the Code, neither TCI Music nor any of its ERISA Affiliates
maintains any TCI Music Benefit Plan that provides medical or welfare benefits
to former employees.
SECTION 4.12 Operations of Acquisition Sub. As of the date of this
Agreement, Acquisition Sub has engaged in no other business activities other
than this Agreement and the transactions contemplated by this Agreement and has
no material assets or liabilities other than its rights and obligations under
this Agreement.
SECTION 4.13 No Broker. No broker, finder or investment banker is entitled
to any brokerage, finder's or other fee or commission in connection with the
Merger or the transactions contemplated by this Agreement based upon
arrangements made by or on behalf of TCI Music or Acquisition Sub.
SECTION 4.14 Taxes. TCI Music and each of its Subsidiaries have timely
filed all Tax returns required to be filed by any of them and have timely paid
or have established an adequate reserve for the payment of, all Taxes owed in
respect of the periods covered by such returns, except where the failure to file
such Tax returns or timely pay or establish an adequate reserve for the payment
of such Taxes will not have a Material Adverse Effect on TCI Music. The
information contained in such Tax returns is complete and accurate in all
material respects. Neither TCI Music's nor any Subsidiary of TCI Music is
delinquent in the payment of any Tax or other amount owed to any Governmental
Entity, except where the amount owed, when paid, or the delinquency in paying
the amount owed will not have a Material Adverse Effect on TCI Music. There are
no claims or investigations pending or, to TCI Music's Knowledge, threatened
against TCI Music or any of its Subsidiaries for past Taxes, except claims and
investigations that would not have a Material Adverse Effect on TCI Music and
adequate provision for which has been made on the Most Recent Balance Sheet.
Except as set forth on Schedule 4.14, none of TCI Music or its Subsidiaries has
waived or extended any applicable statute of limitations relating to the
assessment of any Taxes that would be payable by TCI Music or such Subsidiary.
For the purposes of this Agreement, the term "Tax" includes all federal, state,
local and foreign income, profits, estimated, franchise, gross receipts,
payroll, sales, employment, use, property, withholding, excise and other taxes,
duties and assessments of any nature whatsoever together with all interest,
penalties and additions imposed with respect to such amounts.
SECTION 4.15 Environmental Laws.
(a) Each of TCI Music and its Subsidiaries is in compliance in all respects
with all Environmental Laws, except where the failure to so comply would not
have a Material Adverse Effect on TCI Music; and
(b) No orders, directions or notices have been issued pursuant to any
Environmental Law and no Governmental Entity has submitted to any of TCI Music
and its Subsidiaries any request for information pursuant to any Environmental
Law.
SECTION 4.16 Transactions with Affiliates. Except as disclosed in the TCI
Music SEC Reports or as contemplated by this Agreement, there is no lease,
sublease, indebtedness, contract, agreement, commitment, understanding or other
arrangement of any kind entered into by TCI Music with any officer, director or
shareholder of TCI Music or any "affiliate" or "associate" of any of them (as
those terms are defined in the Exchange Act) or of TCI Music, except, in each
case, for compensation paid to directors and officers consistent with previously
established policies (including normal merit increases in such compensation in
the ordinary course of business), reimbursements of ordinary and necessary
expenses incurred in connection with their employment and amounts paid or
benefits granted pursuant to TCI Music Benefit Plans.
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ARTICLE V
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company represents and warrants to TCI Music and Acquisition Sub as
follows:
SECTION 5.1 Organization and Qualification. The Company is a corporation
duly organized, validly existing and in good standing under the laws of the
State of Florida and has all requisite corporate power and authority to carry on
its business as it is now being conducted. The Company is duly qualified as a
foreign corporation to do business, and is in good standing, in each
jurisdiction where the character of its properties owned or held under lease or
the nature of its activities makes such qualification necessary, except where
the failure to be so qualified would not, individually or in the aggregate, have
a Material Adverse Effect on the Company.
SECTION 5.2 Capitalization.
(a) The authorized capital stock of the Company consists of 40,000,000
shares of Company Common Stock, $.001 par value per share, of which 24,001,781
shares are issued and outstanding, 1,800,000 shares of Company Preferred Stock,
of which 1,666,667 shares are issued and outstanding, and 200,000 shares of 8%
convertible preferred stock, $1.00 par value per share, of which no shares are
issued and outstanding.
(b) Except as set forth on Schedule 5.2(b), there are no options, warrants,
calls, subscriptions or other rights, agreements or commitments of any kind
(including preemptive rights), to which the Company or any of its Subsidiaries
is a party, relating to the issued or unissued capital stock or other securities
of the Company. Schedule 5.2(b) sets forth for all such options, warrants,
calls, subscriptions or other rights, agreements or commitments that are
outstanding (i) the number of shares and the class or series of capital stock of
the Company issuable pursuant thereto, (ii) the exercise or conversion price,
(iii) the exercise or conversion period and (iv) if not immediately exercisable
or convertible, the date on which they can be exercised or converted. Any such
options, warrants, calls, subscriptions or other rights, agreements or
commitments set forth on Schedule 5.2(b), if not exercised before the Effective
Time, will be extinguished or otherwise will cease to be in effect at the
Effective Time, except for the preemptive rights of holders of Company Preferred
Stock that remain outstanding after the Effective Time, which preemptive rights
will not, however, apply to the issuance of Company Common Stock upon conversion
of shares of common stock of Acquisition Sub pursuant to Section 3.1(c).
(c) All issued and outstanding shares of Company Stock have been duly
authorized and validly issued and are fully paid and nonassessable, are not
subject to, and have not been issued in violation of, any preemptive rights, and
have not been issued in violation of any federal or state securities laws or any
other Legal Requirement.
SECTION 5.3 Subsidiaries. All Equity Affiliates of the Company are listed
on Schedule 5.3 to this Agreement, which Schedule reflects the percentage and
nature of the Company's ownership of each Subsidiary and Equity Affiliate of the
Company. Each of the Company's Subsidiaries is a corporation or partnership duly
organized, validly existing and in good standing under the laws of its
jurisdiction of incorporation or formation and has the corporate or partnership
power to carry on its business as it is now being conducted or currently
proposed to be conducted. Each of the Company's Subsidiaries is duly qualified
as a foreign corporation or partnership to do business, and is in good standing,
in each jurisdiction where the character of its properties owned or held under
lease or the nature of its activities makes such qualification necessary except
where the failure to be so qualified will not have a Material Adverse Effect on
the Company. All the outstanding shares of capital stock of each of the
Company's Subsidiaries that is a corporation are validly issued, fully paid and
nonassessable. Except as set forth on Schedule 5.3, the shares of capital stock
or partnership or other ownership interests in each of the Company's
Subsidiaries or Equity Affiliates that are owned by the Company or by a
Subsidiary of the Company are owned free and clear of any Liens, are not subject
to and have not been issued in violation of any preemptive rights and have not
been issued in violation of any federal or state securities laws or any other
Legal Requirement. Except as set forth on Schedule 5.3, there are not, as of the
date hereof, and at the Effective Time there will not be, any outstanding
options, warrants, calls or other rights, agreements or commitments of any
character, to which the Company or any of
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its Subsidiaries is a party, relating to the issued or unissued capital stock,
other securities or partnership or other ownership interests in any of the
Subsidiaries or Equity Affiliates of the Company.
SECTION 5.4 Authority Relative to this Agreement. The Company has all
requisite corporate power and authority to execute and deliver this Agreement
and, subject to approval of this Agreement by the holders of the Company Stock,
to consummate the transactions contemplated by this Agreement. The execution and
delivery of this Agreement and the consummation of the transactions contemplated
by this Agreement have been duly authorized by the Company's Board of Directors.
Except for the approval of the holders of Company Stock, no other corporate
proceedings on the part of the Company are necessary to authorize this Agreement
and the transactions contemplated by this Agreement. The Board of Directors of
the Company has received the opinion of Houlihan Lokey Howard & Zukin as
financial advisor to the Company, to the effect that, as of the date of this
Agreement, the consideration to be received in the Merger by the Company's
shareholders is fair to them from a financial point of view. Subject to approval
of the shareholders of the Company in accordance with the FBCA, this Agreement
constitutes a valid and binding obligation of the Company enforceable in
accordance with its terms except (i) as enforcement may be limited by
bankruptcy, insolvency or other similar Legal Requirements affecting the
enforcement of creditors' rights generally, (ii) as the availability of
indemnification and other remedies may be limited by federal and state
securities laws and (iii) for limitations imposed by general principles of
equity.
SECTION 5.5 No Breach; Required Consents. The execution and delivery of
this Agreement by the Company does not, and the consummation of the transactions
contemplated by this Agreement by the Company will not: (a) subject to the
approval of holders of Company Stock, violate or conflict with the Articles of
Incorporation or Bylaws of the Company; (b) constitute a breach or default (or
an event that with notice or lapse of time or both would become a breach or
default) or give rise to any Lien, third-party right of termination,
cancellation, modification or acceleration under any agreement or undertaking to
which the Company is a party or by which it is bound, except where such breach,
default, Lien, third-party right of termination, cancellation, modification, or
acceleration would not have a Material Adverse Effect on the Company; or (c)
subject to obtaining the consents, approvals or authorizations and making the
filings or registrations described in Section 5.6, constitute a violation of any
Legal Requirement, except where such violation would not have a Material Adverse
Effect on the Company.
SECTION 5.6 Consents and Approvals. Except as set forth on Schedule 5.6,
neither the execution and delivery of this Agreement by the Company nor the
consummation of the transactions contemplated by this Agreement by the Company
will require the Company to make any filing or registration with, or obtain any
authorization, consent or approval of, any Governmental Entity or any other
Person, except those required in connection, or in compliance, with the
provisions of (i) the HSR Act, (ii) the Communications Act of 1934, as amended,
(iii) the Securities Act, (iv) the Exchange Act and (v) the corporation,
securities or blue sky laws or regulations, or similar Legal Requirements, of
the various states of the United States, and other than such other filings,
registrations, authorizations, consents or approvals the failure of which to
make or obtain would not have a Material Adverse Effect on the Company or
prevent the consummation of the transactions contemplated by this Agreement.
SECTION 5.7 Reports and Financial Statements.
(a) SEC Reports. The Company has filed all required forms, reports and
documents required to be filed with the SEC since July 1, 1995 (collectively,
the "Company SEC Reports"). As of their respective dates or effective dates and
except as the same may have been corrected, updated or superseded by means of a
subsequent filing with the SEC prior to the date of this Agreement, none of the
Company SEC Reports, including any financial statements or schedules included or
incorporated by reference therein, contained any untrue statement of a material
fact or omitted to state a material fact required to be stated or incorporated
by reference therein or necessary in order to make the statements therein, in
light of the circumstances under which they were made, not misleading. The
Company has delivered to TCI Music, in the forms filed with the SEC, all the
Company SEC Reports.
(b) Financial Statements. The audited consolidated financial statements of
the Company contained in the Company SEC Reports comply in all material respects
with applicable accounting requirements and with
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the published rules and regulations of the SEC with respect thereto, were
prepared in accordance with GAAP applied on a consistent basis during the
periods involved (except as may be indicated in the notes thereto) and present
fairly the Company's consolidated financial condition and the results of its
operations as of the relevant dates thereof and for the periods covered thereby.
The unaudited consolidated interim financial statements of the Company contained
in the Company SEC Reports comply in all material respects with applicable
accounting requirements and with the published rules and regulations of the SEC
with respect thereto, were prepared on a basis consistent with prior interim
periods (except as required by applicable changes in GAAP or in SEC accounting
policies) and include all adjustments (consisting only of normal recurring
accruals) necessary for a fair presentation of the Company's consolidated
financial condition and results of operations for such periods.
(c) Absence of Certain Changes. Since the date of the most recent
consolidated balance sheet of the Company included in the Company's Quarterly
Report on Form 10-QSB for the quarter ended March 31, 1997 (the "Most Recent
Company Balance Sheet") and except as set forth on Schedule 5.7(c), there has
not been any: (i) transaction, commitment, dispute or other event or condition
(financial or otherwise) of any character (whether or not in the ordinary course
of business) that, individually or in the aggregate, has had, or would have, a
Material Adverse Effect on the Company (other than as a result of changes in
laws or regulations of general applicability or any changes resulting from
general economic, financial, market or industry-wide conditions); (ii) any
declaration, setting aside or payment of any dividend or other distribution
(whether in cash, stock or property) with respect to the capital stock of the
Company; or (iii) entry into any commitment or transaction material to the
Company and its Subsidiaries taken as a whole (including any borrowing or sale
of assets) except in the ordinary course of business consistent with past
practice.
(d) Absence of Undisclosed Liabilities. The Company does not have any
indebtedness, liability or obligation required by GAAP to be reflected on a
balance sheet that is not reflected or reserved against in the Most Recent
Company Balance Sheet other than liabilities, obligations and contingencies that
(i) were incurred after the date of the Most Recent Company Balance Sheet in the
ordinary course of business or (ii) would not, in the aggregate, have a Material
Adverse Effect on the Company.
SECTION 5.8 Compliance with Law; Litigation.
(a) To the Company's Knowledge, the Company and its Subsidiaries hold all
permits, licenses, franchises, variances, exemptions, concessions, leases,
instruments, orders and approvals (the "Company Permits") of all Governmental
Entities required to be held under applicable Legal Requirements, except such
Company Permits the failure of which to hold, individually or in the aggregate,
does not have and, in the future is not likely to have, a Material Adverse
Effect on the Company. To the Company's Knowledge, the Company and its
Subsidiaries are in compliance with the terms of the Company Permits, except for
such failures to comply that, individually or in the aggregate, would not have a
Material Adverse Effect on the Company. To the Company's Knowledge, the
businesses of the Company and its Subsidiaries are not being conducted in
violation of any Legal Requirement, except for such violations which,
individually or in the aggregate, would not have a Material Adverse Effect on
the Company. No investigation or review by any Governmental Entity with respect
to the Company or any of its Subsidiaries is pending, or, to the Knowledge of
the Company, threatened, nor has any Governmental Entity indicated to the
Company in writing an intention to conduct the same, other than those the
outcome of which would not have a Material Adverse Effect on the Company.
(b) There is no suit, action or proceeding pending or, to the Knowledge of
the Company, threatened against or affecting the Company or any of its
Subsidiaries that has had or is likely to have a Material Adverse Effect on the
Company nor is there any judgment, decree, injunction, rule or order of any
Governmental Entity or arbitrator outstanding against the Company or any of its
Subsidiaries that has had or is likely to have a Material Adverse Effect on the
Company.
SECTION 5.9 Title to Assets. The Company and its Subsidiaries have good
and merchantable title to all material assets reflected on the Most Recent
Company Balance Sheet, free and clear of any Lien except: (a) landlord's Liens
and Liens for property taxes not delinquent; (b) statutory Liens that were
created in the ordinary course of business and do not materially detract from
the value of such assets or materially impair the
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use thereof in the operation of the Company's business; (c) the Liens listed on
Schedule 5.3 or Schedule 5.9; (d) leased interests in property owned by others;
and leased interests in property leased to others; and (e) zoning, building or
similar restrictions, easements, rights-of-way, reservations of rights,
conditions, or other restrictions or encumbrances relating to or affecting real
property that do not, individually or in the aggregate, materially interfere
with the use of such real property in the operation of the Company's business.
SECTION 5.10 Labor and Employee Matters. The Company is not a party to any
contract with any labor organization and has not agreed to recognize any union
or other collective bargaining unit. As of the date of this Agreement, no union
or other collective bargaining unit has been certified as representing any of
the Company's employees. To the Company's Knowledge, as of the date of this
Agreement, there is no representation or organizing effort pending or threatened
against or affecting or involving the Company. The Company and its Subsidiaries
are in compliance with all applicable Legal Requirements relating to the
employment of employees, including any obligations relating to employment
standards legislation, pay equity, occupational health and safety, labor
relations and human rights legislation except for such failures to comply as do
not have, and are not likely to have, a Material Adverse Effect on the Company.
Schedule 5.10 sets forth all agreements or arrangements with any employee of the
Company, whether oral or in writing, with respect to such employee's employment
with the Company other than agreements or arrangements otherwise disclosed on
Schedule 5.11(a).
SECTION 5.11 ERISA.
(a) Schedule 5.11(a) sets forth all "employee benefit plans," as defined in
ERISA, and all other material employee benefit arrangements, programs or payroll
practices, including severance pay, sick leave, vacation pay, salary
continuation for disability, deferred compensation, bonus, stock purchase,
hospitalization, medical insurance, life insurance, tuition reimbursement,
employee assistance and employee discounts, that the Company or any of its ERISA
Affiliates maintains or has an obligation to make contributions (the "Company
Benefit Plans").
(b) Neither the Company nor any of its ERISA Affiliates has incurred any
unsatisfied withdrawal liability, as defined in Section 4201 of ERISA, with
respect to any multiemployer plan, nor has any of them incurred any liability
due to the termination or reorganization of any multiemployer plan, except any
such liability that would not have a Material Adverse Effect on the Company. To
the Knowledge of the Company, neither the Company nor any of its ERISA
Affiliates reasonably expects to incur any liability due to a withdrawal from or
termination or reorganization of a multiemployer plan, except any such liability
that would not have a Material Adverse Effect on the Company.
(c) Each Company Benefit Plan that is intended to qualify under Section 401
of the Code, and a form of trust that is similar in all material respects to the
trust maintained pursuant thereto, have been determined to be exempt from
federal income taxation under Section 501 of the Code by the Internal Revenue
Service, and to the Knowledge of the Company, nothing has occurred with respect
to any such plan since such determination that is likely to result in the loss
of such exemption or the imposition of any material liability, penalty or tax
under ERISA or the Code. Each Company Benefit Plan has at all times been
maintained in all material respects, by its terms and in operation, in
accordance with all applicable Legal Requirements.
(d) All contributions (including all employer contributions and employee
salary reduction contributions) required to have been made under the Company
Benefit Plans or pursuant to applicable Legal Requirements (without regard to
any waivers granted under Section 412 of the Code) to any funds or trusts
established thereunder or in connection therewith have been made by the due date
thereof (including any valid extension or grace period) and no accumulated
funding deficiency exists with respect to any of the Company Benefit Plans
subject to Section 412 of the Code.
(e) To the Knowledge of the Company, there have been no violations of ERISA
or the Code with respect to the filing of applicable reports, documents and
notices regarding the Company Benefit Plans with the Secretary of Labor and the
Secretary of the Treasury or the furnishing of such reports, documents and
notices to the participants or beneficiaries of the Company Benefit Plans,
except such violations that, individually or in the aggregate, would not have a
Material Adverse Effect on the Company.
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(f) There are no pending actions, claims or lawsuits that have been
asserted or instituted against the Company Benefit Plans, the assets of any of
the trusts under such plans or the plan sponsor or the plan administrator, or
against any fiduciary of the Company Benefit Plans, with respect to the
operation of such plans (other than routine benefit claims), nor does the
Company have Knowledge of facts that reasonably could be expected to form the
basis for any such action, claim or lawsuit, except any such actions, claims or
lawsuits that, individually or in the aggregate, would not have a Material
Adverse Effect on the Company.
(g) Except as provided in Schedule 5.11(g) and as may be required under
Section 4980B of the Code, neither the Company nor any of its ERISA Affiliates
maintains any Company Benefit Plan that provides medical or welfare benefits to
former employees.
SECTION 5.12 Approval.
(a) The Board of Directors of the Company at a meeting duly called and
held: (i) determined that the Merger is advisable and fair and in the best
interests of the Company and its shareholders; (ii) approved the Merger, the
Capitalization Amendment and this Agreement and the transactions contemplated by
this Agreement in accordance with the provisions of Section 607.1101 of the
FBCA; (iii) recommended the approval of this Agreement, the Capitalization
Amendment and the Merger by the holders of the Company Stock and directed that
the Merger be submitted for consideration by the Company's shareholders at the
Meeting in accordance with the provisions of Section 607.1103 of the FBCA; and
(iv) adopted a resolution having the effect of causing the Merger not to be
subject to Section 607.0902 of the FBCA.
(b) The vote of 75% of the outstanding shares of the Company Stock entitled
to vote, voting as a single class, is the vote required for the adoption and
approval of this Agreement, the Merger and the other transactions contemplated
by this Agreement, except that the vote of a majority of the outstanding shares
of Company Stock entitled to vote, voting as a single class, will be sufficient
for adoption and approval of the Capitalization Amendment. No class or series of
shares of capital stock of the Company is entitled to vote on the adoption and
approval of this Agreement, the Merger, the Capitalization Amendment or the
other transactions contemplated by this Agreement as a separate class or series.
SECTION 5.13 Financial Advisor/Investment Banker. Except for amounts
payable to Houlihan Lokey Howard & Zukin and Communications Equity Associates,
Inc. in the amounts and on the terms and conditions set forth on Schedule 5.13,
no broker, finder or investment banker is entitled to any brokerage, finder's or
other fee or commission in connection with the Merger or the transactions
contemplated by this Agreement based upon arrangements made by or on behalf of
the Company. There has been delivered to TCI Music true and complete copies of
the agreements pursuant to which Houlihan Lokey Howard & Zukin has been retained
to act as financial advisor to, and Communications Equity Associates, Inc. has
been retained to obtain financing for, the Company in connection with the
Merger.
SECTION 5.14 Taxes. The Company and each of its Subsidiaries have timely
filed all Tax returns required to be filed by any of them and have timely paid
or have established an adequate reserve for the payment of, all Taxes owed in
respect of the periods covered by such returns, except where the failure to file
such Tax returns or timely pay or establish an adequate reserve for the payment
of such Taxes, will not have a Material Adverse Effect on the Company. The
information contained in such Tax returns is complete and accurate in all
material respects. Neither the Company nor any Subsidiary of the Company is
delinquent in the payment of any Tax or other amount owed to any Governmental
Entity, except where the amount owed, when paid, or the delinquency in paying
the amount owed will not have a Material Adverse Effect on the Company. There
are no claims or investigations pending or, to the Company's Knowledge,
threatened against the Company or any of its Subsidiaries for past Taxes, except
claims and investigations that would not have a Material Adverse Effect on the
Company and adequate provision for which has been made on the Most Recent
Balance Sheet. Except as set forth on Schedule 5.14, none of the Company or its
Subsidiaries has waived or extended any applicable statute of limitations
relating to the assessment of any Taxes that would be payable by the Company or
such Subsidiary.
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SECTION 5.15 Environmental Laws.
(a) Each of the Company and its Subsidiaries is in compliance in all
respects with all Environmental Laws, except where the failure to so comply
would not have a Material Adverse Effect on the Company; and
(b) No orders, directions or notices have been issued pursuant to any
Environmental Law and no Governmental Entity has submitted to any of the Company
and its Subsidiaries any request for information pursuant to any Environmental
Law.
SECTION 5.16 Transactions with Affiliates. Except as disclosed in the
Company SEC Reports or Schedule 5.16, there is no lease, sublease, indebtedness,
contract, agreement, commitment, understanding or other arrangement of any kind
entered into by the Company with any officer, director or shareholder of the
Company or any "affiliate" or "associate" of any of them (as those terms are
defined in the Exchange Act) or of the Company, except, in each case, for
compensation paid to directors and officers consistent with previously
established policies (including normal merit increases in such compensation in
the ordinary course of business), reimbursements of ordinary and necessary
expenses incurred in connection with their employment and amounts paid or
benefits granted pursuant to Company Benefit Plans.
ARTICLE VI
CONDUCT OF BUSINESS PENDING THE MERGER
SECTION 6.1 Conduct of Business of the Company. Prior to the Effective
Time, except as set forth on Schedule 6.1 to this Agreement, without the prior
consent of TCI Music:
(a) The Company will conduct, and will cause each of its Subsidiaries to
conduct, its business in the ordinary course, and will use, and will cause each
of its Subsidiaries to use, its reasonable best efforts to preserve intact its
present business organization and to preserve relationships with customers,
suppliers and others having business dealings with them.
(b) Except as required or permitted by this Agreement the Company will not,
and will not permit any of its Subsidiaries to: (i) sell or pledge or agree to
sell or pledge any capital stock or other ownership interest in any of its
Subsidiaries; (ii) amend or propose to amend the Articles of Incorporation or
Bylaws of the Company or any of its Subsidiaries; (iii) split, combine or
reclassify its outstanding capital stock or issue or authorize or propose the
issuance of any other securities in respect of, in lieu of or in substitution
for shares of capital stock of, or other ownership interests in, the Company or
any of its Subsidiaries, or declare, set aside or pay any dividend or other
distribution to shareholders of the Company; (iv) directly or indirectly redeem,
purchase or otherwise acquire or agree to redeem, purchase or otherwise acquire
any shares of capital stock of, or other ownership interests in, the Company or
any of its Subsidiaries; or (v) agree to do any of the foregoing.
(c) The Company will not, and will not permit any of its Subsidiaries to:
(i) issue, deliver or sell or agree to issue, deliver or sell any shares of
capital stock of, or other ownership interests in, the Company or any of its
Subsidiaries, or any option, warrant or other right to acquire, or any security
convertible into, shares of capital stock of, or other ownership interests in,
the Company or any of its Subsidiaries, except as required or permitted by this
Agreement; (ii) acquire, lease or dispose of any assets, other than in the
ordinary course of business consistent with past practice; (iii) (A) create,
assume or incur any indebtedness for borrowed money exceeding $200,000, other
than indebtedness incurred to refinance outstanding indebtedness in an amount
not exceeding the principal amount of the indebtedness being refinanced and
indebtedness owed by the Company to any of its Subsidiaries or by way of the
Company's Subsidiaries to the Company or any other Subsidiary of the Company,
(B) mortgage, pledge or subject to any Lien any of its assets except to secure
indebtedness permitted by the foregoing clause (A) and Liens described in
clauses (a) through (e) of Section 5.9 or (C) enter into any other material
transaction other than in each case in the ordinary course of business
consistent with past practice; (iv) make any payments with respect to any
indebtedness of the Company or its Subsidiaries except such payments that are
scheduled to come due prior to the Effective Time; (v) acquire by merging or
consolidating with, or by acquiring assets of, or by purchasing a substantial
ownership interest in, or by any other method, any business or any other Person,
in each case in this clause (v) that are material,
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individually or in the aggregate, to the Company and its Subsidiaries taken as a
whole; or (vi) agree to do any of the foregoing.
(d) Except as required to comply with applicable Legal Requirements or
existing Company Benefit Plans or as otherwise contemplated by this Agreement,
the Company will not, and will not permit any of its Subsidiaries to: (i) adopt
or terminate or amend any bonus, profit sharing, compensation, severance,
termination, stock option, pension, retirement, deferred compensation,
employment or other Company Benefit Plan, agreement, trust, fund or other
arrangement for the benefit or welfare of any director, officer or current or
former employee; (ii) increase in any manner the compensation or benefits of any
director, officer or employee (except normal increases in the ordinary course of
business consistent with past practice); (iii) grant any awards under any bonus,
incentive, performance or other compensation plan or arrangement or Company
Benefit Plan; (iv) take any action to fund or in any other way secure the
payment of compensation or benefits under any employee plan, agreement, contract
or arrangement or Company Benefit Plan (except in the ordinary course of
business consistent with past practice); or (v) agree to do any of the
foregoing.
(e) The Company will not take or agree to take, and will cause its
Subsidiaries not to take or agree to take, any action that would: (i) make any
representation or warranty of the Company set forth in this Agreement untrue or
incorrect so as to cause the condition set forth in Section 8.3(a) of this
Agreement not to be fulfilled as of the Effective Time; or (ii) result in any of
the other conditions of this Agreement set forth in Section 8.1 or Section 8.3
of this Agreement not to be satisfied as of the Effective Time.
SECTION 6.2 Conduct of Business of TCI Music. Prior to the Effective Time,
except as contemplated or permitted by this Agreement TCI Music will not take or
agree to take, and will cause its Subsidiaries not to take or agree to take, any
action that would (i) make any representation or warranty of TCI Music or
Acquisition Sub set forth in this Agreement untrue or incorrect so as to cause
the condition set forth in Section 8.2(a) of this Agreement not to be fulfilled
as of the Effective Time or (ii) result in any of the other conditions set forth
in Section 8.1 or Section 8.2 of this Agreement not to be satisfied as of the
Effective Time.
SECTION 6.3 Remedies for Breach. The sole remedies (i) of TCI Music and
Acquisition Sub for any breach by the Company of Section 6.1(e), and (ii) of the
Company for any breach by TCI Music of Section 6.2, will be injunctive relief or
termination of this Agreement pursuant to Article X, unless, in any case, such
breach is willful or intentional, in which event any and all available legal or
equitable remedies may be obtained.
ARTICLE VII
ADDITIONAL AGREEMENTS
SECTION 7.1 Access and Information. Each of the Company and TCI Music and
their respective Subsidiaries will afford to the other and to the other's
accountants, counsel and other representatives full access during normal
business hours (and at such other times as the parties may mutually agree)
throughout the period prior to the Effective Time to all of its properties,
books, contracts, commitments, records and personnel.
SECTION 7.2 SEC Filings.
(a) The Company and TCI Music will prepare jointly, and, as soon as
reasonably practicable after the date of this Agreement, file with the SEC a
joint proxy statement/registration statement (the "Preliminary Joint Proxy
Statement/Prospectus") comprising preliminary proxy materials of the Company
under the Exchange Act with respect to the Merger and a Registration Statement
on Form S-4 and preliminary prospectus of TCI Music under the Securities Act
with respect to the TCI Music Preferred Stock and the TCI Music Series A Common
Stock underlying the TCI Music Preferred Stock to be issued in the Merger, and
will thereafter use their respective reasonable best efforts to respond to any
comments of the SEC with respect thereto and to cause a definitive joint proxy
statement/registration statement (including all supplements and amendments
thereto, the "Joint Proxy Statement/Prospectus") and proxy to be mailed to the
Company's shareholders as promptly as practicable.
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(b) As soon as reasonably practicable after the date hereof, the Company
and TCI Music will prepare and file any other filings relating to the Merger and
the other transactions contemplated hereby that are required to be filed by each
under the Exchange Act and other applicable Legal Requirements, including, if
required, in the case of TCI Music, a registration statement on the applicable
form under the Exchange Act with respect to the TCI Music Preferred Stock
(collectively "Other Filings"), and will use their reasonable best efforts to
respond to any comments of the SEC or any other appropriate government official
with respect thereto.
(c) The Company, on the one hand, and TCI Music, on the other, will
cooperate with each other and provide all information necessary to prepare the
Preliminary Joint Proxy Statement/Prospectus, the Joint Proxy
Statement/Prospectus and the Other Filings (collectively "SEC Filings") and will
provide promptly to the other party any information that such party may obtain
that could necessitate amending any such document.
(d) Each of the Company and TCI Music will notify the other promptly of the
receipt of any comments from the SEC or its staff or any other government
official and of any requests by the SEC or its staff or any other government
official for amendments or supplements to any of the SEC Filings or for
additional information and will supply the other with copies of all
correspondence between the Company or any of its representatives or TCI or TCI
Music or any of their respective representatives, as the case may be, on the one
hand, and the SEC or its staff or any other government official, on the other
hand, with respect thereto. If at any time prior to the Effective Time, any
event occurs that should be set forth in an amendment of, or a supplement to,
any of the SEC Filings, the Company and TCI Music promptly will prepare and file
such amendment or supplement and will distribute such amendment or supplement as
required by applicable Legal Requirements, including, in the case of an
amendment or supplement to the Joint Proxy Statement/Prospectus, mailing such
supplement or amendment to the Company's shareholders.
(e) TCI Music covenants that the SEC Filings (other than any information
provided by the Company for inclusion in the SEC Filings) (i) will comply in all
material respects with the Securities Act and the Exchange Act and (ii) will not
contain any untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary in order to make the statements
contained therein, in light of the circumstances under which they are made, not
misleading.
(f) The Company covenants that the SEC Filings (other than any information
provided by TCI for inclusion in the SEC Filings) (i) will comply in all
material respects with the Securities Act and the Exchange Act and (ii) will not
contain any untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they were made, not
misleading.
(g) TCI Music will be responsible for all reasonable expenses incurred in
complying with this Section 7.2, including all registration, qualification and
filing fees, printing expenses, fees and disbursements of counsel (other than
counsel to the Company) and applicable blue-sky fees and expenses.
(h) (i) TCI Music will indemnify, defend, and hold harmless the Company,
its officers, directors, employees and agents and each other Person, if any, who
controls any of the foregoing within the meaning of Section 15 of the Securities
Act or Section 20 of the Exchange Act, against any losses, claims, damages or
liabilities (collectively, "Losses"), joint or several, to which any of the
foregoing may become subject under the Securities Act or the Exchange Act or
otherwise, insofar as such Losses (or actions in respect thereof) arise out of
or are based upon (A) an untrue statement or alleged untrue statement of a
material fact contained in any SEC Filing, or (B) the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading, provided that such misstatement or
omission was based on or omitted from information provided by TCI Music in
writing for inclusion in the SEC Filings or was made in reliance upon and in
conformity with such information. TCI Music promptly will reimburse the Company
and each such officer, director, employee, agent and controlling Person for any
legal or any other expenses reasonably incurred by any of them in connection
with investigating or defending any such Losses (or action in respect thereof).
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(ii) If this Agreement is terminated prior to the consummation of the
Merger, the Company will indemnify, defend and hold harmless each of TCI Music
and Acquisition Sub and their officers and directors and each other Person, if
any, who controls any of the foregoing within the meaning of Section 15 of the
Securities Act or Section 20 of the Exchange Act, against any Losses, joint or
several, to which any of the foregoing may become subject under the Securities
Act or the Exchange Act or otherwise, insofar as such Losses (or actions in
respect thereof) arise out of or are based upon (A) an untrue statement or
alleged untrue statement of a material fact contained in any SEC Filing or (B)
the omission or alleged omission to state a material fact required to be stated
therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading, provided that the
misstatement or omission was based on or omitted from information provided by
the Company in writing for use in the SEC Filings or was made in reliance upon
and in conformity with such information. The Company promptly will reimburse TCI
Music and Acquisition Sub and each such officer, director and controlling Person
for any legal or any other expenses reasonably incurred by any of them in
connection with investigating or defending any such Losses (or action in respect
thereof).
(iii) For purposes of this Section 7.2, (A) "Indemnifying Party" means
the Person having an obligation hereunder to indemnify any other Person pursuant
to this Section 7.2, (B) "Indemnified Party" means the Person having the right
to be indemnified pursuant to this Section 7.2 and (C) any information
concerning the Company that is included in any SEC Filing that is provided to
the Company or its counsel for review within a reasonable period before filing
or use thereof and to which the Company has not provided written notice of
objection to TCI Music will be deemed to have been provided by the Company for
inclusion in such SEC Filing. Whenever any claim for indemnification arises
under this Section 7.2, the Indemnified Party will promptly notify the
Indemnifying Party in writing of such claim and, when known, the facts
constituting the basis for such claim (in reasonable detail). Failure by the
Indemnified Party so to notify the Indemnifying Party will not relieve the
Indemnifying Party of any liability hereunder except to the extent that such
failure materially prejudices the Indemnifying Party.
(iv) After such notice, if the Indemnifying Party undertakes to defend
any such claim, then the Indemnifying Party will be entitled, if it so elects,
to take control of the defense and investigation with respect to such claim and
to employ and engage attorneys of its own choice to handle and defend such
claim, at the Indemnifying Party's cost, risk and expense, upon notice to the
Indemnified Party of such election, which notice acknowledges the Indemnifying
Party's obligation to provide indemnification hereunder. The Indemnifying Party
will not settle any third-party claim that is the subject of indemnification
without the written consent of the Indemnified Party, which consent will not be
unreasonably withheld; provided however, that the Indemnifying Party may settle
a claim without the Indemnified Party's consent if the settlement (A) makes no
admission or acknowledgment of liability or culpability with respect to the
Indemnified Party, (B) includes a complete release of the Indemnified Party and
(C) does not require the Indemnified Party to make any payment or forego or take
any action. The Indemnified Party will cooperate in all reasonable respects with
the Indemnifying Party and its attorneys in the investigation, trial and defense
of any lawsuit or action with respect to such claim and any appeal arising
therefrom (including the filing in the Indemnified Party's name of appropriate
cross claims and counterclaims) and the Indemnifying Party will reimburse the
Indemnified Party for all reasonable direct out-of-pocket expenses incurred by
the Indemnified Party in connection with such cooperation. The Indemnified Party
may, at its own expense, participate in any investigation, trial and defense of
such lawsuit or action controlled by the Indemnifying Party and any appeal
arising therefrom. If, after receipt of a claim notice pursuant to Section
7.2(h)(iii), the Indemnifying Party does not undertake to defend any such claim,
the Indemnified Party may, but will have no obligation to, contest any lawsuit
or action with respect to such claim and the Indemnifying Party will be bound by
the result obtained with respect thereto by the Indemnified Party (including the
settlement thereof without the consent of the Indemnifying Party). If there are
one or more defenses available to the Indemnified Party that conflict with, or
are additional to, those available to the Indemnifying Party, the Indemnified
Party will have the right, at the expense of the Indemnifying Party, to
participate in the defense of the lawsuit or action; provided however, that the
Indemnified Party may not settle such lawsuit or action without the consent of
the Indemnifying Party, which consent will not be unreasonably withheld.
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(v) If the indemnification provided for in this Section 7.2(h) is for
any reason unavailable to the Indemnified Party in respect of any Losses (or
action in respect thereof) then the Indemnifying Party will, in lieu of
indemnifying the Indemnified Party, contribute to the amount paid or payable by
the Indemnified Party as a result of such Losses (or action in respect thereof),
in such proportion as is appropriate to reflect the relative fault of the
Indemnifying Party on the one hand and the Indemnified Party on the other with
respect to the statement or omission that resulted in such Losses (or action in
respect thereof) as well as any other relevant equitable considerations.
Relative fault with respect to an untrue or alleged untrue statement or omission
of a material fact will be determined by reference to whether the untrue or
alleged untrue statement or omission of a material fact related to information
supplied by the Indemnifying Party on the one hand or the Indemnified Party on
the other, the intent of the parties and their relative knowledge, access to
information and opportunity to correct or prevent such statement or omission.
The amount paid or payable by the Indemnified Party as a result of the Losses
(or action in respect thereof) referred to above will be deemed to include any
legal or other expenses reasonably incurred by the Indemnified Party in
connection with investigating, trying or defending any such action or claim. No
Person guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the Securities Act) will be entitled to contribution from any Person
who was not guilty of such fraudulent misrepresentation.
SECTION 7.3 Meeting of Shareholders of the Company. The Company will take
all action necessary, in accordance with the FBCA and the Articles of
Incorporation and Bylaws of the Company, to duly call, give notice of, convene
and hold a meeting of its shareholders as promptly as practicable, to consider
and vote upon the adoption and approval of this Agreement (as a plan of merger
in accordance with Section 607.1101 of the FBCA), the Merger and the other
transactions contemplated by this Agreement (the "Meeting"), to the extent such
approval is required by the FBCA and the Articles of Incorporation of the
Company.
SECTION 7.4 Compliance with the Securities Act. Prior to the Closing Date,
the Company will cause to be delivered to TCI Music a letter from the Company,
identifying all Persons who were, in its opinion, at the time of the Meeting,
"affiliates" of the Company as that term is used in paragraphs (c) and (d) of
Rule 145 under the Securities Act. TCI Music may cause the TCI Music
Certificates evidencing shares of TCI Music Preferred Stock issued to such
Persons to bear a legend referring to the applicability of paragraphs (c) and
(d) of Rule 145 under the Securities Act.
SECTION 7.5 Listing. TCI Music will use its best efforts to cause the
shares of TCI Music Preferred Stock issued in connection with the Merger and the
shares of TCI Music Series A Common Stock issuable upon conversion of TCI Music
Preferred Stock to be quoted on NASDAQ, subject to satisfaction, in each case,
of applicable NASDAQ requirements upon official notice of issuance.
SECTION 7.6 Reasonable Best Efforts. Subject to the fiduciary duty
obligations of the Board of Directors of the Company, each of the parties to
this Agreement will use its reasonable best efforts to take, or cause to be
taken, all appropriate action, and to do, or cause to be done, all things
necessary, proper or advisable under applicable Legal Requirements to consummate
and make effective the transactions contemplated by this Agreement in the most
expeditious manner practicable, including the satisfaction of all conditions to
the Merger.
SECTION 7.7 Public Announcements. No party to this Agreement will make any
public announcements or otherwise communicate with any news media with respect
to this Agreement or any of the transactions contemplated by this Agreement
without prior consultation with the other parties as to the timing and contents
of any such announcement as may be reasonable under the circumstances; provided
however, that nothing contained herein will prevent any party from promptly
making all filings with Governmental Entities that may, in its reasonable
judgment, be required or advisable in connection with the execution and delivery
of this Agreement or the consummation of the transactions contemplated by this
Agreement so long as such party gives timely notice to the other parties of the
anticipated disclosure and cooperates with the other parties in designing
reasonable procedural and other safeguards to preserve, to the maximum extent
possible, the confidentiality of all information furnished by the other parties
pursuant to this Agreement.
SECTION 7.8 Notification. In the event of, or after obtaining knowledge of
the occurrence or threatened occurrence of, any fact or circumstance that would
cause or constitute a breach of any of its representations
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and warranties set forth herein, each party to this Agreement promptly will give
notice thereof to the other parties and will use its best efforts to prevent or
remedy such breach.
SECTION 7.9 HSR Act Filings. TCI Music and the Company each will make or
cause to be made an appropriate filing of a Notification and Report Form
pursuant to the HSR Act no later than 15 business days after the date of this
Agreement. Each such filing will request early termination of the waiting period
imposed by the HSR Act. The Company and TCI Music each will use its reasonable
best efforts to respond or cause a response to be made as promptly as reasonably
practicable to any inquiries received from the Federal Trade Commission (the
"FTC") and the Antitrust Division of the Department of Justice (the "Antitrust
Division") for additional information or documentation and to respond as
promptly as reasonably practicable to all inquiries and requests received from
any other Governmental Entity in connection with antitrust matters; provided
however, that nothing contained herein will be deemed to preclude either the
Company or TCI from negotiating reasonably with any Governmental Entity
regarding the scope and content of any such requested information or
documentation. The Company and TCI Music each will use their respective
reasonable best efforts to overcome any objections that may be raised by the
FTC, the Antitrust Division or any other Governmental Entity having jurisdiction
over antitrust matters. Notwithstanding the foregoing, neither TCI Music nor the
Company will be required to make any significant change in the operations or
activities of the business (or any material assets employed therein) of TCI
Music or any of its Affiliates, or of the Company or any of its Affiliates, as
the case may be, if TCI Music or the Company, as the case may be, determines in
good faith that such change would be materially adverse to the operations or
activities of the business (or any material assets employed therein) of TCI
Music or any of its Affiliates or the Company or any of its Affiliates, as the
case may be.
SECTION 7.10 Further Assurances. Each of the parties to this Agreement
will execute such documents and other instruments and take such further actions
as may be reasonably necessary or desirable to carry out the provisions of this
Agreement and to consummate the transactions contemplated by this Agreement or,
at and after the Closing Date, to evidence the consummation of the transactions
contemplated by this Agreement. Upon the terms and subject to the conditions of
this Agreement, each of the parties to this Agreement will take or cause to be
taken all actions and to do or cause to be done all other things necessary,
proper or advisable to consummate and make effective as promptly as practicable
the transactions contemplated by this Agreement and to obtain in a timely manner
all necessary waivers, consents and approvals and to effect all necessary
registrations and filings.
SECTION 7.11 Employee Matters.
(a) Prior to the Effective Time, if so requested by TCI Music, the Company
will give notice of termination of employment to its employees. TCI Music may,
but will have no obligation to, employ or offer employment to any employees of
the Company. The Company has provided to TCI Music a list of all employees of
the Company as of July 1, 1997, showing their current positions, rates of
compensation and dates of hire. Within 30 days after the date of execution of
this Agreement (or such later date as TCI Music and the Company may mutually
agree), TCI Music will provide to the Company in writing a list of employees TCI
Music desires to employ following the Closing (subject to satisfaction of TCI
Music's conditions for employment) (the "Desired Employees"). TCI Music will
notify the Company prior to distributing offer notices to the Desired Employees
and will coordinate in all reasonable respects with TCI Music to allow TCI Music
to evaluate personnel files and interview employees of the Company to make
hiring decisions. As of the Closing Date, the Company will terminate the
employment of all of its employees.
(b) The Company will pay or cause to be paid to all employees all
compensation, including salaries, commissions, bonuses, deferred compensation,
reasonable severance, insurance, pensions, profit sharing, vacation (other than
vacation which is allowed to be carried over pursuant to this Section), sick pay
and other compensation or benefits to which they are entitled for periods prior
to the Closing, including all amounts, if any, payable on account of the
termination of their employment. As to any employees who are entitled to
severance payments but are offered employment with TCI Music, the Company will
use its best efforts to obtain waivers of such employees' rights to severance
payments upon acceptance of such offers of employment.
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(c) The Company will be responsible for maintenance and distribution of
benefits accrued under any employee benefit plan (as defined in ERISA)
maintained by the Company pursuant to the provisions of such plans. TCI Music
will not assume any obligation or liability for any such accrued benefits nor
any fiduciary or administrative responsibility to account for or dispose of any
such accrued benefits under any employee benefit plans maintained by the
Company.
(d) All claims and obligations under, pursuant to or in connection with any
welfare, medical, insurance, disability or other employee benefit plans of the
Company or arising under any Legal Requirement affecting employees of the
Company incurred on or before the Closing Date or resulting or arising from
events or occurrences occurring or commencing on or before the Closing Date will
be satisfied or provided for by the Company prior to the Closing, and TCI Music
will not have or assume any obligation or liability in connection with any such
plan.
(e) The Company will retain full responsibility and liability for offering
and providing "continuation coverage" of any "qualified beneficiary" who is
covered by a "group health plan" sponsored or contributed to by such party and
who has experienced a "qualifying event" or is providing "continuation coverage"
on or prior to the Closing Date. "Continuation coverage," "qualified
beneficiary," "group health plan," and "qualified event" all will have the
meanings given such terms under Code Section 4980B.
(f) Nothing in this Agreement will (i) require TCI Music to assume any
collective bargaining agreement between the Company and any labor organization
or (ii) be deemed to make any employee of the parties a third-party beneficiary
of this Agreement.
(g) To the extent permitted under TCI Music's Benefits Plans, each employee
of the Surviving Corporation who was an employee of the Company immediately
prior to the Effective Time (i) will receive credit for past service with the
Company for purposes of eligibility and vesting under the Surviving
Corporation's employee benefit plans, as defined in Section 3(3) of ERISA, to
the extent such service was credited under the Company Benefit Plans on the
Closing Date, (ii) will not be subject to any waiting periods or limitations on
benefits for pre-existing conditions under the Surviving Corporation's employee
benefit plans, including any group health and disability plans, except to the
extent such employees were subject to such limitations under the Company Benefit
Plans and (iii) will receive credit for past service with the Company for
purposes of eligibility and vesting under the Surviving Corporation's plans and
policies with respect to seniority benefits, including vacation and sick leave.
SECTION 7.12 No Solicitation. Subject to the fiduciary duties of the Board
of Directors of the Company and its Subsidiaries, neither the Company nor any of
its Subsidiaries or any of their respective officers, directors, representatives
or agents will take any action to (i) initiate the submission of any Acquisition
Proposal, (ii) enter into any agreement with respect to any Acquisition Proposal
or (iii) participate in negotiations with, or provide information concerning the
Company, its assets, liabilities or business to, any Person in connection with
any Acquisition Proposal. The Company will promptly communicate to TCI Music any
solicitation or inquiry received by the Company and the terms of any proposal or
inquiry that it may receive in respect of any Acquisition Proposal, or of any
such information requested from it or of any such negotiations or discussions
being sought to be initiated with it. Nothing in this Section 7.12 shall be
construed as prohibiting the Board of Directors of the Company from (i) making
any disclosure to the Company's shareholders, or (ii) responding to any
unsolicited proposal or inquiry by advising the Person making such proposal or
inquiry of the terms of this Section 7.12. "Acquisition Proposal" means any
proposed (i) merger, consolidation or similar transaction involving the Company,
(ii) sale, lease or other disposition directly or indirectly by merger,
consolidation, share exchange or otherwise of all or any substantial part of the
assets of the Company or its Subsidiaries, (iii) issue, sale or other
disposition of securities representing 25% or more of the voting power of the
Company Stock or (iv) transaction in which any Person proposes to acquire
beneficial ownership (within the meaning of Rule 13d-3 under the Exchange Act)
of, or the right to acquire beneficial ownership of, or any "group" (as such
term is defined under the Exchange Act) shall have been formed which
beneficially owns or has the right to acquire beneficial ownership of, 25% or
more of the outstanding Company Stock.
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SECTION 7.13 Indemnification of Executives.
(a) Indemnification. TCI Music will cause the Surviving Corporation to,
and, should the Surviving Corporation fail or be unable to do so, TCI Music
shall, indemnify, defend and hold harmless each person who is now, or has been
at any time prior to the date of this Agreement or who becomes prior to the
Effective Time, an officer or director of the Company (each, an "Executive"),
against all losses, expenses, damages, liabilities, costs, judgments, and
amounts paid in settlement in connection with any claim, action, suit,
proceeding, or investigation based on or arising out of, in whole or in part,
any actions or omissions of such Executive as an officer or director of the
Company on or prior to the Effective Time, including actions or omissions
relating to any of the transactions contemplated by this Agreement, to the
fullest extent permitted under the FBCA, the Articles of Incorporation and
Bylaws of the Company and the Indemnification Agreements listed on Schedule
7.13(a). TCI Music will cause the Surviving Corporation to pay expenses in
advance of the final disposition of any such claim, action, suit, proceeding, or
investigation to each Executive to the fullest extent permitted by applicable
Legal Requirements upon receipt of any undertaking required or contemplated by
applicable Legal Requirements. Without limiting the foregoing, in any case in
which approval of or a determination by the Surviving Corporation is required to
effectuate any indemnification, (i) the Executives will conclusively be deemed
to have met the applicable standards for indemnification with respect to any
actions or omissions of such Executives as an officer or director of the Company
on or prior to the Effective Time relating to any of the transactions
contemplated by this Agreement and (ii) TCI Music shall cause the Surviving
Corporation to direct, at the election of any Executive, that the determination
of any such approval shall be made by independent counsel selected by the
Executive and reasonably acceptable to TCI Music. If any such claim, action,
suit, proceeding, or investigation is brought against any Executive (whether
arising before or after the Effective Time), (i) the Executive may retain
counsel satisfactory to him or her that is reasonably acceptable, and (ii) TCI
Music will pay or will cause the Surviving Corporation to pay all reasonable
fees and expenses of such counsel for the Executive, as such fees and expenses
are incurred, upon receipt of a written undertaking by the Executive that the
Executive will repay the amounts so paid if it ultimately is determined that he
is not entitled to be indemnified by the Surviving Corporation as authorized by
the FBCA. Neither TCI Music nor the Surviving Corporation shall have any
obligation hereunder to any Executive when and if a court of competent
jurisdiction shall ultimately determine, after exhaustion of all avenues of
appeal, that such Executive is not entitled to indemnification hereunder.
(b) Successors. If TCI Music or the Surviving Corporation or any of its
successors or assigns (i) consolidates with or merges into any other Person and
will not be the continuing or surviving Person of such consolidation or merger
or (ii) transfers all or substantially all of its properties and assets to any
Person, then and in each such case, proper provisions will be made so that the
successors and assigns of TCI Music or the Surviving Corporation assume the
obligations set forth in this Section 7.13.
ARTICLE VIII
CONDITIONS PRECEDENT
SECTION 8.1 Conditions to Each Party's Obligation to Effect the
Merger. The respective obligations of each party to effect the Merger will be
subject to the fulfillment at or prior to the Effective Time of the following
conditions:
(a) This Agreement, the Merger and the transactions contemplated by this
Agreement shall have been duly approved by the holders of the outstanding
Company Stock entitled to vote.
(b) The waiting period applicable to the consummation of the Merger under
the HSR Act shall have expired or been earlier terminated.
(c) The Registration Statement on Form S-4 that includes the Joint Proxy
Statement/Prospectus shall have become effective in accordance with the
provisions of the Securities Act and any necessary state securities law
approvals shall have been obtained and no stop orders with respect thereto shall
have been issued by the SEC and remain in effect.
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(d) No Governmental Entity shall have enacted, issued, promulgated,
enforced or entered any Legal Requirement that remains in effect and has the
effect of making the transactions contemplated by this Agreement illegal or
otherwise prohibiting the transactions contemplated by this Agreement, or that
questions the validity or the legality of the transactions contemplated by this
Agreement and that could reasonably be expected to materially and adversely
affect the value of the business of the Company, it being agreed that each party
will use its reasonable best efforts to have any such injunction lifted.
SECTION 8.2 Conditions to Obligation of the Company to Effect the
Merger. The obligation of the Company to effect the Merger will be subject to
the fulfillment at or prior to the Effective Time of the additional following
conditions:
(a) TCI Music and Acquisition Sub shall have performed in all material
respects their agreements contained in this Agreement required to be performed
by them at or prior to the Effective Time and the representations and warranties
of TCI Music and Acquisition Sub set forth in this Agreement if qualified by
materiality are true in all respects and if not so qualified are true in all
material respects when made and at and as of the Effective Time as if made at
and as of such time and the Company shall have received a certificate of TCI
Music and Acquisition Sub executed on behalf of each such corporation by the
President or a Vice President of such corporation to that effect.
(b) The Company shall have received the opinion of counsel to TCI Music and
Acquisition Sub (which counsel may be an employee of TCI) substantially to the
effect set forth in Exhibit B.
(c) The Company shall have received the opinion of Eric J. Kaplan, Esq. (or
such other evidence as may be reasonably satisfactory to the Company) to the
effect that the Merger, when completed in accordance with this Agreement, will
be treated for federal income tax purposes as a reorganization within the
meaning of Section 368(a) of the Code or otherwise shall have been provided with
evidence reasonably satisfactory to the Company that the Merger will qualify for
such treatment.
(d) There shall have been no material adverse change in the financial
condition, results of operations, assets, liabilities or business of TCI Music
since the date of this Agreement.
(e) TCI (or one or more of its Subsidiaries) and TCI Music shall have
entered into an amendment to the Contribution Agreement in accordance with the
terms set forth in the term sheet attached as Schedule 8.2(e), together with one
or more other agreements as may be necessary to effect the transactions
contemplated by such term sheet.
(f) TCI shall have agreed to extend the maturity of the promissory note
dated July 11, 1997, payable by TCI Music to the order of TCI in the principal
amount of $40,000,000, for a period, not to exceed 18 months, as may reasonably
be required to permit TCI Music to obtain other financing sufficient to repay
the loan evidenced thereby.
SECTION 8.3 Conditions to Obligations of TCI Music and Acquisition Sub to
Effect the Merger. The obligations of TCI Music and Acquisition Sub to effect
the Merger will be subject to the fulfillment at or prior to the Effective Time
of the additional following conditions:
(a) The Company shall have performed in all material respects its
agreements contained in this Agreement required to be performed by it at or
prior to the Effective Time and, except as contemplated or permitted by this
Agreement, the representations and warranties of the Company set forth in this
Agreement if qualified by materiality are true in all respects and if not so
qualified are true in all material respects when made and at and as of the
Effective Time as if made at and as of such time, and TCI Music and Acquisition
Sub shall have received a certificate of the Company executed on behalf of the
Company by the President or an Executive Vice President of the Company to that
effect.
(b) All consents of third parties required to be obtained with respect to
the Merger and the other transactions contemplated by this Agreement shall have
been obtained, including consents of the Federal Communications Commission to
the acquisition by TCI Music of an interest in VJN LPTV Corp. and other
Governmental Entities.
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(c) The number of Dissenting Shares do not exceed 15% of the issued and
outstanding shares of Company Stock.
(d) There shall have been no material adverse change in the financial
condition, results of operations, assets, liabilities or business of the Company
since the date of this Agreement.
(e) TCI Music shall have received the opinion of Lucio, Mandler, Croland,
Bronstein, Garbett, Stiphany & Martinez, P.A., counsel to the Company,
substantially to the effect set forth in Exhibit C.
ARTICLE IX
TERMINATION, AMENDMENT AND WAIVER
SECTION 9.1 Termination. This Agreement may be terminated at any time
prior to the Effective Time, whether before or after approval by the
shareholders of the Company:
(a) by mutual consent of the Board of Directors of TCI Music and the Board
of Directors of the Company;
(b) by either TCI Music or the Company (i) if at the Meeting (including any
postponement or adjournment thereof), this Agreement, the Merger and the
transactions contemplated by this Agreement are not approved and adopted by the
affirmative vote specified herein or (ii) after July 11, 1998, if the Merger has
not been consummated on or before such date and so long as the terminating party
is not in breach of any of its obligations hereunder in any material respect as
of the time such party gives notice of its election to terminate this Agreement
and, if the Company is the terminating party, so long as none of the Company
Shareholders is in breach of any obligations under the Voting Agreement as of
the time that the Company gives notice of its election to terminate this
Agreement;
(c) by the Company, provided the Company is not in breach of any of its
obligations under this Agreement in any material respect and none of the Company
Shareholders is in breach of any obligations under the Voting Agreement, in each
case as of the time that the Company gives notice of its election to terminate
this Agreement, if any of the conditions specified in Section 8.1 or Section 8.2
have not been satisfied or waived by the Company (or, in the case of Section
8.1, waived by the Company, TCI Music and Acquisition Sub) at such time as such
condition is no longer capable of satisfaction;
(d) by the Company, provided the Company is not, in any material respect,
in breach of any of its obligations under Section 7.12 or any other provision of
this Agreement and none of the Company Shareholders is in breach of any
obligations under the Voting Agreement, in each case as of the time that the
Company gives notice of its election to terminate this Agreement, if the Company
is presented with an unsolicited Acquisition Proposal that, taking into account
all relevant factors (including the nature and amount of consideration to the
Company's shareholders and the certainty of, and time requirement for,
completion of the transactions proposed in such Acquisition Proposal), is more
favorable to the Company's shareholders from a financial point of view than the
transactions contemplated by this Agreement; or
(e) by TCI Music, provided that neither TCI Music nor Acquisition Sub is in
breach of any of its obligations hereunder in any material respect as of the
time TCI Music gives notice of its election to terminate this Agreement, if any
of the conditions specified in Section 8.1 or Section 8.3 have not been met or
waived by TCI Music (or, in the case of Section 8.1, waived by TCI Music,
Acquisition Sub and the Company) at such time as such condition is no longer
capable of satisfaction.
SECTION 9.2 Effect of Termination. In the event of termination of this
Agreement by either TCI Music or the Company, as provided above, this Agreement
will forthwith become void and (except for the willful breach of this Agreement
by any party to this Agreement) there will be no liability on the part of any of
the Company, TCI Music or Acquisition Sub.
SECTION 9.3 Amendment. This Agreement may be amended by the parties to
this Agreement, by or pursuant to action taken by all of their Boards of
Directors, at any time before or after approval of this Agreement by the
shareholders of the Company and prior to the Effective Time, but, after such
approval, no
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amendment will be made that alters the indemnification provisions of Section
7.2, changes the ratio at which Company Common Stock is to be converted into TCI
Music Preferred Stock as provided in Section 3.2 or changes, in any way adverse
to such shareholders, the terms of the TCI Music Preferred Stock or that in any
other way materially adversely affects the rights of such shareholders, without
the further approval of such shareholders. This Agreement may not be amended
except by an instrument in writing signed on behalf of each of the parties to
this Agreement.
SECTION 9.4 Waiver. At any time prior to the Effective Time, the parties
to this Agreement, by or pursuant to action taken by their respective Boards of
Directors, may (i) extend the time for performance of any of the obligations or
other acts of the other parties to this Agreement, (ii) waive any inaccuracies
in the representations and warranties set forth in this Agreement or in any
documents delivered pursuant to this Agreement and (iii) waive compliance with
any of the agreements or conditions set forth in this Agreement. Any agreement
on the part of a party to this Agreement to any such extension or waiver will be
valid if set forth in an instrument in writing signed on behalf of such party.
ARTICLE X
GENERAL PROVISIONS; DEFINITIONS
SECTION 10.1 Non-Survival of Representations, Warranties and
Agreements. No representations and warranties contained in this Agreement will
survive beyond the Closing Date. This Section 10.1 will not limit any covenant
or agreement of the parties to this Agreement that by its terms requires
performance after the Closing Date.
SECTION 10.2 Notices. All notices or other communications under this
Agreement will be in writing and will be given (and will be deemed to have been
duly given upon receipt) by delivery in person, by cable, telegram, telex or
other standard form of telecommunications, or by registered or certified mail,
postage prepaid, return receipt requested, addressed as follows:
<TABLE>
<S> <C>
If to the Company: The Box Worldwide, Inc.
1221 Collins Avenue
Miami Beach, Florida
Attention: President
Telecopy No.: (305) 674-4906
With a copy to: Lucio, Mandler, Croland, Bronstein, Garbett,
Stiphany & Martinez, P.A.
701 Brickell Avenue, Suite 2000
Miami, Florida 33131
Attention: Leslie J. Croland, Esq.
Telecopy No.: (303) 375-8075
If to TCI Music or
Acquisition Sub: TCI Music, Inc.
Terrace Tower II
5619 DTC Parkway
Englewood, Colorado 80111-3000
Attention: David B. Koff, President
Telecopy No.: 303-721-5443
With a copy to: Legal Department
Terrace Tower II
5619 DTC Parkway
Englewood, Colorado 80111-3000
Telecopy No.: (303) 488-3217
</TABLE>
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With a copy to: Sherman & Howard L.L.C.
633 Seventeenth Street
Suite 3000
Denver, Colorado 80202
Attention: Charles Y. Tanabe, Esq.
Telecopy No.: (303) 298-0940
or to such other addresses as any party may have furnished to the other parties
in writing in accordance with this Section.
SECTION 10.3 Fees and Expenses. Whether or not the Merger is consummated,
all costs and expenses incurred in connection with this Agreement and the
transactions contemplated by this Agreement will be paid by the party incurring
such expenses. Subject to the provisions of Section 7.2(g), the Company's
expenses relating to the transactions contemplated by this Agreement, including
fees of Lucio, Mandler, Croland, Bronstein, Garbett, Stiphany & Martinez, P.A.,
counsel to the Company, will be paid or accrued by the Company prior to the
Effective Time.
SECTION 10.4 Specific Performance. The parties to this Agreement agree
that irreparable damage would occur in the event that any of the provisions of
this Agreement were not performed in accordance with their specific terms or
were otherwise breached. It is accordingly agreed that the parties will be
entitled to enforce specifically the terms and provisions of this Agreement in
any court of the United States or any state having jurisdiction, this being in
addition to any other remedy to which they are entitled at law or in equity.
SECTION 10.5 Third Party Beneficiaries. The parties to this Agreement
agree that the Company's shareholders, officers, directors and employees are
intended third party beneficiaries of the terms of this Agreement, to the extent
such terms refer expressly to such Persons, with full rights hereunder as if
each of them were a party to this Agreement.
SECTION 10.6 Entire Agreement. This Agreement will be of no force or
effect until executed and delivered by all of the parties to this Agreement.
SECTION 10.7 Miscellaneous. This Agreement (including the documents and
instruments referred to in this Agreement) when executed and delivered,
constitutes the entire agreement and supersedes all other prior agreements and
understandings, both written and oral, among the parties, or any of them, with
respect to the subject matter of this Agreement. This Agreement may be executed
in two or more counterparts which together will constitute a single agreement.
Any certificate delivered pursuant to this Agreement will be made without
personal liability on the part of the officer or employee of the Person giving
such certificate.
SECTION 10.8 GOVERNING LAW AND VENUE; WAIVER OF JURY TRIAL.
(a) THIS AGREEMENT SHALL BE DEEMED TO BE MADE UNDER, AND IN ALL RESPECTS
SHALL BE INTERPRETED, CONSTRUED AND GOVERNED BY AND IN ACCORDANCE WITH, THE LAW
OF THE STATE OF DELAWARE. The parties hereby irrevocably submit to the
jurisdiction of the court of the State of Delaware and the Federal courts of the
United States of America located in the State of Delaware solely in respect of
the interpretation and enforcement of the provisions of this Agreement and of
the documents referred to in this Agreement, and in respect of the transactions
contemplated hereby, and hereby waive, and agree not to assert, as a defense in
any action, suit or proceeding for the interpretation or enforcement hereof or
of any such document, that it is not subject thereto or that such action, suit
or proceeding may not be brought or is not maintainable in said courts or that
the venue thereof may not be appropriate or that this Agreement or any such
document may not be enforced in or by such courts, and the parties hereto
irrevocably agree that all claims with respect to such action or proceeding
shall be heard and determined in such a Delaware State or Federal court. The
parties hereby consent to and grant any such court jurisdiction over the person
of such parties and over the subject matter of such dispute and agree that
mailing of process or other papers in connection with any such action or
proceeding in the manner provided in Section 10.2 or in such other manner as may
be permitted by law shall be valid and sufficient service thereof.
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(b) EACH PARTY ACKNOWLEDGES AND AGREES THAT ANY CONTROVERSY WHICH MAY ARISE
UNDER THIS AGREEMENT IS LIKELY TO INVOLVE COMPLICATED AND DIFFICULT ISSUES, AND
THEREFORE EACH SUCH PARTY HEREBY IRREVOCABLY AND UNCONDITIONALLY WAIVES ANY
RIGHT SUCH PARTY MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION
DIRECTLY OR INDIRECTLY ARISING OUT OF OR RELATING TO THIS AGREEMENT, OR THE
TRANSACTIONS CONTEMPLATED BY THIS AGREEMENT. EACH PARTY CERTIFIES AND
ACKNOWLEDGES THAT (i) NO REPRESENTATIVE, AGENT OR ATTORNEY OF ANY OTHER PARTY
HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT SUCH OTHER PARTY WOULD NOT, IN THE
EVENT OF LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVER, (ii) EACH PARTY
UNDERSTANDS AND HAS CONSIDERED THE IMPLICATIONS OF THIS WAIVER, (iii) EACH PARTY
MAKES THIS WAIVER VOLUNTARILY, AND (iv) EACH PARTY HAS BEEN INDUCED TO ENTER
INTO THIS AGREEMENT BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS AND
CERTIFICATIONS IN THIS SECTION 10.8.
IN WITNESS WHEREOF, the parties have caused this Agreement to be signed by
their respective officers thereunder duly authorized all as of the date first
written above.
TCI MUSIC, INC.
By: /s/ DAVID B. KOFF
----------------------------------
Name: David B. Koff
Title: President
TCI ACQUISITION SUB, INC.
By: /s/ DAVID B. KOFF
----------------------------------
Name: David B. Koff
Title: Vice President
THE BOX WORLDWIDE, INC.
By: /s/ ALAN MCGLADE
----------------------------------
Name: Alan McGlade
Title: President and Chief
Executive Officer
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APPENDIX II
TCI MUSIC, INC.
CERTIFICATE OF DESIGNATIONS
---------------------
SETTING FORTH A COPY OF A RESOLUTION
CREATING AND AUTHORIZING THE ISSUANCE
OF A SERIES OF PREFERRED STOCK DESIGNATED
AS "SERIES A CONVERTIBLE PREFERRED STOCK"
ADOPTED BY THE BOARD OF DIRECTORS
OF TCI MUSIC, INC.
---------------------
The undersigned, President and Secretary, respectively, of TCI Music, Inc.,
a Delaware corporation (the "Corporation"), hereby certify that the Board of
Directors duly adopted the following resolutions creating a series of preferred
stock designated as "Series A Convertible Preferred Stock":
"BE IT RESOLVED that, pursuant to authority expressly granted by the
provisions of the Certificate of Incorporation of this Corporation, the Board of
Directors hereby creates and authorizes the issuance of a series of preferred
stock, par value $.01 per share, of this Corporation, to consist of the number
of shares required to be issued pursuant to the Agreement and Plan of Merger by
and among the Corporation, The Box Worldwide, Inc. and TCI Music Acquisition
Sub, Inc. (currently estimated not to exceed 2,250,000 shares), and hereby fixes
the designations, dividend rights, voting powers, rights on liquidation and
other preferences and relative, participating, optional or other special rights
and the qualifications, limitations or restrictions of the shares of such series
(in addition to the designations, preferences and relative, participating,
limitations or restrictions thereof set forth in the Certificate of
Incorporation that are applicable to preferred stock of all series or to all
stock) as follows:
1. Designation. The designation of the series of preferred stock, par value
$.01 per share, of this Corporation authorized hereby is "Series A Convertible
Preferred Stock" (the "Series A Convertible Preferred Stock").
2. Certain Definitions. Unless the context otherwise requires, the terms
defined in this Section 2 shall have the meanings herein specified:
Board of Directors: The Board of Directors of this Corporation and any
authorized committee thereof.
Business Day: Any day other than a Saturday, a Sunday or a day on which
banking institutions in Denver, Colorado are required or authorized to be
closed.
Capital Stock: Any and all shares, interests, participations or other
equivalents (however designated) of corporate stock of this Corporation.
Closing Price: For any security on any Business Day, (a) the last reported
sale price, regular way, of such security (or, if no reported sale takes place
on that day, the average of the reported closing bid and asked prices, regular
way) on the composite tape, or if such security is not quoted on the composite
tape, on the principal United States securities exchange registered under the
Securities Exchange Act of 1934, as amended, on which such security is listed or
admitted to trading, (b) if such security is not listed or admitted to trading
on any such exchange, the last reported sale price (or the average of the quoted
closing bid and asked prices if there were no reported sales) as reported by
NASDAQ or any comparable system, or (c) if such security is not quoted on NASDAQ
or any comparable system, the average of the closing bid and asked prices as
furnished by any member of the National Association of Securities Dealers, Inc.
selected from time to time by this Corporation.
Common Stock: The Series A Common Stock and Series B Common Stock.
Conversion Rate: As defined in Section 5(b).
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Convertible Securities: Securities of this Corporation, other than the
Series B Common Stock, that are convertible into Series A Common Stock.
Debt Instrument: Any bond, debenture, note, indenture, guarantee or other
instrument or agreement evidencing any Indebtedness, whether existing at the
Issue Date or thereafter created, incurred, assumed or guaranteed.
Deemed Liquidation Event: As defined in Section 4.
Indebtedness: Any (a) liability, contingent or otherwise, of this
Corporation (i) for borrowed money (whether or not the recourse of the lender is
to the whole of the assets of this Corporation or only to a portion thereof),
(ii) evidenced by a note, debenture or similar instrument (including a purchase
money obligation) given other than in connection with the acquisition of
inventory or similar property in the ordinary course of business, or (iii) for
the payment of money relating to an obligation under a lease that is required to
be capitalized for financial accounting purposes in accordance with generally
accepted accounting principles; (b) liabilities of others described in the
preceding clause (a) which this Corporation has guaranteed or which is otherwise
its legal liability; (c) obligations secured by a mortgage, pledge, lien, charge
or other encumbrance to which the property or assets of this Corporation are
subject whether or not the obligations secured thereby shall have been assumed
by or shall otherwise be this Corporation's legal liability; and (d) any
amendment, renewal, extension or refunding of any liability of the types
referred to in clauses (a), (b) and (c) above.
Issue Date: The date on which any shares of the Series A Convertible
Preferred Stock are first issued or first deemed to have been issued.
Junior Securities: All shares of Common Stock and any other class or series
of stock of this Corporation authorized after the Issue Date except Parity
Securities and Senior Securities.
Liquidation Value: For each Share of the Series A Convertible Preferred
Stock, the sum of $ [three times the Purchase Price Benchmark],
increased on each anniversary of the Issue Date by an amount equal to the
product of that sum (as previously increased) and the greater of (a) the
percentage increase, if any, in the Consumer Price Index, All Urban Consumers
(CPI-U), U.S. City Average, All Items, as published by the U.S. Department of
Labor, Bureau of Labor Statistics (or any similar successor index), from the
last day of the calendar month immediately preceding the Issue Date (or if the
Issue Date is the last day of a calendar month, the Issue Date) or from the last
day of the calendar month immediately preceding the previous anniversary of the
Issue Date (or if the Issue Date is the last day of a calendar month, the
previous anniversary of the Issue Date), as applicable, in any event not to
exceed 5% in any year, and (b) 3%.
Market Price: For any Capital Stock, as of any date of determination, the
average of the daily Closing Prices of such stock for 10 consecutive Business
Days ending on the Business Day immediately before the date of determination if
there is a public market for such stock, and if there is no public market for
such stock, any other method of determining the market price of such stock as
the Board of Directors shall from time to time deem to be fair. The Market Price
of any Capital Stock shall be appropriately adjusted to reflect the effects of
any stock dividend, stock split, reclassification or combination affecting such
Capital Stock, the record date, ex-dividend date or similar date of which occurs
during the period in which the Market Price is to be determined.
NASDAQ: The National Association of Securities Dealers Automated Quotation
System.
Parity Securities: Any class or series of stock of this Corporation
authorized after the Issue Date that is entitled to receive payment of dividends
on a parity with the Series A Convertible Preferred Stock or is entitled to
receive assets upon liquidation, dissolution or winding up of the affairs of
this Corporation on a parity with the Series A Convertible Preferred Stock.
Person: Any human being or any corporation, limited liability company,
partnership, trust, association, government or other entity.
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Purchase Price Benchmark: $ [(i.e., the average of the averages of
the closing bid and asked prices of one share of Series A Common Stock for a
period of 20 consecutive Business Days ending on the third Business Day prior to
the Issue Date)]. The Purchase Price Benchmark will be appropriately adjusted to
reflect the effects of any stock dividend, stock split, reclassification or
combination affecting the Series A Common Stock, the record date, ex-dividend
date or similar date of which occurs during the period in which the Purchase
Price Benchmark initially is to be determined and, after such initial
determination, will similarly be adjusted to reflect the effects of any stock
dividend, stock split, reclassification or combination affecting the Series A
Common Stock.
Redemption Date: As to any Share, the date fixed for redemption of such
Share as specified in the notice of redemption given in accordance with Section
6(c), provided that if the Redemption Price is not actually paid, or
consideration sufficient for the payment thereof set apart solely for such
purpose, on such date then the Redemption Date shall be the date on which such
Redemption Price is fully paid or consideration sufficient for the payment
thereof set apart solely for such purpose.
Senior Securities: Any class or series of stock of this Corporation
authorized after the Issue Date ranking senior to the Series A Convertible
Preferred Stock in respect of the right to receive payment of dividends prior to
the Series A Convertible Preferred Stock or the right to receive assets upon
liquidation, dissolution or winding up of the affairs of this Corporation prior
to the Series A Convertible Preferred Stock.
Series A Common Stock: The Series A Common Stock of this Corporation and
any Capital Stock of any class or series into which the Series A Common Stock
may be changed.
Series B Common Stock: The Series B Common Stock of this Corporation and
any Capital Stock of any class or series into which the Series B Common Stock
may be changed.
Share: As defined in Section 3(a).
Voting Stock: With respect to this Corporation, Capital Stock having
general voting power under ordinary circumstances to elect directors of this
Corporation, but not including any Capital Stock that has or would have such
voting power solely by reason of the happening of any contingency.
3. Dividends.
(a) Subject to the rights of holders of Senior Securities and to any
prohibition or restriction set forth in any security or Debt Instrument, the
holders of Series A Convertible Preferred Stock shall be entitled to receive
cash dividends from time to time on each share of Series A Convertible Preferred
Stock (hereinafter referred to as a "Share"), payable solely out of funds
legally available therefor, in an amount equal to the product of (i) the amount
of the cash dividend declared on one share of Series A Common Stock or any other
security into which the Shares of Series A Convertible Preferred Stock is then
convertible and (ii) the number of shares of Series A Common Stock or other
security into which one Share of Series A Convertible Preferred Stock may be
converted as of the date such dividend is declared. Such dividends shall be
payable to holders of Series A Convertible Preferred Stock only if, as and when
the Board of Directors declares cash dividends (and not dividends payable in
other property) on Series A Common Stock. Dividends shall be payable to the
holders of record of Series A Convertible Preferred Stock as of the record date
for the determination of Series A Common Stock entitled to receive such cash
dividends and shall be payable on the date established by this Corporation for
the payment of such dividends to holders of Series A Common Stock.
(b) If this Corporation is prohibited or restricted from paying the full
dividends which have been declared to holders of the Series A Convertible
Preferred Stock and any Parity Securities pursuant to applicable law or the
terms of any security or Debt Instrument, the amount available for such payment
pursuant to applicable law and which is not restricted by the terms of any
security or Debt Instrument shall be distributed among the holders of the Series
A Convertible Preferred Stock and any Parity Securities ratably in proportion to
the full amounts to which they otherwise would be entitled.
4. Liquidation. Upon any liquidation, dissolution or winding up of this
Corporation, whether voluntary or involuntary, subject to the prior payment in
full of amounts to which any Senior Securities are entitled, the holders of
Series A Convertible Preferred Stock shall be entitled to be paid an amount in
cash equal to the
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aggregate Liquidation Value at the date fixed for liquidation of all Shares
outstanding before any distribution or payment is made upon any Junior
Securities, which payment shall be made pari passu with any such payment made to
the holders of any Parity Securities. The holders of Series A Convertible
Preferred Stock shall be entitled to no other or further distribution of or
participation in any remaining assets of this Corporation after receiving the
Liquidation Value per Share. If upon such liquidation, dissolution or winding up
the assets of this Corporation to be distributed among the holders of Series A
Convertible Preferred Stock and to holders of Parity Securities are insufficient
to permit payment in full to such holders of the aggregate amounts which they
are entitled to be paid, then the entire assets of this Corporation to be
distributed to such holders shall be distributed ratably among them based upon
the amounts to which the Shares of Series A Convertible Preferred Stock and such
Parity Securities otherwise would be entitled. Any (a) sale or other transfer by
this Corporation of all or substantially all of its assets and (b)
consolidation, merger or other transaction or series of transactions in which
the Persons that are stockholders of this Corporation immediately prior to such
transaction or series of transactions do not retain Voting Stock representing at
least 50% of the total voting power of all Voting Stock of this Corporation
outstanding immediately after such transaction or series of transactions (any
such sale, transfer, consolidation, merger or other transaction or series of
transactions described in the foregoing clauses (a) or (b) being referred to as
a "Deemed Liquidation Event"), shall be deemed to be a liquidation, dissolution
or winding up of this Corporation for purposes of this Section 4 occurring on
the date such Deemed Liquidation Event is consummated. This Corporation shall
mail written notice of any liquidation, dissolution or winding up (including any
Deemed Liquidation Event) to each record holder of Series A Convertible
Preferred Stock not less than 20 days (or 10 days in the case of a Deemed
Liquidation Event that is a tender offer) prior to the payment date stated in
such written notice. Holders of Series A Convertible Preferred Stock shall have
the right to convert their Shares to Series A Common Stock pursuant to Section 5
at any time prior to the close of business on the Business Day immediately
preceding the date of liquidation or dissolution (or the date of consummation of
any Deemed Liquidation Event).
5. Conversion.
(a) Subject to the provisions of Section 6 hereof, each Share of Series A
Convertible Preferred Stock may be converted by the holder thereof at any time
in whole or in part (but if in part, in amounts not less than 100 Shares or any
whole multiple thereof) at such time, in such manner and upon such terms and
conditions as are provided in this Section 5 into fully paid and non-assessable
shares of Series A Common Stock at the Conversion Rate (as defined below). In
the case of Shares called for redemption by this Corporation pursuant to Section
6(a), the conversion right provided by this Section 5 shall terminate at the
close of business on the Business Day immediately preceding the applicable
Redemption Date. In the case of Shares required to be redeemed pursuant to
Section 6(b), the conversion right provided by this Section 5 shall terminate
immediately upon receipt by this Corporation of a notice given pursuant to such
Section. In case cash, securities or property other than Series A Common Stock
shall be payable, deliverable or issuable upon conversion as provided herein,
then all references to Series A Common Stock in this Section 5 shall be deemed
to apply, so far as appropriate and as nearly as may be, to such cash, property
or other securities. Whenever this Section 5 refers to the number of shares of
Series A Common Stock outstanding, such number shall include any shares of such
stock issuable upon exercise of rights or warrants or upon conversion of
Convertible Securities.
(b) Subject to the provisions for adjustment hereinafter set forth in this
Section 5, the Series A Convertible Preferred Stock may be converted into Series
A Common Stock at the initial conversion rate of three fully paid and
non-assessable shares of Series A Common Stock for one share of the Series A
Convertible Preferred Stock. This conversion rate as from time to time adjusted
cumulatively pursuant to the provisions of this Section is hereinafter referred
to as the "Conversion Rate."
(c) In case this Corporation shall (i) pay a dividend or make a
distribution on its outstanding shares of Series A Common Stock in shares of its
Capital Stock, (ii) subdivide the then outstanding shares of Series A Common
Stock into a greater number of shares of Series A Common Stock, (iii) combine
the then outstanding shares of Series A Common Stock into a smaller number of
shares of Series A Common Stock, or (iv) issue by reclassification of its shares
of Series A Common Stock any shares of any other class of Capital
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Stock of this Corporation (including any such reclassification in connection
with a merger in which this Corporation is the surviving corporation), then the
Conversation Rate in effect immediately prior to the opening of business on the
record date for such dividend or distribution or the effective date of such
subdivision, combination or reclassification shall be adjusted so that the
holder of each share of the Series A Convertible Preferred Stock thereafter
surrendered for conversion shall be entitled to receive the number and kind of
shares of Capital Stock of this Corporation that such holder would have owned or
been entitled to receive immediately following such action had such shares of
Series A Convertible Preferred Stock been converted immediately prior to such
time. An adjustment made pursuant to this Section 5(c) for a dividend or
distribution shall become effective immediately after the record date for the
dividend or distribution and an adjustment made pursuant to this Section 5(c)
for a subdivision, combination or reclassification shall become effective
immediately after the effective date of the subdivision, combination or
reclassification. Such adjustment shall be made each time any action listed
above is taken.
(d) In case this Corporation issues any Series A Common Stock or rights or
warrants to subscribe for or purchase shares of Series A Common Stock or
Convertible Securities ("Additional Securities") for consideration per share of
Series A Common Stock (including, in the case of Convertible Securities, the
aggregate amount of any additional consideration payable upon conversion or
exercise thereof, determined as provided below) less than the then current
Market Price per share of Series A Common Stock, the number of shares of Series
A Common Stock into which each Share shall thereafter be convertible shall be
determined by multiplying the number of shares of Series A Common Stock into
which such Share was convertible immediately prior to the issuance of such
Additional Securities by a fraction of which the numerator shall be the number
of shares of Series A Common Stock outstanding prior to such issuance plus the
number of additional shares of Series A Common Stock offered for subscription or
purchase (or into which the Convertible Securities so offered are initially
convertible) and of which the denominator shall be the number of shares of
Series A Common Stock outstanding immediately prior to the issuance of such
Additional Securities plus the number of shares of Series A Common Stock which
the aggregate consideration received in respect of the total number of shares of
Series A Common Stock so offered (plus the aggregate amount of any additional
consideration payable upon conversion or exercise of the Convertible Securities
so offered) would purchase at the then current Market Price per share of Series
A Common Stock.
In case of the issuance (otherwise than upon conversion of shares of
Capital Stock of this Corporation) of additional shares of Series A Common Stock
or Convertible Securities for consideration that consists in whole or in part of
property other than cash, the amount of the consideration other than cash
received by this Corporation for such shares shall be deemed to be the value of
such consideration as determined by the Board of Directors, whose determination
shall be conclusive. In case of the issuance by this Corporation of any rights
to subscribe for or to purchase shares of Series A Common Stock or Convertible
Securities, all shares of Series A Common Stock or Convertible Securities to
which the holders of such rights or options shall be entitled to subscribe for
or purchase pursuant to such rights shall be deemed outstanding as of the date
of the offering of such rights, and the minimum aggregate consideration named in
such rights for the shares of Series A Common Stock or Convertible Securities
covered thereby, plus the consideration, if any, received by this Corporation
for such rights shall be deemed to be the aggregate consideration received by
this Corporation as of the date of the offering of such rights for the issuance
of such shares. In case of the issuance by this Corporation of Convertible
Securities, all shares of Series A Common Stock issuable upon the conversion or
exchange of such Convertible Securities shall be deemed issued as of the date
such Convertible Securities are issued, and the amount of the aggregate
consideration received by this Corporation for such additional shares of Series
A Common Stock shall be deemed to be the total of (x) the amount of
consideration received by this Corporation upon the issuance of such Convertible
Securities, plus (y) the minimum aggregate consideration, if any, other than
such Convertible Securities, payable to this Corporation upon such conversion or
exchange. On the expiration of any such rights or warrants to purchase Series A
Common Stock or the termination of any right of conversion which is the subject
of an adjustment hereunder (or upon any change in the number of shares of Series
A Common Stock issuable upon such exercise or conversion) the Conversion Rate
then in effect shall be readjusted to such Conversion Rate as would have been in
effect had the adjustments made upon the issuance of such rights, warrants or
Convertible Securities been made upon the basis only of issuance
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of the number of shares of Series A Common Stock actually issued or to be issued
upon the exercise of such rights or warrants or conversion of such Convertible
Securities.
(e) In case this Corporation shall distribute to all holders of shares of
Series A Common Stock (including any such distribution made in connection with a
merger in which this Corporation is the surviving corporation, other than a
merger to which Section 5(g) is applicable) any evidences of its indebtedness or
assets (other than cash dividends, Capital Stock or rights to acquire Capital
Stock), then in each such case the number of shares of Series A Common Stock
into which each Share of Series A Convertible Preferred Stock shall thereafter
be convertible shall be determined by multiplying the number of shares of Series
A Common Stock into which such Share was convertible immediately prior to the
record date for the determination of stockholders entitled to receive the
distribution by a fraction of which the numerator shall be the then current
Market Price per share of Series A Common Stock on such record date and of which
the denominator shall be the then current Market Price per share of Series A
Common Stock less the value on such record date (as determined by the Board of
Directors, whose determination shall be conclusive) of the portion of the assets
or evidences of indebtedness so distributed applicable to one share of Series A
Common Stock. Such adjustment shall be made each time any such distribution is
made and shall become effective immediately after the record date for the
determination of stockholders entitled to receive such distribution.
(f) For the purpose of any determination of value to be made by the Board
of Directors hereunder, the Board of Directors shall specify in reasonable
detail the results of and basis for such determination in the notice delivered
pursuant to Section 5(h).
(g) In case of any reclassification or change in the Series A Common Stock
(other than any reclassification or change referred to in Section 5(c) and other
than a change in par value) or in case of any consolidation of this Corporation
with any other Person or any merger of this Corporation into another Person or
of another Person into this Corporation (other than (i) a merger in which this
Corporation is the continuing corporation and which does not result in any
reclassification or change (other than a change in par value or any
reclassification or change to which Section 5(c) is applicable) in the
outstanding Series A Common Stock or (ii) a Deemed Liquidation Event), this
Corporation (or its successor in such consolidation or merger) shall make
appropriate provision so that each holder of a Share of Series A Convertible
Preferred Stock shall have the right thereafter to convert such Share into the
kind and amount of shares of stock and other securities and property that such
holder would have owned immediately after such reclassification, change,
consolidation or merger if such holder had converted such Share into Series A
Common Stock immediately prior to the effective date of such reclassification,
change, consolidation, merger (assuming for this purpose (to the extent
applicable) that such holder failed to exercise any rights of election and
received per share of Series A Common Stock the kind and amount of shares of
stock and other securities and property received per share by a plurality of the
non-electing shares), and the holders of the Series A Convertible Preferred
Stock shall have no other conversion rights under these provisions; provided,
that effective provision shall be made in the constituent and governing
documents of the resulting or surviving Person or otherwise so that the
provisions set forth herein for the protection of the conversion rights of the
Series A Convertible Preferred Stock shall thereafter be made applicable, as
nearly as reasonably may be, to any such other shares of stock and other
securities and property deliverable upon conversion of the Series A Convertible
Preferred Stock remaining outstanding or other convertible preferred stock or
other Convertible Securities received by the holders of Series A Convertible
Preferred Stock in place thereof; and provided further, that any such resulting
or surviving Person or purchaser shall expressly assume the obligation to
deliver, upon the exercise of the conversion privilege, such shares, securities
or other property as the holders of the Series A Convertible Preferred Stock
remaining outstanding, or other convertible preferred stock or other Convertible
Securities received by the holders in place thereof, shall be entitled to
receive pursuant to the provisions hereof, and to make provisions for the
protection of the conversion rights as above provided.
(h) Whenever the Conversion Rate shall be adjusted or any other event
affecting the conversion rights of the holders of Series A Convertible Preferred
Stock shall occur as provided in Sections 5(c), (d), (e) or (g), this
Corporation shall promptly cause a notice to be mailed to the holders of record
of the Series A Convertible Preferred Stock describing the nature of the event
requiring such adjustment, the Conversion Rate in effect immediately thereafter
and the kind and amount of stock or other securities or property into
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which the Series A Convertible Preferred Stock shall be convertible after such
event. Such notice may be given in advance and included as a part of a notice
required to be mailed under the provisions of Section 5(j).
(i) This Corporation may, but shall not be required to, adjust the
Conversion Rate if such adjustment would require an increase or decrease of less
than 1% in such Conversion Rate; provided, however, that any adjustments which
by reason of this Section 5(i) are not made shall be carried forward and taken
into account in any subsequent adjustment. All calculations under this Section 5
shall be made to the nearest cent or the nearest 1/100th of a share, as the case
may be. In any case in which this Section 5(i) shall require that an adjustment
shall become effective immediately after a record date for such event, the
Corporation may defer until the occurrence of such event (x) issuing to the
holder of any shares of Series A Convertible Preferred Stock converted after
such record date and before the occurrence of such event the additional shares
of Series A Common Stock or other Capital Stock issuable upon such conversion by
reason of the adjustment required by such event over and above the shares of
Series A Common Stock or other Capital Stock issuable upon such conversion
before giving effect to such adjustment and (y) paying to such holder cash in
lieu of any fractional share to which such holder is entitled pursuant to
Section 5(n);
provided, however, that if requested by such holder, this Corporation shall
deliver to such holder a due bill or other appropriate instrument evidencing
such holder's right to receive such additional shares of Series A Common Stock
or other Capital Stock, and such cash, upon the occurrence of the event
requiring such adjustment.
(j) If at any time:
(i) this Corporation takes any action which would require an
adjustment in the Conversion Rate pursuant to this Section 5;
(ii) there occurs any capital reorganization or reclassification of
the Series A Common Stock (other than a change in par value), or any
consolidation or merger to which the Corporation is a party and for which
approval of any shareholders of this Corporation is required, or any sale
or other transfer of all or substantially all of the assets of the
Corporation, or a tender offer for shares of Series A Common Stock
constituting at least a majority of the total voting power represented by
the outstanding shares of Series A Common Stock which has been recommended
by the Board of Directors as being in the best interests of the holders of
Series A Common Stock; or
(iii) there is a voluntary or involuntary dissolution, liquidation or
winding up of this Corporation;
then this Corporation shall give written notice, in the manner provided in
Section 6(c) hereof, to the holders of the Series A Convertible Preferred Stock
at their respective addresses as the same appear on the books of the
Corporation, at least 20 days (or 10 days in the case of a recommended tender
offer as specified in clause (ii) above) prior to any record date for such
action, dividend or distribution or the date as of which it is expected that
holders of Series A Common Stock of record shall be entitled to exchange their
shares of Series A Common Stock for securities or other property, if any,
deliverable upon such reorganization, reclassification, consolidation, merger,
sale, transfer, tender offer, dissolution, liquidation or winding up; provided,
however, that any notice required by any event described in clause (ii) of this
Section 5(j) shall be given in the manner and at the time that such notice is
given to the holders of Series A Common Stock. Without limiting the obligations
of this Corporation to provide notice of corporate actions hereunder, the
failure to give the notice required by this Section 5(j) or any defect therein
shall not affect the legality or validity of any such corporate action of the
Corporation or the vote upon such action.
(k) Before any holder of Series A Convertible Preferred Stock shall be
entitled to convert the same into Series A Common Stock, such holder shall
surrender the certificate or certificates for such Series A Convertible
Preferred Stock at the office of this Corporation or at the office of the
transfer agent for the Series A Convertible Preferred Stock, which certificate
or certificates, if this Corporation shall so request, shall be duly endorsed to
this Corporation or in blank or accompanied by proper instruments of transfer to
this Corporation or in blank (such endorsements or instruments of transfer to be
in form satisfactory to this Corporation), and shall given written notice to
this Corporation at said office that it elects to convert all or a part of the
Shares represented by said certificate or certificates in accordance with the
terms of this Section 5,
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and shall state in writing therein the name or names in which such holder wishes
the certificates for Series A Common Stock to be issued. Every such notice of
election to convert shall constitute a contract between the holder of such
Series A Convertible Preferred Stock and the Corporation, whereby the holder of
such Series A Convertible Preferred Stock shall be deemed to subscribe for the
amount of Series A Common Stock which such holder shall be entitled to receive
upon conversion of the number of Shares of Series A Convertible Preferred Stock
to be converted, and, in satisfaction of such subscription, to deposit the
shares of Series A Convertible Preferred Stock to be converted, and thereby this
Corporation shall be deemed to agree that the surrender of the Shares of Series
A Convertible Preferred Stock to be converted shall constitute full payment of
such subscription for Series A Common Stock to be issued upon such conversion.
This Corporation shall as soon as practicable after such deposit of a
certificate or certificates for Series A Convertible Preferred Stock,
accompanied by the written notice and the statement above prescribed, issue and
deliver at the office of this Corporation or of said transfer agent to the
person for whose account such Series A Convertible Preferred Stock was so
surrendered, or to his nominee(s) or, subject to compliance with applicable law,
transferee(s), a certificate or certificates for the number of full shares of
Series A Common Stock to which such holder shall be entitled, together with cash
in lieu of any fraction of a share as hereinafter provided. If surrendered
certificates for Series A Convertible Preferred Stock are converted only in
part, this Corporation shall issue and deliver to the holder, or to his
nominee(s), without charge therefor, a new certificate or certificates
representing the unconverted Shares. Such conversion shall be deemed to have
been made as of the date of such surrender of the Series A Convertible Preferred
Stock to be converted, and the Person or Persons entitled to receive the Series
A Common Stock issuable upon conversion of such Series A Convertible Preferred
Stock shall be treated for all purposes as the record holder or holders of such
Series A Common Stock on such date.
The issuance of certificates for shares of Series A Common Stock upon
conversion of shares of Series A Convertible Preferred Stock shall be made
without charge for any issue, stamp or other similar tax in respect of such
issuance, provided, however, if any such certificate is to be issued in a name
other than that of the registered holder of the share or shares of Series A
Convertible Preferred Stock converted, the Person or Persons requesting the
issuance thereof shall pay to this Corporation the amount of any tax which may
be payable in respect of any transfer involved in such issuance or shall
establish to the satisfaction of this Corporation that such tax has been paid.
This Corporation shall not be required to convert any shares of Series A
Convertible Preferred Stock, and no surrender of Series A Convertible Preferred
Stock shall be effective for that purpose, while the stock transfer books of
this Corporation are closed for any purpose. The surrender of Series A
Convertible Preferred Stock for conversion during any period while such books
are so closed shall become effective for conversion immediately upon the
reopening of such books, as if the conversion had been made on the date such
Series A Convertible Preferred Stock was surrendered.
(l) This Corporation shall at all times reserve and keep available, solely
for the purpose of issuance upon conversion of the outstanding shares of Series
A Convertible Preferred Stock, such number of shares of Series A Common Stock as
shall be issuable upon the conversion of all outstanding Shares, provided that
nothing contained herein shall be construed to preclude this Corporation from
satisfying its obligations in respect of the conversion of Shares of Series A
Convertible Preferred Stock by delivery of shares of Series A Common Stock which
are held in the treasury of this Corporation. This Corporation shall take all
such corporate and other actions as from time to time may be necessary to insure
that all shares of Series A Common Stock issuable upon conversion of Shares of
Series A Convertible Preferred Stock at the Conversion Rate in effect from time
to time shall, upon issue, be duly and validly authorized and issued, fully paid
and non-assessable and free of any preemptive or similar rights.
(m) All Shares of Series A Convertible Preferred Stock received by this
Corporation upon conversion thereof into Series A Common Stock shall be retired
and shall be restored to the status of authorized and unissued shares of
preferred stock and may be reissued as part of another series of the preferred
stock of this Corporation, but such shares shall not be reissued as Series A
Convertible Preferred Stock.
(n) This Corporation shall not be required to issue fractional shares of
Series A Common Stock or scrip upon conversion of the Series A Convertible
Preferred Stock. As to any fraction of a share of Series A
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Common Stock which a holder of one or more Shares otherwise would be entitled to
receive upon conversion of such Shares, this Corporation shall pay cash in
respect of such fraction in an amount equal to the same fraction of the Market
Price per share of Series A Common Stock as of the date notice of conversion of
such Shares is received by this Corporation.
(o) Anything herein to the contrary notwithstanding, no adjustment shall be
made in respect of shares of Series A Common Stock issued (or issuable upon
exercise of options, warrants or other rights to acquire Series A Common Stock
or upon exercise or conversion of Convertible Securities) to officers,
directors, employees or agents of this Corporation or its subsidiaries under
plans or arrangements approved by the Board of Directors.
6. Redemption.
(a) All or any portion of the Shares of Series A Convertible Preferred
Stock may be redeemed out of funds legally available therefor, at the option of
this Corporation exercised by giving written notice as prescribed by Section
6(c), (i) during the 30-day periods immediately following the fourth, sixth and
eighth anniversaries of the Issue Date, (ii) at any time after the Closing Price
of the Series A Common Stock equals or exceeds 125% of the Purchase Price
Benchmark for a period of at least 30 consecutive Business Days, and (iii) at
any time after the tenth anniversary of the Issue Date, in each case at the
Liquidation Value per Share as of the applicable Redemption Date. If only a
portion of the outstanding Shares are redeemed, the Shares to be redeemed shall
be redeemed ratably among all holders of Series A Convertible Preferred Stock.
(b) Subject to the rights of the holders of Senior Securities and to any
prohibition or restriction set forth in any security or Debt Instrument, each
holder of Series A Convertible Preferred Stock may require this Corporation to
redeem, out of funds legally available therefor, all or any portion of the
outstanding Shares of Series A Convertible Preferred Stock held by it at any
time after the tenth anniversary of the Issue Date at the Liquidation Value per
Share as of the applicable Redemption Date by giving written notice to this
Corporation stating the number of Shares such holder elects to have this
Corporation redeem. This Corporation shall redeem, out of funds legally
available therefor, the Shares so requested to be redeemed within 30 days
following this Corporation's receipt of such notice. If the funds of this
Corporation legally available for redemption of Shares are insufficient to
redeem the total number of Shares required to be redeemed pursuant to this
Section 6(b), those funds which are legally available for redemption of such
Shares shall be used to redeem the maximum possible number of such Shares
ratably among the holders that have required Shares to be redeemed and any
Parity Securities that are required by their terms to be redeemed. At any time
thereafter when additional funds of this Corporation are legally available for
such purpose, such funds shall immediately be used to redeem the Shares this
Corporation failed to redeem on such Redemption Date until the balance of such
Shares are redeemed.
(c) Notice of any redemption pursuant to this Section 6 shall be mailed,
first class, postage prepaid, not less than 20 days (or 10 days in the case of a
redemption pursuant to Section 6(b)) nor more than 60 days prior to the
Redemption Date, to the holders of record of the shares of Series A Convertible
Preferred Stock to be redeemed, at their respective addresses as the same appear
upon the books of this Corporation or are supplied by them in writing to this
Corporation for the purpose of such notice. No failure to mail such notice or
any defect therein or in the mailing thereof shall affect the validity of the
proceedings for the redemption of any shares of the Series A Convertible
Preferred Stock. Such notice shall set forth the Liquidation Value, the
Redemption Date, the number of Shares to be redeemed and the place at which the
Shares called for redemption shall, upon presentation and surrender of the stock
certificates evidencing such Shares, be redeemed.
(d) If notice of any redemption by this Corporation pursuant to this
Section 6 shall have been mailed as provided in Section 6(c) and if on or before
the Redemption Date specified in such notice the consideration necessary for
such redemption shall have been set apart so as to be available therefor and
only therefor, then on and after the close of business on the Redemption Date,
the Shares called for redemption, notwithstanding that any certificate therefor
shall not have been surrendered for cancellation, shall no longer be deemed
outstanding, and all rights with respect to such Shares shall forthwith cease
and terminate, except the right of the holders thereof to receive upon surrender
of their certificates the consideration payable upon redemption
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thereof. Nothing in this Section 6(d) shall affect the rights of holders of
Series A Convertible Preferred Stock to convert such Shares into Series A Common
Stock in accordance with the provisions of Section 5.
(e) All Shares of Series A Convertible Preferred Stock redeemed, retired,
purchased or otherwise acquired by this Corporation shall be retired and shall
be restored to the status of authorized and unissued shares and may be reissued
as part of another series of the preferred stock of this Corporation, but such
shares shall not be reissued as Series A Convertible Preferred Stock.
(f) If this Corporation shall fail to redeem on a Redemption Date pursuant
to Section 6(b) all Shares of Series A Convertible Preferred Stock required by
the holders thereof to be redeemed on such date, this Corporation shall not
redeem, or discharge any sinking fund obligation with respect to, any Parity
Securities (except pro rata with any Series A Convertible Preferred Stock
redeemed) or Junior Securities, until all outstanding shares of Series A
Convertible Preferred Stock and Parity Securities are redeemed, and shall not
purchase or otherwise acquire any Shares of Series A Convertible Preferred
Stock, Parity Securities or Junior Securities. Nothing contained in this Section
6(f) shall prevent the purchase or acquisition (i) of Shares of Series A
Convertible Preferred Stock and Parity Securities pursuant to a purchase or
exchange offer or offers made to holders of all outstanding Shares of Series A
Convertible Preferred Stock and Parity Securities, provided that (A) as to
holders of all outstanding Shares of Series A Convertible Preferred Stock, the
terms of the purchase or exchange offer for all such Shares are identical, (B)
as to holders of all outstanding shares of a particular series or class of
Parity Securities, the terms of the purchase or exchange offer for all such
shares are identical, and (C) as among holders of all outstanding Shares of
Series A Convertible Preferred Stock and Parity Securities, the terms of each
purchase or exchange offer or offers are substantially identical relative to the
liquidation price of the Shares of Series A Convertible Preferred Stock and each
series or class of Parity Securities, or (ii) of shares of Series A Convertible
Preferred Stock, Parity Securities or Junior Securities in exchange for
(together with a cash adjustment for fractional shares, if any), or through the
application of the proceeds of the sale of, shares of Junior Securities. The
provisions of this Section 6(f) are for the benefit of holders of Series A
Convertible Preferred Stock and Parity Securities and accordingly, at any time
when there are no Parity Securities outstanding, the provisions of this Section
6(f) shall not restrict any redemption by this Corporation of Shares held by any
holder.
7. Voting Rights. The holders of the Series A Convertible Preferred Stock
shall be entitled to vote on all matters submitted to a vote of the holders of
the Series A Common Stock. Each Share shall entitle the registered holder
thereof to a number of votes equal to the number of shares of Series A Common
Stock into which such Share is convertible as of the record date for the matter
to be voted upon. Holders of Series A Convertible Preferred Stock shall vote
together with holders of Series A Common Stock and shall not be entitled to vote
as a class except as otherwise required by law or this Corporation's Certificate
of Incorporation.
8. Amendment. No amendment or modification of the designation, rights,
preferences, and limitations of the Shares set forth herein shall be binding or
effective without the prior consent of the holders of record of Shares
representing a majority of the voting power of all Shares outstanding at the
time such action is taken.
9. No Preemptive Rights. Holders of Series A Convertible Preferred Stock
shall not have any preemptive right to purchase or subscribe for any class or
series of securities issued by this Corporation after the Issue Date.
10. Exclusion of Other Rights. Except as may otherwise be required by law
and for the equitable rights and remedies that may otherwise be available to
holders of Series A Convertible Preferred Stock, the Shares of Series A
Convertible Preferred Stock shall not have any designations, preferences,
limitations or relative rights, other than those specifically set forth in these
resolutions (as such resolutions may, subject to Section 8, be amended from time
to time) and in the Certificate of Incorporation of this Corporation.
11. Headings. The headings of the various sections and subsections hereof
are for convenience of reference only and shall not affect the interpretation of
any of the provisions hereof.
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FURTHER RESOLVED that the appropriate officers of this Corporation are
hereby authorized to execute and acknowledge a certificate setting forth these
resolutions in completed and final form and to cause such certificate to be
filed and recorded in accordance with the requirements of Section 151(g) of the
General Corporation Law of the State of Delaware."
------------------------------------
President
ATTEST:
- ------------------------------------
Secretary
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APPENDIX III
LOGO
August 12, 1997
To The Board of Directors
The Box Worldwide, Inc.
Gentlemen:
We understand that The Box Worldwide, Inc. ("Company" hereinafter) has
entered into a merger agreement on this date ("Agreement") with TCI Music, Inc.
("TCI Music" hereinafter) and TCI Music Acquisition Sub, Inc. ("Acquisition Sub"
hereinafter) whereby Acquisition Sub will be merged with and into the Company
("Merger" hereinafter). Capitalized terms not otherwise defined herein are
defined as set forth in the Agreement.
The aggregate consideration deliverable by TCI Music in the Merger (the
"Merger Consideration") will be equal to (a) a sum of (i) $38,502,672 and (ii)
$1.50 times the number of shares of Company Common Stock issued prior to the
Effective Time upon the exercise or conversion of options, warrants, convertible
securities or other rights to acquire Company Common Stock that are outstanding
as of the date of the Agreement minus (b) the sum of (i) $1.50 times the number
of Dissenting Shares, (ii) $1.50 times the number of shares of the Company
Preferred Stock outstanding at the Effective Time that are not Dissenting Shares
and (iii) all accrued and unpaid dividends on shares of Company Preferred Stock
as of the Effective Time, whether or not such shares are Dissenting Shares. The
Merger and other related transactions disclosed to Houlihan Lokey all referred
to collectively herein as the "Transaction".
You have requested our opinion (the "Opinion") as to the matters set forth
below. The Opinion does not address the Company's underlying business decision
to effect the Transaction. We have not been requested to, and did not, solicit
third party indications of interest in acquiring all or any part of the Company.
Furthermore, at your request, we have not negotiated the Transaction or advised
you with respect to alternatives to it.
In connection with this Opinion, we have made such reviews, analyses and
inquiries as we have deemed necessary and appropriate under the circumstances.
Among other things, we have:
1. reviewed the Company's annual reports to shareholders on Form 10-K for
the fiscal years ended 1996 and quarterly reports on Form 10-Q for the
quarter ended March 31, 1997, and Company-prepared interim financial
statements for the period ended May 31, 1997, which the Company's
management has identified as being the most current financial statements
available;
2. reviewed copies of the following agreements:
Agreement and Plan of Merger dated August 12, 1997 by and among TCI
Music, Inc., TCI Music Acquisition Sub, Inc., and The Box Worldwide,
Inc.;
3. met with certain members of the senior management of the Company to
discuss the operations, financial condition, future prospects and
projected operations and performance of the Company, and met with
representatives of the Company's investment bankers to discuss certain
matters;
4. reviewed forecasts and projections prepared by the Company's management
with respect to the Company for the years ended December 31, 1997
through 2002;
5. reviewed the historical market prices and trading volume for the
Company's publicly traded securities;
6. reviewed certain other publicly available financial data for certain
companies that we deem comparable to the Company, and publicly available
prices and premiums paid in other transactions that we considered
similar to the Transaction;
7. conducted such other studies, analyses and inquiries as we have deemed
appropriate.
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The Board of Directors
The Box Worldwide, Inc.
August 12, 1997
We have relied upon and assumed, without independent verification, that the
financial forecasts and projections provided to us have been reasonably prepared
and reflect the best currently available estimates of the future financial
results and condition of the Company, and that there has been no material change
in the assets, financial condition, business or prospects of the Company since
the date of the most recent financial statements made available to us.
We have not independently verified the accuracy and completeness of the
information supplied to us with respect to the Company and do not assume any
responsibility with respect to it. We have not made any physical inspection or
independent appraisal of any of the properties or assets of the Company. Our
opinion is necessarily based on business, economic, market and other conditions
as they exist and can be evaluated by us at the date of this letter.
Based upon the foregoing, and in reliance thereon, it is our opinion that
the consideration to be received by the Public Stockholders of the Company in
connection with the Transaction is fair to them from a financial point of view.
HOULIHAN LOKEY HOWARD & ZUKIN FINANCIAL ADVISORS, INC.
/s/ Houlihan Lokey Howard & Zukin Financial Advisors, Inc.
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APPENDIX IV
SECTIONS 607.1301, 607.1302 AND 607.1320
OF THE FLORIDA BUSINESS CORPORATION ACT
607.1301. Dissenter's Rights: Definitions
The following definitions apply to Sections 607.1302 and 607.1320:
(1) "Corporation" means the issuer of the shares held by a dissenting
shareholder before the corporate action or the surviving or acquiring
corporation by merger or share exchange of that issuer.
(2) "Fair value," with respect to a dissenter's shares, means the value of
the shares as of the close of business on the day prior to the shareholders'
authorization date, excluding any appreciation or depreciation in anticipation
of the corporate action unless exclusion would be inequitable.
(3) "Shareholders' authorization date" means the date on which the
shareholders' vote authorizing the proposed action was taken, the date on which
the corporation received written consents without a meeting from the requisite
number of shareholders in order to authorize the action, or, in the case of a
merger pursuant to Section 607.1104, the day prior to the date on which a copy
of the plan of merger was mailed to each shareholder of record of the subsidiary
corporation.
607.1302. Right of Shareholders to Dissent.
(1) Any shareholder of a corporation has the right to dissent from, and
obtain payment of the fair value of his shares in the event of, any of the
following corporate actions:
(a) Consummation of a plan of merger to which the corporation is a party:
1. If the shareholder is entitled to vote on the merger, or
2. If the corporation is a subsidiary that is merged with its parent
under 607.1104, and the shareholders would have been entitled to vote on
action taken, except for the applicability of Section 607.1104;
(b) Consummation of a sale or exchange of all, or substantially all, of the
property of the corporation, other than in the usual and regular course of
business, if the shareholder is entitled to vote on the sale or exchange
pursuant to Section 607.1202, including a sale in dissolution but not including
a sale pursuant to court order or a sale for cash pursuant to a plan by which
all or substantially all of the net proceeds of the sale will be distributed to
the shareholders within 1 year after the date of sale;
(c) As provided in Section 607.0902(1), the approval of a control-share
acquisition;
(d) Consummation of a plan of share exchange to which the corporation is a
party as the corporation the shares of which will be acquired, if the
shareholder is entitled to vote on the plan;
(e) Any amendment of the articles of incorporation if the shareholder is
entitled to vote on the amendment and if such amendment would adversely affect
such shareholder by:
1. Altering or abolishing any preemptive rights attached to any of his
shares;
2. Altering or abolishing the voting rights pertaining to any of his
shares, except as such rights may be affected by the voting rights of new
shares then being authorized or any existing or new class or series of
shares;
3. Effecting an exchange, cancellation, or reclassification or any of
his shares, when such exchange, cancellation, or reclassification would
alter or abolish his voting rights or alter his percentage of equity in the
corporation, or effecting a reduction or cancellation of accrued dividends
or other arrearages in respect to such shares;
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4. Reducing the stated redemption price of any of his redeemable
shares, altering or abolishing any provision relating to any sinking fund
for the redemption or purchase of any of his shares, or making any of his
shares subject to redemption when they are not otherwise redeemable;
5. Making noncumulative, in whole or in part, dividends of any of his
preferred shares which had theretofore been cumulative;
6. Reducing the stated dividend preference of any of his preferred
shares; or
7. Reducing any stated preferential amount payable on any of his
preferred shares upon voluntary or involuntary liquidation; or
(f) Any corporate action taken, to the extent the articles of incorporation
provide that a voting or nonvoting shareholder is entitled to dissent and obtain
payment for his shares.
(2) A shareholder dissenting from any amendment specified in paragraph
(1)(e) has the right to dissent only as to those of his shares which are
adversely affected by the amendment.
(3) A shareholder may dissent as to less than all the shares registered in
his name. In that event, his rights shall be determined as if the shares as to
which he has dissented and his other shares were registered in the name of
different shareholders.
(4) Unless the articles of incorporation otherwise provide, this section
does not apply with respect to a plan of merger or share exchange or a proposed
sale or exchange of property, to the holders of shares of any class or series
which, on the record date fixed to determine the shareholders entitled to vote
at the meeting of shareholders at which such action is to be acted upon or to
consent to any such action without a meeting, were either registered on a
national securities exchange or designated as a national market system security
on an interdealer quotation system by the National Association of Securities
Dealers, Inc., or held of record by not fewer than 2,000 shareholders.
(5) A shareholder entitled to dissent and obtain payment for his shares
under this section may not challenge the corporate action creating his
entitlement unless the action is unlawful or fraudulent with respect to the
shareholder or the corporation.
607.1320. PROCEDURE FOR EXERCISE OF DISSENTERS' RIGHTS
(1)(a) If a proposed corporate action creating dissenters' rights under
Section 607.1302 is submitted to a vote at a shareholders' meeting, the meeting
notice shall state that shareholders are or may be entitled to assert
dissenters' rights and be accompanied by a copy of Sections 607.1301, 607.1302,
and 607.1320. A shareholder who wishes to assert dissenters' rights shall:
1. Deliver to the corporation before the vote is taken written notice
of his intent to demand payment for his shares if the proposed action is
effectuated, and
2. Not vote his shares in favor of the proposed action. A proxy or
vote against the proposed action does not constitute such a notice or
intent to demand payment.
(b) If proposed corporate action creating dissenters' rights under Section
607.1302 is effectuated by written consent without a meeting, the corporation
shall deliver a copy of Sections 607.1301, 607.1302, and 607.1320 to each
shareholder simultaneously with any request for his written consent or, if such
a request is not made, within 10 days after the date the corporation received
written consents without a meeting from the requisite number of shareholders
necessary to authorize the action.
(2) Within 10 days after the shareholders' authorization date, the
corporation shall give written notice of such authorization or consent or
adoption of the plan of merger, as the case may be, to each shareholder who
filed a notice of intent to demand payment for his shares pursuant to paragraph
(1)(a) or, in the case of action authorized by written consent, to each
shareholder, excepting any who voted for, or consented in writing to, the
proposed action.
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(3) Within 20 days after the giving of notice to him, any shareholder who
elects to dissent shall file with the corporation a notice of such election,
stating his name and address, the number, classes, and series of shares as to
which he dissents, and a demand for payment of the fair market value of his
shares. Any shareholder failing to file such election to dissent within the
period set forth shall be bound by the terms of the proposed corporate action.
Any shareholder filing an election to dissent shall deposit his certificates for
certificated shares with the corporation simultaneously with the filing of the
election to dissent. The corporation may restrict the transfer of uncertificated
shares from the date the shareholder's election to dissent is filed with the
corporation.
(4) Upon filing a notice of election to dissent, the shareholder shall
thereafter be entitled only to payment as provided in this section and shall not
be entitled to vote or to exercise any other rights of a shareholder. A notice
of election may be withdrawn in writing by the shareholder at any time before an
offer is made by the corporation, as provided in subsection (5), to pay for his
shares. After such offer, no such notice of election may be withdrawn unless the
corporation consents thereto. However, the right of such shareholder to be paid
the fair value of his shares shall cease, and he shall be reinstated to have all
his rights as a shareholder as of the filing of his notice of election,
including any intervening preemptive rights and the right to payment of any
intervening dividend or other distribution or, if any such rights have expired
or any such dividend or distribution other than in cash has been completed, in
lieu thereof, at the election of the corporation, the fair value thereof in cash
as determined by the board as of the time of such expiration or completion, but
without prejudice otherwise to any corporate proceedings that may have been
taken in the interim, if:
(a) Such demand is withdrawn as provided in this section;
(b) The proposed corporate action is abandoned or rescinded or the
shareholders revoke the authority to effect such action;
(c) No demand or petition for the determination of fair value by a court
has been made or filed within the time provided in this section; or
(d) A court of competent jurisdiction determines that such shareholder is
not entitled to the relief provided by this section.
(5) Within 10 days after the expiration of the period in which shareholders
may file their notices of election to dissent, or within 10 days after such
corporate action is effected, whichever is later (but in no case later than 90
days from the shareholders' authorization date), the corporation shall make a
written offer to each dissenting shareholder who has made demand as provided in
this section to pay an amount the corporation estimates to be the fair value of
such shares. If the corporate action has not been consummated before the
expiration of the 90-day period after the shareholders' authorization date, the
offer may be made conditional upon the consummation of such action. Such notice
and offer shall be accompanied by:
(a) A balance sheet of the corporation, the shares of which the dissenting
shareholder holds, as of the latest available date and not more than 12 months
prior to the making of such offer; and
(b) A profit and loss statement of such corporation for the 12-month period
ended on the date of such balance sheet or, if the corporation was not in
existence throughout such 12-month period, for the portion thereof during which
it was in existence.
(6) If within 30 days after the making of such offer any shareholder
accepts the same, payment for his shares shall be made within 90 days after the
making of such offer or the consummation of the proposed action, whichever is
later. Upon payment of the agreed value, the dissenting shareholder shall cease
to have any interest in such shares.
(7) If the corporation fails to make such offer within the period specified
therefor in subsection (5) or if it makes the offer and any dissenting
shareholder or shareholders fail to accept the same within the period of 30 days
thereafter, then the corporation, within 30 days after receipt of written demand
from any dissenting shareholder given within 60 days after the date on which
such corporate action was effected, shall, or at its election at any time within
such period of 60 days may, file an action in any court of competent
jurisdiction in
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the county in this state where the registered office of the corporation is
located requesting that the fair value of such shares be determined. The court
shall also determine whether each dissenting shareholder, as to whom the
corporation requests the court to make such determination, is entitled to
receive payment for his shares. If the corporation fails to institute the
proceeding as herein provided, any dissenting shareholder may do so in the name
of the corporation. All dissenting shareholders (whether or not residents of
this state), other than shareholders who have agreed with the corporation as to
the value of their shares, shall be made parties to the proceeding as an action
against their shares. The corporation shall serve a copy of the initial pleading
in such proceeding upon each dissenting shareholder who is a resident of this
state in the manner provided by law for the service of a summons and complaint
and upon each nonresident dissenting shareholder either by registered or
certified mail and publication or in such other manner as is permitted by law.
The jurisdiction of the court is plenary and exclusive. All shareholders who are
proper parties to the proceeding are entitled to judgment against the
corporation for the amount of the fair market value of their shares. The court
may, it so elects, appoint one or more persons as appraisers to receive evidence
and recommend a decision on the question of fair value. The appraisers shall
have such power and authority as is specified in the order of their appointment
or an amendment thereof. The corporation shall pay each dissenting shareholder
the amount found to be due him within 10 days after final determination of the
proceedings. Upon payment of the judgment, the dissenting shareholder shall
cease to have any interest in such shares.
(8) The judgment may, at the discretion of the court, include a fair rate
of interest, to be determined by the court.
(9) The costs and expenses of any such proceeding shall be determined by
the court and shall be assessed against the corporation, but all or any part of
such costs and expenses may be apportioned and assessed as the court deems
equitable against any or all of the dissenting shareholders who are parties to
the proceeding, to whom the corporation has made an offer to pay for the shares,
if the court finds that the action of such shareholders in failing to accept
such offer was arbitrary, vexatious, or not in good faith. Such expenses shall
include reasonable compensation for, and reasonable expenses of, the appraisers,
but shall exclude the fees and expenses of counsel for, and experts employed by,
any party. If the fair value of the shares, as determined, materially exceeds
the amount which the corporation offered to pay therefor or if no offer was
made, the court in its discretion may award to any shareholder who is a party to
the proceeding such sum as the court determines to be reasonable compensation to
any attorney or expert employed by the shareholder in the proceeding.
(10) Shares acquired by a corporation pursuant to payment of the agreed
value thereof or pursuant to payment of the judgment entered therefor, as
provided in this section, may be held and disposed of by such corporation as
authorized but unissued shares of the corporation, except that, in the case of a
merger, they may be held and disposed of as the plan of merger otherwise
provides. The shares of the surviving corporation into which the shares of such
dissenting shareholders would have been converted had they assented to the
merger shall have the status of authorized but unissued shares of the surviving
corporation.
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APPENDIX V
================================================================================
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 9, 1997.
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[ ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1997
OR
[X] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from October 1, 1996 to June 30, 1997(1).
COMMISSION FILE NUMBER 0-22815
TCI MUSIC, INC.(1)
(Exact name of registrant as specified in its charter)
<TABLE>
<C> <C>
DELAWARE 84-1380293
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
8101 EAST PRENTICE AVENUE, SUITE 500 80111
ENGLEWOOD, CO (Zip Code)
(Address of principal executive offices)
</TABLE>
Registrant's telephone number, including area code: (303) 267-5500
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 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 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. [X]
Unless otherwise specifically indicated, all monetary references in this
filing are in U.S. dollars.
As of June 30, 1997 the aggregate market value of the Common Stock held by
non-affiliates of DMX Inc. was approximately $39,763,000.
Number of shares of Common Stock of DMX Inc. outstanding as of June 30,
1997: 59,586,594 shares, excluding 85,630 shares held as Treasury Stock.
- ---------------
(1) This Transition Report on Form 10-K is filed by TCI Music, Inc. with respect
to its predecessor DMX Inc. TCI Music, Inc. became the successor to DMX Inc.
on July 11, 1997 upon the consummation of the merger of DMX Inc. with a
wholly owned subsidiary of TCI Music, Inc., pursuant to which DMX Inc.
became a wholly owned subsidiary of TCI Music, Inc. Such merger was deemed
effective July 1, 1997 for accounting purposes and the reporting period
covers the transition period from the end of DMX Inc.'s last fiscal year,
September 30, 1996 through June 30, 1997.
================================================================================
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TABLE OF CONTENTS
<TABLE>
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PAGE
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<S> <C> <C>
PART I
Item 1. Business.................................................... A-V-3
Item 2. Properties.................................................. A-V-19
Item 3. Legal Proceedings........................................... A-V-20
Item 4. Submission of Matters to a Vote of Security Holders......... A-V-20
PART II
Item 5. Market for DMX Inc.'s Common Equity and Related Stockholder
Matters..................................................... A-V-21
Item 6. Selected Financial Data..................................... A-V-22
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of
Operations.................................................. A-V-23
Item 8. Financial Statements and Supplementary Data................. A-V-27
Item 9. Changes In and Disagreements with Accountants on Accounting
and Financial
Disclosure.................................................. A-V-27
PART III
Item 10. Directors and Executive Officers of DMX Inc................. A-V-28
Item 11. Executive Compensation...................................... A-V-30
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................. A-V-34
Item 13. Certain Relationships and Related Transactions.............. A-V-36
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form
8K.......................................................... A-V-38
</TABLE>
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PART I
ITEM 1. BUSINESS.
GENERAL DEVELOPMENT OF BUSINESS.
On July 11, 1997, DMX Inc. and TCI Music, Inc. ("TCI Music"), a wholly
owned subsidiary of Tele-Communications, Inc. ("TCI") 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 Inc., TCI, TCI Music, and TCI Merger Sub, Inc. ("Merger
Sub"), a wholly owned subsidiary of TCI Music, whereby Merger Sub was merged
with and into DMX Inc. (the "Merger") with DMX Inc. as the surviving
corporation.
In connection with the Merger, TCI and TCI Music entered into a
Contribution Agreement dated July 11, 1997 (the "Contribution Agreement").
Pursuant to the Contribution Agreement: (i) TCI Music issued to TCI (as designee
of certain of its indirect subsidiaries) 62,500,000 shares of Series B Common
Stock, par value $0.01 per share, of TCI Music and a promissory note in the
amount of $40 million; (ii) until December 31, 2006 certain subsidiaries of TCI
will transfer to TCI Music the right to receive all revenue from sales of DMX
Inc.'s 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 Inc. as license fees for DMX
Inc.'s music services under affiliation agreements currently in effect
("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 Inc. 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 among TCI, TCI Music and the Bank of New York, as Rights Agent.
Each Right entitles the holder 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 TCI Series A TCI
Group Common Stock ("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 common stock,
$.01 par value per share, of DMX Inc. was converted into the right to receive
(i) one-quarter 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 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 collectively represent 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.
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Effective July 11, 1997, TCI Music, as the successor registrant to DMX
Inc., determined to change its fiscal year end from September 30 to December 31,
and reports the nine month transition period ended June 30, 1997 on the
Transition Report on Form 10-K, herein.
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 ("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 shares of TCI
Music Series A Common Stock into which the 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 Series B Common Stock of TCI Music.
Unlike the shares of TCI Music Series A Common Stock issued to former
stockholders of DMX Inc., 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 TCI Music 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 56.4% 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.
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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 $24 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 $5,000,000.
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.
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.
BUSINESS OF DMX INC.
DMX Inc. 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.
DMX Inc.'s operations are comprised of those of DMX Inc. and its three (3)
wholly owned subsidiaries: 450714 B.C. Ltd., a British Columbia corporation,
formed for the purpose of holding DMX Inc.'s equity interest in its Canadian
joint venture with Shaw Communications Inc. ("Shaw"), the second largest cable
operator in Canada (see "Business -- International Business"); TEMPO Sound, Inc.
("TEMPO"), an Oklahoma corporation, which DMX Inc. acquired from TCI in April
1979, in exchange for approximately 224,000 shares of common stock of DMX Inc.
TEMPO is engaged in a joint venture with an affiliate of 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 N.V. 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 such date.
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. DMX-E UK
was placed into receivership on
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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 as of December 18, 1996 (the "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 a termination certificate was executed in July 1997, which terminated
the Stock Purchase Agreement dated December 18, 1996 that provided for the
disposition of DMX-E to Mr. Jerold H. Rubinstein. Pursuant to the Definitive
Agreements, 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. At June 30, 1997 the estimated loss on disposal
of DMX-E was accounted for in DMX Inc.'s consolidated financial statements.
Certain statements in this Transition Report on Form 10-K (this "Report")
constitute "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. Such forward-looking statements
involve known and unknown risks, uncertainties and other important factors that
could cause the actual results, performance or achievements of TCI Music, Inc.
and subsidiaries ("the Company"), or industry results, to differ materially from
any future results, performance or achievements expressed or implied by such
forward-looking statements. Such risks, uncertainties and other factors include,
among others: general economic and business conditions and industry trends; the
continued strength of the multichannel video programming distribution industry
and the satellite services industry; uncertainties inherent in proposed business
strategies and development plans; future financial performance, including
availability, terms and deployment of capital; availability of qualified
personnel; changes in, or the failure or the inability to comply with,
government regulation, including, without limitation, regulations of the Federal
Communications Commission, and adverse outcomes from regulatory proceedings;
changes in the nature of key strategic relationships with partners and joint
venturers; competitor responses to the Company's products and services, and the
overall market acceptance of such products and services, including acceptance of
the pricing of such products and services; and other factors referenced in this
Report. These forward-looking statements speak only as of the date of this
Report. The Company expressly disclaims any obligation or undertaking to
disseminate any updates or revisions to any forward-looking statement contained
herein to reflect any change in the Company's expectations with regard thereto
or any change in events, conditions or circumstances on which any such statement
is based.
DMX Inc. is primarily engaged in programming, distributing and marketing a
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 96 formats, respectively. In addition DMX Inc. currently
has over 133 titles in its DMX-Disc library catalogue for on-premise
distribution. DMX Inc. 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.
Cable Distribution -- 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 DMX tuner to their stereo systems. DMX is delivered in 30 different music
formats for cable distribution. DMX Inc. expects
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the existing analog technology used in this form of distribution to gradually be
replaced by digital compression technology using a wider bandwidth and
potentially allowing for carriage of significantly more music formats.
Direct Broadcast Satellite -- Since the June 1994 launch of the music
services on the Ku-Band satellite, DMX Inc. 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 connect
through a DMX receiver to a subscriber's sound system. Currently, DMX offers 96
different music formats through this DBS distribution. In October 1995, DMX Inc.
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 music service is also available
through digital program providers such as PRIMESTAR Partners, L.P.
("PRIMESTAR"), and Headend In the Sky by TCI ("HITS"), 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 through their satellite provider's
standard equipment package.
DMX-Disc -- 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 DMX Inc.'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 DMX Inc. 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.
DMX Inc. believes that DMX is differentiated from other sources of audio
programming currently available to residential and commercial consumers.
Subscribers currently receive 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".)
DMX is carried by more than 885 affiliates comprised of cable systems,
owned and operated offices, DBS program providers and independent franchises in
49 states. DMX currently is accessible to more than 18 million cable subscribers
and 11 million businesses in the United States.
GOALS AND STRATEGIES.
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 enhance the
marketing, distribution and subscriber penetration levels of DMX and, (3) to
maintain its market position as a leader in digital audio through an emphasis on
superior programming and technology.
DMX Inc. 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. DMX Inc. 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
DMX Inc. has: (i) entered into affiliation agreements with over 50 U.S. cable
operators; (ii) entered into distribution agreements with a DBS programming
provider; (iii) entered into distribution agreements for DMX in Canada, Mexico,
Latin America, Africa and the Caribbean; and (iv) obtained distribution on HITS,
a new distribution technology utilizing digital compression. The focus to gain
wide distribution of DMX is intended to provide DMX Inc. with greater market
share and limit the market development potential of its competitors.
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DOMESTIC BUSINESS.
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, DMX Inc. 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 DMX Inc. 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 DMX Inc.
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 DMX Inc. 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 services available to subscribers due to increased band-width.
This transition will commence with the roll-out of TCI's digital programming
package in the latter part of 1997.
Cable Affiliate Sales. The acquisition of subscribers is a joint effort
between DMX Inc. and the cable affiliate. To support its affiliates' marketing
efforts, DMX Inc. 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, DMX Inc. 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.
Cable operators have recently begun to launch a new method of distributing
video and other programming using digital compression technology. Digital
compression technology can compress, on average, as many as 14 of the current
analog video signals into the space normally occupied by one. Such technology
improves picture quality and allows for carriage of significantly more video
product offerings ("Digital Distribution") without cable operators having to
build a new cable plant. The technology is distributed through HITS, that
enables TCI and each other participating cable operator to increase their
program offerings and create new packages that could include, if they so choose,
DMX music services as part of a package of video and music services. The
technology permits subscribers to receive video and music signals through a
single standard set-top-tuner or "box" without the use of a separate tuner for
music, as is currently the case. TCI conducted a beta test of its Digital
Distribution in late 1996 and began offering such service to selected paying
customers in three test markets during the first quarter of 1997.
The launch of digital compression technology has the potential to provide
an additional distribution market for DMX music services if cable operators
utilizing Digital Distribution, such as TCI, elect to offer DMX music services
as part of one or more digital video programming packages, thereby capturing as
subscribers customers who might not otherwise elect to subscribe to DMX music
services on an a la carte basis. However, the launch of and the transition to
Digital Distribution may also have the effect of materially reducing residential
subscriber fee revenues as a result of the expected change from the a la carte
fee structure currently in effect. DMX Inc. does not expect the launch of
Digital Distribution to affect the current rate structure for commercial cable
subscribers or DBS Distribution.
DMX Inc. expects that license fees paid by cable operators for Digital
Distribution that include DMX music services in their digital packages will be
much lower than the a la carte fees now paid under affiliation
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agreements currently in effect. While a substantial increase in the overall
number of residential subscribers purchasing digital packages that include DMX
music services could result in revenues equal to or exceeding the revenues from
residential subscribers currently electing to purchase DMX services for a
separate a la carte fee, such a result depends on a number of factors over which
TCI Music has no control, including whether cable operators elect to include DMX
music services as part of their digital packages, the acceptance by consumers of
the digital products and whether those electing to purchase the digital packages
are already DMX subscribers. Neither TCI Music nor DMX Inc. can predict the
number of DMX residential subscribers that will elect to receive a digital
package that includes DMX when it is offered.
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. Such distribution commitments
are represented by contracts, or "affiliation agreements" reached between DMX
Inc. 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. DMX Inc. 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 DMX Inc. for
each DMX residential subscriber. Certain of the MSOs affiliated with DMX Inc.
have also made direct equity investments in the common stock of DMX Inc.
In 1989, TCI entered into a series of agreements with DMX Inc. which
resulted in the acquisition of approximately 2.0 million shares of DMX Inc.'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. During 1995 and 1996, TCI increased their
interest to approximately 45% of the outstanding common stock of DMX Inc.
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. were exchanged
for TCI's 49% interest in DMX-E. On July 11, 1997, DMX Inc. 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
among DMX Inc., TCI, TCI Music, and Merger Sub, whereby Merger Sub was merged
with and into DMX Inc. with DMX Inc. as the surviving corporation. During fiscal
years 1995, 1996 and for the nine months ended June 30, 1997, TCI accounted for
approximately 61%, 53% and 50% of DMX Inc.'s residential cable revenues,
respectively.
Direct-to-Home ("DTH") Sales.
Direct Sales. In October 1995, DMX Inc. 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 DMX Inc.'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.
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.
Third Party DBS Sales. In October 1995, PRIMESTAR, a DBS distributor of
packaged programming to the residential market, launched its service with
carriage of DMX. DMX Inc.'s agreement with PRIMESTAR requires PRIMESTAR to pay a
per subscriber license fee to DMX Inc. 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 July 1997, there were approximately 1,800,000 PRIMESTAR DMX
subscribers.
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Commercial Service.
The U.S. business marketplace has approximately 7.4 million business
establishments in the top 337 metropolitan statistical areas, according to
Equifax/National Data Systems. Approximately 60% of these businesses use some
form of background music, based on marketing research performed by DMX Inc.
DMX distributes its programming services to the commercial marketplace
through its Commercial Division under the brand name DMX for Business(R). 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 two regional direct sales channels owned
and operated by DMX Inc.
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 DMX Inc.'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 DBS distribution of DMX became available via AT&T's Telstar
402R 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.
DMX Inc.'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 DMX Inc.'s performance standards, it
could lose its DMX affiliation. DMX Inc. 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 for 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.
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 3 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.
DMX Inc. 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 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.
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Owned and Operated Accounts. In May 1995, DMX Inc. 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. DMX Inc. is expanding its
O&O markets and has recently opened three new offices in Phoenix, Arizona,
Atlanta, Georgia and Miami, Florida. The O&OS sell 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&OS 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 average contract term ranges from 48 to 60
months for such customer contracts.
The Sound Solutions Center. DMX Inc. has established a customer service
center, The Sound Solutions Center which provides ongoing professional
management, training and support required to ensure that DMX subscribers receive
the high quality service demanded by the competitive marketplace. The support
services required by the music subscribers are often 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.
INTERNATIONAL BUSINESS.
Although DMX Inc. has recently focused on domestic growth, it continues to
review opportunities in distributing DMX in foreign markets. DMX Inc. has
licensing and royalty arrangements that cover Canada, Mexico, Latin America, the
Caribbean and Sub-Saharan Africa and continues to evaluate other possible joint
relationships to enhance the international distribution of DMX.
Europe.
In connection with the ceased operations of DMX-E on July 1, 1997 and the
definitive agreements entered into between DMX Inc., Jerold H. Rubinstein and
XTRA, XTRA has 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 DMX Inc.'s trademarks for two years. However, the
music service is currently not being distributed. (See "Business -- General
Development of Business".)
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 entered into a licensing and royalty agreement with DMX Inc.
which provides for a monthly per subscriber royalty for both residential and
commercial distribution. DMX Inc., through its subsidiary 450714 B.C. Ltd., is a
partner in 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 DMX Inc. to provide subscription-based music
service to homes in Canada which requires special programming mandated by the
CRTC for the Canadian residential market. DMX is currently offered by DMX-Canada
to residential subscribers.
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.
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In addition to forming DMX-Canada, Shaw has invested in DMX Inc. by
purchasing stock in private placements and making open market purchases, and
held approximately 14% of the outstanding common stock of DMX Inc. as of June
30, 1997. (See "Security Ownership of Certain Beneficial Owners and
Management".)
Latin America and The Caribbean.
On December 10, 1996, DMX Inc. entered into a letter agreement with Sky
Entertainment Services in Latin America ("Sky-LA"), pursuant to which Sky-LA was
granted the right to carry up to 40 DMX music formats on the Mexican, Brazilian
and South American platforms of Sky-LA. 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 News Corporation, Limited; and Tele-Communications International, Inc.
(the "Sky Entertainment Alliance"). Tele-Communications International, Inc. is a
subsidiary of TCI.
Africa.
During 1995, DMX Inc. 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
customers in South Africa. DMX Inc. 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 100,000 subscribers.
THE SUPERAUDIO SERVICE.
In May 1990, DMX Inc.'s subsidiary, Tempo, entered into the Galactic/Tempo
joint venture agreement with an affiliate of 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 DMX Inc.'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. 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.
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PROGRAMMING.
DMX Inc. believes that the primary consumer appeal of DMX is its
programming content. DMX Inc. has researched and refined each of its current 96
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:
CLASSICAL
Chamber Music
#Classical Guitar
#Lite Classical
#Opera
Symphonic
INSTRUMENTAL
Beautiful Instrumentals
#Contemporary Instrumentals
New Age
#Piano
JAZZ
#Acid Jazz
Classic Jazz
#Dixieland
#Jazz Vocal Blends
#Lite Jazz
COUNTRY
#Bluegrass
#Hot Country
Modern Country
Traditional Country
POP/ADULT CONTEMPORARY
Adult Contemporary
#Classic Hits Blend
Folk Rock
#Hit Sweep
Hottest Hits
Love Songs
#New Adult Contemporary
#New Music
#Power Hits
#Soft Hits
OLDIES
50's Oldies
60's Oldies
#70's Oldies
#80's Oldies
Big Band/Swing
#Euro Oldies
#Upbeat Oldies
ROCK
Album Rock
Alternative Rock
Classic Rock
Heavy Metal
URBAN
Dance
Gospel
#Motor City Sound
#R&B/Rap Hits
Rap
Traditional Blues
Urban Adult Contemporary
SPECIALTY
#Beach Party
#Cajun
#Children's
Christian Inspirational
#Contemporary Christian
#Contemporary Blues
#Environmental Sounds
#Folk Music
Great Singers
#Hawaiian Music
#Polka
Show Tunes
Holiday Music
#The Mirage Channel**
LATIN
#Brazilian Music
#Cumbia
#Flamenco Music
#Latin Contemporary
#Mariachi
#Rock en Espanol
Salsa
Tejano
INTERNATIONAL
#African Rhythms
#Caribbean Music
#Chinese Music
#Danish Hits
#Dutch Hits
#Euro Hits
#Flemish Music
#French Hits
#German Easy Listening
#German Folk Music
#German Oldies/Schlager
#German Rock
#Greek Music
#Hebrew Music
#Indian Music
#Irish Music
#Italian Hits
#Japanese Music
#Norwegian Music
#Oriental/Eastern Mediterranean
#Quebec Hits
#Quebec Pop/Rock
#Quebec Soft Hits
Reggae
#Traditional Italian
#Turkish Music
#U.K. Hits
#World Beat
# Expanded formats available only on DBS service
** The Mirage Channel is for the exclusive use of Mirage Resorts Incorporated
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DMX Inc. seeks consumer feedback on DMX programming to help determine when
to add or change formats to meet the ever changing tastes of its listeners. DMX
Inc. 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 DMX Inc. with demographic and subscriber preference
information.
DMX Inc. 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 DMX Inc.'s studio operations where
the DMX service is originated. DMX Inc. has developed a sophisticated system of
programming, originating and distributing the DMX service. This process involves
the use of certain software and hardware for selecting songs and encoding the
music information into a data stream, which then is uplinked to DMX Inc.'s
satellites for delivery to its cable affiliates and DBS customers. The same
programming process is used in developing DMX-Disc custom four hour CDs, which
are maintained in a library catalogue for replication and distribution to DMX
Inc.'s DMX-Disc customers.
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 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, DMX Inc.
expanded its DMX programming from the 30 formats available by cable to a 120
channel capacity DBS system. There are currently 96 channels available for
commercial subscribers and DMX Inc. plans to continue expanding its music
line-up. DMX Inc. believes this will further enhance the appeal of DMX by
offering greater choice and flexibility to commercial subscribers. 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.
MARKETING.
DMX Inc.'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 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 Inc.'s affiliate marketing focus is to support cable operators and
other DMX distributors by providing creative and integrated marketing campaigns
and 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; 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#DJ(R)
program guide explaining the use of the DMX#DJ and format description.
DMX for Business marketing programs include: sales literature, trade
advertising, participation in local trade shows, and direct mail. Within
National Accounts and O&O, the Commercial 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;
and Audiocom, one of the nation's leading providers of customized business
messaging, for message production services. 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
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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.
TECHNOLOGY.
DMX Inc. has rights to use the 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 (other than there receiving DMX
via Digital Distribution) 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#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#DJ using a liquid crystal display.
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.
cable transmission and was also used for European cable transmission. AC-3 is
currently used for U.S. DBS transmission. MUSICAM was used for European DTH
transmission and could ultimately replace SuperSound for European cable
transmission. DMX Inc. 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.
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, DMX Inc. 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 DMX Inc.'s web page. In addition, DMX Inc. will
continue to develop enhancements to the DMX service and other upgrades to its
technology as may be required. DMX Inc. 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 AC-3
encoded under the M-Peg transmission technology, to be compatible with the
General Instrument digital boxes being used with HITS. The current DMX#DJ is in
the process of being redesigned as the existing remote does not work with the
new digital boxes.
SATELLITES.
C-Band Transmission. DMX Inc. 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. DMX Inc. began using the
satellite in Spring 1993. This satellite is used
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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 Loral Telstar 4 satellite, formerly known
as 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 Loral.
Although there has never been sustained interruption of DMX Inc.'s signals
due to transponder failure or satellite unavailability, failure or loss, no
assurance can be given that such event will not occur in the future. If such an
event were to occur or if WTCI were unable to provide transponder services to
DMX Inc., DMX Inc. would have to seek alternative transponder or satellite
facilities. However, alternative facilities may not be available on a timely or
cost-effective basis and may require the expense of repositioning each DBS
subscriber's satellite dish in order to receive signals from another satellite.
Any one or more of these events would require DMX Inc. to incur additional
expenditures and could degrade DMX Inc.'s ability to serve its customer base and
have may have a material adverse effect on DMX Inc.'s financial condition and
results of operations. If DMX Inc. is required to enter into new transponder
lease agreements, no assurance can be given that it will be able to do so on
terms as favorable as those in its current agreements with WTCI.
MUSIC RIGHTS.
DMX Inc. has entered into agreements or is operating under interim
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 DMX Inc. for all music played on DMX in the
United States.
DMX Inc.'s agreement with ASCAP for commercial distribution was previously
governed by an interim industry wide agreement. A final form of the agreement
covering commercial distribution was finalized in 1995. DMX Inc. signed that
agreement and thus effected a new agreement term through May 1999. The
residential agreement with ASCAP 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, DMX Inc. entered into a new residential agreement
with BMI, with a term extending through September 30, 1999. DMX Inc.'s agreement
with BMI for commercial distribution has expired, and DMX Inc. 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. DMX Inc.'s agreements with SESAC for residential
and commercial distribution both expired in June 1997. Certain of the agreements
that are being negotiated on an industrywide basis over new rate structures may
require retroactive rate increases. DMX Inc. has continued to accrue royalties
that are under negotiations based on its best estimates, after consultation with
legal counsel and consideration of the terms and rates of the expired contracts.
DMX Inc. is currently involved in an arbitration with the Recording
Industry Association of America regarding royalty rates which will be payable to
the sound recordings owners pursuant to the Digital Performance Right in Sound
Recordings Act of 1995 (see "Business -- Copyright and Royalty Provisions").
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.
DMX Inc. currently has one main competitor in the residential marketplace,
Music Choice, formerly known as Digital Cable Radio, a digital audio service
similar to DMX. DMX Inc. principally competes for
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third party cable and DBS affiliations with Music Choice. 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 DMX Inc.'s affiliation agreements prohibit a distributor
from offering a competitive music service. Therefore, DMX Inc. 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,
DMX Inc. 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 networks. Music Choice is carried on DirecTV. Muzak, one of DMX Inc.'s
competitors in the commercial marketplace, secured residential DBS distribution
with Echostar Communication Corporation's DISH Network. DMX Inc. entered into an
agreement with Sky-LA and DMX is currently being offered in Mexico and Latin
America.
DMX Inc. 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 96 options available on DBS.
DMX for Business is competitively priced with other business music services.
DMX-Disc, DMX Inc.'s CD technology, provides an additional distribution
method to better compete in situations which require an on-premise music service
solution. This technology is 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.
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. 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"), the Cable
Television Consumer Protection and Competition Act of 1992 (the "1992 Act"), the
Communications Act of 1934, as amended, and the Cable Communications Policy Act
of 1984, as amended (the "Cable Act"), and to regulation thereunder by the FCC.
The FCC regulates the providers of satellite communications services and
facilities for the transmission of programming services, the cable television
systems that carry such services and to some extent the programming services
themselves. Cable television systems are also regulated by municipalities or
other state and local government authorities. Municipalities generally have the
jurisdiction to grant and to review the transfer of franchises, to review rates
charged to subscribers, and to require public, educational, governmental or
leased-access channels, except to the extent that such jurisdiction is preempted
by federal law. Any such rate regulation or other franchise conditions could
place downward pressure on subscriber fees earned by the providers of cable
television programming, and such regulatory carriage requirements could
adversely affect the number of channels available to carry such programming.
The 1992 Cable Act directed the FCC to promulgate regulations regarding the
sale and acquisition of cable programming between multichannel video program
distributors (including cable operators) and programming services in which a
cable operator has an attributable interest. The legislation and the
implementing regulations adopted by the FCC preclude virtually all exclusive
programming contracts between cable operators and programmers affiliated with
any cable operator (unless the FCC first determines the contract serves the
public interest) and generally prohibit a cable operator which has an
attributable interest in a programmer from improperly influencing the terms and
conditions of sale to unaffiliated multichannel video
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distributors. Further, the 1992 Cable Act requires that such affiliated
programmers make their programming services available to cable operators and
competing video technologies such as MMDS and DBS services on terms and
conditions that do not unfairly discriminate among such technologies. The 1996
Telecom Act has extended this requirement to programming services in which
telephone companies and other common carriers have attributable ownership
interests.
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 DMX Inc.
DMX Inc. believes certain revisions to the Communications Act of 1934
promulgated under the more recent legislative acts set forth above 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.
Program Access and Carriage Agreement provisions in the 1992 Act designed
to protect programmers, and ultimately consumers, from discriminatory practices
by cable system operators, affect programmers such as DMX Inc. 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 DMX Inc. by guaranteeing it access to a
broader market, the MSOs with which DMX Inc. has affiliation agreements, and
which have ownership interests in DMX Inc., are also subject to these provisions
and may not discriminate against other programmers for the benefit of DMX Inc.
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.
An arbitration proceeding relating to residential digital music
distribution is pending before the United States Copyright Office. The purpose
of the proceeding is to determine the statutory license royalty rate to be paid
under the 1995 Act by DMX Inc. (and other digital music residential subscription
services) on services transmitted to non-business subscribers. The proceeding
commenced August 2, 1996. The royalty rate would be retroactive to February
1996, and accordingly, DMX Inc. has been accruing 3% of residential subscriber
fee revenue since such date. Royalty rates of 0.5% by Muzak L.P., 1.25% by DMX
Inc., 2% by Digital Cable Radio Associates, and 41.5% by the Recording Industry
Association of America have been proposed to the
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arbitrators. The results of the arbitration could have an adverse effect on DMX
Inc. if DMX Inc. is required to pay a higher license royalty rate than the rate
at which DMX Inc. has been accruing.
DMX Inc. 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.
DMX Inc. has filed for worldwide trademark registration (including DMX,
Digital Music Express, DMX for Business, DMX#DJ and, through its joint venture
with Jones, Superaudio). DMX Inc. believes that its trademarks are valuable
properties and intends to defend them vigorously.
Under DMX Inc.'s agreements with XTRA, the European company will have the
right to use DMX Inc.'s trademarks for two years (See "Business -- General
Development of Business".)
PERSONNEL.
As of June 30, 1997, DMX Inc. had 125 full-time employees, 33 of whom were
engaged in administration, 58 in sales and marketing, 31 in studio and
programming and 3 in engineering. DMX Inc.'s employees are not covered by any
collective bargaining agreement, and DMX Inc. considers its relations with its
employees to be satisfactory.
ITEM 2. PROPERTIES.
TCI Music's, the successor Registrant, principal executive offices are
located at 8101 East Prentice Avenue, Suite 500, Englewood, Colorado 80111.
DMX Inc.'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 $49,700 which is subject to certain cost of living
adjustments and pro rata property taxes.
DMX Inc. maintained 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 occupied approximately 2,500 square feet and the monthly
rental rate was approximately $4,500. The office was closed in June 1997.
DMX Inc. leases studio facilities in Colorado for the origination and
uplinking of the DMX service. The studio is located at the facilities of
National Digital Television Center, Inc. a subsidiary of TCI ("NDTC"), at 4100
East Dry Creek Road, Littleton, Colorado 80122. The six year lease agreement
with NDTC, that expires on the last day of February 2000, has an automatic one
year renewal and is subject to DMX Inc.'s right to terminate the origination and
uplinking services at any time with 60 days prior notice and upon payment of
early termination fees. NDTC charges DMX Inc. approximately $6,700 for space
rental. In addition, NDTC has provided a capital lease for studio equipment at
the facility which totaled up to $2.2 million with interest at 9.5%. The
outstanding balance of the lease obligation at June 30, 1997 was $1,386,000.
DMX Inc. leased engineering facilities in Southern California located at
3551 Voyager Street, Suites 104 D and F, Torrance, California 90503. These
facilities contained approximately 4,400 square feet and the monthly rental was
$3,400. The office was closed in June 1997.
DMX Inc. maintains a regional sales office in Schaumberg, Illinois 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
$1,800. The five year lease expires in January 2001.
DMX Inc. maintains a regional sales office and its DMX-Disc operations in
Seattle, located at 1417 Fourth Avenue, Suite 800, Seattle, Washington 98101.
The office is approximately 2,400 square feet and the monthly rental rate is
approximately $2,600. The five year lease expires in September 2001.
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DMX Inc. 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
$3,200. The four year lease expires in July 1999.
ITEM 3. LEGAL PROCEEDINGS.
From time to time DMX Inc. 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, DMX Inc. 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, Bhaskar Menon, 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
DMX Inc. by TCI is wrongful, unfair and harmful to DMX Inc.'s public
stockholders and seeking to enjoin the consummation of the Merger. DMX Inc.
believes that this action is without merit and intends to defend it vigorously.
On July 23, 1997, Jeri L. Amstutz, a former employee of DMX Inc., filed a
complaint in Superior Court of California, County of Los Angeles, Jeri L.
Amstutz v. DMX Inc., Otis Smith, Jerold Rubinstein and Does 1 to 100. The
plaintiff alleges certain wrongful employment practices. The plaintiff seeks
compensatory damages for lost wages and benefits, foreseeable consequential and
incidental damages in an unspecified amount, as well a attorneys' fees, costs
and prejudgment interest. The plaintiff also seeks punitive damages and damages
for emotional distress (and similar harm) in unspecified amounts which the
plaintiff claims to believe will exceed $2,000,000.
On July 23, 1997, Marnie Tenden, a former employee of DMX Inc., filed a
complaint in Superior Court of California, County of Los Angeles, Marnie Tenden
v. DMX Inc., Otis Smith, Jerold Rubinstein and Does 1 to 100, which alleges sex
discrimination and retaliatory harassment. The plaintiff seeks compensatory
damages for lost wages and benefits, foreseeable consequential and incidental
damages, as well as attorneys' fees, costs and prejudgment interest. The
plaintiff also seeks punitive damages and damages for emotional distress (and
similar harm) in unspecified amounts which the plaintiff claims to believe will
exceed $500,000.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There were no matters submitted to a vote of DMX Inc.'s security holders
during the third quarter of DMX Inc.'s nine months ended June 30, 1997. However,
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 Inc., TCI, TCI Music and TCI Merger Sub, pursuant to which TCI
Merger Sub was merged with and into DMX Inc. with DMX Inc. as the surviving
Corporation. (See "Business -- General Development of Business".)
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.
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PART II
ITEM 5.MARKET FOR DMX INC.'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
DMX Inc.'s Common Stock was quoted on the OTC Bulletin Board from April 8,
1997 to July 11, 1997. From May 28, 1996 to April 8, 1997, the DMX Common Stock
was quoted in the Nasdaq SmallCap Market under the symbol "TUNE". Until May 28,
1996, the DMX Common Stock was traded on the Nasdaq National Market System.
The following table sets forth the range of high and low sales prices of
DMX Common Stock for the periods indicated:
<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
December, 1996.............................................. 1.938 0.813
March, 1997................................................. 1.183 0.969
June, 1997.................................................. 1.780 1.680
</TABLE>
On June 30, 1997, the closing price reported by Nasdaq was $1.74. As of
June 30, 1997 there were 418 Stockholders of record of DMX Inc. with
approximately 35.3% of the shares held in "street name."
DIVIDENDS.
No dividends have been paid by DMX Inc. as of June 30, 1997.
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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>
NINE MONTHS
ENDED FISCAL YEAR ENDED SEPTEMBER 30,
------------- ---------------------------------------------------------
JUNE 30, 1997 1996 1995 1994 1993
------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA
Revenue.......................... $ 16,594,278 $ 17,326,603 $ 12,773,384 $ 9,377,059 $ 4,792,527
Operating, selling, general and
administrative expenses........ 27,438,525 30,459,586 22,166,898 20,558,849 17,726,103
Depreciation and amortization.... 1,789,024 1,883,415 1,341,775 1,065,666 790,229
Loss on disposal of DMX-
Europe N.V..................... 1,737,554 7,153,278 -- -- --
------------ ------------ ------------ ------------ ------------
Net operating loss............... (14,370,825) (22,169,676) (10,735,289) (12,247,456) (13,723,805)
Equity earnings in Galactic/
TEMPO.......................... 203,436 197,227 306,640 223,852 143,622
Equity loss in DMX-Europe N.V.... -- (11,853,686) (13,271,599) (4,746,239) (3,553,932)
Interest income (expense), net... (397,409) (188,507) 73,540 38,168 85,943
Other income (expense), net...... (142,946) 159,865 547,179 226,461 640,197
------------ ------------ ------------ ------------ ------------
Net loss......................... $(14,707,744) $(33,854,777) $(23,079,529) $(16,505,214) $(16,407,975)
============ ============ ============ ============ ============
Loss per share................... $ (0.25) $ (0.68) $ (0.60) $ (0.48) $ (0.52)
============ ============ ============ ============ ============
BALANCE SHEET DATA
(AT END OF YEAR)
Current assets................... $ 6,186,452 $ 7,719,069 $ 12,122,658 $ 9,650,493 $ 3,102,741
Investments in Galactic/TEMPO
Sound Partnership.............. 557,592 504,156 456,929 450,289 476,448
Goodwill, net of accumulated
amortization................... -- 4,535,658 -- -- 15,459
Other assets, net of accumulated
depreciation................... 109,678 99,148 166,419 55,169 54,000
Property and equipment, net of
accumulated depreciation....... 4,132,173 5,893,988 4,336,378 4,443,995 3,225,093
------------ ------------ ------------ ------------ ------------
Total assets..................... $ 10,985,895 $ 18,752,019 $ 17,082,384 $ 14,599,946 $ 6,873,741
============ ============ ============ ============ ============
Current liabilities.............. $ 22,599,513 $ 16,636,107 $ 3,250,042 $ 3,405,082 $ 3,714,835
Royalty payable.................. 1,773,275 1,773,275 1,251,983 713,421 267,770
Deferred revenue................. 308,895 295,461 376,395 418,540 --
Capital lease obligation......... 821,548 1,401,426 1,446,085 1,502,990 --
Notes payable.................... 1,784,889 -- -- 201,090 382,545
Investment in and advances to
DMX-Europe N.V................. -- -- 15,886,116 8,175,171 3,428,932
------------ ------------ ------------ ------------ ------------
Total liabilities................ 27,288,120 20,106,269 22,210,621 14,416,294 7,794,082
Net stockholders' (deficit)
equity......................... (16,302,225) (1,354,250) (5,128,237) 183,652 (920,341)
------------ ------------ ------------ ------------ ------------
Total liabilities and
stockholders'
equity......................... $ 10,985,895 $ 18,752,019 $ 17,082,384 $ 14,599,946 $ 6,873,741
============ ============ ============ ============ ============
</TABLE>
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ITEM 7.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
RESULTS OF OPERATIONS.
Revenue DMX Inc.
Total revenues, exclusive of revenue from DMX-Europe N.V., for the nine
months ended June 30, 1997 increased to $14.4 million from $12 million for the
nine months ended June 30, 1996. The $2.4 million or 20% increase was primarily
attributed to: (i) 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; (ii) continued growth in PRIMESTAR
residential subscriber fees; 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.
Commercial subscriber fees represented approximately 44% as compared to 34%
of total subscriber fee revenue for the nine months ended June 30, 1997 and
1996, respectively. Residential subscriber fees represented approximately 56%
and 66% of total subscriber fee revenue for the nine months ended June 30, 1997,
and 1996, respectively. Subscriber fee revenue from TCI and its affiliates
represented approximately 50% and 57% of total subscriber fees, for the nine
months ended June 30, 1997 and 1996, respectively.
Total revenues, exclusive of revenue from DMX-Europe N.V., for the fiscal
year ended September 30, 1996 increased to $16.5 million from $12.8 million for
the fiscal year ended September 30, 1995. The $3.7 million or 29% 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, DMX Inc. 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, DMX
Inc.'s commercial division implemented its national accounts sales program, and
in May 1995 launched its first O&O sales group in the Southern California
business market.
Commercial subscriber fees represented approximately 36% as compared to 31%
of total subscriber fee revenue for the fiscal years ended September 30, 1996
and 1995, respectively. Residential subscriber fees represented approximately
64% and 69% 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.
Cable operators have recently begun to launch a new method of distributing
video and other programming using digital compression technology. The technology
enables TCI and each other participating cable operator to increase their
program offerings and create new packages that could include, if they so choose,
DMX music services as part of a package of video and music services.
The launch of digital compression technology has the potential to provide
an additional distribution market for DMX music services if cable operators
utilizing Digital Distribution, such as TCI, elect to offer DMX music services
as part of one or more digital video programming packages, thereby capturing as
subscribers customers who might not otherwise elect to subscribe to DMX music
services on an a la carte basis. However, the launch of and the transition to
Digital Distribution may also have the effect of materially reducing residential
subscriber fee revenues as a result of the expected change from the a la carte
fee structure currently in effect.
DMX Inc. expects that license fees paid by cable operators for Digital
Distribution that include DMX music services in their digital packages will be
much lower than the a la carte fees now paid under affiliation agreements
currently in effect. While a substantial increase in the overall number of
residential subscribers purchasing digital packages that include DMX music
services could result in revenues equal to or exceeding the revenues from
residential subscribers currently electing to purchase DMX services for a
separate a la carte
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fee, such a result depends on a number of factors over which TCI Music has no
control, including whether cable operators elect to include DMX music services
as part of their digital packages, the acceptance by consumers of the digital
products and whether those electing to purchase the digital packages are already
DMX subscribers. Neither TCI Music nor DMX Inc. can predict the number of DMX
residential subscribers that will elect to receive a digital package that
includes DMX when it is offered. Accordingly, DMX Inc. and TCI Music's revenue
could be materially adversely affected.
General and Administrative Expenses.
General and administrative expenses increased to $5.3 million for the nine
months ended June 30, 1997 from $3.9 million for the nine months ended June 30,
1996. The net increase of $1.4 million or 36% was primarily attributed to
increased legal expenses of $978,000 due to issues related to the possible
restructure of DMX-E and the Merger with TCI Music a provision for bad debts of
$810,000; and reduced by decreased salaries expense of $422,000 due to a
performance bonus that was paid to Mr. Rubinstein, the Chairman of DMX Inc. in
the first quarter of the 1996 fiscal year and two executives and other staff
leaving DMX Inc. in the latter half of the 1996 fiscal year; increased rent
expense of $158,000 as DMX Inc. expanded its office premises in the Spring of
1996; and decreased public and shareholder relations expenses of $129,000 as the
Merger transaction was first announced in September 1996 and activities related
to those activities were curtailed.
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 Mr. Rubinstein, 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
DMX Inc. 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.
Sales and Marketing Expenses.
Sales and marketing expense decreased to $5.3 million for the nine months
ended June 30, 1997 from $6.7 million for the nine months ended June 30, 1996.
The $1.4 million or 21% decrease was attributed to a decrease in the Scientific
Atlanta royalty expense of $422,000 as the manufacture, distribution and
servicing agreement with Scientific Atlanta, Inc. terminated in August 1996; a
decrease in net installation cost of $66,000 for commercial accounts as DMX Inc.
typically recoups the cost of installations; decreased warranty service expense
of $112,000; and decreases in marketing and advertising expenses of $224,000,
trade shows and conferences of $170,000, travel and entertainment of $151,000,
and office and other expenses of due to DMX Inc.'s effort to reduce overhead
expenses.
Sales and marketing expense increased to $8.6 million for the fiscal year
ended September 30, 1996 from $7.4 million for 1995. The $1.2 million or 16%
increase included an increase of $477,000 in salaries and commissions resulting
from increased sales and marketing activities of DMX Inc.'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 DMX Inc.'s contribution and marketing activities related to the 1996
Summer Olympics.
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Studio and Programming Expenses.
Studio and programming expense increased to $7.5 million for the nine
months ended June 30, 1997 from $6.6 million for the nine months ended June 30,
1996. The net increase of $932,000 or 14% increase was primarily attributed to
increased music rights expense of $765,000 commensurate with the growth in
subscribers and fee revenue and $334,000 relating to programming expenses
incurred on behalf of DMX-E for the nine months ended June 30, 1997. Prior to
the consolidation of DMX-E financial statements with DMX Inc.'s, these expenses
were charged to DMX-E; however, the benefit of DMX-E's reimbursement has been
eliminated in the consolidated financial statements for the nine months ended
June 30, 1997. These increases were offset by decreased satellite and uplinking
expense of $275,000 due to the double illumination cost as DMX Inc. migrated
from the AT&T Telstar 401 Ku-Band satellite to the Loral Telstar 4 satellite,
formerly known as the AT&T Telstar 402R Ku-Band in 1996.
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%
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 DMX Inc.
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 DMX Inc.'s increase in music formats
from approximately 69 to over 90 over the last year and DMX-Disc production cost
incurred to establish the new on-premise DMX-Disc product line.
Research and Development Expenses.
Research and development expenses included 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 were allocated on a
shared benefit basis with DMX-E in previous years.
Research and development expense was $630,000 for the nine months ended
June 30, 1997 as compared to $588,000 for the nine months ended June 30, 1996.
The increase was primarily related to the severance and cost related to the
close of the engineering office on June 30, 1997.
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 DMX Inc. and DMX-E had been established and new
development of major projects was curtailed.
Stock Bonus and Options Compensation.
Stock bonus and option compensation expense decreased to $137,000 for the
nine months ended June 30, 1997 from $412,000 for nine months ended June 30,
1996 as the expiration date of the grant was December 31, 1996. The expense
related to the extension of the exercise date to December 31, 1996 on options to
purchase 350,000 shares of common stock granted to Mr. Rubinstein in October
1990.
Operating Expenses -- DMX-E.
DMX Inc. has not previously consolidated the operations of DMX-E and such
amounts for 1996 represent the activities from acquisition date of May 17, 1996
through September 30, 1996. As discussed below, DMX-E ceased operations on July
1, 1997.
Disposal of DMX-E.
DMX-E NV and its subsidiary DMX-E UK, ceased operation on July 1, 1997.
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.
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As a result of the DMX-E cessation of operations, the Definitive Agreements
between DMX Inc.; Mr. Jerold H. Rubinstein, an individual; and 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
for the disposition of DMX-E to Mr. Jerold H. Rubinstein. Pursuant to the
Definitive Agreements, DMX Inc. obtained a 10% interest in XTRA and the 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 trademarks for two years.
The music service is currently not being distributed by XTRA as Mr. Jerold H.
Rubinstein is seeking financial partners. 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 Inc.'s net investment in these subsidiaries of
$5.7 million and other obligations guaranteed by DMX Inc. of $1.4 million.
The net loss from DMX-E operations decreased to $6.4 million for the nine
months ended June 30, 1997 compared to $14 million for the nine months ended
June 30, 1996. In the fourth quarter ended September 30, 1996, DMX Inc. ceased
funding the operations of DMX-E. The net losses since that period were primarily
related to accrued expenses for their uplink and satellite business and
associated advertising and marketing commitments.
The net loss from DMX-E 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 DMX Inc. 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 $25
million credit facility provided by TCI Euromusic, Inc., an indirect affiliate
of TCI. In the fourth quarter of the fiscal year ended September 30, 1995, DMX
Inc. funded operating losses of DMX-E and accordingly the equity in loss of
DMX-E included operating losses funded by DMX Inc. in excess of its guaranteed
portion of the debt.
LIQUIDITY AND CAPITAL RESOURCES.
The decrease in cash of $288,000 for the nine months ended June 30, 1997,
was the net result of $2.5 million provided by financing activities and used to
purchase equipment of $1.1 million, primarily related to the obtaining of
commercial customers, $229,000 used to pay DMX Inc.'s capital lease obligation
and approximately $1.5 million of cash used in operating activities.
Historically DMX Inc. has used cash provided by financing activities to
fund its operating and investing activities. With the discontinuance of the
operations of DMX-E and the implementation of certain cost reduction measures,
management believes that DMX Inc. will begin to generate cash from its operating
activities on a prospective basis. However, there can be no assurances that DMX
Inc.'s operating activities will in fact generate cash.
DMX Inc. has borrowed $3.5 million from TCI pursuant to a February 6, 1996
loan agreement. The loan bears interest at an annual interest rate of 12.5% and
is being paid in 34 monthly installments commencing on September 1, 1997. DMX
Inc. presently has no plans to seek additional financing as it intends to
primarily rely on funds provided by its parent, TCI Music.
As more fully described under "Business -- General -- Development of
Business," on July 11, 1997, DMX Inc. and TCI Music consummated a merger
pursuant to which DMX Inc. became a wholly-owned subsidiary of TCI Music. In
connection with the merger, TCI Music issued a $40 million promissory note
payable to TCI. The promissory note is due and payable on the January 10, 1998
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
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connection with the Merger, and pursuant to a 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 Inc.'s subscribers.
During the two months ended August 31, 1997, TCI Music has received $3 million
of revenue contributions from TCI. However, there can be no assurance that the
revenues will continue at the current historical levels as the launch of and the
transition to Digital Distribution may have the effect of materially reducing
residential subscriber fee revenue as a result of the expected change from the a
la carte fee structure currently in effect. (See "Business -- Business of DMX
Inc. -- Residential Service" and "Management Discussion and Analysis -- Results
of Operations -- Revenue DMX Inc.") TCI Music also anticipates that it will use
the funds provided by the above-described source of liquidity to supplement the
sources of liquidity of DMX Inc. and to satisfy other liquidity requirements,
including those that may arise as the result of the proposed acquisition of The
Box and Paradigm, as further described below.
As further described under "Business -- General Development of Business,"
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 $24 million of TCI Music Series A Common Stock and the assumption
of debt or contribution in cable 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.
As described in notes 5 and 11 to DMX Inc.'s consolidated financial
statements and in the disposal of DMX-E above, DMX-E has ceased operations on
July 1, 1997. 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. 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 DMX Inc.
Inflation.
Management believes that the effect of inflation has not been material to
DMX Inc. However, inflation in the costs of personnel, marketing, programming or
certain other operating expenses could significantly affect DMX Inc.'s future
operations. Current economic conditions indicate a relatively low inflationary
period and as a result, inflation is not expected to materially affect DMX Inc.
in fiscal year 1998.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
See Item 14. Exhibits, Financial Statement Schedules and Reports on Form
8-K for DMX Inc.'s Consolidated Financial Statements, the notes thereto and
Schedules filed as part of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF DMX INC.
DMX Inc.'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 at June 30, 1997 was 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 DMX Inc. acting within their capacity as such. There are no family
relationships among directors or executive officers of DMX Inc. as of the date
hereof.
The following table sets forth biographical information of the directors of
DMX Inc.:
<TABLE>
<CAPTION>
YEAR FIRST
BECAME
PRINCIPAL OCCUPATION OR EMPLOYMENT DIRECTOR/
DIRECTORS AND OCCUPATION FOR THE PAST FIVE YEARS TERM EXPIRES
--------- -------------------------------------- ------------
<S> <C> <C>
Kent Burkhart.................. Chairman of Burkhart/Douglas and Associates since 1973. He 1990(2)
Born: July 22, 1934 is also President and a Director of Degree
Communications.(1)
Donne F. Fisher................ Director of TCI Music effective January 1997. He has served 1996(2)
Born: May 24, 1938 as a director of TCI since 1994 and a director of TCI
Communications, Inc. ("TCIC") since 1980. Mr. Fisher was
Executive Vice President and Treasurer of TCI from January
1994 until January 1, 1996; served as Executive Vice
President of TCIC from December 1991 to October 1994; and
was previously Senior Vice President of TCIC since 1982 and
Treasurer since 1970. Since January 1, 1996 he has provided
consulting services to TCI. Mr. Fisher also serves as a
director of General Communication, Inc. and United Video
Satellite Group Inc.
Leo J. Hindery, Jr............. Chairman of the Board of TCI Music effective January 1997. 1996(2)
Born: October 31, 1947 He was appointed director of TCI in May 1997 and President
and Chief Operating Officer of TCI effective March 1, 1997
and was appointed Director and President of TCIC in March
1997. From 1988 to 1997 he was the managing general partner
of InterMedia Partners and its affiliated entities.
InterMedia Partners is a multi-system cable television
operator.
Bhaskar Menon.................. Formerly Chairman and Chief Executive Officer of EMI Music 1991(2)
Born: May 29, 1934 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........... Chairman of the Board and Chief Executive Officer of DMX 1986(2)
Born: July 7, 1938 Inc. 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.............. Founder, President and Chief Executive Officer of Shaw 1993(2)
Born: August 14, 1934 Communications Inc. since 1970.
J.C. Sparkman.................. Appointed director of TCI Music effective May 1997. He has 1989(2)
Born: September 12, 1932 been a director of TCI since December 1996. He served as
Executive Vice President of TCI from January 1994 through
March 1995. Mr. Sparkman retired in March of 1995 and has
provided consulting services to TCI since March 1995. He
served as Executive Vice President of TCIC from 1987 to
October 1995. He also serves as a director of Shaw
Communications Inc. and United Video Satellite Group Inc.
</TABLE>
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<PAGE> 208
- ---------------
(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.
(2) Effective July 11, 1997, upon consummation of DMX Inc.'s merger with a
subsidiary of TCI Music, (See "Business -- General Development of
Business".) the directorship ceased.
The following table sets forth biographical information of the executive
officers of DMX Inc. For a discussion of the biographical information of Mr.
Rubinstein, see "Directors" immediately above.
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION OR EMPLOYMENT
EXECUTIVE OFFICERS AND OCCUPATION FOR THE PAST FIVE YEARS
------------------ --------------------------------------
<S> <C>
Lon A. Troxel.................. Appointed a director of TCI Music effective May 1997. He was
Born: October 14, 1947 appointed Chief Operating Officer of DMX in April 1997 and
served as Executive Vice President, Commercial Division from
April 1994 to April 1997. Mr. Troxel served as Vice
President, U.S./Canada Dealer Sales of AEI Music Networks,
Inc. during 1991 and as Chief Executive Officer and
President of Protection One Alarm Services from May 1988 to
October 1990.(1)
Joanne Wendy Kim............... Corporate Secretary and Chief Financial Officer since 1995.
Born: March 2, 1955 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.(2)
Douglas G. Talley.............. Executive Vice President and Chief Technical Officer of DMX
Born: April 14, 1947 Inc. 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.
Otis Smith..................... Executive Vice President, Programming and Residential
Born: June 4, 1941 Division since June 1995, Executive Vice President,
Programming of DMX Inc. since December 1992. Formerly a
record industry executive.(3)
</TABLE>
- ---------------
(1) Effective July 11, 1997, Mr. Troxel was appointed President and Chief
Executive Officer of DMX Inc.
(2) Effective July 11, 1997, Ms. Kim was appointed Executive Vice President and
Chief Financial Officer of DMX Inc.
(3) Effective July 11, 1997, Mr. Smith was no longer an officer or employee of
DMX Inc.
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.
Under Section 16(a) of the Exchange Act, DMX Inc.'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
DMX Inc. with copies of such reports. Specific due dates for these reports have
been established and DMX Inc. 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.
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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 DMX Inc. to or on behalf of DMX Inc.'s Chief
Executive Officer and for the four most highly compensated executive officers of
DMX Inc. (the "Named Executives") for the nine months ended June 30, 1997 and
for each of the fiscal years ended September 30, 1996 and 1995:
Summary Compensation Table.
<TABLE>
<CAPTION>
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. RUBINSTEIN....... 1997(3) $386,538 -- -- -- -- -- --
Chairman of the Board 1996 509,600 $250,000 -- -- -- -- $579
Chief Executive Officer 1995 509,615 200,000 -- -- 1,000,000 -- 924
LON A. TROXEL.............. 1997(3) 209,135 -- -- -- -- -- --
Chief Operating Officer 1996 256,377 -- -- -- -- -- --
1995 241,673 -- -- -- 25,000 -- --
JOANNE WENDY KIM........... 1997(3) 110,096 101,250 -- -- -- -- --
Chief Financial Officer 1996 110,975 -- -- -- -- -- --
1995(4) 26,654 -- -- -- 20,000 -- --
DOUGLAS G. TALLEY.......... 1997(3) 215,288 -- -- -- -- -- --
Executive Vice President, 1996 248,077 -- -- -- -- -- --
Chief Technical Officer 1995 223,077 -- -- -- 75,000 -- --
OTIS SMITH................. 1997(3) 211,538 -- -- -- -- -- --
Executive Vice President, 1996 280,289 -- -- -- -- -- --
Programming and 1995 263,200 -- -- -- 50,000 -- --
Residential
</TABLE>
- ---------------
(1) Includes salary, accrued vacation and amounts deferred by the named
executive pursuant to the DMX Inc. Savings Plan.
(2) Amounts contributed by DMX Inc. to the Savings Plan on behalf of the Named
Executives.
(3) Nine months ended June 30, 1997.
(4) Ms. Kim's employment with DMX Inc. commenced July 1995.
Employment Agreements and Termination of Employment Arrangements.
Jerold H. Rubinstein was employed on an at-will basis and effective July
11, 1997 his employment was terminated. DMX Inc. 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, DMX Inc. 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.
DMX Inc. 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
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<PAGE> 210
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, DMX Inc. granted Mr. Rubinstein a
non-qualified option, pursuant to the 1993 Stock Option Plan, to purchase 70,000
shares of Common Stock at an exercise price of $5.00 per share, the fair market
value of the stock on the date of the grant.
DMX Inc. and Lon A. Troxel entered into an Employment Agreement dated
October 1, 1991 (the "Troxel Agreement"), pursuant to which Mr. Troxel received
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 DMX Inc. 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. On August 22, 1997, a third amendment to the
Troxel Agreement was entered into which adjusts his annual salary to $300,000
June 1, 1998 through May 31, 1999 and $325,000 during the years ending May 31,
2000, 2001 and 2002. Mr. Troxel has agreed not to acquire more than a 10% direct
or indirect ownership in any cable company, other than DMX Inc., without the
prior written consent of DMX Inc. Mr. Troxel receives basic and extended
benefits commensurate with other senior management employees such as vacation
pay and other fringe benefits. 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.
DMX Inc. 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.
DMX Inc. and DigiTempo, Inc., a California corporation, entered into an
Employment Agreement dated October 17, 1994, whereby DigiTempo, Inc. furnished
the services of Otis Smith, in the capacity of Executive Vice President, to DMX
Inc., and DigiTempo, Inc. received annual compensation of $275,000 for the
period from October 17, 1994 to October 16, 1997. Mr. Smith received basic and
extended benefits commensurate with other senior management level employees such
as vacation pay and other fringe benefits. The Agreement also included a
provision that in case Mr. Smith was disabled during the term of the agreement,
DigiTempo, Inc. would receive the same compensation it was entitled to under the
agreement for a time period not exceeding six months. Effective July 11, 1997,
the Mr. Smith/DigiTempo, Inc. relationship with DMX Inc. terminated.
Stock Options.
No stock option grants were issued to Named Executives for the nine months
ended June 30, 1997.
Mr. Troxel received a grant effective as of July 11, 1997, of options to
acquire 200,000 shares of TCI Music Series A Common Stock pursuant to the TCI
Music 1997 Stock Incentive Plan and all of the existing options to acquire
shares of Common Stock of DMX Inc. were canceled in exchange therefor. Ms. Kim
received a grant effective as of July 11, 1997 to acquire 50,000 shares of TCI
Music Series A Common Stock pursuant to the TCI Music 1997 Stock Incentive Plan.
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Option Exercises and Holdings.
The following table provides information with respect to the Named
Executives concerning the exercise of options during the nine months ended June
30, 1997 and unexercised options held by the Named Executives as of June 30,
1997:
AGGREGATED OPTION EXERCISES IN THE NINE MONTHS ENDED JUNE 30, 1997
AND JUNE 30, 1997 OPTION VALUES
<TABLE>
<CAPTION>
SHARES ACQUIRED VALUE
ON EXERCISE REALIZED
NAME (#) ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- --------------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Jerold H. Rubinstein..... N/A N/A 2,170,000(2) -- -- --
Lon A. Troxel............ N/A N/A 150,000(3) -- -- --
Joanne Wendy Kim......... N/A N/A 20,000(4) -- -- --
Douglas G. Talley........ N/A N/A 183,333(5) -- -- --
Otis Smith............... N/A N/A 100,000(6) -- -- --
</TABLE>
- ---------------
(1) Value of unexercised "in-the-money" options is the difference between the
market price of the Common Stock on June 30, 1997 ($1.74 per share) and the
exercise price of the option, multiplied by the number of shares subject to
the option. At June 30, 1997 no options were "in-the-money."
(2) Includes 333,334 shares which Mr. Rubinstein had the right to acquire prior
to July 11, 1997 due to the acceleration of options. By terms of the DMX
Inc. 1993 Stock Option Plan, options issued, outstanding and unexercised
were terminated upon consummation of the Merger. Includes stock options to
purchase 400,000 shares of DMX Inc.'s Common Stock which were under the DMX
Inc. 1991 Stock Option Plan and were carried over in the Merger and can be
exercisable for 100,000 shares of TCI Music Series A Common Stock and
Rights. However, all such options terminate and are not exercisable three
months after the holder is no longer employed or serving as director of DMX
Inc.
(3) Includes 8,334 shares which Mr. Troxel had the right to acquire prior to
July 11, 1997 due to the acceleration of options. By terms of the DMX Inc.
1993 Stock Option Plan, options issued, outstanding and unexercised were
terminated upon consummation of the Merger. Includes stock options to
purchase 50,000 shares of DMX Inc.'s Common Stock which were issued under
the DMX Inc. 1991 Stock Option Plan and were canceled in exchange for stock
options granted, effective with the Merger, to acquire 200,000 shares of TCI
Music Series A Common Stock.
(4) Includes 6,667 shares which Ms. Kim had the right to acquire prior to July
11, 1997 due to the acceleration of options. By terms of the DMX Inc. 1993
Stock Option Plan, options issued, outstanding and unexercised were
terminated upon consummation of the Merger.
(5) Includes 25,000 shares which Mr. Talley had the right to acquire prior to
July 11, 1997 due to the acceleration of options. By terms of the DMX Inc.
1993 Stock Option Plan, options issued, outstanding and unexercised were
terminated upon consummation of the Merger.
(6) Includes 16,667 shares which Mr. Smith had the right to acquire prior to
July 11, 1997 due to the acceleration of options. By terms of the DMX Inc.
1993 Stock Option Plan, options issued, outstanding and unexercised were
terminated upon consummation of the Merger.
Compensation Committee Interlocks and Insider Participation.
Jerold H. Rubinstein, Chairman of the Board and Chief Executive Officer of
DMX Inc., was appointed to the Compensation Committee for the 1996 fiscal year.
Mr. Rubinstein beneficially owns 5.1% of the outstanding shares of Common Stock.
(See "summary Compensation Table and Employment Agreements and Termination of
Employment Agreements" for a discussion of the compensation Mr. Rubinstein
received.)
J.C. Sparkman, a Director and Chairman of the Compensation Committee,
retired in 1995 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 DMX Inc., which includes
A-V-32
<PAGE> 212
100,000 shares acquired at $2.50 per share in a private placement on September
21, 1995. TCI directly through its subsidiaries beneficially owns 45.7% of the
outstanding shares of Common Stock.
DMX Inc. and a subsidiary of TCI entered into a ten year network
affiliation agreement in 1989 under which DMX Inc.'s basic audio and Digital
Music Express services are made available to TCI cable television subscribers.
DMX Inc. 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 DMX Inc. accounted for approximately 50% of DMX Inc.'s consolidated gross
revenues during the nine months ended June 30, 1997.
DMX Inc. leases studio facilities in Colorado for the origination and
uplinking of the DMX service. The studio is located at the facilities of NDTC,
at 4100 East Dry Creek Road, Littleton, Colorado 80122. The six year lease
agreement with NDTC, that expires on the last day of February 2000, has an
automatic one year renewal and is subject to DMX Inc.'s right to terminate the
origination and uplinking services at any time, with 60 days prior notice and
upon payment of early termination fees. NDTC charges DMX Inc. approximately
$54,600 per month, which includes approximately $6,700 for space rental and
$45,400 for satellite uplinking services. In addition, NDTC provided a capital
lease for studio equipment at the facility, up to a total of $2.2 million with
interest at 9.5%. The outstanding balance of the lease obligation at June 30,
1997 was $1,386,000.
DMX Inc. sub-leases space on a U.S. domestic communications satellite known
as C-3 Transponder 24. The sublease 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 $204,100.
DMX Inc. sub-leases space on a Ku-Band satellite Loral Telstar 4, formerly
known as AT&T 402R. The sub-lease was entered into in March 4, 1994 with WTCI,
which in turn leases the transponder from Loral. Monthly sub-lease charges for
the transponder and uplink is approximately $167,000.
Director Compensation.
DMX Inc. 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 DMX Inc. 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
DMX Inc. thereafter, received an additional option to acquire 50,000 shares up
to a maximum of two such periods.
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<PAGE> 213
ITEM 12.SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth the beneficial ownership of Common Stock as
of June 30, 1997 by each person known to DMX Inc. to be the beneficial owner of
more than five percent of the outstanding shares of Common Stock by each
executive officer and director of DMX Inc., and by all directors and executive
officers as a group.
<TABLE>
<CAPTION>
AMOUNT AND NATURE PERCENT
NAME OF BENEFICIAL OWNERSHIP(1) OF CLASS(2)
---- -------------------------- -----------
<S> <C> <C>
Tele-Communications, Inc.................................... 27,249,575(3) 45.7%
Shaw Communications Inc..................................... 7,600,000(4) 12.8%
Jerold H. Rubinstein, Chairman of the Board and Chief
Executive Officer......................................... 3,124,148(5) 5.1%
Kent Burkhart, Director..................................... 200,000(6) *
V. Bhaskar Menon, Director.................................. 200,000(7) *
James R. Shaw, Sr., Director................................ 8,530,500(8) 14.3%
J.C. Sparkman, Director..................................... 350,000(9) *
Otis Smith, Executive Vice President........................ 100,000(10) *
Douglas G. Talley, Executive Vice President................. 183,333(11) *
Lon A. Troxel, Chief Operating Officer...................... 150,000(12) *
Joanne Wendy Kim, Chief Financial Officer................... 20,000(13) *
Directors and Executive Officers (a group of 11 persons).... 12,857,981(14) 20.4%
</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 June 30, 1997 or prior to July 11, 1997, 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).
(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, 128,580 shares held by Brasha Holdings Ltd., 128,580
shares held by Jay-Shaw Holdings Ltd., 128,580 shares held by Julmar
Holdings Ltd., and 118,680 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 333,334 shares which Mr. Rubinstein had the right to acquire
prior to July 11, 1997 due to the acceleration of options. By terms of the
DMX Inc. 1993 Option Plan, options issued, outstanding and unexercised were
terminated upon consummation of the Merger. Includes stock options to
purchase 400,000 shares of DMX Inc.'s Common Stock which were issued under
the DMX Inc. 1991 Stock Option Plan and were carried over in the Merger and
can be exercisable for 100,000 shares of TCI Music Series A Common Stock
and Rights. However, all such options terminate and are not exercisable
three months after the holder is no longer employed or serving as director
of DMX Inc. Mr. Rubinstein's business address was 11400 West Olympic
Boulevard, Suite 1100, Los Angeles, California 90064-1507.
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<PAGE> 214
(6) Represented 200,000 shares which Mr. Burkhart had the right to acquire
prior to July 11, 1997, by the exercise of vested stock options. By terms
of the DMX Inc. 1993 Stock Option Plan, options issued, outstanding and
unexercised were terminated upon consummation of the Merger. Includes stock
options to purchase 50,000 shares of DMX Inc.'s Common Stock which were
issued under the DMX Inc. 1991 Stock Option Plan and was carried over in
the Merger. However, all such options terminate and are not exercisable
three months after the holder is no longer employed or serving as director
of DMX Inc.
(7) Represented 200,000 shares which Mr. Menon had the right to acquire within
prior to July 11, 1997, by the exercise of vested stock options. By terms
of the DMX Inc. 1993 Stock Option Plan, options issued, outstanding and
unexercised were terminated upon consummation of the Merger. Includes stock
options to purchase 50,000 shares of DMX Inc.'s Common Stock which were
issued under the DMX Inc. 1991 Stock Option Plan and was carried over in
the Merger. However, all such options terminate and are not exercisable
three months after the holder is no longer employed or serving as director
of DMX Inc.
(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, 128,580 shares held by
Brasha Holdings Ltd., 128,580 shares held by Julmar Holdings Ltd., 128,580
shares held by Shawana Estates Ltd., and 118,680 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 150,000 shares which
Mr. Shaw, Sr. has the right to acquire prior to July 11, 1997, by the
exercise of vested stock options. By terms of the DMX Inc. 1993 Stock
Option Plan, options issued, outstanding and unexercised were terminated
upon consummation of the Merger. Mr. Shaw, Sr.'s business address is
630-3rd Avenue, Suite 900, Calgary, Alberta T2P4L4.
(9) Represented 200,000 shares which Mr. Sparkman had the right to acquire
prior to July 11, 1997, by the exercise of vested stock options. Includes
stock options to purchase 50,000 shares of DMX Inc.'s Common Stock which
were issued under the DMX Inc. 1991 Stock Option Plan and were canceled in
exchange for stock options granted, effective with the Merger, to acquire
100,000 shares of TCI Music Series A common Stock.
(10) Represented 100,000 shares which Mr. Smith had the right to acquire prior
to July 11, 1997, by the exercise of vested stock options. Included 16,667
shares which Mr. Smith had the right to acquire prior to July 11, 1997 due
to the acceleration of options. By terms of the DMX Inc. 1993 Stock Option
Plan, options issued, outstanding and unexercised were terminated upon
consummation of the Merger.
(11) Represented 183,333 shares which Mr. Talley had the right to acquire prior
to July 11, 1997 by the exercise of vested stock options. Included 25,000
shares which Mr. Talley had the right to acquire prior to July 11, 1997 due
to the acceleration of options. By terms of the DMX Inc. 1993 Stock Option
Plan, options issued, outstanding and unexercised were terminated upon
consummation of the Merger.
(12) Represented 150,000 shares which Mr. Troxel had the right to acquire prior
to July 11, 1997, by the exercise of vested stock options. Included 8,334
shares which Mr. Troxel had the right to acquire prior to July 11, 1997 due
to the acceleration of options. By terms of the DMX Inc. 1993 Stock Option
Plan, options issued, outstanding and unexercised were terminated upon
consummation of the Merger. Included stock options to purchase 50,000
shares of DMX Inc.'s Common Stock which were issued under the DMX Inc. 1991
Stock Option Plan and were canceled in exchange for stock option granted,
effective with the Merger, to acquire 200,000 shares of TCI Music Series A
Common Stock.
(13) Represented 20,000 shares which Ms. Kim had the right to acquire prior to
July 11, 1997 due to the acceleration of options. By terms of the DMX Inc.
1993 Stock Option Plan, options issued, outstanding or unexercised were
terminated upon consummation of the Merger.
(14) Represented 2,983,333 shares which members of the group had the right to
acquire prior to July 11, 1997, by the exercise of vested stock options and
390,000 shares which members of the group had the right to acquire prior to
July 11, 1997 due to acceleration of options. By terms of the DMX Inc. 1993
A-V-35
<PAGE> 215
Stock Option Plan, options issued, outstanding and unexercised were
terminated upon consummation of the Merger. Includes those shares described
in note 8, to which Mr. Shaw, Sr. has disclaimed beneficial ownership and
includes stock options to purchase 600,000 shares of DMX Inc.'s stock that
were issued under DMX Inc. 1991 Stock Option Plan and described in notes 5,
6, 7, 9 and 12.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
At June 30, 1997 TCI beneficially owns 45.7% 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 DMX Inc. upon the terms set forth in the Agreement and Plan of
Merger among TCI-E, United Artists Programming International, Inc. ("UAPI") and
DMX Inc., UAPI, an affiliate of TCI, was issued 10,841,624 shares of Common
Stock.
DMX Inc. under an agreement with NDTC has a capital lease to lease
equipment for its studio and uplinking facility in Littleton, Colorado. The
obligation under the capital lease at June 30, 1997 was $1,386,000 with terms
which extend to 2000 at an interest rate of 9.5%. DMX Inc. is also obligated to
WTCI under various operating leases for uplinking and satellite services. The
total expense under those leases for the nine months ended June 30, 1997 and the
fiscal year ended September 30, 1996 and 1995 were $3,358,000, $4,831,000 and
$4,489,000, respectively.
Total subscriber fee revenue from TCI and its affiliates represented
approximately 50%, 57%, 56% and 61% of total subscriber fee revenue for the nine
months ended June 30, 1997 and 1996 and the fiscal years ended September 30,
1996 and 1995, respectively, with accounts receivable due from TCI and its
affiliates at June 30, 1997 and September 30, 1996 totaling approximately
$1,482,000 and $1,829,000, respectively.
Shaw beneficially owns 12.8% of the outstanding shares of Common Stock of
DMX Inc., 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, is a director of DMX Inc. Mr. Sparkman, a director of
DMX Inc., is a director of Shaw. In March 1992, Shaw, the second largest cable
operator in Canada, entered into a license and distribution agreement with DMX
Inc. which grants to DMX-Canada Ltd. the exclusive license and right to
distribute DMX Inc.'s premium service in Canada, and was amended on November 1,
1994 by the Commercial License and Distribution Agreement and was amended on
April 14, 1997 by the Residential License and Distribution Agreement. 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 DMX Inc.
During 1995, DMX Inc. 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 April 1996 DMX Inc. entered into two capital leases with DMX-Canada, the
proceeds of which were used to purchase DMX-Disc equipment leased to two DMX
Inc. customers, 9-West and Coach. The obligation under the capital lease was for
a term which extended to May 2001 at an effective interest rate of 27.21%. In
May 1997, the lease balance of $268,625 was paid in full through an offset of
license fees due to DMX Inc. totaling $220,714 and cash for the balance of
$47,911.
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
A-V-36
<PAGE> 216
during 1995 for a license to distribute DMX to Canadian residential cable
subscribers. The CRTC issued a favorable ruling in December 1995 and requires a
one to one ratio of Canadian content to non Canadian content. DMX-Canada and DMX
Inc. have negotiated an agreement to distribute DMX service to the Canadian
residential cable market. The service includes a total of 30 formats and is
distributed through Shaw Cable Systems and their affiliates. DMX-Canada will
also license other Canadian third party distributors such as Star Choice. The
launch of the DMX service for residential distribution was July 1997.
The CRTC does not regulate programming delivered to commercial
establishments by DBS and DMX-Canada has been distributing the DMX service to
the commercial sector since 1994. DMX Inc. and DMX-Canada have negotiated a new
license and distribution agreement which grants an exclusive license and right
to distribute the DMX service to commercial establishments in Canada. The term
of the new agreement coincides with the original agreement dated March 9, 1992
and terminates March 31, 2012. DMX Inc. received total license fees of
approximately $370,000 for the nine months ended June 30, 1997 under the
agreements.
Stephen A. Wynn, Chairman of the Board, President and Chief Executive
Officer, Mirage Resorts, Incorporated, resigned as a director of DMX Inc. in May
1996 concurrently with his sale of 5,700,000 shares of DMX Inc. 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, DMX Inc. entered into a five year commercial music service agreement with
Mirage Resorts, Inc. whereby DMX Inc. provides its DMX for Business music
service for a monthly fee.
DMX Inc. entered into definitive agreements dated December 18, 1996 with
Jerold H. Rubinstein, Chairman of the Board and Chief Executive Officer, of DMX
Inc., which provided for Mr. Rubinstein to either purchase a 90% interest in
DMX-E in a transaction referenced as the "Reorganization Plan", or if an
agreement cannot be reached with the creditors of DMX-E, then Mr. Rubinstein
would organize a new company that would distribute DMX service in Europe. As a
result of the DMX-E cessation of operation on July 1, 1997, the Definitive
Agreements between DMX Inc.; Mr. Jerold H. Rubinstein, an individual; and XTRA
were put into place whereby a 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.
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<PAGE> 217
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 nine month period ended June 30, 1997, for a list of financial
statements and schedules filed as part of this report at page F-1.
(b) Reports on Form 8-K. None.
(c) Exhibits. Following is a list of Exhibits filed with this report.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
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 DMX
Inc.
3.2(1) -- Bylaws of the DMX Inc. [3.2]*
4.1(3) -- Articles IV, VI, VII, VIII, XI, XII of the Certificate of
Incorporation of the DMX Inc. (filed as part of Exhibit
3.1)
4.2(1) -- Articles II, III, VII and XI of the Bylaws of DMX Inc.
(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 DMX Inc.
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 DMX Inc. and Colony
Communications dated May 1, 1992 [10.4]*
10.5**(11) -- Affiliation Agreement between DMX Inc. and Crown Media,
Inc., dated July 1, 1992 [10.5]*
10.6**(11) -- Affiliation Agreement between DMX Inc. and Prime II
Management, L.P. [10.6]*
10.7(11) -- Stock Purchase Agreement between DMX Inc. and various
private parties, dated August 2, 1991 [10.7]*
10.8(11) -- Stock Purchase Agreement between DMX Inc. and Scudder
Development Fund, dated August 23, 1993 [10.8]*
10.9(11) -- Stock Purchase Agreement between DMX Inc. and Crown
Media, Inc. dated July 22, 1992 [10.9]*
</TABLE>
A-V-38
<PAGE> 218
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.10(11) -- Stock Purchase Agreement between DMX Inc. and Crown
Media, Inc. dated August 30, 1993 [10.10]*
10.11(11) -- Stock Purchase Agreement between DMX Inc. and Brahman
Partners, II, L.P. dated September 15, 1993 [10.11]*
10.12(11) -- Stock Purchase Agreement between DMX Inc. and Quota Fund,
N.V.-Brahman, dated September 15, 1993 [10.12]*
10.13(11) -- Stock Purchase Agreement between DMX Inc. and Genesis
Capital Fund, dated September 15, 1993 [10.13]*
10.14(11) -- Stock Purchase Agreement between DMX Inc. and Shaw
Cablesystems, dated March 9, 1992 [10.14]*
10.15(11) -- Stock Purchase Agreement between DMX Inc. 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 DMX Inc.
10.26**(11) -- [10.15]* 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) -- DMX Inc. Promissory Note in favor of TCI-E, dated May 19,
1993
10.33(11) -- DMX Inc. 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,
10.35**(11) -- dated March 31, 1992 License and Distribution Agreement
between DMX Inc. 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 DMX Inc. and
Scientific-Atlanta, Inc. [10.12]*
</TABLE>
A-V-39
<PAGE> 219
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.38(2) -- License and Technical Assistance Agreement between DMX
Inc. 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 DMX Inc. and COMSTREAM
Corporation, dated July 22, 1993
10.42**(11) -- COMSTREAM Option Agreement between DMX Inc. 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 DMX Inc.
10.56(10) -- Satellite Transponder Management Agreement between WTCI
and DMX Inc., dated December 2, 1992
10.57(10) -- Satellite Transponder Management Agreement between WTCI
and DMX Inc., 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 DMX Inc. and the American Society of
Composers, Authors & Publishers, dated December 20, 1991
10.61**(10) -- Agreement between DMX Inc. and Broadcast Music Inc.,
dated October 11, 1991, as supplemented and amended
10.62**(10) -- Agreement between DMX Inc. and SESAC, dated December 26,
1991
10.63**(11) -- Affiliation Agreement between DMX Inc. and Scripps
Howard, Inc. dated April 30, 1994
10.64***(11) -- Employment Agreement between DMX Inc. and Lon Troxel,
dated October 1, 1991, as amended.
10.65***(11) -- Employment Agreement between DMX Inc. and Keno Thomas,
dated January 24, 1994
</TABLE>
A-V-40
<PAGE> 220
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
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 DMX Inc. and DigiTempo,
Inc., dated October 17, 1994
10.69***(12) -- Employment Agreement between DMX Inc. and Doug Talley,
dated January 1, 1995
10.70***(13) -- Employment Agreement between DMX Inc. and Lon Troxel,
dated October 1, 1991, as amended September 16, 1996
10.71*****(13) -- Affiliation Agreement between DMX Inc. and PRIMESTAR
Partners, dated January 25, 1995
10.72*****(13) -- Affiliation Agreement between DMX Inc. and AlphaStar
Television Network, Inc., dated November 29, 1995
10.73*****(13) -- Stock Purchase and Shareholders Agreement between DMX
Inc., DMX-Europe (UK) Limited, DMX-Europe N.V. and Jerold
H. Rubinstein
10.74(13) -- Subscription and Shareholders Agreement between DMX Inc.,
Jerold H. Rubinstein and XTRA Music Limited
10.75***** -- Commercial License and Distribution Agreement between DMX
Inc. and DMX Canada Partnership, dated November 1, 1994
10.76***** -- Residential License and Distribution Agreement between
DMX Inc. and DMX-Canada (1995) Ltd., dated March 9, 1992,
as amended April 18, 1997
10.77 -- Channel Distribution Agreement between DMX Inc. and XTRA
Music Limited, dated July 3, 1997
10.78 -- Termination Certificate between DMX Inc. and Jerold H.
Rubinstein (Stock Purchase Agreement, dated December 18,
1996), dated July 3, 1997
10.79 -- Termination Agreement between DMX Inc. and DMX-Europe
N.V., a Netherlands corporation (Technology License and
Services Agreement, Dated May 19, 1993), dated July 3,
1997
10.80 -- Termination Agreement between DMX Inc. and DMX-Europe
N.V., a Netherlands corporation (Trademark Agreement,
dated May 19, 1993), dated July 3, 1997
10.81 -- Assignment Agreement between DMX Inc. and Jerold H.
Rubinstein, dated July 8, 1997
10.82*** -- Employment Agreement between DMX Inc. and Lon Troxel,
dated October 1, 1991, as amended August 22, 1997
10.83 -- TCI Music, Inc. 1997 Stock Incentive Plan
11.1 -- Statement Regarding Computation of Per Share Earnings
(included in DMX Inc.'s Financial Statements)
21.1 -- Listing of All Subsidiaries of DMX Inc.
27. -- Financial Data Schedule
</TABLE>
- ---------------
(1) Incorporated by Reference to DMX Inc.'s Registration Statement on Form
S-1, July 10, 1990, file #33-35690
(2) Incorporated by Reference to DMX Inc.'s Post-Effective Amendment No. 2 to
Registration Statement on Form S-1, May 24, 1991, file #33-35690
(3) Incorporated by Reference to DMX Inc.'s Post-Effective Amendment No. 1 to
Registration Statement on Form S-1, filed on October 15, 1990, file
#33-35690
A-V-41
<PAGE> 221
(4) Incorporated by Reference to DMX Inc.'s Amendment No. 2 to Registration
Statement on Form S-1, September 28, 1990, file #33-35690
(5) Incorporated by Reference to DMX Inc.'s Amendment No. 1 to Registration
Statement on Form S-1, August 31, 1990, file #33-35690
(6) Incorporated by Reference to DMX Inc.'s Registration Statement on Form
S-1, February 24, 1992, file #33-35690
(7) Incorporated by Reference to DMX Inc.'s Post-Effective Amendment No. 3 to
Registration Statement on Form S-1, August 15, 1991, file #33-35690
(8) Incorporated by Reference to DMX Inc.'s 1992 10-K, December 13, 1992
(9) Incorporated by Reference to DMX Inc.'s 1993 Registration Statement on
Form S-8, May 3, 1993
(10) Incorporated by Reference to DMX Inc.'s 1993 10-K, December 23, 1993
(11) Incorporated by Reference to DMX Inc.'s 1994 10-K, December 29, 1994
(12) Incorporated by Reference to DMX Inc.'s 1995 10-K, January 9, 1996
(13) Incorporated by Reference to DMX Inc.'s 1996 10-K, January 14, 1997
* Indicates exhibit number of document in original filing
** DMX Inc. has received confidential treatment for a portion of the
referenced exhibit
*** Indicates Management Contract
**** Indicates Compensatory Plan
***** DMX Inc. has requested confidential treatment for a portion of the
referenced exhibit
A-V-42
<PAGE> 222
DMX INC.
AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997 AND SEPTEMBER 30, 1996
(WITH INDEPENDENT AUDITORS' REPORT THEREON)
A-V-43
<PAGE> 223
DMX INC.
AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
------
<S> <C>
Independent Auditors' Report................................ A-V-45
Consolidated Financial Statements of DMX Inc.:
Consolidated Balance Sheets -- June 30, 1997 and September
30, 1996............................................... 46
Consolidated Statements of Operations -- Nine months ended
June 30, 1997 and 1996 (unaudited) and years ended
September 30, 1996 and 1995............................ 47
Consolidated Statements of Stockholders' Deficit -- Nine
months ended June 30, 1997 and years ended September
30, 1996 and 1995...................................... 48
Consolidated Statements of Cash Flows -- Nine months ended
June 30, 1997 and 1996 (unaudited) and years ended
September 30, 1996 and 1995............................ 49
Notes to Consolidated Financial Statements................ 50
Financial Statement Schedules have not been provided as any
required information has been included in the financial
statements and notes thereto
</TABLE>
A-V-44
<PAGE> 224
INDEPENDENT AUDITORS' REPORT
We have audited the consolidated financial statements of DMX Inc. and
subsidiaries as listed in the accompanying index. These consolidated financial
statements are the responsibility of DMX Inc.'s management. Our responsibility
is to express an opinion on these consolidated financial statements based on our
audits.
We have conducted our audits in accordance with generally accepted auditing
standards. 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.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of DMX Inc. and
subsidiaries as of June 30, 1997 and September 30, 1996 and the results of their
operations and their cash flows for the nine months ended June 30, 1997 and the
years ended September 30, 1996 and 1995, in conformity with generally accepted
accounting principles.
KPMG PEAT MARWICK LLP
Los Angeles, California
September 26, 1997
A-V-45
<PAGE> 225
DMX INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1997 AND SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
ASSETS
JUNE 30, SEPTEMBER 30,
1997 1996
------------- -------------
<S> <C> <C>
Current assets, excluding DMX-Europe N.V.:
Cash and cash equivalents................................. $ 664,340 $ 928,399
Prepaid expenses.......................................... 827,233 464,545
Equipment inventory....................................... 491,573 438,163
Accounts receivable:
Trade related party (note 2)............................ 1,481,748 1,828,973
Other trade............................................. 3,003,586 2,732,018
Allowance for doubtful accounts (note 3)................ (450,455) (251,247)
------------- -------------
Total current assets, excluding DMX-Europe N.V........ 6,018,025 6,140,851
Current assets DMX-Europe N.V.:
Cash...................................................... 168,427 192,635
Prepaid expenses.......................................... -- 851,586
Equipment inventory....................................... -- 98,517
Accounts receivable (net)................................. -- 435,480
------------- -------------
Total current assets DMX-Europe N.V................... 168,427 1,578,218
------------- -------------
Total current assets.................................. 6,186,452 7,719,069
Investment in Galactic/TEMPO Sound (note 4)................. 557,592 504,156
Property and equipment, net (note 6)........................ 3,968,053 4,418,799
Property and equipment DMX-Europe N.V., net (note 6)........ 164,120 1,475,189
Goodwill, net............................................... -- 4,535,658
Other assets................................................ 109,678 99,148
------------- -------------
Total Assets....................................... $ 10,985,895 $ 18,752,019
============= =============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities, excluding DMX-Europe N.V.:
Accounts payable.......................................... $ 1,815,066 $ 1,097,476
Accrued liabilities (note 7).............................. 7,523,802 4,886,837
Accrued obligations on disposal -- DMX-Europe N.V......... 2,826,950 1,468,530
Note payable due to related party (note 8)................ 731,611 --
Current portion of capital lease obligation (note 11)..... 571,600 410,108
------------- -------------
Total current liabilities, excluding DMX-Europe
N.V.............................................. 13,469,029 7,862,951
Current liabilities DMX-Europe N.V.:
Accounts payable.......................................... 1,014,269 7,284,664
Accrued liabilities....................................... 1,525,461 1,488,492
Investment in and advances to DMX-Europe (UK)............. 6,590,754 --
------------- -------------
Total current liabilities DMX-Europe N.V........... 9,130,484 8,773,156
------------- -------------
Total current liabilities.......................... 22,599,513 16,636,107
Deferred revenue............................................ 308,895 295,461
Royalty payable (note 11)................................... 1,773,275 1,773,275
Note payable due to related party (note 8).................. 1,784,889 --
Capital lease obligation (note 11).......................... 821,548 1,401,426
Stockholders' deficit (note 9):
Common Stock, $.01 par value. Authorized 100,000,000
shares;
issued 59,672,224 shares in 1997 and 1996............... 596,722 596,722
Paid-in capital........................................... 136,895,686 136,758,259
Accumulated deficit....................................... (152,786,657) (138,078,913)
Foreign currency translation reserve...................... (429,973) (52,315)
Treasury stock, 85,630 shares, at cost.................... (578,003) (578,003)
------------- -------------
Net stockholders' deficit.......................... (16,302,225) (1,354,250)
Commitments and contingencies (note 11)..................... -- --
------------- -------------
Total Liabilities and Stockholders' Deficit........ $ 10,985,895 $ 18,752,019
============= =============
</TABLE>
See accompanying notes to consolidated financial statements
A-V-46
<PAGE> 226
DMX INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
NINE MONTHS ENDED JUNE 30, 1997 AND 1996 AND YEARS ENDED SEPTEMBER 30, 1996 AND
1995
<TABLE>
<CAPTION>
JUNE 30, SEPTEMBER 30,
--------------------------- ---------------------------
1997 1996 1996 1995
------------ ------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Subscriber fee revenues -- related party (note
2)........................................... $ 6,907,044 $ 6,648,371 $ 9,086,434 $ 7,695,978
Subscriber fee revenues -- other............... 6,902,393 5,033,936 6,972,671 4,920,380
Other revenue, net............................. 564,990 270,669 431,060 157,026
Revenue -- DMX-Europe N.V. (note 5)............ 2,219,851 238,305 836,438 --
------------ ------------ ------------ ------------
16,594,278 12,191,281 17,326,603 12,773,384
Operating expenses:
General and administrative................... 5,312,343 3,945,166 5,803,043 5,511,615
Sales and marketing.......................... 5,320,841 6,672,658 8,570,141 7,438,023
Studio and programming....................... 7,548,413 6,616,162 9,016,760 7,773,759
International development.................... -- 868 1,598 168,629
Research and development..................... 630,263 588,506 778,047 725,164
Stock bonus and option compensation.......... 137,427 412,281 549,708 549,708
Depreciation and amortization................ 1,789,024 1,301,937 1,883,415 1,341,775
Operating expenses -- DMX-Europe N.V.
(note 5)................................... 8,489,238 2,110,020 5,740,289 --
Loss on disposal of DMX-Europe N.V. (note
5)......................................... 1,737,554 -- 7,153,278 --
------------ ------------ ------------ ------------
30,965,103 21,647,598 39,496,279 23,508,673
Net operating loss.................... (14,370,825) (9,456,317) (22,169,676) (10,735,289)
Other income (expense):
Equity in earnings of Galactic/TEMPO Sound
(note 4)................................... 203,436 107,571 197,227 306,640
Equity in loss of DMX-Europe N.V. (note 5)... -- (11,853,686) (11,853,686) (13,271,599)
Interest income.............................. 23,918 95,720 111,610 282,234
Interest expense............................. (247,680) (190,742) (246,181) (208,694)
Interest expense DMX-Europe N.V. (note 5).... (173,647) (297,222) (53,936) --
Other income................................. 1,519 451,976 172,270 779,866
Other expense................................ (144,465) -- (12,405) (232,687)
------------ ------------ ------------ ------------
(336,919) (11,686,383) (11,685,101) (12,344,240)
Net loss.............................. $(14,707,744) $(21,142,700) $(33,854,777) $(23,079,529)
============ ============ ============ ============
Loss per common share.......................... $ (0.25) $ (0.46) $ (0.68) $ (0.60)
============ ============ ============ ============
Weighted average number of common shares....... 59,586,594 46,308,220 49,675,569 38,505,107
============ ============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements
A-V-47
<PAGE> 227
DMX INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
NINE MONTHS ENDED JUNE 30, 1997 AND YEARS ENDED SEPTEMBER 30, 1996 AND 1995
<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, 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 9)..... -- -- 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.......... 15,991,624 159,916 37,237,643 -- -- -- 37,397,559
Cost of issuance.................. -- -- (239,798) -- -- -- (239,798)
Accrued compensation (note 9)..... -- -- 549,708 -- -- -- 549,708
Foreign currency translation
reserve......................... -- -- -- -- -- (78,705) (78,705)
Net loss.......................... -- -- -- (33,854,777) -- -- (33,854,777)
---------- -------- ------------ ------------- --------- --------- ------------
BALANCE AT SEPTEMBER 30, 1996..... 59,672,224 596,722 136,758,259 (138,078,913) (578,003) (52,315) (1,354,250)
Accrued compensation (note 9)..... -- -- 137,427 -- -- -- 137,427
Foreign currency translation
reserve......................... -- -- -- -- -- (377,658) (377,658)
Net loss.......................... -- -- -- (14,707,744) -- -- (14,707,744)
---------- -------- ------------ ------------- --------- --------- ------------
BALANCE AT JUNE 30, 1997.......... 59,672,224 $596,722 $136,895,686 $(152,786,657) $(578,003) $(429,973) $(16,302,225)
========== ======== ============ ============= ========= ========= ============
</TABLE>
See accompanying notes to consolidated financial statements
A-V-48
<PAGE> 228
DMX INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED JUNE 30, 1997 AND 1996 AND YEARS ENDED SEPTEMBER 30, 1996 AND
1995
<TABLE>
<CAPTION>
JUNE 30, SEPTEMBER 30,
--------------------------- --------------------------
1997 1996 1996 1995
------------ ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss...................................... $(14,707,744) (21,142,700) (33,854,777) (23,079,529)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization............... 2,462,259 1,413,479 2,229,646 1,341,775
Dividend from Galactic/TEMPO Sound.......... 150,000 150,000 150,000 300,000
Equity in earnings of Galactic/TEMPO
Sound..................................... (203,436) (107,571) (197,227) (306,640)
Equity in loss of DMX-Europe N.V............ -- 11,853,686 11,853,686 13,271,599
Loss on disposal of DMX-Europe N.V.......... 1,737,554 -- 7,153,278 --
Loss on disposal of property and
equipment................................. 46,056 -- -- --
Compensation expense for stock bonus and
options................................... 137,427 412,281 549,708 549,708
Provision for doubtful accounts............. 810,219 -- 643,148 700,000
(Increase) decrease in prepaid and other
current assets............................ 30,100 (827,469) (947,596) 76,315
Decrease in advances to DMX-Europe N.V...... -- -- -- 490,296
(Increase) in receivables................... (777,726) (1,995,712) (1,077,525) (715,015)
(Increase) decrease in other assets......... (42,810) 64,801 93,157 (111,250)
Increase (decrease) in deferred revenue..... 13,434 (87,110) (80,934) (42,145)
Increase in royalty payable................. -- 434,485 521,292 538,562
Increase (decrease) in accounts payable and
accrued liabilities....................... 8,823,660 2,369,520 4,035,653 (33,365)
------------ ----------- ----------- -----------
Net cash used in operating
activities........................... (1,521,007) (7,462,310) (8,928,491) (7,019,689)
------------ ----------- ----------- -----------
Cash flows from investing activities:
Purchase of property and equipment, net....... (1,055,213) (1,050,754) (1,519,444) (954,101)
Advances to DMX-Europe N.V., net.............. -- (681,846) (681,846) (2,044,311)
Investment in preferred stock of DMX-Europe
(UK) Limited................................ -- (6,440,000) (6,440,000) (3,500,000)
Purchase of securities held to maturity....... -- -- (165,000)
Proceeds from matured securities held to
maturity.................................... -- 165,000 165,000 2,279,738
------------ ----------- ----------- -----------
Net cash used in investing
activities........................... (1,055,213) (8,007,600) (8,476,290) (4,383,674)
------------ ----------- ----------- -----------
Cash flows from financing activities:
Issuance of common stock, net................. -- 10,346,094 10,346,094 17,191,542
Issuance of note payable due to related
party....................................... 2,516,500 -- -- --
Repayment of note payable to bank............. -- (45,000) (45,000) (240,000)
Repayment of note payable..................... -- -- -- (181,455)
Repayment of principal portion of capital
lease obligation............................ (228,547) (295,210) (397,398) (228,225)
------------ ----------- ----------- -----------
Net cash provided by financing
activities........................... 2,287,953 10,005,884 9,903,696 16,541,862
------------ ----------- ----------- -----------
Net (decrease) increase in cash and
cash equivalents..................... (288,267) (5,464,026) (7,501,085) 5,138,499
Cash and cash equivalents, beginning of
period........................................ 1,121,034 8,622,119 8,622,119 3,483,620
------------ ----------- ----------- -----------
Cash and cash equivalents, end of period........ $ 832,767 3,158,093 1,121,034 8,622,119
============ =========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements
A-V-49
<PAGE> 229
DMX INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED JUNE 30, 1997 AND YEARS ENDED SEPTEMBER 30, 1996 AND 1995
(1) INCORPORATION AND NATURE OF BUSINESS.
DMX Inc., 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, ICT changed its name to DMX
Inc.
DMX Inc. is primarily engaged in programming, distributing and marketing a
digital music service; Digital Music Express(R) (DMX(R)), which provides
continuous 24-hours-per-day commercial free, CD quality music programming.
On July 11, 1997, DMX Inc. and TCI Music, Inc. ("TCI Music"), a wholly
owned subsidiary of Tele-Communications, Inc. ("TCI"), 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 Inc., TCI, TCI Music and TCI Merger Sub, Inc. ("Merger
Sub"), a wholly owned subsidiary of TCI Music, whereby Merger Sub was merged
with and into DMX Inc. (the "Merger") with DMX Inc. as the surviving corporation
and TCI Music became the successor Registrant to DMX Inc. Such Merger was deemed
effective July 1, 1997 for accounting purposes.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES.
ACCOUNTING PRINCIPLES AND CONSOLIDATION.
The consolidated financial statements include the accounts of DMX Inc. and
its wholly owned subsidiaries, TEMPO Sound, 450714 B.C. Ltd. and DMX-Europe N.V.
and subsidiary ("DMX-E"). DMX-Europe (UK) Limited was deconsolidated as of June
30, 1997 as discussed in note 5. 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 DMX Inc.'s plan to
dispose of its operations as described in note 5. In connection with the
anticipated disposal of operations and considering the terms of such agreements
goodwill was reduced by $5,685,000 due the impairment of its value during the
fiscal year ended September 30, 1996. Due to the deconsolidation of DMX-Europe
(UK) Limited as discussed in note 5, goodwill was incorporated with the
investment in and advance to DMX-Europe (UK) in the accompanying balance sheet
as of June 30, 1997.
REVENUE RECOGNITION AND ALLOWANCE FOR DOUBTFUL ACCOUNTS.
DMX Inc. 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 beginning at inception of
service ratably over the contract terms. DMX Inc. 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 TCI and its affiliates. At June 30, 1997,
TCI held 45.7% of the outstanding common stock of DMX Inc. (see note 12 "Recent
Developments"). Total subscriber fee revenue from TCI for the nine months ended
June 30, 1997 and 1996 and the fiscal years ended September 30, 1996 and 1995
represented approximately 50%, 57%, 56%, and 61%, respectively, of total
subscriber fee revenue.
A-V-50
<PAGE> 230
DMX INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
INVENTORY.
Inventory consisted of receivers, amplifiers, compact disc players, compact
discs and packaging material and is valued at the lower of cost (determined on a
first-in, first-out method) or estimated net realizable value.
INVESTMENT IN GALACTIC/TEMPO SOUND PARTNERSHIP.
DMX Inc.'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.
PROPERTY AND EQUIPMENT.
Property and equipment is carried at cost and is depreciated over the
estimated useful lives of 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.
DMX Inc. accounts for income taxes under Statement of Financial Accounting
Standard No. 109, Accounting for Income Taxes ("SFAS No. 109"), whereby deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amount of
existing assets and liabilities and their respective tax bases. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to
be recovered or settled. Under SFAS No. 109, the effect on deferred tax assets
and liabilities of a change in tax rates is recognized in income in the period
that includes the enactment date.
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 period
by the weighted average number of common shares issued and outstanding during
the period. Outstanding share options, 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 the nine months ended June 30, 1997 and
fiscal years ended September 30, 1996 and 1995 were $247,700, $246,200 and
$236,500, respectively. Foreign currency translation was $377,658 for the nine
months ended June 30, 1997, $78,705 and $26,390 for the fiscal years ended
September 30, 1996 and 1995, respectively.
A-V-51
<PAGE> 231
DMX INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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, including the
accrual of music rights and royalties, 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.
DMX Inc.'s accounts receivable balance is comprised primarily of amounts
due from cable system operators, with the majority due from its largest
customer, TCI.
STOCK OPTIONS.
Prior to January 1, 1996, DMX Inc. accounted for its stock option plan in
accordance with the provisions of Accounting Principles Board ("APB") Opinion
No. 25, "Accounting for Stock Issued to Employees", and related interpretations.
As such, compensation expense would be recorded on the date of grant only if the
current market price of the underlying stock exceeded the exercise price. On
January 1, 1996, DMX Inc. adopted Statement of Financial Accounting Standard No.
109, "Accounting for Stock-Based Compensation" (SFAS No. 123), which permits
entities to recognize as expense over the vesting period the fair value of all
stock-based awards on the date of grant. Alternatively, SFAS No. 123 allows
entities to continue to apply the provision of APB Opinion No. 25 and provide
pro forma net income and pro forma earnings per share disclosures for employee
stock option grants made in 1995 and future years as if the fair-value-based
method defined in SFAS No. 123 had been applied. DMX Inc. has elected to
continue to apply the provisions of APB Opinion No. 25 and provide the pro forma
disclosure provisions of SFAS No. 123.
RECLASSIFICATIONS.
Certain reclassifications of prior period amounts have been made to conform
to the current year's reporting format.
(3) ALLOWANCE FOR DOUBTFUL ACCOUNTS.
A summary of the activity of the allowance for doubtful accounts for the
nine months ended June 30, 1997 and fiscal years ended September 30, 1996 and
1995 follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
NINE MONTHS SEPTEMBER 30,
ENDED JUNE 30, -----------------------
1997 1996 1995
-------------- ----------- --------
<S> <C> <C> <C>
Balance, beginning of period.................. $ 251,247 $ 856,802 $156,802
Provision for doubtful accounts............... 810,219 643,148 700,000
Accounts charged-off.......................... (611,011) (1,248,703) --
--------- ----------- --------
Balance, end of period........................ $ 450,455 $ 251,247 $856,802
========= =========== ========
</TABLE>
A-V-52
<PAGE> 232
DMX INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(4) INVESTMENT IN GALACTIC/TEMPO SOUND PARTNERSHIP.
The summarized balance sheet and operating data as of and for the nine
months ended June 30, 1997, and the twelve months ended September 30, 1996, of
the Galactic/TEMPO Sound partnership follows:
<TABLE>
<CAPTION>
NINE MONTHS ENDED TWELVE MONTHS ENDED TWELVE MONTHS ENDED
JUNE 30, 1997 SEPTEMBER 30, 1996 SEPTEMBER 30, 1995
(UNAUDITED) (UNAUDITED) (UNAUDITED)
----------------- ------------------- -------------------
<S> <C> <C> <C>
Current assets............... $ 945,000 $ 890,000 $ 828,804
Non-current assets........... 225,000 144,000 186,747
Current liabilities.......... 55,000 26,000 101,694
Partners' capital............ 1,115,000 1,008,000 913,857
Partners' draws for the
period..................... (300,000) (300,000) (600,000)
Revenues..................... 1,769,000 2,227,000 1,903,000
Operating expenses........... (1,362,000) (1,833,000) (1,290,000)
Net income................... $ 407,000 $ 394,000 $ 613,000
=========== =========== ===========
</TABLE>
(5) INVESTMENT AND DISPOSITION OF DMX-EUROPE N.V. AND SUBSIDIARY.
The summarized operating data for the nine months ended June 30, 1997 and
the years ended September 30, 1996 and 1995, of DMX-Europe N.V. and subsidiary
follows:
<TABLE>
<CAPTION>
NINE MONTHS FOR THE YEAR ENDED
ENDED SEPTEMBER 30,
JUNE 30, ----------------------------
1997 1996 1995
----------- ------------ ------------
<S> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Revenue................................. $ 2,219,851 $ 1,559,262 $ 151,176
Operating, selling, general and
administrative expenses (including
intercompany expenses of $867,763 for
the nine months ended June 30, 1997
and $351,786 for the year ended
September 30, 1996)................... 8,706,261 15,594,979 16,500,784
Depreciation and amortization......... 673,234 909,022 541,678
----------- ------------ ------------
Operating loss.......................... (7,159,644) (14,944,739) (16,891,286)
Interest expense (including intercompany
expenses of $1,362,804 for the nine
months ended June 30, 1997 and
$874,250 for the year ended September
30, 1996)............................. (1,536,451) (3,115,621) (2,876,252)
Other................................. 22,494 22,851 54,519
----------- ------------ ------------
Net loss...................... $(8,673,601) $(18,037,509) $(19,713,019)
=========== ============ ============
</TABLE>
DISPOSITION OF DMX-EUROPE N.V. AND SUBSIDIARY.
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
balance sheet as of June 30, 1997 gives 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.
A-V-53
<PAGE> 233
DMX INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
DMX Inc. has accounted for the effects of the disposal of DMX-E and
accordingly has estimated the loss on the disposal of DMX-E of $1,737,554 and
$7,153,278 in the consolidated statements of operations for the nine months
ended June 30, 1997 and the year ended September 30, 1996, respectively. The
loss on disposal of DMX-Europe NV 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 $5,720,000 and the incurrence of certain
potential liabilities of $1,469,000 in conjunction with such disposal
activities.
DMX-E was formed by DMX Inc. 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 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. DMX Inc. partially
guaranteed the credit facility, and would be liable for one-half of the TCI-E's
"loss" as defined, which was payable at the option of DMX Inc., in DMX Inc.'s
Common Stock.
On May 17, 1996, DMX Inc. consummated the merger of TCI-E (the "TCI-E
Merger"), 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 DMX Inc., 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 Inc.acquired
the remaining 49% interest in DMX-E.
The TCI-E Merger was accounted for as a purchase and DMX Inc. 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 at 49% of the interest accrued on the notes
receivable............................................. (4,213,793)
Other....................................................... 31,391
-----------
Goodwill.................................................... $10,415,701
===========
</TABLE>
A-V-54
<PAGE> 234
DMX INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The accompanying consolidated balance sheets of DMX Inc. at June 30, 1997
and September 30, 1996 is consolidated with the accounts of DMX-E and the
accompanying consolidated statements of operations and cash flows of DMX Inc.
were consolidated with the accounts of DMX-E for the nine months ended June 30,
1997 and for the period from May 18, 1996 through September 30, 1996. Prior to
May 18, 1996, DMX Inc. accounted for its investment in DMX-E using the modified
equity method of accounting.
(6) PROPERTY AND EQUIPMENT.
Property and equipment as of June 30, 1997 and September 30, 1996 consist
of the following:
<TABLE>
<CAPTION>
JUNE 30, SEPTEMBER 30,
1997 1996
----------- -------------
<S> <C> <C>
DMX INC.
Furniture and equipment..................................... $ 4,398,935 $ 3,613,145
Leasehold improvements...................................... 213,205 181,348
Studio equipment............................................ 3,432,489 4,103,686
Music library............................................... 1,046,944 918,126
Computer system............................................. 571,410 556,411
----------- -----------
9,662,983 9,372,716
Less accumulated depreciation and amortization.............. (5,694,930) (4,953,917)
----------- -----------
$ 3,968,053 $ 4,418,799
=========== ===========
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, SEPTEMBER 30,
1997 1996
----------- -------------
<S> <C> <C>
DMX-EUROPE
Furniture and equipment..................................... $ -- $ 344,224
Studio equipment............................................ 164,120 2,041,021
Computer system............................................. -- 695,049
----------- -----------
164,120 3,080,294
Less accumulated depreciation and amortization.............. -- (1,605,105)
----------- -----------
$ 164,120 $ 1,475,189
=========== ===========
</TABLE>
Studio equipment with a net book value of $137,000, net of accumulated
depreciation of $583,000 was leased to DMX-E for a monthly fee of approximately
$23,000, and was written off at June 30, 1997. Lease income related to leased
equipment to DMX-E for the period from October 1, 1995 through May 17, 1996, and
the fiscal year ended September 30, 1995 was approximately $172,000 and
$245,000, respectively, and was included in other income. For the nine months
ended June 30, 1997 and the period from May 18, 1996 through September 30, 1996,
the lease income of approximately $160,000 and $103,000, respectively, was
eliminated in consolidation.
Studio equipment of $948,000, net of accumulated depreciation of
$1,248,000, at June 30, 1997 was financed under the capital lease obligation.
A-V-55
<PAGE> 235
DMX INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(7) ACCRUED LIABILITIES.
Accrued liabilities as of June 30, 1997 and September 30, 1996 were
comprised of the following:
<TABLE>
<CAPTION>
JUNE 30, SEPTEMBER 30,
1997 1996
---------- -------------
<S> <C> <C>
Accrued music right royalties.............................. $2,920,285 1,574,449
Accrued marketing credits.................................. 2,305,240 2,575,408
Accrued legal fees......................................... 496,750 102,338
Accrued payroll............................................ 564,532 75,831
Accrued employee benefits.................................. 319,076 205,347
Deferred rent.............................................. 231,020 83,784
Other accrued expenses..................................... 686,899 269,680
---------- ----------
$7,523,802 4,886,837
========== ==========
</TABLE>
ACCRUED MUSIC RIGHT ROYALTIES.
DMX Inc. licenses rights to re-record and distribute music from a variety
of sources and pays royalties to songwriters and publishers through contracts
negotiated with performing rights societies such as the American Society of
Composers, Authors and Publishers ("ASCAP"), Broadcast Music, Inc. ("BMI") and
the Society of European Stage Authors and Composers ("SESAC"). DMX Inc. has
separate agreements with ASCAP, BMI and SESAC for residential and commercial
distribution. Certain of the agreements are being negotiated on an industrywide
basis mainly over new rate structures that may require retroactive rate
increases. DMX Inc. has continued to accrue royalties that are under
negotiations based on its best estimate, after consultation with counsel and
consideration of the terms and rates of the expired contracts.
The Digital Performance Right in Sound Recordings Act of 1995 ("1995 Act")
was signed into law on November 1, 1995. The 1995 Act establishes the right of
owners of the performance rights, such as the performers and record companies,
to control digital transmission of sound recordings by means of subscription
service digital transmissions. The 1995 Act provides a compulsory license for
noninteractive subscription services. An arbitration proceeding relating to
residential digital music distribution is pending before the United States
Copyright Office. The purpose of the proceeding is to determine the statutory
license royalty rate to be paid under the 1995 Act by DMX Inc. and other digital
music residential subscription services on services transmitted on non-business
subscribers. The rate charged is retroactive to February 1996 and is contingent
on the negotiated rate agreed to as result of the arbitration proceeding. DMX
Inc. has been accruing royalties at an estimated rate of 3% of residential
subscriber fee revenue since such date after consultation with counsel.
ACCRUED MARKETING CREDITS.
Accrued marketing credits at June 30, 1997 and September 30, 1996 of
$2,305,240 and $2,575,408, respectively, related to a certain license fee
arrangement. In July 1997, the total marketing credits were satisfied in full
through a cash payment of $855,436 and offset of certain license fees due to DMX
Inc.
(8) NOTE PAYABLE RELATED PARTY.
On February 6, 1997 DMX Inc. entered into a loan and security agreement
with TCI which provides DMX Inc. up to $3.5 million. The loan proceeds were used
to purchase and/or reimburse DMX Inc. 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
A-V-56
<PAGE> 236
DMX INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
commencing September 1, 1997. At June 30, 1997 the principal balance outstanding
was approximately $2,420,000 and accrued interest was approximately $97,000.
(9) STOCKHOLDERS' DEFICIT.
STOCK OPTIONS AND COMMITMENTS.
DMX Inc. 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, 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
Options expired and canceled.... (230,000) $2.563 - $4.180 per share
Options 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.
Options expired................. (531,250) $1.95 - $5.75 per share
---------
Outstanding options at June
30,1997....................... 3,584,583
========= $2.063 - $6.25 per share, expiring on
various dates, June 30, 1998 to July 1,
2006.
</TABLE>
At June 30, 1997, options to purchase 3,584,583 shares were exercisable at
prices ranging from $2.063 to $6.25 per share and include options to purchase
400,000 shares that were exercisable prior to July 11, 1997 due to the
acceleration of options. By terms of the DMX Inc. 1993 Stock Option Plan,
options issued, outstanding and unexercised were terminated upon consummation of
the Merger. (See note 12 "Recent Developments".) Exercisable options held by
officers and directors of DMX Inc. at June 30, 1997 totaled 3,373,333.
ACCOUNTING FOR STOCK BASED COMPENSATION.
The per share fair value of stock options granted during the years ended
September 30, 1996 and 1995 ranged from $1.69 to $2.69 on the date of grant
using the Black Scholes option-pricing model. There were no options granted
during the nine months ended September 30, 1997. DMX Inc. applies APB Opinion
No. 25 in accounting for its Plans and accordingly, no compensation cost was
recognized to the extent the exercise price of the stock options equaled the
fair value. Had DMX Inc. determined compensation cost based on the fair
A-V-57
<PAGE> 237
DMX INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
value at the grant date for its stock options under SFAS No. 123, DMX Inc.'s net
loss and loss per share would have been increased to the pro forma amounts
indicated below:
<TABLE>
<CAPTION>
YEAR ENDED
NINE MONTHS SEPTEMBER 30,
ENDED ----------------------------
JUNE 30, 1997 1996 1995
------------- ------------ ------------
<S> <C> <C> <C>
Net loss
As reported............................ $(14,707,744) (33,854,777) (23,079,529)
Pro forma.............................. (15,216,002) (34,363,035) (23,574,673)
Net loss per share
As reported............................ (0.25) (0.68) (0.60)
Pro forma.............................. (0.26) (0.69) (0.61)
Weighted average common stock and common
stock equivalents outstanding.......... 59,586,594 49,675,569 38,505,107
</TABLE>
Pro forma net income reflects only options granted during the years ended
September 30, 1996 and 1995. Therefore, the full impact of calculating
compensation cost for stock options under SFAS No. 123 is not reflected in the
pro forma net income amounts presented above because compensation cost is
reflected over the options vesting period and compensation cost for options
granted prior to January 1, 1995 is not considered.
STOCK BONUS AND OPTION COMPENSATION.
Stock bonus expense included $137,427 and $412,281 for the nine months
ended June 30, 1997 and 1996, respectively, and $549,708 of compensation for
each of the years ended September 30, 1996 and 1995, 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 represented 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
and at December 31, 1996 the remaining options to purchase 200,000 shares
expired.
COMMON STOCK.
During 1996, DMX Inc. completed private placements with certain related
parties. Stephen A. Wynn, a director of DMX Inc., 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 DMX Inc. merger with TCI-E. In addition, TCI bought Stephen A. Wynn's
5,200,000 shares in DMX Inc. for 2.00 per share.
(10) INCOME TAXES.
At June 30, 1997, DMX Inc. had approximately $86,000,000 of net operating
loss carryforwards for U.S. Federal income tax reporting purposes, expiring in
years 2001 through 2012. 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 DMX Inc. has occurred for U.S. tax purposes.
A-V-58
<PAGE> 238
DMX INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
(11) COMMITMENTS AND CONTINGENCIES.
CAPITAL LEASE WITH RELATED PARTY.
DMX Inc. 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 June 30, 1997 was $1,386,000 with terms that extends
through the year 2000, at an interest rate of 9.5%. The related studio equipment
had a net book value of $948,000 at June 30, 1997 and is included in Property
and Equipment in the accompanying consolidated balance sheets.
OPERATING LEASE COMMITMENTS.
DMX Inc. 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 $4,023,000 for
the nine months ended June 30, 1997 and $5,324,000 and $5,097,000 for the fiscal
years ended September 30, 1996 and 1995, respectively 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 June 30,
1997 follows:
<TABLE>
<CAPTION>
OPERATING LEASES
CAPITAL WITH RELATED OPERATING LEASES
LEASE PARTIES WITH OTHERS
---------- ---------------- ----------------
<S> <C> <C> <C>
1998....................................... $ 569,600 4,535,800 770,900
1999....................................... 564,000 4,519,000 704,400
2000....................................... 552,600 3,913,300 681,600
2001....................................... -- 2,258,400 670,100
Thereafter................................. -- 7,904,400 --
---------- ----------- ----------
Total minimum lease payments............... $1,686,200 23,130,900 2,827,000
========== =========== ==========
Less amounts representing interest......... (293,100)
==========
Present value of net minimum lease
payments................................. $1,393,100
==========
</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 $3,392,000 for the nine months
ended June 30, 1997 and $4,831,000 and $4,489,000 for the fiscal years ended
September 30, 1996 and in 1995.
MANUFACTURING COMMITMENTS AND ROYALTY PAYABLE.
DMX Inc. 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. DMX Inc. 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 DMX Inc.'s premium audio service revenues until August 1996. No
payments are required until DMX Inc. achieves "operating breakeven", as defined
in the agreement.
DMX Inc. and Comstream Corporation ("Comstream"), have an agreement with
respect to the manufacture, distribution and servicing of the DR-200 Digital
Satellite Receiver. DMX Inc. has guaranteed
A-V-59
<PAGE> 239
DMX INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
the purchase of 50,000 digital satellite receivers by DMX Inc., its approved
customers and/or affiliates within 42 months after commencement of the
agreement.
401(k) SAVINGS PLAN.
DMX Inc. 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 DMX Inc.'s
common stock. Subsequent to January 1, 1995, eligible participants vest in
employer matching contributions of 10% of the participants pretax deferrals
invested in DMX Inc.'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 DMX Inc.'s common
stock. For the nine months ended June 30, 1997, DMX Inc.'s employee benefit
expense for matching contributions totaled $3,550.
PARENT GUARANTEES.
DMX Inc. 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 DMX Inc. 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. DMX Inc. 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. DMX Inc. 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 DMX Inc.
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.
LEGAL ACTIONS.
From time to time DMX Inc. may be a party to legal actions arising in the
ordinary course of business, including claims by former employees. In the
opinion of DMX Inc.'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 DMX Inc.
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
DMX Inc. by TCI is wrongful, unfair and harmful to DMX Inc.'s public
stockholders and seeking to enjoin the consummation of the Merger. DMX Inc.
believes that this action is without merit and intends to defend it vigorously.
On July 23, 1997, Jeri L. Amstutz, a former employee of DMX Inc., filed a
complaint in Superior Court of California, County of Los Angeles, Jeri L.
Amstutz v. DMX Inc., Otis Smith, Jerold Rubinstein and Does 1 to 100. The
plaintiff alleges certain wrongful employment practices. The plaintiff seeks
compensatory damages
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DMX INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
for lost wages and benefits, foreseeable consequential and incidental damages in
an unspecified amount, as well a attorneys' fees, costs and prejudgment
interest. The plaintiff also seeks punitive damages and damages for emotional
distress (and similar harm) in unspecified amounts which the plaintiff claims to
believe will exceed $2,000,000.
On July 23, 1997, Marnie Tenden, a former employee of DMX Inc., filed a
complaint in Superior Court of California, County of Los Angeles, Marnie Tenden
v. DMX Inc., Otis Smith, Jerold Rubinstein and Does 1 to 100, which alleges sex
discrimination and retaliatory harassment. The plaintiff seeks compensatory
damages for lost wages and benefits, foreseeable consequential and incidental
damages, as well as attorneys' fees, costs and prejudgment interest. The
plaintiff also seeks punitive damages and damages for emotional distress (and
similar harm) in unspecified amounts which the plaintiff claims to believe will
exceed $500,000.
(12) RECENT DEVELOPMENTS.
On July 11, 1997, DMX Inc. and TCI Music consummated a merger pursuant to
the Merger Agreement, among DMX Inc., TCI, TCI Music and Merger Sub, whereby
Merger Sub was merged with and into DMX Inc. with DMX Inc. as the surviving
corporation.
In connection with the Merger, TCI and TCI Music entered into a
Contribution Agreement dated July 11, 1997 (the "Contribution Agreement").
Pursuant to the Contribution Agreement: (i) TCI Music issued to TCI (as designee
of certain of its indirect subsidiaries), 62,500,000 shares of Series B Common
Stock, par value $0.01 per share, of TCI Music and a promissory note in the
amount of $40 million; (ii) until December 31, 2006 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 music services
under affiliation agreements currently in effect; (iii) TCI contributed to TCI
Music certain digital commercial tuners that are not in service; and (iv) TCI
granted to each stockholder of DMX Inc. 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 among TCI, TCI Music and the Bank of New York,
as Rights Agent. Each Right entitles the holder 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 ("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 common stock,
$.01 par value per share, of DMX Inc.was converted into the right to receive (i)
one-quarter 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 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
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<PAGE> 241
DMX INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
Effective July 11, 1997, TCI Music, as the successor registrant to DMX Inc.
determined to change its fiscal year end from September 30 to December 31, and
reports the nine month transition period ended June 30, 1997 on Form 10-K.
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 ("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 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 Series B Common Stock of TCI Music. Unlike the shares of TCI Music
Series A Common Stock issued to former stockholders of DMX Inc., 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
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<PAGE> 242
DMX INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
collectively beneficially own 60.5% of the outstanding shares of common stock of
The Box, have agreed to vote such shares, which represent 56.4% 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 $24 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 $5,000,000.
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.
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.
A-V-63
<PAGE> 243
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, DMX Inc. has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
TCI MUSIC, INC.
(Registrant)
By: /s/ DAVID B. KOFF
----------------------------------
David B. Koff
President and Chief Executive
Officer
October 9, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of DMX Inc. and
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ LEO J. HINDERY Chairman of the Board October 9, 1997
- -----------------------------------------------------
Leo J. Hindery
/s/ ROBERT R. BENNETT Director October 9, 1997
- -----------------------------------------------------
Robert R. Bennett
/s/ DONNE F. FISHER Director October 9, 1997
- -----------------------------------------------------
Donne F. Fisher
/s/ PETER M. KERN Director October 9, 1997
- -----------------------------------------------------
Peter M. Kern
/s/ DAVID B. KOFF Director, President and Chief October 9, 1997
- ----------------------------------------------------- Executive Officer
David B. Koff
/s/ J.C. SPARKMAN Director October 9, 1997
- -----------------------------------------------------
J.C. Sparkman
/s/ LON A. TROXEL Director October 9, 1997
- -----------------------------------------------------
Lon A. Troxel
/s/ STEPHEN M. BRETT Secretary, Vice President & October 9, 1997
- ----------------------------------------------------- General Counsel
Stephen M. Brett
/s/ JOANNE WENDY KIM Vice President-Finance October 9, 1997
- ----------------------------------------------------- Principal Financial Officer and
Joanne Wendy Kim Principal Accounting Officer
</TABLE>
A-V-64
<PAGE> 244
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the DGCL provides, generally, that a corporation shall have
the power to indemnify any person who was or is a party or is threatened to be
made a party to any action, suit, or proceeding (except actions by or in the
right of the corporation) by reason of the fact that such person is or was a
director, officer, employee, or agent of the corporation against all expenses,
judgments, fines, and amounts paid in settlement actually and reasonably
incurred by him in connection with such action, suit, or proceeding if he acted
in good faith and in a manner he reasonably believed to be in or not opposed to
the best interest of the corporation and, with respect to any criminal action or
proceeding, had no reasonable cause to believe his conduct was unlawful. A
corporation may similarly indemnify such person for expenses actually and
reasonably incurred by him in connection with the defense or settlement of an
action or suit by or in the right of the corporation if such person acted in
good faith and in a manner he reasonably believed to be in or not opposed to the
best interests of the corporation, and, in the case of claims, issues, and
matters as to which such person shall have been adjudged liable to the
corporation, provided that a court shall have determined, upon application,
that, despite the adjudication of liability, but in view of all of the
circumstances of the case, such person is fairly and reasonably entitled to
indemnity for such expenses that such court shall deem proper.
Section 102(b)(7) of the DGCL provides, generally, that the certificate of
incorporation may contain a provision eliminating or limiting the personal
liability of a director to the corporation or its stockholders for monetary
damages for breach of fiduciary duty as a director, provided that such provision
may not eliminate or limit the liability of a director (i) for any breach of the
director's duty of loyalty to the corporation or its stockholders, (ii) for acts
or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) under Section 174 of Title 8, or (iv) for any
transaction from which the director derived an improper personal benefit. No
such provision may eliminate or limit the liability of a director for any act or
omission occurring prior to the date when such provision became effective.
Article V, Section E of the TCI Music Charter provides as follows:
1. Limitation on Liability.
To the fullest extent permitted by the Delaware General Corporation
Law as the same exists or may hereafter be amended, a director of the
Corporation shall not be liable to the Corporation or any of its
stockholders for monetary damages for breach of fiduciary duty as a
director. Any repeal or modification of this paragraph 1 shall be
prospective only and shall not adversely affect any limitation, right or
protection of a director of the Corporation existing at the time of such
repeal or modification.
2. Indemnification.
a. RIGHT TO INDEMNIFICATION. The Corporation shall indemnify and
hold harmless, to the fullest extent permitted by applicable law as it
presently exists or may hereafter be amended, any person who was or is
made or is threatened to be made a party or is otherwise involved in any
action, suit or proceeding, whether civil, criminal, administrative or
investigative (a "proceeding") by reason of the fact that he, or a
person for whom he is the legal representative, is or was a director or
officer of the Corporation or is or was serving at the request of the
Corporation as a director, officer, employee or agent of another
corporation or of a partnership, joint venture, trust, enterprise or
nonprofit entity, including service with respect to employee benefit
plans, against all liability and loss suffered and expenses (including
attorneys' fees) reasonably incurred by such person. Such right of
indemnification shall inure whether or not the claim asserted is based
on matters which antedate the adoption of Article V, Section E of the
TCI Music Charter. The Corporation shall be required to indemnify or
make advances to a person in connection with a proceeding (or part
thereof) initiated by such person only if the proceeding (or part
thereof) was authorized by the Board of Directors of the Corporation.
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<PAGE> 245
b. PREPAYMENT OF EXPENSES. The Corporation shall pay the expenses
(including attorneys' fees) incurred in defending any proceeding in
advance of its final disposition, provided, however, that the payment of
expenses incurred by a director or officer in advance of the final
disposition of the proceeding shall be made only upon receipt of an
undertaking by the director or officer to repay all amounts advanced if
it should be ultimately determined that the director or officer is not
entitled to be indemnified under this paragraph or otherwise.
c. CLAIMS. If a claim for indemnification or payment of expenses
under this paragraph is not paid in full within 60 days after a written
claim therefor has been received by the Corporation, the claimant may
file suit to recover the unpaid amount of such claim and, if successful
in whole or in part, shall be entitled to be paid the expense of
prosecuting such claim. In any such action the Corporation shall have
the burden of proving that the claimant was not entitled to the
requested indemnification or payment of expenses under applicable law.
d. NON-EXCLUSIVITY OF RIGHTS. The rights conferred on any person by
this paragraph shall not be exclusive of any other rights which such
person may or hereafter acquire under any statute, provision of this
Certificate, the Bylaws, agreement, vote of stockholders or
disinterested directors or otherwise.
e. OTHER INDEMNIFICATION. The Corporation's obligation, if any, to
indemnify any person who was or is serving at its request as a director,
officer, employee or agent of another corporation, partnership, joint
venture, trust, enterprise or nonprofit entity shall be reduced by any
amount such person may collect as indemnification from such other
corporation, partnership, joint venture, trust, enterprise or nonprofit
entity.
Article II, Section 2.9 of TCI Music's Bylaws also contains an indemnity
provision, requiring TCI Music to indemnify members of the Board of Directors
and officers of TCI Music and their respective heirs, personal representatives
and successors in interest for or on account of any action performed on behalf
of TCI Music, to the fullest extent provided by the laws of the State of
Delaware and the TCI Music Charter.
TCI Music may purchase liability insurance policies covering its directors
and officers.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(A) EXHIBITS. See Exhibit Index.
(B) FINANCIAL STATEMENT SCHEDULES.
Schedules have been omitted because the information required to be set
forth therein is not applicable or is shown in the Financial Statements or notes
thereto.
(C) REPORTS, OPINIONS OR APPRAISALS.
Opinion of Houlihan, Lokey, Howard & Zukin (included in the Proxy
Statement/Prospectus as Appendix III).
ITEM 22. UNDERTAKINGS
TCI Music hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1993;
(ii) To reflect in the prospectus any facts or events arising after
the Effective Date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any
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<PAGE> 246
deviation from the low or high and of the estimated maximum offering
range may be reflected in the form of prospectus filed with the
Commission pursuant to Rule 424(b) if, in the aggregate, the changes in
volume and price represent no more than 20 percent change in the maximum
aggregate offering price set forth in the "Calculation of Registration
Fee" table in the effective registration statement.
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the registration statement
or any material change to such information in the registration
statement; provided, however, that paragraphs (1)(i) and (1)(ii) do not
apply if the information required to be included in a posteffective
amendment by those paragraphs is contained in periodic reports filed
with or furnished to the Commission by the registrant pursuant to
Section 13 or 15(d) of the Securities Exchange Act of 1934 that are
incorporated by reference in the registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such posteffective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(4) That, for purposes of determining any liability under the
Securities Act of 1933, each filing of the Registrant's annual report
pursuant to section 13(a) or section 15(d) of the Securities Exchange Act
of 1934 (and, where applicable, each filing of an employee benefit plan's
annual report pursuant to Section 15(d) of the Securities Exchange Act of
1934) that is incorporated by reference in the registration statement shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at the time shall be
deemed to be the initial bona fide offering thereof.
(5) To respond to requests for information that is incorporated by
reference into the prospectus pursuant to Item 4, 10(b), 11 or 13 of this
Form, within one business day of receipt of such request, and to send the
incorporated documents by first class mail or other equally prompt means.
This includes information contained in documents filed subsequent to the
effective date of the registration statement through the date of responding
to the request.
(6) To supply by means of a post-effective amendment all information
concerning a transaction, and the company being acquired involved therein,
that was not the subject of and included in the registration statement when
it became effective, provided, in the case of a transaction that (but for
the possibility of integration with other transactions) would itself
qualify for an exemption from registration, that (i) such transactions by
itself or when aggregated with other such transactions made since the
filing of the most recently audited financial statements of the Registrant
would have a material financial effect upon the Registrant and (ii) the
information required to be supplied in a post-effective amendment by this
paragraph is not contained in periodic reports filed by the Registrant
pursuant to section 13 or section 15(d) of the Securities Exchange Act of
1934 that are incorporated by reference in the registration statement.
(7) That prior to any public reoffering of the securities registered
hereunder through use of a prospectus which is a part of this registration
statement, by any person or party who is deemed to be an underwriter within
the meaning of Rule 145(c), the issuer undertakes that such reoffering
prospectus will contain the information called for by the applicable
registration form with respect to reofferings by persons who may be deemed
underwriters, in addition to the information called for by the other Items
of the applicable form.
(8) That every prospectus (i) that is filed pursuant to paragraph (7)
immediately preceding, or (ii) that purports to meet the requirements of
section 10(a)(3) of the Act and is used in connection with an offering of
securities subject to Rule 415 (sec.230.415 of this chapter), will be filed
as a part of an
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<PAGE> 247
amendment to the registration statement and will not be used until such
amendment is effective, and that, for purposes of determining any liability
under the Securities Act of 1933, each such post-effective amendment shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
(9) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the foregoing provisions,
or otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities
(other than the payment by the Registrant of expenses incurred or paid by a
director, officer or controlling person of the Registrant in the successful
defense of any action, suit or proceeding) is asserted by such director,
officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be
governed by the final adjudication of such issue.
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SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized in the City of Englewood, State of
Colorado, on November 10, 1997.
TCI MUSIC, INC.
By: /s/ STEPHEN M. BRETT
----------------------------------
Stephen M. Brett
Vice President and Secretary
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints and Stephen M. Brett and Leo J. Hindery, Jr., and
each of them, his true and lawful attorneys-in-fact and agents, each with full
power of substitution and resubstitution, for him and in his name, place and
stead, in any and all capacities, to sign any and all amendments (including
pre-effective and post-effective amendments) to this Registration Statement, and
to file the same, with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite or necessary to be done in
and about the premises, as fully to all intents and purposes as he might or
could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents, or either of them, or their or his substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ LEO J. HINDERY, JR. Chairman of the Board November 10, 1997
- -----------------------------------------------------
Leo J. Hindery, Jr.
/s/ DAVID B. KOFF Director, President and November 10, 1997
- ----------------------------------------------------- Chief Executive Officer
David B. Koff (Principal Executive
Officer)
/s/ ROBERT R. BENNETT Director November 10, 1997
- -----------------------------------------------------
Robert R. Bennett
/s/ DONNE F. FISHER Director November 10, 1997
- -----------------------------------------------------
Donne F. Fisher
/s/ PETER M. KERN Director November 10, 1997
- -----------------------------------------------------
Peter M. Kern
/s/ J. C. SPARKMAN Director November 10, 1997
- -----------------------------------------------------
J. C. Sparkman
/s/ LON A. TROXEL Director November 10, 1997
- -----------------------------------------------------
Lon A. Troxel
/s/ JOANNE WENDY KIM Vice President-Finance November 10, 1997
- ----------------------------------------------------- (Principal Accounting
Joanne Wendy Kim Officer; Principal
Financial Officer)
</TABLE>
II-5
<PAGE> 249
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
2.1 -- Agreement and Plan of Merger, dated as of August 12,
1997, among TCI Music, Inc., TCI Music Acquisition Sub,
Inc. and The Box Worldwide, Inc. (Included in Proxy
Statement/Prospectus as Appendix I)
3.1 -- Certificate of Incorporation of TCI Music, Inc.
(Incorporated by Reference to Exhibit 3.1 to the
Registration Statement on Form S-4 of TCI Music, Inc. and
Tele-Communications, Inc., filed with the Securities and
Exchange Commission on June 6, 1997 (Commission File Nos.
333-28613 and 333-28613-01))
3.2 -- Bylaws of TCI Music, Inc. (Incorporated by Reference to
Exhibit 3.2 to the Registration Statement on Form S-4 of
TCI Music, Inc. and Tele-Communications, Inc., filed with
the Securities and Exchange Commission on June 6, 1997
(Commission File Nos. 333-28613 and 333-28613-01))
4.1 -- Specimen Stock Certificate for Series A Common Stock, par
value $.01 per share, of TCI Music, Inc. to be issued in
the Merger (without TCI Rights)
4.2 -- Specimen Stock Certificate for Series A Convertible
Preferred Stock, par value $.01 per share, of TCI Music,
Inc.
4.3 -- TCI Music, Inc. Certificate of Designations for Series A
Convertible Preferred Stock (Included in Proxy
Statement/Prospectus as Appendix II)
5.1 -- Opinion of Sherman & Howard L.L.C. regarding legality of
securities being registered
8.1 -- Opinion of Sherman & Howard L.L.C. regarding tax matters
10.1 -- Rights Agreement among Tele-Communications, Inc., TCI
Music, Inc., and the Bank of New York, as Rights Agent,
dated as of July 11, 1997 (Incorporated by Reference to
Exhibit 4.3 to the Registration Statement on Form S-4 of
TCI Music, Inc. and Tele-Communications, Inc., filed with
the Securities and Exchange Commission on June 6, 1997
(Commission File Nos. 333-28613 and 333-28613-01))
10.2 -- Amended and Restated Contribution Agreement by and
between Tele-Communications, Inc. and TCI Music, Inc.
10.3 -- Letter Agreement by and between TCI Music, Inc. and
Tele-Communications, Inc., dated November 7, 1997,
extending Promissory Note made by TCI Music, Inc., as
Borrower, payable to Tele-Communications, Inc., as
Lender, dated July 11, 1997
10.4 -- Voting Agreement, dated as of August 12, 1997, by and
among TCI Music, Inc., H.F. Lenfest, J. Patrick Michaels,
Jr., and StarNet/CEA II Partners
10.5 -- Binding Term Sheet for Services Agreement, dated August
12, 1997, and Promissory Note dated October 3, 1997, by
and between The Box Worldwide, Inc. and TCI Music, Inc.
10.6 -- Letter of Intent, dated as of September 18, 1997, between
TCI Music, Inc. and Paradigm Music Entertainment Company
10.7 -- Loan and Security Agreement and Promissory Note, dated as
of September 18, 1997, between TCI Music, Inc. and
Paradigm Music Entertainment Company
10.8 -- Voting Agreement, dated as of September 18, 1997, by and
among Paradigm Music Entertainment Company, TCI Music,
Inc., Thomas McPartland, Robert B. Meyrowitz and Lou
Falcigno
</TABLE>
<PAGE> 250
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.9 -- Services Agreement between Tele-Communications, Inc. and
TCI Music, Inc. (Incorporated by Reference to Exhibit
10.2 to the Registration Statement on Form S-4 of TCI
Music, Inc. and Tele-Communications, Inc., filed with the
Securities and Exchange Commission on June 6, 1997
(Commission File Nos. 333-28613 and 333-28613-01))
10.10 -- Tax Sharing Agreement, dated as of October 1, 1997, by
and among Tele-Communications, Inc., TCI Communications,
Inc., Liberty Media Corporation, and TCI Ventures Group
L.L.C. (Incorporated by Reference to Exhibit 9(c)(2) to
Tele-Communications, Inc.'s Schedule 13E-4/A (Amendment
No. 2), Issuer Tender Offer Statement, filed with the
Securities and Exchange Commission on September 5, 1997
(Commission File No. 0-20421))
10.11 -- First Amendment to Tax Sharing Agreement, dated as of
October 1, 1997, among Tele-Communications, Inc., TCI
Communications, Inc., Liberty Media Corporation, and TCI
Ventures Group L.L.C. (Incorporated by Reference to
Exhibit 9(c)(2) to Tele-Communications, Inc.'s Schedule
13E-4/A (Amendment No. 2), Issuer Tender Offer Statement,
filed with the Securities and Exchange Commission on
September 5, 1997 (Commission File No. 0-20421))
10.12 -- Loan and Security Agreement by and between DMX Inc. and
Tele-Communications, Inc., dated as of February 6, 1997,
as amended (Incorporated by Reference to Exhibit 10.7 to
the Registration Statement on Form S-4 of TCI Music, Inc.
and Tele-Communications, Inc., filed with the Securities
and Exchange Commission on June 6, 1997 (Commission File
Nos. 333-28613 and 333-28613-01))
10.13 -- TCI Music, Inc. 1997 Stock Incentive Plan (Incorporated
by Reference to Exhibit 10.83 to TCI Music, Inc.'s
Transition Report on Form 10-K for the transition period
October 1, 1996 through June 30, 1997, filed with the
Securities and Exchange Commission on October 9, 1997)
10.14 -- Form of TCI Music, Inc. Officer/Director Stock Option
Agreement
10.15 -- Form of TCI Music, Inc. Director Stock Option Agreement
10.16 -- Form of TCI Music, Inc. Employee Stock Option Agreement
10.17 -- Employment Agreement between DMX Inc. and Lon Troxel,
dated October 1, 1991, as amended August 22, 1997
(Incorporated by Reference to Exhibit 10.64 to DMX Inc.'s
1994 Report on Form 10-K, filed with the Securities and
Exchange Commission on December 29, 1994, and to Exhibit
10.82 to TCI Music, Inc.'s Transition Report on Form 10-K
for the transition period October 1, 1996 through June
30, 1997, filed with the Securities and Exchange
Commission on October 9, 1997)
10.18** -- Loan Agreement between International Cablecasting
Technologies Europe N.V. and TCI-Euromusic, Inc. (without
exhibits), dated May 19, 1993 (Incorporated by Reference
to Exhibit 4.9 to DMX Inc.'s 1993 Report on Form 10-K,
filed with the Securities and Exchange Commission on
December 23, 1993)
10.19** -- Affiliation Agreement between International Cablecasting
Technologies Inc. and Satellite Services, Inc., dated
July 6, 1989 (Incorporated by Reference to Exhibit 10.2
to DMX Inc.'s Amendment No. 1 to Registration Statement
on Form S-1, filed with the Securities and Exchange
Commission on August 31, 1990 (Commission File No.
33-35690))
</TABLE>
<PAGE> 251
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.20** -- Affiliation Agreement between International Cablecasting
Technologies Inc. and Viacom Cable, dated May 4, 1990
(Incorporated by Reference to Exhibit 10.3 to DMX Inc.'s
Amendment No. 1 to Registration Statement on Form S-1,
filed with the Securities and Exchange Commission on
August 31, 1990 (Commission File No. 33-35690))
10.21** -- Affiliation Agreement between International Cablecasting
Technologies Inc. and KBLCOM Incorporated, dated June 20,
1990 (Incorporated by Reference to Exhibit 10.4 to DMX
Inc.'s Amendment No. 1 to Registration Statement on Form
S-1, filed with the Securities and Exchange Commission on
August 31, 1990 (Commission File No. 33-35690))
10.22 -- Western Tele-Communications, Inc. Security Agreement and
Promissory Note, dated March 26, 1991 (Incorporated by
Reference to Exhibit 10.14 to DMX Inc.'s Post-Effective
Amendment No. 2 to Registration Statement on Form S-1,
filed with the Securities and Exchange Commission on May
24, 1991 (Commission File No. 33-35690))
10.23** -- Uplink Services Agreement between Western
Tele-Communications, Inc. and International Cablecasting
Technologies Inc., dated March 16, 1991 (Incorporated by
Reference to Exhibit 10.15 to DMX Inc.'s Post-Effective
Amendment No. 3 to Registration Statement on Form S-1,
filed with the Securities and Exchange Commission on
August 15, 1991 (Commission File No. 33-35690))
10.24 -- International Cablecasting Technologies Inc. Promissory
Note in favor of TCI-Euromusic, Inc., dated May 19, 1993
(Incorporated by Reference to Exhibit 10.32 to DMX Inc.'s
1993 Report on Form 10-K, filed with the Securities and
Exchange Commission on December 23, 1993)
10.25 -- International Cablecasting Technologies Inc. Security
Agreement in favor of TCI-Euromusic, Inc., dated May 19,
1993 (Incorporated by Reference to Exhibit 10.33 to DMX
Inc.'s 1993 Report on Form 10-K, filed with the
Securities and Exchange Commission on December 23, 1993)
10.26** -- Amendment to Digital Music Express License and
Distribution Agreement between International Cablecasting
Technologies Inc. and Broadcom International Holdings,
dated March 31, 1992 (Incorporated by Reference to
Exhibit 10.34 to DMX Inc.'s 1993 Report on Form 10-K,
filed with the Securities and Exchange Commission on
December 23, 1993)
10.27 -- Manufacturing and Sales Agreement between International
Cablecasting Technologies Inc. and Scientific-Atlanta,
Inc., dated February 28, 1991 (Incorporated by Reference
to Exhibit 10.12 to DMX Inc.'s Post-Effective Amendment
No. 2 to Registration Statement on Form S-1, filed with
the Securities and Exchange Commission on May 24, 1991
(Commission File No. 33-35690))
10.28 -- License and Technical Assistance Agreement between
International Cablecasting Technologies Inc. and
Scientific-Atlanta, dated February 28, 1991 (Incorporated
by Reference to Exhibit 10.13 to DMX Inc.'s
Post-Effective Amendment No. 2 to Registration Statement
on Form S-1, filed with the Securities and Exchange
Commission on May 24, 1991 (Commission File No.
33-35690))
10.29 -- Development and Licensing Agreement between International
Cablecasting Technologies Inc. and Frederikson & Shu
Laboratories, Inc., as amended March 29, 1990
(Incorporated by Reference to Exhibit 10.8 to DMX Inc.'s
Registration Statement on Form S-1, filed with the
Securities and Exchange Commission on July 10, 1990
(Commission File No. 33-35690))
</TABLE>
<PAGE> 252
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.30 -- Agreement between GE American Communications, Inc. and
International Cablecasting Technologies Inc., dated April
14, 1989 (Incorporated by Reference to Exhibit 10.9 to
DMX Inc.'s Registration Statement on Form S-1, filed with
the Securities and Exchange Commission on July 10, 1990
(Commission File No. 33-35690))
10.31** -- Agreement between International Cablecasting Technologies
Inc. and Comstream Corporation, dated July 22, 1993
(Incorporated by Reference to Exhibit 10.41 to DMX Inc.'s
1993 Report on Form 10-K, filed with the Securities and
Exchange Commission on December 23, 1993)
10.32** -- Option Agreement between International Cablecasting
Technologies Inc. and Comstream Corporation, dated July
22, 1993 (Incorporated by Reference to Exhibit 10.42 to
DMX Inc.'s 1993 Report on Form 10-K, filed with the
Securities and Exchange Commission on December 23, 1993)
10.33 -- Partnership Agreement between TEMPO Sound, Inc. and
Galactic Radio Partners, Inc., dated May 7, 1990
(Incorporated by Reference to Exhibit 10.7 to DMX Inc.'s
Registration Statement on Form S-1, filed with the
Securities and Exchange Commission on July 10, 1990
(Commission File No. 33-35690))
10.34 -- C-3 Satellite Transponder Sub-Lease Agreement between
Western Tele-Communications, Inc. and International
Cablecasting Technologies Inc., dated December 2, 1992
(Incorporated by Reference to Exhibit 10.55 to DMX Inc.'s
1993 Report on Form 10-K, filed with the Securities and
Exchange Commission on December 23, 1993)
10.35 -- Satellite Transponder Management Agreement between
Western Tele-Communications, Inc. and International
Cablecasting Technologies Inc., dated December 2, 1992
(Incorporated by Reference to Exhibit 10.56 to DMX Inc.'s
1993 Report on Form 10-K, filed with the Securities and
Exchange Commission on December 23, 1993)
10.36 -- Satellite Transponder Management Agreement between
Western Tele-Communications, Inc. and International
Cablecasting Technologies Inc., dated January 27, 1993
(Incorporated by Reference to Exhibit 10.57 to DMX Inc.'s
1993 Report on Form 10-K, filed with the Securities and
Exchange Commission on December 23, 1993)
10.37 -- Assignment and Assumption Agreement between Western
Tele-Communications, Inc. and International Cablecasting
Technologies Europe N.V. dated April 22, 1993
(Incorporated by Reference to Exhibit 10.58 to DMX Inc.'s
1993 Report on Form 10-K, filed with the Securities and
Exchange Commission on December 23, 1993)
10.38** -- Assignment Agreement between IDB Communications Group,
Inc. and Western Tele-Communications, Inc., dated January
21, 1993 (Incorporated by Reference to Exhibit 10.59 to
DMX Inc.'s 1993 Report on Form 10-K, filed with the
Securities and Exchange Commission on December 23, 1993)
10.39 -- Agreement between International Cablecasting Technologies
Inc. and the American Society of Composers, Authors &
Publishers, dated December 20, 1991 (Incorporated by
Reference to Exhibit 10.60 to DMX Inc.'s 1993 Report on
Form 10-K, filed with the Securities and Exchange
Commission on December 23, 1993)
</TABLE>
<PAGE> 253
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.40** -- Agreement between International Cablecasting Technologies
Inc. and Broadcast Music Inc., dated October 11, 1991, as
supplemented and amended (Incorporated by Reference to
Exhibit 10.61 to DMX Inc.'s 1993 Report on Form 10-K,
filed with the Securities and Exchange Commission on
December 23, 1993)
10.41** -- Agreement between DMX Inc. and SESAC, dated December 26,
1991 (Incorporated by Reference to Exhibit 10.62 to DMX
Inc.'s 1993 Report on Form 10-K, filed with the
Securities and Exchange Commission on December 23, 1993)
10.42 -- International Cablecasting Technologies Inc. Savings
Plan, Amended and Restated Generally Effective as of May
1, 1992 (Incorporated by Reference to Exhibit 10.66 to
DMX Inc.'s 1994 Report on Form 10-K, filed with the
Securities and Exchange Commission on December 29, 1994)
10.43 -- Addendum to Affiliation Agreement between KBLCOM and
International Cablecasting Technologies Inc., dated May
4, 1994 (Incorporated by Reference to Exhibit 10.67 to
DMX Inc.'s 1994 Report on Form 10-K, filed with the
Securities and Exchange Commission on December 29, 1994)
10.44** -- Affiliation Agreement between DMX Inc. and PRIMESTAR
Partners, dated January 25, 1995 (Incorporated by
Reference to Exhibit 10.71 to DMX Inc.'s 1996 Report on
Form 10-K, filed with the Securities and Exchange
Commission on January 14, 1997)
10.45** -- Affiliation Agreement between DMX Inc. and AlphaStar
Television Network, Inc., dated November 29, 1995
(Incorporated by Reference to Exhibit 10.72 to DMX Inc.'s
1996 Report on Form 10-K, filed with the Securities and
Exchange Commission on January 14, 1997)
10.46 -- Subscription and Shareholders Agreement between DMX Inc.,
Jerold H. Rubinstein and XTRA Music Limited, dated
December 18, 1996 (Incorporated by Reference to Exhibit
10.74 to DMX Inc.'s 1996 Report on Form 10-K, filed with
the Securities and Exchange Commission on January 14,
1997)
10.47** -- Commercial License and Distribution Agreement between DMX
Inc. and DMX-Canada Partnership, dated November 1, 1994
(Incorporated by Reference to Exhibit 10.75 to TCI Music,
Inc.'s Transition Report on Form 10-K for the transition
period October 1, 1996 through June 30, 1997, filed with
the Securities and Exchange Commission on October 9,
1997)
10.48** -- Residential License and Distribution Agreement between
DMX Inc. and DMX-Canada (1995) Ltd., dated March 9, 1992,
as amended April 18, 1997 (Incorporated by Reference to
Exhibit 10.76 to TCI Music, Inc.'s Transition Report on
Form 10-K for the transition period October 1, 1996
through June 30, 1997, filed with the Securities and
Exchange Commission on October 9, 1997)
10.49 -- Channel Distribution Agreement between DMX Inc. and XTRA
Music Limited, dated July 3, 1997 (Incorporated by
Reference to Exhibit 10.77 to TCI Music, Inc.'s
Transition Report on Form 10-K for the transition period
October 1, 1996 through June 30, 1997, filed with the
Securities and Exchange Commission on October 9, 1997)
</TABLE>
<PAGE> 254
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.50 -- Termination Agreement between DMX Inc. and DMX-Europe
N.V., a Netherlands corporation (Technology License and
Services Agreement, dated May 19, 1993), dated July 3,
1997 (Incorporated by Reference to Exhibit 10.79 to TCI
Music, Inc.'s Transition Report on Form 10-K for the
transition period October 1, 1996 through June 30, 1997,
filed with the Securities and Exchange Commission on
October 9, 1997)
10.51 -- Termination Agreement between DMX Inc. and DMX-Europe
N.V., a Netherlands corporation (Trademark Agreement,
dated May 19, 1993), dated July 3, 1997 (Incorporated by
Reference to Exhibit 10.80 to TCI Music, Inc.'s
Transition Report on Form 10-K for the transition period
October 1, 1996 through June 30, 1997, filed with the
Securities and Exchange Commission on October 9, 1997)
10.52 -- Assignment Agreement between DMX Inc. and Jerold H.
Rubinstein, dated July 8, 1997 (Incorporated by Reference
to Exhibit 10.81 to TCI Music, Inc.'s Transition Report
on Form 10-K for the transition period October 1, 1996
through June 30, 1997, filed with the Securities and
Exchange Commission on October 9, 1997)
10.53 -- Separation Agreement and Mutual Release between DMX Inc.
and Jerold Rubinstein, dated July 11, 1997
10.54 -- Background/Foreground Music Service License Agreement
between American Society of Composers, Authors and
Publishers and International Cablecasting Technologies
Inc., dated April 4, 1995
10.55 -- License Agreement between Broadcast Music, Inc. and DMX
Inc., dated August 7, 1995
21 -- Subsidiaries of TCI Music, Inc.
23.1 -- Consent of Ernst & Young (The Box Worldwide, Inc.)
23.2 -- Consent of KPMG Peat Marwick LLP (TCI Music, Inc.)
23.3 -- Consent of KPMG Peat Marwick LLP (DMX Inc.)
23.4 -- Consent of Janover Rubinroit (Paradigm Music
Entertainment Company)
23.5 -- Consent of Sherman & Howard L.L.C. (legality) (included
in Exhibit 5.1)
23.6 -- Consent of Sherman & Howard L.L.C. (tax matters)
(included in Exhibit 8.1)
24.1 -- Power of Attorney (TCI Music) (included herein on page
II-7)
99.1 -- Form of Proxy for Special Meeting of The Box Worldwide,
Inc.
</TABLE>
- ---------------
** DMX Inc. has received confidential treatment for a portion of the referenced
exhibit.
<PAGE> 1
EXHIBIT 4.1
SERIES A SERIES A
COMMON STOCK COMMON STOCK
NUMBER SHARES
[MU ] [ ]
INCORPORATED UNDER THE
LAWS OF THE STATE OF
DELAWARE
SEE REVERSE FOR
CERTAIN DEFINITIONS
CUSIP 87229N 10 1
[LOGO]
TCI MUSIC, INC.
SERIES A COMMON STOCK
This Certifies That
is the owner of
FULLY PAID AND NON-ASSESSABLE SHARES OF SERIES A COMMON STOCK
OF THE PAR VALUE OF $0.01 PER SHARE OF SERIES A
TCI MUSIC, INC.
(the "Corporation") transferable on the books of the Corporation by the holder
hereof in person or by duly authorized attorney upon surrender of this
Certificate properly endorsed. The Corporation will furnish without charge to
each stockholder who so requests the powers, designations, preferences and
relative, participating, optional or other special rights of each class of
stock or series thereof of the Corporation and the qualifications, limitations
or restrictions of such preferences and/or rights. This Certificate is not
valid unless countersigned by the Transfer Agent and Registrar of the
Corporation.
WITNESS the facsimile seal of the Corporation and the facsimile
signatures of its duly authorized officers.
DATED,
/s/ STEPHEN M. BRETT /s/ DAVID KOFF
SECRETARY PRESIDENT
[TCI MUSIC, INC. SEAL]
COUNTERSIGNED: TRANSFER AGENT
BY THE BANK OF NEW YORK AND RESISTRAR
(NEW YORK)
AUTHORIZED SIGNATURE
<PAGE> 2
The following abbreviations, when used in the inscription on the face of
this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM - as tenants in common UNIF GIFT MIN ACT - Custodian
TEN ENT - as tenants by the ------ --------
entireties (Cust) (Minor)
JT TEN - as joint tenants with under Uniform Gifts to
right of survivorship Minors Act
and not as tenants ------------
in common (State)
Additional abbreviations may also be used though not in the above list.
For Value received, hereby sell, assign and transfer unto
--------
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
[ ]
----------------------------------------------------------------------------
PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS OF ASSIGNEE
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Shares
----------------------------------------------------------------------
of the capital stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint
Attorney
--------------------------------------------------------------------
to transfer the said stock on the books of the within-named Corporation
with full power of substitution in the premises.
Dated,
---------------------------------
X
-------------------------------------------
X
-------------------------------------------
NOTICE: THE SIGNATURE(S) TO THIS ASSIGNMENT
MUST CORRESPOND WITH THE NAME(S) AS
WRITTEN UPON THE FACE OF THE
CERTIFICATE IN EVERY PARTICULAR,
WITHOUT ALTERATION OR ENLARGEMENT
OR ANY CHANGE WHATEVER.
SIGNATURE(S) GUARANTEED:
By
--------------------------------------
SIGNATURE(S) SHOULD BE GUARANTEED BY AN ELIGIBLE GUARANTOR INSTITUTION
(BANKS, STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS AND CREDIT UNIONS
WITH MEMBERSHIP IN AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM),
PURSUANT TO S.E.C. RULE 17Ad-15.
Certain shares of TCI Music Series A Common Stock trade together with associated
rights issued by Tele-Communications, Inc. ("Rights") on the Nasdaq SmallCap
Market, under the symbol "TUNE." Such Rights will terminate prior to, or expire
on, August 10, 1998 unless extended pursuant to their terms. The shares of TCI
Music Series A Common Stock represented by this certificate do not include
associated Rights and are not tradable on the Nasdaq SmallCap Market under the
symbol "TUNE" until the Rights terminate or expire. Prior to the termination or
expiration of the Rights, no public trading market is available for the shares
of TCI Music Series A Common Stock represented by this certificate unless an
application for listing the TCI Music Series A Common Stock without the
associated Rights has been approved by Nasdaq.
<PAGE> 1
EXHIBIT 4.2
PREFERRED STOCK PREFERRED STOCK
[MP ] [ ]
SEE REVERSE FOR
CERTAIN DEFINITIONS
[TCI MUSIC, INC. LOGO]
TCI MUSIC, INC.
SERIES A CONVERTIBLE PREFERRED STOCK
INCORPORATED UNDER THE LAWS OF
THE STATE OF DELAWARE CUSIP 87229N 20 0
This Certifies That
is the owner of
FULLY PAID AND NON-ASSESSABLE SHARES OF SERIES A CONVERTIBLE PREFERRED STOCK OF
THE PAR VALUE OF $0.01 PER SHARE OF
TCI MUSIC, INC.
(the "Corporation") transferable on the books of the Corporation by the holder
hereof in person or by duly authorized attorney upon surrender of this
Certificate properly endorsed. This Certificate and the shares represented
hereby are subject to all of the terms and conditions contained in the
Certificate of Incorporation and the Certificate of Designations for the Series
A Convertible Preferred Stock (the "Certificate of Designations"). The Series A
Convertible Preferred Stock is convertible into Series A Common Stock of the
Corporation, subject to and in accordance with the provisions of the
Certificate of Designations. The Corporation will furnish without charge to
each stockholder who so requests the powers, designations, preferences and
relative, participating, optional or other special rights of each class of
stock or series thereof of the Corporation and the qualifications, limitations
or restrictions of such preferences and/or rights. This Certificate is not
valid unless countersigned by the Transfer Agent and Registrar of the
Corporation.
WITNESS the facsimile seal of the Corporation and the facsimile signatures
of its duly authorized officers.
Dated:
[TCI MUSIC, INC. CORPORATE SEAL 1997]
/s/ STEPHEN M. BRETT /s/ DAVID KOFF
SECRETARY PRESIDENT
COUNTERSIGNED:
THE BANK OF NEW YORK
(NEW YORK)
TRANSFER AGENT
AND REGISTRAR
BY
AUTHORIZED SIGNATURE
<PAGE> 2
The following abbreviations, when used in the inscription on the face of
this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM - as tenants in common UNIF GIFT MIN ACT-______ Custodian _________
TEN ENT - as tenants by the (Cust) (Minor)
entireties under Uniform Gifts to
JT TEN - as joint tenants with Minors Act _______________
right of survivorship (State)
and not as tenants
in common
Additional abbreviations may also be used though not in the above list.
For Value received, ______________________ hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
[ ]
- --------------------------------------------------------------------------------
PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS OF ASSIGNEE
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
________________________________________________________________________, Shares
of the capital stock represented by the written Certificate, and do hereby
irrevocably constitute and appoint _____________________________________________
___________________________________________________________________, Attorney to
transfer the said stock on the books of the within named Corporation with full
power of substitution in the premises.
Dated, _____________________
X
---------------------------------------
X
---------------------------------------
NOTICE: THE SIGNATURE(S) TO THIS
ASSIGNMENT MUST CORRESPOND WITH THE
NAME(S) AS WRITTEN UPON THE FACE OF THE
CERTIFICATE IN EVERY PARTICULAR,
WITHOUT ALTERATION OR ENLARGEMENT OR
ANY CHANGE WHATEVER.
SIGNATURE(S) GUARANTEED:
By
- -----------------------------------------
THE SIGNATURE(S) SHOULD BE GUARANTEED BY
AN ELIGIBLE GUARANTOR INSTITUTION (BANKS,
STOCKBROKERS, SAVINGS AND LOAN
ASSOCIATIONS AND CREDIT UNIONS WITH
MEMBERSHIP IN AN APPROVED SIGNATURE
GUARANTEE MEDALLION PROGRAM), PURSUANT TO
S.E.C. RULE 17Ad-15.
Certain shares of TCI Music Series A Common Stock trade together with
associated rights issued by Tele-Communications, Inc. ("Rights") on the Nasdaq
SmallCap Market, under the symbol "TUNE." Such Rights will terminate prior to,
or expire on, August 10, 1998 unless extended pursuant to their terms. The
shares of TCI Music Series A Common Stock into which each share of TCI Music
Series A Convertible Preferred Stock represented by this certificate is
convertible will not include associated Rights. Any such shares of TCI Music
Series A Common Stock issued upon such conversion will not be tradable on the
Nasdaq SmallCap Market under the symbol "TUNE" until the Rights terminate or
expire. Therefore, if the shares of TCI Music Series A Convertible Preferred
Stock represented by this certificate are converted to shares of TCI Music
Series A Common Stock prior to the termination or expiration of the Rights, no
public trading market will be available for such shares of TCI Music Series A
Common Stock unless an application for listing the TCI Music Series A Common
Stock without the associated Rights has been approved by Nasdaq.
<PAGE> 1
EXHIBIT 5.1
[SHERMAN & HOWARD L.L.C. LETTERHEAD]
November 12, 1997
The Board of Directors
TCI Music, Inc.
8101 E. Prentice, Suite 500
Englewood, CO 80111
Re: Validity of TCI Music Series A Convertible Preferred Stock and
TCI Music Common Stock
Gentlemen:
We have acted as special counsel to TCI Music, Inc., a Delaware corporation
("TCI Music"), in connection with its Registration Statement on Form S-4
relating to (i) approximately 2,100,000 shares of TCI Music's Series A
Convertible Preferred Stock, $.01 par value per share ("TCI Music Preferred
Stock") issuable pursuant to an Agreement and Plan of Merger dated as of August
12, 1997 by and between The Box Worldwide, Inc. and TCI Music, Inc. (the "Merger
Agreement"), filed as Appendix I to the Proxy Statement/Prospectus included as
part of such Registration Statement and (ii) approximately 6,300,000 shares of
TCI Music Series A Common Stock ("Series A Common Stock"), $.01 par value per
share, issuable upon conversion of the TCI Music Preferred Stock.
We have examined the Certificate of Incorporation and Bylaws of TCI Music,
form of Certificate of Designations filed as Appendix II to the Proxy
Statement/Prospectus and the minutes of the proceedings of the Board of
Directors of TCI Music authorizing the issuance of the TCI Music Preferred Stock
and the Series A Common Stock issuable upon conversion of the TCI Music
Preferred Stock and the execution, delivery and performance of the Merger
Agreement.
Based upon the foregoing examination, we advise you that in our opinion:
(1) the shares of TCI Music Preferred Stock have been duly authorized and, when
issued as contemplated in the Merger Agreement, the shares of TCI Music
Preferred Stock will be validly issued, fully paid and nonassessable; and (2)
the shares of Series A Common Stock issuable upon conversion of the TCI Music
Preferred Stock have been duly authorized and reserved for issuance and, when
issued upon such conversion in accordance with the terms of the TCI Music
Preferred Stock, will be validly issued, fully paid and nonassessable.
We consent to the filing of this letter as an exhibit to the Registration
Statement referred to above and to the reference to our firm under the heading
"Legal Matters" in the
<PAGE> 2
The Board of Directors
TCI Music, Inc.
November 12, 1997
Page 2
Registration Statement. In giving this consent, we do not thereby admit that we
are within the category of persons whose consent is required under Section 7 of
the Securities Act of 1933 or the Rules of the Securities and Exchange
Commission thereunder.
Very truly yours,
/s/ SHERMAN & HOWARD L.L.C.
<PAGE> 1
EXHIBIT 8.1
[SHERMAN & HOWARD L.L.C. LETTERHEAD]
November 12, 1997
The Board of Directors
TCI Music, Inc.
8101 E. Prentice, Suite 500
Englewood, CO 80111
Gentlemen:
Reference is made to the information set forth under the heading "Certain
Consequences of the Merger -- Certain Federal Income Tax Consequences" contained
in the Proxy Statement/Prospectus included in the Registration Statement on Form
S-4 of TCI Music, Inc. ("TCI Music") relating to (i) 2,100,000 shares of TCI
Music's Series A Convertible Preferred Stock that will be issued in connection
with the proposed merger (the "Merger") of a subsidiary of TCI Music with and
into The Box Worldwide, Inc. ("Box"), and (ii) approximately 6,300,000 shares of
TCI Music Series A Common Stock ("Series A Common Stock"), par value $.01 per
share, issuable upon conversion of the TCI Music Preferred Stock. It is our
opinion that the discussion under that heading, to the extent it represents
matters of law or legal conclusions, accurately summarizes the material
anticipated federal income tax consequences of the Merger to the holders of the
common stock of Box.
Our opinion set forth in this letter is based on the case law, Internal
Revenue Code, Treasury Regulations and Internal Revenue Service rulings as of
the above date. Our opinion is based on such authorities now in existence. These
authorities are all subject to change, and such change may be made with
retroactive effect. We can give no assurance that, after such change, our
opinions would not be different. We undertake no responsibility to update or
supplement our opinion.
We consent to the filing with the Securities and Exchange Commission of
this letter as an exhibit to the Registration Statement of which the Proxy
Statement/Prospectus is a part and to the reference to our firm under the
headings "Certain Consequences of the Merger -- Certain Federal Income Tax
Consequences" and "Legal Matters" contained therein. In giving such consent, we
do not thereby admit that we are within the category of persons whose consent is
required under Section 7 of the Securities Act of 1933 or the Rules of the
Securities and Exchange Commission thereunder.
Very truly yours,
/s/ SHERMAN & HOWARD L.L.C.
<PAGE> 1
EXHIBIT 10.2
AMENDED AND RESTATED
CONTRIBUTION AGREEMENT
This Amended and Restated Contribution Agreement (this
"Agreement") is entered into by and between Tele-Communications, Inc., a
Delaware corporation ("TCI"), and TCI Music, Inc., a Delaware corporation (the
"Company"), to amend, restate and replace the Contribution Agreement dated as
of July 11, 1997 between them (the "Original Agreement").
RECITALS
TCI desires to cause various of its indirect subsidiaries to
transfer to the Company and to DMX Inc. ("DMX"), a subsidiary of the Company,
(i) equipment useful in DMX's business and (ii) rights to receive revenues from
the distribution and sale to subscribers of those TCI subsidiaries of music
programming services produced by DMX. To induce TCI, among other things, to
cause such transfers to be effected and to obtain assurances from TCI as to the
annual amounts of the transferred revenues that will be received by the Company
in consideration of such transfer, the Company desires (i) to issue to TCI
62,500,000 shares of the Company's Series B Common Stock, (ii) to issue to TCI
a promissory note for $40,000,000 and (iii) to cause DMX to enter into an
affiliation agreement granting to Satellite Services, Inc., a subsidiary of
TCI, the right to distribute DMX's music programming services and to sublicense
to affiliates of TCI and other qualifying parties such right to distribute.
In consideration of the mutual covenants set forth in this
Agreement and other good and valuable consideration, the receipt and
sufficiency of which are acknowledged, the parties agree as follows:
I. DEFINITIONS
As used in this Agreement, terms with initial capital letters
will have the meanings ascribed to them below, unless the context clearly
requires otherwise:
Affiliate means, with respect to any Person, any other Person
Controlling, Controlled by, or under common Control with, such Person.
Analog DMX Revenues means all revenues of a TCI System Owner
that are attributable to the distribution and sale of DMX Services to cable
subscribers who receive the DMX Services via C-Band satellite transmission
(rather than digital compression technology), including equipment rental,
installation and other charges payable by such subscribers.
<PAGE> 2
Annual Benchmark means, for the Measurement Year beginning
January 1, 1997, $18,000,000, and for each succeeding Measurement Year an
amount equal to the Annual Benchmark for the preceding Measurement Year
increased by the percentage increase, if any, in the Consumer Price Index, All
Urban Consumers, All Items (or any similar successor index published by a U.S.
governmental agency) as of January 1 of such Measurement Year over such index
as of January 1 of the preceding calendar year.
Benchmark Deficit has the meaning set forth in Section 8.2.
Business Day means any day other than a Saturday or Sunday or
a day on which banks in New York, New York or Denver, Colorado are authorized
to be closed.
Closing has the meaning set forth in Section 2.1.
Company has the meaning set forth in the preamble to this
Agreement.
Company Note means a promissory note in the principal amount
of $40,000,000, payable to the order of TCI, (i) providing for principal to be
paid in full 180 days after the Closing, (ii) providing that if principal is
not paid in full 180 days after the Closing, interest will accrue at 10% per
annum on the unpaid principal from the date of the note through and including
the date of payment in full of unpaid principal, (iii) providing for the
prepayment of principal without penalty by the Company at any time after the
Closing, and (iv) including such other terms and conditions as TCI and the
Company may agree, as such promissory note may from time to time be extended or
modified.
Contributed Tuners means all of the commercial DMX tuners
indirectly owned and held in inventory by TCI at the time of the Closing.
Control means, with respect to any Person, the possession,
directly or indirectly, of the power to direct or cause the direction of the
management and policies of the Controlled Person, whether by the ownership of
voting securities, by contract or otherwise.
DMX has the meaning set forth in the Recitals to this
Agreement.
DMX Affiliation Agreement means the Affiliation Agreement being
entered into as of the Effective Date, between DMX and Satellite Services, Inc.,
an Owned Subsidiary of TCI (including its successors and assigns, "SSI"),
pursuant to which TCI System Owners are granted rights to distribute and sell
DMX Services, as such Affiliation Agreement may from time to time be in effect.
DMX Services means the audio music programming services
offered for sale by DMX.
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<PAGE> 3
Effective Date means July 1, 1997.
Measurement Year means a 12-month period beginning January 1
of any year prior to the Termination Date and ending December 31 of such year.
Merger means the merger of TCI Music Merger Sub, Inc. with and
into DMX pursuant to the Merger Agreement.
Merger Agreement means the Agreement and Plan of Merger, dated
as of February 6, 1997, among DMX, the Company, TCI and TCI Music Merger Sub,
Inc.
Music Business means the business of acquiring, producing,
packaging or compiling audio or video programming the content of which is
primarily music or music-related, and the marketing and sale of such
programming by any method of distribution.
Net Analog DMX Revenues means, for any period of
determination, all Analog DMX Revenues of a TCI System Owner for such period,
minus (i) the Retained Percentage for such period and (ii) license fees for
such period that are payable to DMX pursuant to the DMX Affiliation Agreement.
Owned Subsidiary means, with respect to any Person, any other
Person that such Person Controls and in which all the outstanding common stock,
in the case of a corporation, or, in the case of a Person that is not a
corporation, all the ownership interests, are owned, directly or indirectly, by
such Person, including with respect to such Person any other Person that
pursuant to the preceding clause would be an Owned Subsidiary of any other
Owned Subsidiary.
Person means a human being or a corporation, general or
limited partnership, limited or unlimited liability company, trust,
association, unincorporated organization, governmental authority or other
entity.
Retained Percentage means, for any period of determination, an
amount equal to 10% of that portion of Analog DMX Revenues of a TCI System
Owner for such period that is attributable to the distribution and sale of DMX
Services to residential subscribers.
Retail Digital Revenues means all revenues of a TCI System
Owner that are attributable to the distribution and sale of audio or video
programming services via digital compression technology.
Shares means 62,500,000 shares of Series B Common Stock, par
value $.01 per share, of the Company.
TCI has the meaning set forth in the preamble to this
Agreement.
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<PAGE> 4
TCI System Owner means each Owned Subsidiary of TCI that
offers DMX Services to its subscribers.
Termination Date means June 30, 2017.
II. ASSIGNMENT OF DMX REVENUES AND
CONTRIBUTED TUNERS; ISSUANCE OF SHARES
2.1 Rights Agreement; Assignment of Net DMX Revenues,
Etc. At the closing of the transactions contemplated by this Agreement (the
"Closing"):
(a) TCI will execute and deliver a Rights
Agreement, in the form prescribed by the Merger Agreement, granting to
stockholders of DMX who are entitled to receive shares of stock of the Company
pursuant to the Merger Agreement the right to require TCI to purchase such
shares, subject to the terms and conditions of such Rights Agreement.
(b) TCI will cause each Person that is a TCI
System Owner as of the Effective Date to assign to the Company the right to
receive Net Analog DMX Revenues of such TCI System Owner for the period
beginning on July 1, 1997 and ending on the earlier of the Termination Date and
the date on which such TCI System Owner ceases to be a TCI System Owner.
Payments of Net Analog DMX Revenues will be remitted to the Company and DMX as
provided in Section 8.2.
(c) TCI will cause the Contributed Tuners to be
assigned and transferred to the Company pursuant to one or more bills of sale
or assignments in form reasonably satisfactory to the Company.
(d) The Company will deliver to TCI, as the
designee of the TCI System Owners, (i) the Shares and (ii) the Company Note.
(e) The Company will cause DMX to execute and
deliver to SSI the DMX Affiliation Agreement.
2.2 New TCI System Owners. Promptly after any Person
becomes a TCI System Owner, TCI will cause such TCI System Owner to assign to
the Company and DMX the right to receive such TCI System Owner's Net Analog DMX
Revenues for the period beginning on the date such Person becomes a TCI System
Owner and ending on the earlier of the Termination Date and the date on which
such Person ceases to be a TCI System Owner.
4
<PAGE> 5
III. REPRESENTATIONS AND WARRANTIES OF TCI
TCI represents and warrants to the Company that:
3.1 Organization, Good Standing and Authority. Each of
TCI and the TCI System Owners is a corporation duly organized, validly existing
and in good standing under the laws of the jurisdiction of its incorporation
and has all requisite corporate power and authority to enter into and to
perform its obligations under this Agreement and the other agreements to be
executed and delivered by it pursuant to this Agreement.
3.2 Authorization and Validity; Consents; No Conflicts.
The execution and delivery by each of TCI and the TCI System Owners of, and the
performance by each of them of its obligations under, this Agreement and the
other agreements to be executed and delivered by it pursuant to this Agreement
have been duly authorized by all requisite corporate action of TCI or such TCI
System Owner. This Agreement constitutes, and when executed and delivered by
it pursuant to this Agreement, the other agreements to be executed and
delivered by it pursuant to this Agreement will constitute, the legal, valid
and binding obligations of each of TCI and the TCI System Owners, enforceable
in accordance with their terms, except as such enforceability may be affected
by applicable bankruptcy, reorganization, insolvency, moratorium or similar
laws affecting creditors' rights generally or by general equitable principles.
No consent or approval of, notice to, or filing with, any other Person is
required in connection with the execution, delivery and performance by TCI or
any of the TCI System Owners of this Agreement or any other agreement to be
executed and delivered by it pursuant to this Agreement, or the consummation by
it of the transactions contemplated hereby or thereby, the failure of which to
be obtained, given or made would have a material adverse effect on TCI and the
TCI System Owners, taken as a whole, or on their ability to perform their
obligations under this Agreement. The execution and delivery by TCI or any of
the TCI System Owners of, and the performance by each of them of its
obligations under, this Agreement and any other agreement to be executed and
delivered by it pursuant to this Agreement will not violate its certificate or
articles of incorporation or bylaws or any material agreement to which it is a
party or by which it is bound or affected.
3.3 Investment Intent. TCI is acquiring the Shares for
investment only and acknowledges that they may not be sold without registration
under the Securities Act of 1933, as amended, and applicable state securities
laws, or unless an exemption therefrom is available, and agrees that a legend
to the foregoing effect may be placed on the certificate representing the
Shares.
IV. REPRESENTATIONS AND WARRANTIES OF THE COMPANY
4.1 Organization, Good Standing and Authority. The
Company is a corporation duly organized, validly existing and in good standing
under the laws of the jurisdiction of its incorporation and has all requisite
corporate power and authority to enter into and to perform its obligations
under this Agreement and the other agreements to be executed and delivered by
it pursuant to this Agreement.
5
<PAGE> 6
4.2 Authorization and Validity; Consents; No Conflicts.
The execution and delivery by the Company of, and the performance by it of its
obligations under, this Agreement and the other agreements to be executed and
delivered by it pursuant to this Agreement have been duly authorized by all
requisite corporate action of the Company. This Agreement constitutes, and
when executed and delivered by the Company pursuant to this Agreement, the
other agreements to be executed and delivered by it pursuant to this Agreement
will constitute, its legal, valid and binding obligations, enforceable in
accordance with their terms, except as such enforceability may be affected by
applicable bankruptcy, reorganization, insolvency, moratorium or similar laws
affecting creditors' rights generally or by general equitable principles. No
consent or approval of, notice to, or filing with, any other Person is required
in connection with the execution, delivery and performance by the Company of
this Agreement or any other agreement to be executed and delivered by the
Company pursuant to this Agreement, or the consummation by it of the
transactions contemplated hereby or thereby, the failure of which to be
obtained, given or made would have a material adverse effect on the Company or
on its ability to perform its obligations under this Agreement. The execution
and delivery by the Company of, and the performance by it of its obligations
under, this Agreement and any other agreement to be executed and delivered by
it pursuant to this Agreement will not violate its certificate of incorporation
or bylaws or any material agreement to which it is a party or by which it is
bound or affected.
4.3 Shares. When issued and delivered by it at the
Closing, the Shares to be issued by the Company hereunder will be validly
issued, fully paid and nonassessable and will be owned by TCI (or, if
applicable, TCI's designee) free and clear of any lien, charge, encumbrance,
security interest or any other similar right of any third party.
V. CONDITIONS TO OBLIGATIONS OF THE COMPANY
The obligations of the Company to consummate the transactions
contemplated by this Agreement to take place at the Closing are subject to
satisfaction or the waiver by it, at or prior to the Closing, of each of the
following conditions:
5.1 Truth of Representations and Warranties. All
representations and warranties of TCI set forth in this Agreement, if qualified
by a reference to materiality, are true and, if not so qualified, are true in
all material respects, in each case at the time of the Closing with the same
effect as if made at that time, except for changes permitted or contemplated by
this Agreement.
5.2 Performance of Agreements. All agreements of TCI set
forth in this Agreement that are required to be performed by it at or before
the Closing have been performed in all material respects.
5.3 Merger Completed. The Merger is completed.
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<PAGE> 7
VI. CONDITIONS TO OBLIGATIONS OF TCI
The obligations of TCI to consummate the transactions
contemplated by this Agreement to take place at the Closing are subject to
satisfaction or the waiver by it, at or prior to the Closing, of each of the
following conditions:
6.1 Truth of Representations and Warranties. All
representations and warranties of the Company set forth in this Agreement, if
qualified by a reference to materiality, are true and, if not so qualified, are
true in all material respects, in each case at the time of the Closing with the
same effect as if made at that time, except for changes permitted or
contemplated by this Agreement.
6.2 Performance of Agreements. All agreements of the
Company set forth in this Agreement that are required to be performed by it at
or before the Closing have been performed in all material respects.
6.3 Merger Completed. The Merger is completed.
VII. CLOSING
7.1 Closing. If the Merger has occurred, the Closing will
be deemed to have taken place on the Effective Date.
7.2 Items Delivered by TCI and TCI System Owners.
Effective as of the Closing, TCI will deliver, and will cause each TCI System
Owner to deliver, to the Company (i) an assignment transferring the rights of
such TCI System Owner in and to its Net DMX Revenues as required by this
Agreement and such other assignments, bills of sale or other instruments as are
sufficient to transfer to the Company all the legal and beneficial interests in
such rights and (ii) the other instruments and agreements contemplated by
Section 2.1.
7.3 Items Delivered by the Company. Effective as of the
Closing:
(a) The Company will deliver to TCI, as the
designee of the TCI System Owners, the Company Note.
(b) The Company will deliver to TCI one or more
duly executed certificates representing the Shares.
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<PAGE> 8
VIII. COVENANTS
8.1 Right to Compete.
(a) TCI and any Affiliate of TCI may engage in or
possess interests in one or more other businesses or ventures of any nature or
description, without regard to whether any of such businesses or ventures are
or may be deemed to be competitive in any way with any business of the Company
or any person in which the Company has an interest. Without limiting the
generality of the foregoing, none of TCI or any of its Affiliates or any
director, officer or employee of TCI or any of its Affiliates (including any
such director, officer or employee who serves as a director, officer or
employee of the Company) will be obligated to present to the Company any
particular investment or business opportunity, regardless of whether such
opportunity is of a character that the Company could pursue it if it were
presented to the Company, but instead, TCI and its Affiliates will have the
right to take such opportunity for their own account or for the account of any
other Person without any obligation whatsoever to the Company.
(b) Although the Company and TCI agree to be
bound by the provisions of subsection (a) of this Section for purposes of
defining their respective legal rights and obligations, TCI acknowledges that,
subject to such provisions, TCI intends to use commercially reasonable efforts
to expand the involvement of the Company in the Music Business and to cause the
Company to pursue future business activities in the Music Business.
8.2 Delivery of Net Analog DMX Revenues and other
Payments to the Company and DMX.
(a) For each Measurement Year (or the portion
thereof during which this Agreement is in effect) prior to the Termination
Date, TCI will deliver, or will cause the TCI System Owners to deliver, to the
Company monthly in arrears a payment equal to one-twelfth of the Annual
Benchmark for such Measurement Year (a "Monthly Payment"). The total of all
Monthly Payments made during each Measurement Year will be deemed to be payment
of Net Analog DMX Revenues to the extent thereof. If for any Measurement Year
the total of the Monthly Payments required to be made exceeds the Net Analog
DMX Revenues for such Measurement Year (or the portion of such Measurement Year
for which Monthly Payments are required to be made), such excess (a "Benchmark
Deficit") (i) will be retained by TCI Music for its account and for the account
of DMX, to be apportioned between the Company and DMX as the Company may
determine, it being acknowledged that the Benchmark Deficit represents
compensation to the Company and DMX for the loss of Net Analog DMX Revenues
resulting from the offering by TCI System Owners of DMX Services for
distribution through digital compression technology and the grant to SSI of the
right to distribute DMX Services to commercial subscribers, and (ii) unless
otherwise specified by TCI, will be deemed to have been paid out of Retail
Digital Revenues of the TCI System Owners, it being acknowledged that the
designation of Retail Digital Revenues as the primary source for payment of a
Benchmark Deficit is not intended to be an allocation thereof to the sale of
DMX Services.
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<PAGE> 9
(b) Each Monthly Payment will be made by the end
of the calendar month immediately following the calendar month for which
payment is required to be made. In no event will the sum of all Monthly
Payments required to be made for any Measurement Year exceed the Annual
Benchmark or, if Monthly Payments are required to be made for less than a full
Measurement Year, a pro rata portion of the Annual Benchmark.
(c) If the Net Analog Revenues for any
Measurement Year (or the portion thereof during which this Agreement is in
effect) exceed the applicable Annual Benchmark (or, in the case of a partial
Measurement Year, a pro rata portion of such Annual Benchmark), the excess will
be deemed to have been retained by TCI in reduction of fees otherwise payable
by it or its affiliates for the right to distribute DMX Services.
(d) The obligations of TCI to pay or cause to be
paid to the Company and DMX the Monthly Payments as provided above will
terminate on the Termination Date, except as to the obligation to make any
payment that has accrued on or before the Termination Date, which obligation
will continue until satisfied.
IX. MISCELLANEOUS
9.1 Notices. All notices, requests, demands and other
communications called for or contemplated hereunder will be in writing and will
be deemed to have been duly given if delivered in person or by United States
certified or registered mail, prepaid, addressed to the parties, their
permitted successors in interest or assignees, or sent by courier or
telecopier:
To TCI at:
Tele-Communications, Inc.
5619 DTC Parkway
Englewood, Colorado 80111
Attention: Brendan Clouston
Telecopy: (303) 488-3200
with a copy similarly addressed,
Attention: Legal Department
and another copy to:
Sherman & Howard L.L.C.
3000 First Interstate Tower North
633 Seventeenth Street
Denver, Colorado 80202
Attention: Charles Y. Tanabe, Esq.
Telecopy: (303) 298-0940
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<PAGE> 10
To the Company at:
TCI Music, Inc.
c/o Tele-Communications, Inc.
5619 DTC Parkway
Englewood, Colorado 80111
Attention: President
Telecopy: (303) 267-5376
Any party may change the address to which notices are required to be sent by
giving notice of such change in the manner provided in this Section. All
notices will be deemed to have been received on the date of delivery or on the
third Business Day after the mailing thereof, except that any notice of a
change of address will be effective only upon actual receipt.
9.2 Expenses. Whether or not the transactions
contemplated hereby are consummated, each of the parties will bear the fees and
expenses relating to its compliance with the various provisions of this
Agreement, and each of the parties will pay all of its own expenses (including
all attorneys' fees and expenses) incurred in connection with this Agreement,
the transactions contemplated hereby, the negotiations leading to the same and
the preparation made for carrying the same into effect.
9.3 Modification; Waiver. This Agreement may be
modified or terminated by mutual agreement only by a writing signed by each of
the parties, and no provision or condition herein may be waived other than by a
writing signed by the party waiving such provision or condition.
9.4 Headings. Article and Section headings in this
Agreement are for the sole purpose of convenient reference and in no way
define, limit or prescribe the scope or intent of this Agreement or any part
hereof, and such headings will not be considered in interpreting or construing
this Agreement.
9.5 Assignment. Neither party may assign any of its
rights under this Agreement or delegate its duties hereunder unless it obtains
the prior written consent of the other party, which consent may be withheld at
such party's absolute discretion. Notwithstanding the preceding sentence, any
party may assign its rights under this Agreement to any Affiliate of such party
without the consent of any other party.
9.6 Counterparts. This Agreement may be executed in any
number of counterparts, each of which may be deemed to be an original, and all
of which taken together will constitute one instrument.
9.7 Additional Documents. At the Closing and from time
to time after the Closing, at either party's request and without further
consideration, the other party will execute and
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deliver (or cause to be executed and delivered) such other instruments of
conveyance and transfer and will take such other actions as may reasonably be
required effectively to carry out the transactions contemplated by this
Agreement.
9.8 Other. This Agreement constitutes the entire
agreement of the parties regarding the subject matter hereof, and all prior or
contemporaneous agreements, understandings, representations and statements,
oral or written (including the Original Agreement), are merged into this
Agreement. This Agreement will be binding upon and inure to the benefit of the
parties and, subject to the limitations set forth in Section 9.5, their
respective successors and assigns. The provisions of this Agreement are for
the exclusive benefit of the parties and their permitted successors and
assigns, and no other Person is intended to be a third-party beneficiary or to
have any rights by virtue of this Agreement.
9.9 Governing Law. This Agreement will be governed by
the laws of the State of Colorado, without regard to the conflicts of laws
rules thereof.
9.10 Interpretation. Terms used with initial capital
letters will have the meanings specified, applicable to both singular and
plural forms, for all purposes of this Agreement. All pronouns (and any
variation) will be deemed to refer to the masculine, feminine or neuter, as the
identity of the Person may require. The singular or plural includes the other,
as the context requires or permits. The word "include" (and any variation) is
used in an illustrative sense rather than a limiting sense. The word "day"
means a calendar day, and if the last day for the giving of any notice or the
taking of any other action is a day that is not a Business Day, the time for
giving such notice or taking such action will be deemed extended to the next
Business Day.
IN WITNESS WHEREOF, the parties have executed this Agreement
on November 10, 1997 to be effective as of the Effective Date provided herein.
TELE-COMMUNICATIONS, INC.
By: /s/ Stephen M. Brett
------------------------------
Name: Stephen M. Brett
Title: Executive Vice President
TCI MUSIC, INC.
By: /s/ David B. Koff
------------------------------
Name: David B. Koff
Title: President
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EXHIBIT 10.3
November 7, 1997
TCI Music, Inc.
8101 East Prentice Avenue, Suite 500
Englewood, Colorado 80111
Attn: J. Wendy Kim, Vice President-Finance
Re: Promissory Note in the amount of $40,000,000 dated July 11, 1997 made
by TCI Music, Inc., as Borrower (the "Note"), payable to
Tele-Communications, Inc., as Lender
Ladies and Gentlemen:
This letter sets forth the terms of the extension of the Termination Date
with respect to the above-referenced Note, which is attached to this letter as
Exhibit A. Any capitalized term not otherwise defined in this letter will have
the meaning given to it in the Note.
The first two sentences in the second paragraph of the Note are amended and
restated as follows:
"The outstanding Principal and all accrued interest thereon shall be due
and payable in full on January 10, 1999 (the "Extended Termination Date").
Lender will waive interest accrued from July 11, 1997 through January 10, 1998
(the "Original Termination Date") if all outstanding Principal is paid in full
as of the Original Termination Date. If all outstanding Principal is not paid as
of the Original Termination Date, any and all interest accrued beginning July
11, 1997 and through the date of payment shall be due and payable."
Subject to the provisions above, all terms and provisions of the Note will
remain in full force and effect.
Please confirm the agreement of TCI Music, Inc. to the above by signing
below on behalf of TCI Music, Inc.
Sincerely,
TELE-COMMUNICATIONS, INC.
By: /s/ Stephen M. Brett
--------------------------------
Name: Stephen M. Brett
Title: Executive Vice President
Confirmed and Agreed:
TCI MUSIC, INC.
By: /s/ Joanne Wendy Kim
--------------------------------
Name: Joanne Wendy Kim
Title: Vice President-Finance
<PAGE> 2
EXHIBIT A
PROMISSORY NOTE
$40,000,000 July 11, 1997
FOR VALUE RECEIVED, TCI Music, Inc., a Delaware corporation, whose address
is 5619 DTC Parkway, Englewood, Colorado 80111 (the "Borrower"), unconditionally
promises to pay to the order of Tele-Communications, Inc., a Delaware
corporation (the "Lender") the principal amount of Forty Million Dollars (the
"Principal"), with interest on the outstanding Principal balance from and after
July 11, 1997 at the rate of 10% per annum. Interest shall accrue on a daily
basis and shall be computed for the actual number of days elapsed on the basis
of a year consisting of 365 days. This Note is made pursuant to the terms of the
Contribution Agreement dated July 11, 1997 by and between the Borrower and the
Lender.
The outstanding Principal and all accrued interest thereon shall be due and
payable in full on January 10, 1998 (the "Termination Date"); provided that
Lender will waive interest accrued from July 11, 1997 through the Termination
Date if all outstanding Principal is paid in full as of such Termination Date.
If all outstanding Principal is not paid as of the Termination Date, any and all
interest accrued beginning July 11, 1997 and through the date of payment shall
be due and payable. All payments of Principal and interest shall be paid in
lawful money of the United States in immediately available funds at 5619 DTC
Parkway, Englewood, Colorado 80111 or such place as may hereafter be designated
by written notice from the Lender to the Borrower. All payments made on this
Note shall be credited, first, to interest due on the outstanding Principal
balance of this Note and, second, to the reduction of the Principal balance
under this Note.
The Borrower may prepay amounts owed under this Note, in whole or in part,
at any time without premium or penalty. Any partial prepayment shall first be
applied to any unpaid interest accrued at the time of prepayment on the
outstanding Principal and then to Principal.
The Borrower waives presentment, demand, protest and notice of any kind.
In the event of any action at law or suit in equity with respect to this
Note, the Borrower, in addition to all other sums which it may be required to
pay hereunder, will pay a reasonable sum for attorneys' fees and expenses
incurred by the Lender in connection with such action or suit and all other
costs and expenses of collection.
In the absence of manifest error, the unpaid Principal balance and unpaid
accrued interest from time to time applicable to such balance shall be
determined from the records of the Lender or the holder of this Note.
<PAGE> 3
This Note is executed and delivered in, and shall in all respects be
governed by and construed in accordance with, the laws of the State of Colorado,
including all matters of construction, validity and performance, shall bind the
Borrower, its successors and assigns, and shall inure to the benefit of any
holder hereof, its successors and assigns.
TCI MUSIC, INC.
By: /s/ David Koff
----------------------------
Name: David Koff
Title: President
<PAGE> 1
EXHIBIT 10.4
VOTING AGREEMENT
This Voting Agreement (this "Agreement") is entered into as of
August 12, 1997, by and among TCI Music, Inc., a Delaware corporation ("TCI
Music"), and the Company Shareholders (as defined below).
Recitals
TCI Music, TCI Music Merger Sub, Inc. ("Merger Sub") and The
Box Worldwide, Inc. (the "Company") are entering into an Agreement and Plan of
Merger (the "Merger Agreement"), dated as of the date of this Agreement,
providing, among other things, for the merger of Merger Sub with and into the
Company. As an inducement to TCI Music to enter into the Merger Agreement, the
Company Shareholders have agreed to enter into this Agreement.
Agreement
For good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties agree as follows:
1. Certain Definitions.
(a) Capitalized terms that are used but not
otherwise defined in this Agreement will have the meanings given to them in the
Merger Agreement.
(b) For the purposes of this Agreement, the
following terms will have the meanings set forth below:
A Person will be deemed the "Beneficial Owner", and
to have "Beneficial Ownership" of, and to "Beneficially Own," any securities as
to which such Person is or may be deemed to be the beneficial owner pursuant to
Rule 13d-3 and 13d-5 under the Exchange Act, as such rules are in effect on the
date of this Agreement, as well as any securities as to which such Person has
the right to become a Beneficial Owner (whether such right is exercisable
immediately or only after the passage of time or the occurrence of conditions)
pursuant to any agreement, arrangement or understanding or upon the exercise of
conversion rights, exchange rights, warrants, options or other acquisition
rights or otherwise.
"Bankruptcy and Equity Exception" means an exception
to enforceability of an obligation because of the application of (i)
bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium and
similar laws of general applicability relating to or affecting creditors'
rights and (ii) general equity principles.
"Company Shareholders" means the Persons named on
Schedule 1 to this Agreement.
<PAGE> 2
"Shares" means shares of Company Stock and any other
shares of capital stock or other voting securities of the Company.
2. Representations and Warranties of TCI Music. TCI
Music represents and warrants to each of the Company Shareholders that:
(a) TCI Music has all requisite corporate power
and authority and has taken all corporate action necessary in order to execute
and deliver, and to perform its obligations under, this Agreement; and
(b) this Agreement has been duly executed and
delivered by TCI Music and is a valid and binding agreement of TCI Music
enforceable against TCI Music in accordance with its terms, subject to the
Bankruptcy and Equity Exception.
3. Representations and Warranties of the Company
Shareholders. Each of the Company Shareholders severally represents and
warrants to TCI Music that:
(a) such Company Shareholder Beneficially Owns
the number of Shares set forth on Schedule 3;
(b) each record holder of any Shares Beneficially
Owned by such Company Shareholder is identified on Schedule 3;
(c) such Company Shareholder, either alone or
with one or more other Company Shareholders, has (i) the right to vote, or to
direct the voting of, the Shares Beneficially Owned by such Company Shareholder
and (ii) the right to dispose, or to direct the disposition of, the Shares
Beneficially Owned by such Company Shareholder;
(d) such Company Shareholder has all requisite
power and authority (corporate or otherwise) and has taken all action
(corporate or otherwise) necessary in order to execute and deliver, and to
perform its obligations under, this Agreement;
(e) this Agreement has been duly executed and
delivered by such Company Shareholder and is a valid and binding agreement of
such Company Shareholder enforceable against such Company Shareholder in
accordance with its terms, subject to the Bankruptcy and Equity Exception;
(f) no notices, reports or other filings are
required to be made by such Company Shareholder with, and no consents,
registrations, approvals, permits or authorizations are required to be obtained
by such Company Shareholder from, any Governmental Entity or any other Person,
in connection with the execution, delivery and performance of this Agreement by
such Company Shareholder, except those that the failure to make or obtain is
not, individually or in the
- 2 -
<PAGE> 3
aggregate, reasonably likely to prevent, delay or impair the ability of such
Company Shareholder to perform such Company Shareholder's obligations under
this Agreement; and
(g) the execution, delivery and performance of
this Agreement by such Company Shareholder do not, and the consummation by such
Company Shareholder of the transactions contemplated hereby will not,
constitute or result in (i) a breach or violation of, or a default under (in
the case of any Company Shareholder that is not a human being), the articles or
certificate of incorporation or the bylaws of such Company Shareholder or any
comparable governing instruments or (ii) a breach or violation of, or a default
under, or the acceleration of any obligations of or the creation of a Lien on
the assets of such Company Shareholder (with or without notice, lapse of time
or both) pursuant to, any instrument or agreement binding on such Company
Shareholder or to which such Company Shareholder is subject or any Legal
Requirement to which such Company Shareholder is subject, except, in the case
of clause (ii) above, for any breach, violation, default, acceleration,
creation or change that, individually or in the aggregate, is not reasonably
likely to prevent, delay or impair the ability of such Company Shareholder to
perform such Company Shareholder's obligations under this Agreement.
4. Agreement to Vote Shares. Each of the Company
Shareholders severally covenants and agrees with TCI Music: (a) to vote or to
cause to be voted all Shares that are Beneficially Owned by such Company
Shareholder (to the extent such Shares are entitled to be voted) in favor of
(or to grant or to cause to be granted consents with respect to such Shares
for), and to cause any holder of record of Shares to vote such Shares in favor
of (or to grant consents with respect to such Shares for), the adoption and
approval of the Merger Agreement and the Merger at every meeting of the
shareholders of the Company (or any solicitation of consents in lieu thereof)
at which such matters are considered and at every adjournment or postponement
thereof; and (b) to vote or to cause to be voted such Shares (to the extent
such Shares are entitled to be voted) against (or to withhold or to cause to be
withheld consents with respect to such Shares for), and to cause any holder of
record of Shares to vote such Shares against (or to withhold or to cause to be
withheld consents with respect to such Shares for), any Acquisition Proposal
(other than the proposal for the Merger) or any other proposal that would
compete or interfere with, or that would in any way delay or otherwise inhibit
the timely consummation of, the Merger and the other transactions contemplated
by the Merger Agreement.
5. No Voting Trusts or Transfers. Each Company
Shareholder will not, and will not permit any record holder of Shares to, (i)
deposit any Shares Beneficially Owned by such Company Shareholder in a voting
trust or subject any Shares to any arrangement with respect to the voting of
such Shares other than this Agreement or any other agreement entered into in
furtherance of the Merger or (ii) sell, assign, pledge, grant a Lien on or
otherwise transfer any of its interest in any Shares to any Person unless such
transferee agrees in writing to be bound by this Agreement to the same extent
as such Company Shareholder.
- 3 -
<PAGE> 4
6. Miscellaneous.
(a) GOVERNING LAW. THIS AGREEMENT AND THE RIGHTS
AND OBLIGATIONS OF THE PARTIES UNDER THIS AGREEMENT WILL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH AND SUBJECT TO THE LAWS OF THE STATE OF DELAWARE,
WITHOUT REFERENCE TO CONFLICTS OF LAWS PRINCIPLES.
(b) Venue; WAIVER OF JURY TRIAL. The parties
hereby irrevocably submit to the jurisdiction of the courts of the State of
Delaware and the federal court of the United States of America located in the
State of Delaware solely in respect of the interpretation and enforcement of
the provisions of this Agreement and of the documents referred to in this
Agreement and in respect of the transactions contemplated hereby, and hereby
waive, and agree not to assert, as a defense in any action, suit or proceeding
for the interpretation or enforcement hereof or of any such document, that it
is not subject thereto or that such action, suit or proceeding may not be
brought or is not maintainable in such courts or that the venue thereof may not
be appropriate or that this Agreement or any such document may not be enforced
in or by such courts, and the parties irrevocably agree that all claims with
respect to such action or proceeding will be heard and determined in such a
Delaware state or federal court. Each party consents to and grants any such
court jurisdiction over the person of such party and over the subject matter of
such dispute and agrees that mailing of process or other papers in connection
with any such action or proceeding in the manner provided in paragraph (c) of
this Section or in such other manner as may be permitted by law will be valid
and sufficient service thereof.
EACH PARTY ACKNOWLEDGES AND AGREES THAT ANY
CONTROVERSY THAT MAY ARISE UNDER THIS AGREEMENT IS LIKELY TO INVOLVE
COMPLICATED AND DIFFICULT ISSUES, AND THEREFORE EACH SUCH PARTY HEREBY
IRREVOCABLY AND UNCONDITIONALLY WAIVES ANY RIGHT SUCH PARTY MAY HAVE TO A TRIAL
BY JURY IN RESPECT OF ANY LITIGATION DIRECTLY OR INDIRECTLY ARISING OUT OF OR
RELATING TO THIS AGREEMENT, OR THE TRANSACTIONS CONTEMPLATED BY THIS AGREEMENT.
EACH PARTY CERTIFIES AND ACKNOWLEDGES THAT (i) NO REPRESENTATIVE, AGENT OR
ATTORNEY OF ANY OTHER PARTY HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT SUCH
OTHER PARTY WOULD NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE THE
FOREGOING WAIVER, (ii) EACH PARTY UNDERSTANDS AND HAS CONSIDERED THE
IMPLICATIONS OF THIS WAIVER, (iii) EACH PARTY MAKES THIS WAIVER VOLUNTARILY,
AND (iv) EACH PARTY HAS BEEN INDUCED TO ENTER INTO THIS AGREEMENT BY, AMONG
OTHER THINGS, THE MUTUAL WAIVERS AND CERTIFICATIONS IN THIS PARAGRAPH (b).
(c) Notices. All notices, requests, claims,
demands and other communications required or permitted to be given or made
pursuant to this Agreement will be in writing and will be deemed given (i) on
the first business day following the date received, if delivered
- 4 -
<PAGE> 5
personally or by telecopy (with telephonic confirmation of receipt by the
addressee), (ii) on the business day following timely deposit with an overnight
courier service, if sent by overnight courier specifying next day delivery and
(iii) on the first business day that is at least five days following deposit in
the mails, if sent by first class mail, to the parties at the following
addresses (or at such other address for a party as will be specified by like
notice):
if to the Company
Shareholders: As set forth on Schedule 1
if to TCI Music: c/o Liberty Media Corporation
8101 East Prentice Avenue, Suite 500
Englewood, Colorado 80111
Attn: Mr. David B. Koff, President
Fax No.: (303) 721-5443
with a copy to: Sherman & Howard L.L.C.
633 Seventeenth Street, Suite 3000
Denver, Colorado 80202
Attn: Charles Y. Tanabe, Esq.
Fax No.: (303) 298-0940
or to such other Persons or addresses as may be designated in writing by the
party to receive such notice as provided above.
(d) Severability. The provisions of this
Agreement will be deemed severable and the invalidity or unenforceability of
any provision will not affect the validity or enforceability of the other
provisions hereof. If any provision of this Agreement, or its application to
any Person or any circumstance, is invalid or unenforceable, (i) a suitable and
equitable provision will be substituted therefor in order to carry out, so far
as may be valid and enforceable, the intent and purpose of such invalid or
unenforceable provision and (ii) the remainder of this Agreement and the
application of such provision to other Persons or circumstances will not be
affected by such invalidity or unenforceability, nor will such invalidity or
unenforceability affect the validity or enforceability of such provision, or
the application thereof, in any other jurisdiction.
(e) Counterparts. This Agreement may be executed
in any number of counterparts, each of which will be deemed to be an original
and all of which will together constitute the same agreement.
(f) Termination. This Agreement will terminate
(i) upon the mutual written consent of all parties, (ii) at the Effective Time
or (iii) upon termination of the Merger Agreement.
- 5 -
<PAGE> 6
(g) Captions. All captions in this Agreement are
for convenience of reference only and are not part of this Agreement, and no
construction or reference will be derived therefrom.
(h) Specific Performance. Each party
acknowledges that it will be impossible to measure in money the damage to the
other party if such party fails to comply with any of the obligations imposed
by this Agreement, that each such obligation is material and that, in the event
of any such failure, the other party will not have an adequate remedy at law or
damages. Accordingly, each party agrees that injunctive relief or any other
equitable remedy, in addition to remedies at law or damages, is the appropriate
remedy for any such failure and will not oppose the granting of such relief on
the basis that the other party has an adequate remedy at law or in the form of
damages. Each party agrees that it will not seek, and agrees to waive any
requirement for, the securing or posting of a bond in connection with any other
party's seeking or obtaining such equitable relief.
(i) Successors and Assigns. This Agreement will
be binding upon and inure to the benefit of the parties and their respective
successors and permitted assigns and will not be assignable without the written
consent of all other parties hereto.
(j) Entire Agreement; Amendment; Waiver. This
Agreement (including any schedules hereto) supersedes all prior agreements,
written or oral, among the parties with respect to the subject matter hereof
and contain the entire agreement among the parties with respect to the subject
matter hereof. This Agreement may not be amended, supplemented or modified,
and no provision hereof may be modified or waived, except by an instrument in
writing signed by all the parties or, in the case of a waiver, each party
granting such waiver. No waiver of any provision hereof by any party will be
deemed a waiver of any other provision hereof by any such party, nor will any
such waiver be deemed a continuing waiver of any provision hereof by such
party.
(k) Further Assurances. The parties will execute
and deliver such additional instruments and other documents and will take such
further actions as may be necessary or appropriate to effectuate, carry out and
comply with all of the terms of this Agreement and the transactions
contemplated hereby.
(l) Third Party Beneficiaries. Nothing in this
Agreement, express or implied, is intended to confer upon any third party any
rights or remedies of any nature whatsoever under or by reason of this
Agreement.
- 6 -
<PAGE> 7
In witness whereof, the parties have executed and delivered
this Agreement as of the date first written above.
TCI MUSIC, INC.
By: /s/ David B. Koff
--------------------------------------------
Name: David B. Koff
------------------------------------------
Title: President
-----------------------------------------
THE COMPANY SHAREHOLDERS:
STARNET/CEA II PARTNERS
By: StarNet Interactive Entertainment, Inc.,
a General Partner
By: /s/ H.F. Lenfest
-----------------------------------
Name: H.F. Lenfest
---------------------------------
Title: Chief Financial Officer
--------------------------------
By: CEA Investors Partnership II, Ltd.,
a General Partner
By: CEA Investors, Inc., its General
Partner
By: /s/ J. Patrick Michaels
-----------------------------------
Name: J. Patrick Michaels
---------------------------------
Title: Chairman
--------------------------------
/s/ H.F. Lenfest
-----------------------------------------------
H.F. Lenfest
/s/ J. Patrick Michaels, Jr.
-----------------------------------------------
J. Patrick Michaels, Jr.
- 7 -
<PAGE> 8
SCHEDULE 1
COMPANY SHAREHOLDERS
H.F. Lenfest
c/o The Lenfest Group
200 Cresson Boulevard
Oaks, Pennsylvania 19546
copies to:
Saul Ewing Remick & Saul
3800 Centre Square West
Philadelphia, Pennsylvania 19102
Attn: Thomas K. Pasch
J. Patrick Michaels, Jr.
c/o Communications Equity Associates, Inc.
101 East Kennedy Boulevard, Suite 3800
Tampa, Florida 33602
Attn: David A. Burns
copies to:
Edwards & Angell
250 Royal Palm Way
Palm Beach, Florida 33480
Attn: John Igoe
StarNet/CEA II Partners
c/o Communications Equity Associates, Inc.
101 East Kennedy Boulevard, Suite 300
Tampa, Florida 33602
Attn: David A. Burns
copies to:
Edwards & Angell
250 Royal Palm Way
Palm Beach, Florida 33480
Attn: John Igoe
- 8 -
<PAGE> 9
SCHEDULE 3
OWNERSHIP OF SHARES
<TABLE>
<CAPTION>
Company Shares
Shareholder Beneficially Owned Record Holder
----------- ------------------ -------------
<S> <C> <C>
H.F. Lenfest 14,210,419(1) (2)
J. Patrick Michaels, Jr. 14,210,419(1) (2)
StarNet/CEA II Partners 14,210,419(1) (2)
</TABLE>
________________________
(1) Beneficial ownership is as described in Item 11 of the Company's Form
10-KSB for the year ended December 31, 1996.
<TABLE>
<S> <C> <C>
(2) Record Holders: StarNet/CEA II Partners 9,013,845
L. and L.R. Wolfson 1,647,647
Blanks and Robert Puck 1,581,163
Kim Enterprises, L.P. 12,625
Michaels Family Trust 71,584
Starnet, Inc. 1,883,555
---------
Total 14,210,419
==========
</TABLE>
- 9 -
<PAGE> 1
EXHIBIT 10.5
TERM SHEET
FOR SERVICES AGREEMENT
BETWEEN
TCI MUSIC, INC.
AND
THE BOX WORLDWIDE, INC.
PURPOSES AND PARTIES: Pursuant to a services agreement (the "Agreement"),
The Box Worldwide, Inc. ("BOX") will provide to TCI
Music, Inc. ("TCI Music"), at the discretion of and
subject to approval by TCI Music, certain services
necessary to develop, market and manage a
multiple-channel music video service, which may
include interactive and scheduled programming (the
"Music Multiplex").
TERM AND TERMINATION: INITIAL PERIOD: The effective date of the Agreement
will be July 28, 1997. The Agreement will remain in
effect for an initial period of one year (the
"Initial Period"). At the end of the Initial Period,
the Agreement will be renewed automatically for
successive six-month periods if, at the end of the
then-current period, the Merger Agreement (as defined
below) is still in effect and the closing thereof is
pending. However, (i) BOX may terminate the
Agreement at the end of any additional six-month term
if it gives written notice of such intention to TCI
Music at least 60 days before the end of such
six-month term and (ii) TCI Music may, upon not less
than 60 days' prior notice to BOX, terminate the
Agreement at any time.
PROPOSAL TERMINATION AND SHAREHOLDER TERMINATION: If
the Agreement has not been previously terminated and
either:
(a) the Agreement and a Plan of Merger,
dated as of the date hereof, among TCI Music,
BOX and TCI Acquisition Sub (including one or
more amendments, if any, the "Merger
Agreement") is terminated pursuant to Section
9.1(d) of the Merger Agreement (a "Proposal
Termination"); or
(b) the Merger Agreement is terminated
pursuant to Section 9.1(b) or 9.1(e) of the
Merger Agreement (a "Shareholder
Termination"),
<PAGE> 2
then TCI Music may either: (i) terminate the
Agreement; or (ii) extend the term of the
Agreement for a period of three years from
the date of the Proposal Termination or the
Shareholder Termination, as the case may be.
If TCI Music chooses to extend the Agreement
for the three-year period, TCI Music may
renew the Agreement for a further two-year
period at the end of the initial three-year
period after the Proposal Termination or the
Shareholder Termination. During any renewal
period following a Proposal Termination or
Shareholder Termination, BOX will have no
right to terminate the Agreement; however,
TCI Music may, upon not less than 60 days'
prior notice to BOX, terminate the Agreement
at any time during any such renewal period.
COMPLETION OF MERGER: If the Merger contemplated by
the Merger Agreement is completed, this Agreement
shall terminate at the Effective Time (as such term
is defined in the Merger Agreement).
SERVICES TO BE PROVIDED: BOX will provide to TCI Music the services described
in Exhibit A (the "Services").
COMPENSATION: GENERAL: In exchange for the Services and except as
set forth below in Proposal Termination and
Shareholder Termination, TCI Music will pay BOX the
compensation detailed on Exhibit A. Attached hereto
as Exhibit B is an estimate of the allocation of
domestic departmental costs associated with the
operation of the Music Multiplex for music formats
that are not substantially similar to music formats
currently aired by BOX. Such schedule is merely an
estimate and is non-binding. BOX will maintain
detailed records of Services performed and
documentation of all expenses to be reimbursed as
described below in "REIMBURSEMENT OF EXPENSES."
PROPOSAL TERMINATION: During any two-year renewal
after the initial three-year period following a
Proposal Termination, the compensation for all of the
Services shall be the cost of such Services plus 20%
of such cost.
SHAREHOLDER TERMINATION: During the term of the
Agreement after any Shareholder Termination, the
compensation for all of the Services shall be the
cost of such Services plus 20% of such cost.
- 2 -
<PAGE> 3
AUDIT RIGHTS: TCI Music will be entitled, during
normal business hours and upon reasonable notice to
BOX, to examine the books and records of BOX for the
purpose of determining compliance with the provisions
of the Agreement, including the calculation of costs
under the Agreement.
MAXIMUM HOURS: For each type of Services to be compensated at an
hourly rate, Exhibit A indicates the maximum number
of hours the parties anticipate will be required to
complete the objective of such type of Service. Any
hours to be charged by BOX in excess of such maximum
number of hours of a particular type of service must
be approved in advance by TCI Music.
REIMBURSEMENT
OF EXPENSES: All expenses incurred in connection with performing
Services will be reimbursed by TCI Music, without
markup. However, BOX will not incur any charge with
an outside vendor in excess of $10,000, without the
prior approval of TCI Music. In particular, TCI
Music shall reimburse BOX for any royalties or
similar fees required to be paid to any third party
(including, but not limited to, BMI and ASCAP), as
well as any administrative costs associated
therewith, and incurred as a result of the exhibition
or performance of music or music videos over the
Music Multiplex. Except as otherwise indicated
herein or on Exhibit A, TCI Music will not reimburse
any other expenses incurred by BOX in performing
Services pursuant to the Agreement. All expenses
which are reimbursable hereunder shall be paid by TCI
Music within 60 days after TCI Music's receipt of
BOX's invoice for such expenses, which invoice sets
forth in reasonable detail the calculation of the
expenses for which reimbursement is sought.
- 3 -
<PAGE> 4
RIGHTS TO INTELLECTUAL
PROPERTY: BOX will retain ownership of the brand "THE BOX" and
all BOX images and, in consideration of the other
payments under the Agreement, will license (and until
the Agreement is signed, BOX hereby licenses) to TCI
the right to use such brand and images during the
term of the Agreement. All design elements or Music
Multiplex-specific branding, logos, IDs, images, or
other elements created by outside vendors pursuant to
the Agreement (including graphics, voice-overs,
backplates and similar elements created by outside
vendors), and which are not derived from the brand
"THE BOX" or any BOX images will be the exclusive
property of TCI Music. If the Agreement is
terminated or expires, TCI Music's license of the
right to use the brand "THE BOX," any logo derived
from the brand "THE BOX" and used in connection with
the Music Multiplex, and all BOX images (including
graphics, voice-overs, backplates and similar
elements created or owned by BOX prior to the
Agreement and supplied to TCI Music in BOX's
performance of the Agreement) will also terminate and
TCI Music will have no right thereafter to use such
brand or images in any way. Furthermore, if the
Agreement is continued after a Proposal Termination
or Shareholder Termination, TCI Music may only use
the brand "THE BOX," any logo derived from the brand
"THE BOX" and used in connection with the Music
Multiplex, and all BOX images (including graphics,
voice-overs, backplates and similar elements created
or owned by BOX prior to the Agreement and supplied
to TCI Music in BOX's performance of the Agreement),
for a period of one year after such Proposal
Termination or Shareholder Termination, and solely in
connection with TCI Music's operation of the Music
Multiplex distributed through the Headend in the Sky.
TCI Music shall not alter the brand "THE BOX" or any
of the BOX images, without the prior written approval
of BOX.
PROCEDURE UPON
TERMINATION OR
EXPIRATION: Upon the termination or expiration of the Agreement,
BOX will promptly invoice TCI Music for any
previously unbilled bills and expenses. TCI Music
will pay such invoice within 60 days of receipt. BOX
will refund to TCI Music the net depreciated amount
(as depreciated over a 60-month life) of the
original material cost (but excluding any travel and
shipping expenses) charged to TCI Music in connection
with installation of the digital boxes at the NDTC
facility in Denver, CO, and TCI Music will return the
digital boxes to BOX at TCI Music's sole expense.
Viewer call revenue earned during the term of the
Agreement, after reduction for voice, DAK, transport,
music costs and satellite costs attributable to such
revenue, will be shared equally by TCI Music and BOX.
BOX will supply detailed records of such income and
attributable expenses and will remit to TCI Music its
share of the net revenue within 60 days of the
termination or expiration of the Agreement.
- 4 -
<PAGE> 5
INTERIM ARRANGEMENT: TCI Music and BOX agree to negotiate in good faith to
arrive at a definitive agreement dealing with the
matters addressed herein. Until such agreement is
executed, (i) the provisions of the Term Sheet will
be legally binding upon the parties and their
successors, (ii) all references herein to the
Agreement will be deemed to be references to this
Term Sheet, and (iii) the provisions of Article X of
the Merger Agreement (except Sections 10.1 and 10.5)
are incorporated herein and deemed to be a part
hereof.
APPROVED AS OF AUGUST 12, 1997:
TCI MUSIC, INC. THE BOX WORLDWIDE, INC.
By: /s/ David Koff By: /s/ Alan McGlade
--------------------------------- --------------------------------
Name: David B. Koff Name: Alan McGlade
------------------------------- ------------------------------
Title: President Title: President and CEO
----------------------------- -----------------------------
- 5 -
<PAGE> 6
EXHIBIT A
<TABLE>
<CAPTION>
Type of Hourly Rate/ Maximum Description and Objectives
Service Compensation Hours
Pre-Launch
Consulting
----------
<S> <C> <C> <C>
-Programming $150 60 Assist in determining proper demographic targets,
musical genres, network positioning and branding for
each of the digital networks in the Music Multiplex.
-Marketing $150 60 Strategize multiplex launch to the cable industry,
the ad sales community, and the record labels,
including consulting with ad sales, affiliate sales,
programming and marketing teams.
-Sales/Industry $200 60 Assist with preparation of sales materials for, and
Relations communicate with cable affiliates, the ad sales
community and record labels. Materials may be
created using outside vendors.
-Engineering $150 40 Assess the technical needs for delivery of music
videos via VSAT or terrestrial link to NDTC facility
in Denver, CO and for management of four Digital
Boxes at NDTC facility.
-Production $200 40 Initial production of network specific ID's,
interstitial and programming elements.
Equipment
---------
-Digital Boxes Reimbursement of N/A Installation of Digital Boxes at the NDTC facility in
actual cost of Denver, CO
materials and
installation
(estimated to be
$40,000 per Box)
</TABLE>
-6-
<PAGE> 7
<TABLE>
<CAPTION>
Type of Hourly Rate/ Maximum Description and Objectives
Service Compensation Hours
<S> <C> <C> <C>
Post Launch Reimbursement of N/A Operational support for the Music Multiplex
Execution allocable portion including:
----------- of domestic
departmental costs and
external costs a. Maintenance, upgrade and repair of
the Digital Boxes
b. A software license which provides
for maintenance and upgrade of
software required to operate Digital
Boxes
c. Access to a music video library that
is updated with titles necessary to
program each format in the Music
Multiplex with the provision that
the music formats remain substantially
the same
d. Update of databases
e. Digital encoding of video elements
f. Trafficking of program segments and
commercials
g. Transport of video elements
h. Request processing
i. Technical monitoring
j. Customer service
k. Music scheduling for pre-programmed
services or segments
l. Preparation of marketing materials
for cable operators, advertising and
record labels
m. Production of network specific ID's,
interstitial and programming elements
</TABLE>
- 7 -
<PAGE> 8
PROMISSORY NOTE
$252,400
October 3, 1997
Miami Beach, Florida
FOR VALUE RECEIVED, The Box Worldwide, Inc., a Florida
corporation ("Maker"), promises to pay to the order of TCI Music, Inc., a
Delaware corporation ("Holder"), at 5619 DTC Parkway, Englewood, Colorado 80111
or at such other place as from time to time may be designated by Holder to
Maker in writing, the principal sum of $252,400 plus interest at the rate of
10% per annum, compounded annually. Interest shall be computed and paid based
on the actual number of days lapsed in a year consisting of 365 (or 366, if
applicable) days.
The principal of and accrued interest on this Note shall be
due and payable in lawful money of the United States of America on January 31,
1998.
Maker shall have the right to make prepayments, in whole or in
part at any time and from time to time, of the unpaid balance and accrued
interest hereof, free of premium or penalty. All prepayments shall be applied
by Holder first to any costs or expenses, including, without limitation,
reasonable attorneys' fees and costs incurred by Holder in enforcing Holder's
rights under this Note, then to interest accrued hereon and then to the
remaining outstanding principal balance hereof.
The unpaid principal and acquired interest on this note shall
be offset in full by Maker's invoice number 9809001 dated September 18, 1997 in
the amount of $252,400 for goods and services provided to holder pursuant to
the Services Agreement dated as of August 12, 1997 between Maker and Holder.
Time is of the essence hereof. Maker shall be in default
under this Note if it fails to pay any amount due hereunder as and when due.
Upon any such default, all unpaid principal of and accrued interest on this
Note shall become at once due and payable automatically and without notice and
the unpaid balance of this Note shall from that date forward bear interest at
15% per annum, compounded annually, until fully paid.
Maker agrees to pay all costs of collection of this Note,
including reasonable attorney's fees, whether suit is brought or not, including
fees associated with bankruptcy and appellate proceedings.
Maker, for itself and its successors and assigns, expressly
waives presentment, demand, protest, notice of dishonor, notice of nonpayment,
notice of maturity, notice of protest, presentment, presentment for the
purposes of accelerating maturity, diligence in collection, and the benefit of
any exemption under any exemption or insolvency laws. Holder, without notice,
may release or surrender, exchange or substitute, any property now held or
which may hereafter be held as security for the payment of this Note, may
extend the time for payment or otherwise modify the terms of payment of any
part or the whole of the debt evidenced hereby, and may renew this Note.
- 8 -
<PAGE> 9
The exercise or non-exercise by Holder of any rights or
remedies hereunder shall not preclude Holder's exercise of any other rights or
remedies provided herein, at law or in equity. The failure of Holder at any
time to exercise any rights or remedies hereunder shall not constitute a waiver
of the right to exercise the same or other remedies at any other time.
This Note may not be changed, altered, modified or terminated
orally, but only by agreement or discharge in writing signed by Maker and the
holder of this Note at the time of any such change, alteration, modification or
discharge.
In no event shall the amount paid or agreed to be paid to
Holder as interest hereunder exceed the highest lawful rate permissible under
applicable law. If, due to any circumstance, the interest payable hereunder is
deemed to exceed the highest rate of interest permitted by applicable law, then
the interest payable hereunder shall be reduced to the maximum rate so
permitted. If Holder shall ever receive interest on this Note which would
exceed the highest lawful rate, the interest which would be excessive shall be
applied to the reduction of the principal balance remaining unpaid and not to
the payment of interest. This provision shall supersede all contrary
agreements between Maker and Holder with respect to the calculation and payment
of interest on this Note.
Any references in this Note to "Holder" will be deemed to
include any successor or assign of Holder.
If the last day for the making of any payment or the taking of
any other action is not a day on which banks in Denver, Colorado are open for
business, the time for making such payment or taking such action will be
extended to the next business day.
The provisions of this Note shall be construed and interpreted
and all rights and obligations of the parties hereunder determined in
accordance with the laws of the State of Colorado without regard to any choice
of law principles. At the option of Holder, an action may be brought to
enforce this Note in any court located in the State of Colorado, or in any
other court in which venue and jurisdiction are proper. Maker irrevocably
consents to venue and jurisdiction in the state and federal courts located in
the State of Colorado and to service of process by mail in any such action.
Maker further consents to the bringing of an action to recognize and enforce
any judgment rendered by the above courts in any jurisdiction in which Maker
has assets or may be found, and irrevocably waives, to the full extent
permitted by law, any defense based on lack of jurisdiction or inconvenience of
forum.
- 9 -
<PAGE> 10
IN WITNESS WHEREOF, Maker has signed and delivered this Note
the day and year first above written.
THE BOX WORLDWIDE, INC.
By: /s/ Alan McGlade
------------------------------
Name: Alan McGlade
Title: President
- 10 -
<PAGE> 1
EXHIBIT 10.6
September 18, 1997
Board of Directors
Paradigm Music Entertainment Company
67 Irving Place North
4th Floor
New York, New York 10003
Gentlemen:
This letter agreement sets forth the terms on which TCI Music,
Inc. ("TCI Music") proposes to acquire all the issued and outstanding shares of
capital stock of Paradigm Music Entertainment Company ("Paradigm") in a
transaction structured as a merger (the "Merger") of a wholly owned subsidiary
of TCI Music with and into Paradigm.
This letter agreement, including the attached Term Sheet
(collectively, this "Agreement"), when executed by both parties is intended to
constitute a binding legal obligation of TCI Music and Paradigm entered into by
the parties in consideration of the mutual benefits to be derived from this
Agreement. The parties intend to negotiate in good faith and enter into a
definitive agreement and plan of merger and other documents and instruments to
supersede this Agreement, which if entered into will include customary
representations, warranties and covenants, as well as provisions incorporating
and expanding upon the agreements set forth herein, in each case as may be
reasonable and appropriate in the context of the transactions contemplated
hereby. However, if TCI Music and Paradigm are unable to reach such definitive
agreements on or before October 15, 1997, this Agreement, subject to the
conditions set forth below, will continue to constitute a binding agreement of
the parties setting forth the terms on which the Merger will proceed. The
definitive agreement and plan of merger negotiated by the parties or this
Agreement, as the case may be, that sets forth the terms of the Merger is
referred to herein as the "Merger Agreement."
Each party's obligation to consummate the Merger will be
subject to (a) the absence of any court order or other legal requirement that
would make consummation of the Merger illegal, (b) the approval of Paradigm's
stockholders, to the extent required by applicable law, (c) the accuracy, in all
material respects, as of the effective time of the Merger (the "Effective
Time"), of the other party's representations and warranties set forth in the
Merger Agreement and (d) the performance, in all material respects, by the other
party of its obligations under the Merger Agreement to the extent required to be
performed at or before the Effective Time.
TCI Music's obligation to consummate the Merger also will be
subject to (u) approval of its Board of Directors, notice of which will be given
by TCI Music to Paradigm, if at all, by 5:00 p.m., Denver time, on September 23,
1997, (v) the completion by TCI Music and its agents of a legal, financial,
accounting and technical "due diligence" investigation of Paradigm and its
assets and operations (including the assets and operations of its subsidiaries),
with which Paradigm and its
<PAGE> 2
Paradigm Music Entertainment Company
September 18, 1997
Page 2
agents will cooperate, with results satisfactory to TCI Music, which review will
conclude at 5:00 p.m., Denver time, on September 23, 1997, (w) the exercise by
stockholders of Paradigm owning no more than 15% of all shares of all classes of
common stock of Paradigm outstanding as of the Effective Time of statutory
dissenter's or appraisal rights in connection with the Merger, (x) the receipt
by TCI Music of evidence satisfactory to it of (i) the unanimous consent of the
holders of Paradigm's warrants, options and any other rights to acquire capital
stock of Paradigm of the cancellation of such warrants, options and rights and
(ii) the consent of any person or entity that has registration rights with
respect to Paradigm warrants or capital stock of the cancellation or termination
thereof, (y) the release from escrow of all shares of Class A, Class B and Class
E Common Stock of Paradigm currently held in escrow pursuant to the Stock Escrow
Agreement dated as of November 21, 1995 among Paradigm, certain of its
stockholders and American Stock Transfer & Trust Company (the "Escrow
Agreement"), Paradigm's Second Restated Certificate of Incorporation or
otherwise and (z) the receipt by TCI Music of executed agreements between
Paradigm and each of Robert B. Meyrowitz and Lou Falcigno terminating their
consulting agreements with Paradigm on terms satisfactory to TCI Music. Failure
by TCI Music to notify Paradigm of the receipt of approval by TCI Music's Board
of Directors or of the satisfactory conclusion of TCI Music's due diligence
investigation by the time specified above will be deemed an election by TCI
Music to terminate the Merger Agreement, and upon such termination the parties
will cease to have any obligations under the Merger Agreement.
To the extent permitted by law and the Escrow Agreement, if
Paradigm's shareholders and D.H. Blair & Co., Inc. do not consent to the release
of the shares of Paradigm Class B Common Stock currently held in escrow prior to
the Effective Time and the beneficial owners of such shares do not otherwise
receive shares of TCI Music Series A Common Stock in replacement therefor in
connection with the Merger, TCI Music will vote for or consent to the release
from escrow of the shares of TCI Music Series A Common Stock into which such
shares will be converted at the Effective Time.
In addition, TCI Music's obligation to consummate the Merger
will be subject to the absence of any material adverse change (other than a
decrease in Paradigm's working capital consistent with the decreases experienced
in recent periods) in the financial condition, results of operations, assets,
liabilities, business or prospects of Paradigm since the date of the most recent
balance sheet included in the Amendment No. 1 to the Registration Statement on
Form SB-2/A (File No. 333-23781) filed by Paradigm with the Securities and
Exchange Commission (the "Paradigm Registration Statement") and TCI Music's
receipt from each Paradigm stockholder to whom shares of TCI Music stock are to
be issued in the Merger of an executed undertaking of the nature
<PAGE> 3
Paradigm Music Entertainment Company
September 18, 1997
Page 3
customarily obtained to establish an exemption from registration or
qualification under federal and state securities laws for transactions by an
issuer not involving any public offering.
Paradigm's obligation to consummate the Merger also will be
subject to (a) the absence of any material adverse change (other than as
contemplated by this Agreement) in the financial condition, results of
operations, assets, liabilities, business or prospects of TCI Music after the
date of this Agreement and (b) the receipt by Paradigm prior to the Effective
Time of a letter from Tele-Communications, Inc. ("TCI") or one or more
affiliates controlled by TCI pursuant to which TCI or such affiliates agree to
maintain beneficial ownership of shares of TCI Music capital stock representing
at least one-third of the total voting power of all voting stock of TCI Music
through the date the Merger Shares are required to be registered, or such
registration obligations expire, pursuant to the attached Term Sheet.
Either party may at its option, by written notice to the other
party, terminate the Merger Agreement at any time after December 31, 1997 if the
Merger has not occurred before that date, if such party is not at that time in
material breach of any provision of the Merger Agreement and, if Paradigm is the
electing party, if the TCI Music Loan described below is repaid in full,
together with accrued interest.
TCI Music will loan to Paradigm (the "TCI Music Loan") an
amount not to exceed $2,183,169, which will be advanced to Paradigm within one
business day after the parties' execution of this Agreement, and amounts
sufficient to permit Paradigm to pay normal operating expenses in amounts agreed
by Paradigm and TCI Music (but not to exceed $550,000 for any month) for the
months of October, November and December 1997 (unless the Effective Time has
occurred prior to the scheduled date of any such advance) pursuant to the loan
and security agreement in the form attached as Exhibit A (the "Loan Agreement").
All advances under the TCI Music Loan will bear interest at 10.0% per annum (11%
per annum after default) and all principal and interest will be payable on the
earlier of June 30, 1998 or, if either the Merger Agreement terminates without
consummation of the Merger, or prior to the Effective Time any condition to TCI
Music's obligations to consummate the Merger fails (or it is evident that any
such condition will not be satisfied), December 31, 1997. The proceeds of the
TCI Music Loan may be used by Paradigm only for payroll, rent, trade payables
and other day-to-day operational purposes and for transaction costs relating to
the Merger and Paradigm's proposed public offering of securities, as specified
on Schedule A. Payment of the TCI Music Loan will be secured by a first priority
security interest in all of Paradigm's assets and property, including the
capital stock of Paradigm's subsidiaries (and the Addicted to Noise assets after
the acquisition thereof by Paradigm), pursuant to the Loan Agreement.
<PAGE> 4
Paradigm Music Entertainment Company
September 18, 1997
Page 4
Within five business days after the execution and delivery of
this Agreement by Paradigm, Paradigm will enter into (a) an agreement to
purchase all of the assets of the Addicted to Noise business for consideration
not to exceed $220,000 in cash and promissory notes and 75,000 shares of Class A
Common Stock of Paradigm (or such TCI Music Series A Common Stock into which
such shares will be converted at the Effective Time) and (b) an employment and
non-competition agreement with Michael Goldberg on substantially the same terms
as those contained in the draft of such agreement dated April 7, 1997, and will
complete such acquisition as promptly as practicable thereafter.
Effective at the Effective Time, Mr. McPartland will be
appointed as President and CEO of TCI Music and will become a director of TCI
Music. Mr. McPartland will serve as President and CEO of TCI Music pursuant to
the employment agreement under which Mr. McPartland currently serves as
President of Paradigm for compensation (which will be at least equal to $375,000
per year) determined by agreement between Mr. McPartland and TCI Music. Mr.
McPartland will be entitled to participate in bonus, incentive, stock option and
other benefit programs on a basis consistent with the practice of TCI Music in
compensating senior executives. TCI Music's Board of Directors will consider
nominating Mr. Robert Meyrowitz as a director of TCI Music.
As a material inducement to TCI Music to enter into this
Agreement, Paradigm represents and warrants to TCI Music as follows:
(a) this Agreement has been duly approved by
all requisite corporate action of Paradigm;
(b) except as specifically provided for in this
Agreement, no consent of any person, entity or agency (including any
governmental authority or instrumentality) will be required in order for
Paradigm and its stockholders to consummate the transactions contemplated by
this Agreement;
(c) the Paradigm Registration Statement (other
than any information about D.H. Blair & Co., Inc. that was provided by D.H.
Blair & Co., Inc.) does not contain any untrue statement of a material fact or
omit to state a material fact necessary in order to make the statements made
therein, in the light of the circumstances under which they were made, not
misleading;
(d) other than amounts, if any, payable by
Paradigm to D.H. Blair & Co., Inc. pursuant to the letter agreement dated
November 4, 1996, all of which will be paid by
<PAGE> 5
Paradigm Music Entertainment Company
September 18, 1997
Page 5
Paradigm's stockholders, and none of which will be paid by, assumed by or
constitute a liability or obligation of either TCI Music, Paradigm or the
surviving entity in the Merger, none of Paradigm or its subsidiaries will be
liable to any broker, finder or other agent for any fee, commission or other
compensation in connection with the Merger; and
(e) Paradigm is an ultimate parent entity, as
the term "ultimate parent entity" is defined in 16 C.F.R. ss. 801.1(a)(3).
Neither Paradigm nor any entity controlled by Paradigm is engaged in
manufacturing, and Paradigm's total assets are (and, immediately prior to the
Effective Time, will be) less than $10,000,000, all as determined in accordance
with 16 C.F.R. ss.ss. 801.1(a)-(c), 801.1(j) and 801.11.
As a further material inducement to TCI Music to enter into
this Agreement, Paradigm covenants to and with TCI Music that, until the
Effective Time:
(a) except as required by this Agreement,
Paradigm will conduct, and will cause each of its subsidiaries to conduct, its
business in the ordinary course substantially in accordance with past practice,
and will use, and will cause each of its subsidiaries to use, its reasonable
best efforts to preserve intact its current business organization and
relationships;
(b) except as required by this Agreement
Paradigm will not, and will not permit or cause any of its subsidiaries to,
directly or indirectly (i) sell, pledge or otherwise encumber any capital stock
or other interest in Paradigm or any of its subsidiaries, (ii) amend or propose
to amend the certificate of incorporation or bylaws of Paradigm or similar
constituent and governing documents of any of its subsidiaries, (iii) split,
combine or reclassify the outstanding capital stock of, or authorize or propose
the issuance of any other securities in respect of, in lieu of or in
substitution for shares of capital stock of, or other ownership interests in,
Paradigm or any of its subsidiaries, (iv) declare, set aside or pay any
dividend, distribution or other payment to any stockholder, director or officer
of Paradigm or any of its subsidiaries, other than regularly scheduled payroll,
(v) redeem, purchase or otherwise acquire any shares of capital stock of, or
other ownership interests in, Paradigm or any of its subsidiaries or (vi) agree
to do any of the foregoing;
(c) except as required by this Agreement
Paradigm will not, and will not permit any of its subsidiaries to, (i) issue,
deliver or sell any shares of capital stock of, or other ownership interests
(including any option, warrant or other right to acquire, or any security
convertible into, shares of capital stock of, or other ownership interests) in
Paradigm or any of its subsidiaries, (ii) acquire, lease or dispose of any
assets other than in the ordinary course of business consistent with past
practice, (iii) create, assume, guaranty or incur any indebtedness, (iv)
mortgage,
<PAGE> 6
Paradigm Music Entertainment Company
September 18, 1997
Page 6
pledge or otherwise encumber any of its assets except to secure the TCI Music
Loan, (v) enter into any other material transaction except in the ordinary
course of business consistent with past practice, (vi) make any payment or
transfer any property with respect to any indebtedness, except such payments
with respect to indebtedness of Paradigm as are scheduled to come due prior to
the Effective Time, (vii) acquire by merging or consolidating with, by acquiring
assets of, by purchasing an ownership interest in, or by any other method, any
business or entity or (viii) agree to do, or to permit any subsidiary to do, any
of the foregoing;
(d) except as required by this Agreement,
Paradigm will not, and will not permit any of its subsidiaries to, (i) adopt,
terminate or amend any bonus, profit sharing, compensation, severance,
termination, stock option, pension, retirement, deferred compensation,
employment or other benefit plan, agreement, trust, fund or arrangement for the
benefit of any director, officer or current or former employee, (ii) increase in
any manner the compensation or benefits of any director, officer, consultant,
employee, (iii) grant any award or option under any bonus, benefit, incentive,
performance or other compensation plan or arrangement, (iv) take any action to
fund or in any way secure the payment of compensation or benefits under any
employee plan, agreement, contract, benefit plan or arrangement or (v) agree to
do, or to cause or permit any subsidiary to do, any of the foregoing;
(e) Paradigm will not, and will not permit any
of its subsidiaries to, enter into any transaction, contract or arrangement with
any officer, stockholder, director, consultant, employee of Paradigm or any
subsidiary thereof or any person or entity that is an "affiliate" or "associate"
of any of the foregoing, as those terms are defined in Rule 12b-2 under the
Securities Exchange Act of 1934, as amended, whether or not such transaction
would be in the ordinary course of business; and
(f) Paradigm will not, and will not permit any
of its subsidiaries to, take or agree to take any action that would make any
representation or warranty of Paradigm in the Merger Agreement untrue or
incorrect or result in any breach of the Merger Agreement or in any condition to
the Merger not being satisfied.
As used in this Agreement, the term "subsidiaries" means
entities in which Paradigm directly or indirectly owns a stock or any other
equity or ownership interest of 20% or more (including, after the acquisition
thereof is completed by Paradigm, Addicted to Noise, Inc.).
As a material inducement to Paradigm to enter into this
Agreement, TCI Music represents and warrants to Paradigm as follows:
<PAGE> 7
Paradigm Music Entertainment Company
September 18, 1997
Page 7
(a) except as specifically provided for in this Agreement,
no consent of any person, entity or agency (including any governmental authority
or instrumentality) will be required in order for TCI Music to consummate the
transactions contemplated by this Agreement;
(b) TCI Music will not be liable to any broker, finder or
other agent for any fee, commission or other compensation in connection with the
Merger; and
(c) the audited consolidated financial statements of TCI
Music and DMX Inc. contained in the proxy statement/prospectus in the form
included in the Registration Statement on Form S-4 filed with the Securities and
Exchange Commission on June 12, 1997 (File No. 333- 28613) (the "DMX
Prospectus") were prepared in accordance with generally accepted accounting
principles applied on a consistent basis during the periods involved (except as
may be indicated in the notes thereto) and present the financial condition and
results of operations of each company, respectively, as of the dates and for the
periods indicated therein. The unaudited condensed pro forma combined interim
financial statements of TCI Music contained in the DMX Prospectus present the
financial condition and results of operations of TCI Music as of the dates and
for the periods indicated therein on a pro forma basis and such financial
statements, as of the date of the DMX Prospectus, conformed in all material
respects with the requirements for pro forma financial statements set forth in
Article 11 of Regulation S-X under the Securities Exchange Act of 1934, as
amended.
Paradigm will prepare and deliver to TCI Music, promptly after
the execution of this Agreement, the disclosure statement it proposes to deliver
to its shareholders in connection with the solicitation of their consent to the
transactions contemplated by this Agreement. Such statement, to the extent it
describes TCI Music and its businesses or the Merger, the Merger Agreement and
related transactions, will be subject to the approval of TCI Music prior to the
delivery thereof to Paradigm shareholders, which approval will not unreasonably
be withheld.
Each party promptly will give written notice to the other if
at any time prior to the Effective Time of the Merger there is a breach or
violation of any of the representations, warranties or covenants of such party
set forth in this Agreement.
Upon the request of TCI Music, Paradigm will prepare and
deliver to TCI Music, within 20 days after such request, such financial
statements (including audited financial statements) as may be required by TCI
Music to meet its financial reporting obligations (including requirements under
applicable securities laws). To the extent Paradigm would not otherwise be
required to
<PAGE> 8
Paradigm Music Entertainment Company
September 18, 1997
Page 8
prepare such financial statements, all costs and expenses of preparing such
financial statements will be borne by TCI Music.
Each of Paradigm and TCI Music agrees that, except to the
extent required by law, it will not issue any press release or otherwise
disclose the contents of this Agreement without the approval of the other party,
which approval will not unreasonably be withheld.
Please indicate your agreement with the foregoing by executing
and returning a copy of this letter.
Very truly yours,
TCI MUSIC, INC.
By: /s/ David Koff
------------------------------------
David B. Koff, President
Agreed and accepted:
PARADIGM MUSIC ENTERTAINMENT
COMPANY
By: /s/ Thomas McPartland
-------------------------------
Title: President
Dated: September 18, 1997
<PAGE> 9
TERM SHEET
Merger
The merger of a newly created, wholly owned subsidiary of TCI Music into
Paradigm, with Paradigm as the surviving entity (the "Merger"). The Merger is
intended to qualify as a tax-free reorganization under Section 368(a)(2)(E) of
the Internal Revenue Code.
Paradigm Securities To Be Exchanged
All of the capital stock of Paradigm outstanding immediately before the
Effective Time (collectively, "Paradigm Common Stock"), other than shares held
by any stockholders exercising appraisal or dissenter's rights available under
applicable state law ("Dissenting Shares"), will be converted at the Effective
Time into the right to receive Merger Shares (as defined below). Such conversion
will be calculated and effected on a fully diluted basis, treating as issued and
outstanding immediately before the Effective Time: (a) all shares of Paradigm
capital stock issuable upon the conversion, exercise or exchange of securities
or other obligations of Paradigm that are convertible into or exercisable or
exchangeable for shares of Paradigm capital stock (whether or not such
securities or obligations are vested, exercisable, conditional or contingent
upon one or more events), (b) all shares of Paradigm capital stock held in
escrow, whether or not such shares are released from escrow at or prior to the
Effective Time, and (c) all shares of capital stock Paradigm is required to
issue at or after the Effective Time pursuant to the Stock Purchase Agreement
dated as of February 14, 1997 among Paradigm, Purple Demon, Inc., David Wolin,
Dean Brownrout and Charles Pye or otherwise. Any shares of Paradigm Common Stock
held in treasury will be canceled at the Effective Time.
Consideration
In exchange for Paradigm Common Stock and any options, warrants or other rights
to acquire shares of Paradigm capital stock:
(a) TCI Music will issue to the holders thereof (or reserve for issuance, as
appropriate), in the aggregate, that number of shares of TCI Music Series A
Common Stock determined by dividing $24,000,000 (less the amount equal to the
number of Dissenting Shares multiplied by the portion of $24,000,000 allocable
to each share of Paradigm Common Stock assuming that there were no Dissenting
Shares) by the average of the mean daily closing bid and asked prices of TCI
Music Series A Common Stock on the NASDAQ SmallCap Market for a period of 20
consecutive trading days ending on the third trading day prior to the Effective
Time. The shares of TCI Music Series A Common Stock to be issued to stockholders
of Paradigm in the Merger (the "Merger Shares") will be allocated among such
holders as Paradigm may direct. TCI Music will pay cash in lieu of issuing any
fractional shares. The holders of Merger Shares will not have any right to
require TCI Music or any of its affiliates to repurchase such shares at any
time.
<PAGE> 10
At or prior to the Effective Time, Paradigm will take such actions as are
required to cause all options, warrants and other securities and rights that are
convertible into, exchangeable or exercisable for, or that represent the right
to receive, shares of capital stock of Paradigm to be canceled (to the extent
not exercised or converted prior to the Effective Time) without any payment of
cash or other consideration (other than the allocation of Merger Shares to the
holders thereof as Paradigm directs) by Paradigm.
(b) TCI Music will pay an amount equal to $7,154,000 less the aggregate amounts
advanced to Paradigm pursuant to the TCI Music Loan prior to the Effective Time,
either by (i) purchasing debt owed by Paradigm at the Effective Time of the
Merger other than the TCI Music Loan or (ii) contribution of cash to Paradigm at
the Effective Time. Such amount will be used to repay the promissory notes
described in note 4 to the table included in "Use of Proceeds" in the Paradigm
Registration Statement and for other purposes approved in advance by TCI Music.
Governing Documents, Directors and Officers of Surviving Corporation
At the Effective Time, the Second Restated Certificate of Incorporation of
Paradigm as in effect immediately prior to the Effective Time will become the
certificate of incorporation of the surviving corporation, and the bylaws of the
TCI Music subsidiary that will be incorporated to effect the Merger ("Merger
Sub"), as in effect immediately prior to the Effective Time, will become the
bylaws of the surviving corporation. At the Effective Time the directors and
officers of Merger Sub holding office immediately prior to the Effective Time
will become the directors and officers of the surviving corporation.
Registration Rights
TCI Music will register the resale by Paradigm stockholders of Merger Shares
received by them in the Merger pursuant to a registration statement to be
effective on or before July 11, 1998 or such earlier date as the Rights (as
defined in the Proxy Statement/Prospectus of DMX Inc. and TCI Music dated June
12, 1997) expire. TCI Music will pay all registration expenses in connection
with such registration statement.
Voting Agreement
Contemporaneously with the execution of the letter agreement to which this Term
Sheet is attached, Paradigm will execute and deliver, and will obtain (as a
condition to the effectiveness of the obligations of TCI Music under the letter
agreement and this Term Sheet) the execution and delivery by certain
stockholders of Paradigm of, a voting agreement with respect to the Merger.
Other
Paradigm and TCI Music each will bear its own expenses, including legal
expenses, relating to the Merger.
- 2 -
<PAGE> 1
EXHIBIT 10.7
LOAN AND SECURITY AGREEMENT
THIS LOAN AND SECURITY AGREEMENT (this "Agreement") is entered
into as of September 18, 1997, between Paradigm Music Entertainment Company, a
Delaware corporation ("Borrower"), and TCI Music, Inc., a Delaware corporation
("Lender").
RECITAL
Pursuant to the letter agreement dated as of the date of this
Agreement between Lender and Borrower (the "Letter Agreement"), Lender has
agreed to lend to Borrower, and Borrower desires to borrow from Lender, up to
$3,833,169 on the terms and conditions set forth in this Agreement.
NOW, THEREFORE, for good and valuable consideration, the
receipt and adequacy of which hereby are acknowledged, the parties agree as
follows:
ARTICLE 1
Definitions
The following terms have the meanings indicated for purposes
of this Agreement:
1.1 "Business Day" means a day when banks in New York, New
York and Denver, Colorado are open for business.
1.2 "GAAP" means generally accepted accounting principles as
in effect in the United States, as set forth in the opinions and pronouncements
of the Accounting Principles Board and the American Institute of Certified
Public Accountants and statements and pronouncements of the Financial Accounting
Standards Board or in such other statements by such other entity as may be
approved by a significant segment of the accounting profession, which principles
are applicable as of the date of determination.
1.3 "Indebtedness" means, with respect to any Person, without
duplication, (a) all obligations of such Person for borrowed money or with
respect to advances of any kind (including repurchase obligations), (b) all
obligations of such Person evidenced by bonds, debentures, notes or similar
instruments, (c) all obligations of such Person under conditional sale or other
title retention agreements relating to property purchased by such Person, (d)
all obligations of such Person incurred or assumed as the deferred purchase
price of property or services (other than accounts payable to suppliers incurred
in the ordinary course of business and paid in the ordinary course of business
of such Person), (e) all indebtedness of others secured by (or for which the
holder of such indebtedness has an existing right, contingent or otherwise, to
be secured by) any Lien on property owned or acquired by such Person, whether or
not the obligations secured thereby have been assumed by such
<PAGE> 2
Person, (f) all capitalized lease obligations of such Person, (g) all guaranties
of such Person and (h) all obligations of such Person as an account party in
respect of letters of credit and bankers acceptances.
1.4 "Legal Requirements" means all legal requirements in
effect from time to time, including all laws, statutes, codes, acts, ordinances,
orders, judgments, decrees, injunctions, rules, regulations, permits, licenses,
authorizations, certificates, orders, franchises, determinations, approvals,
notices, demand letters, directions and requirements of all governments,
departments, commissions, boards, courts, authorities and agencies, ordinary or
extraordinary, including any change in any law, regulation or the interpretation
thereof by any governmental authority (whether or not having the force of law).
1.5 "Lien" means any lien, security interest, pledge,
mortgage, deed of trust, encumbrance, right of first refusal or other right to
purchase or any right or claim in the nature of any of the foregoing.
1.6 "Loan" means the loan by Lender to Borrower described in
Section 2.1.
1.7 "Material Adverse Effect" means a material adverse effect
on (i) the business, assets, operations, prospects or financial condition of
Borrower, (ii) the ability of Borrower to satisfy the Obligations in accordance
with their terms or (iii) the enforceability of Borrower's obligations under
this Agreement or the Note.
1.8 "Maturity Date" means the date on which the outstanding
principal and accrued interest on the Note becomes due.
1.9 "Obligations" means the Loan and any other loans,
advances, debts, interest, liabilities, obligations, fees, expenses, covenants
and duties owing to Lender by Borrower, of any kind or nature, present or
future, whether or not evidenced by any note, guaranty or other instrument.
1.10 "Person" means any human being or any corporation,
partnership, trust, association, governmental authority or other entity or
organization.
1.11 "Potential Default" means any event or condition which
with notice, passage of time or a determination by Lender, or any combination of
the foregoing, would constitute an Event of Default.
Any capitalized term that is used but not defined in this
Agreement will have the meaning ascribed to it in the Letter Agreement.
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<PAGE> 3
ARTICLE 2
Loan and Note
2.1 Loan.
(a) Subject to the terms and conditions of this
Agreement, from time to time during the period beginning on the date of this
Agreement and ending on December 31, 1997, Lender will make the Loan to Borrower
in the aggregate principal amount of up to $3,833,169 by advancing funds to
Borrower from time to time as provided in this Section 2.1 (each an "Advance
Date"). Each request by Borrower for an advance will state the principal amount
requested to be disbursed and will be accompanied by (i) a certificate of
Borrower signed by its Chief Executive Officer certifying that the conditions to
the obligation of Lender to make such advance, as set forth in Article 3, will
be satisfied as of the Advance Date and (ii) the other items prescribed by
Article 3. Lender will advance to Borrower $2,183,169 of the Loan within two
Business Days after the execution of this Agreement if such certificate and
other items are delivered to Lender on this date. On the first Business Day of
October, November and December 1997 Lender will advance to Borrower, upon the
receipt of such certificate and other items, amounts agreed by Lender and
Borrower, but not to exceed $550,000 per month, for normal operating expenses
payable during those months if Lender receives a request for such advance at
least three Business Days before such Advance Date. Notwithstanding any other
provision of this Agreement or the Note, no advance under the Loan will be
requested by Borrower or made by Lender after the Effective Time.
(b) Borrower's obligation to repay the Loan
will be evidenced by a promissory note (the "Note") in the form attached as
Exhibit A, which Borrower will execute and deliver to Lender on the date of this
Agreement.
2.2 Payments. All payments on the Note will be made and
applied as stated therein. Amounts repaid by Borrower may not be reborrowed.
ARTICLE 3
Conditions Precedent
The obligation of Lender to make the Loan (or any advance
thereof) will be subject to the satisfaction, on the date of this Agreement and
on each Advance Date, of the following conditions:
3.1 Reports, Certificates and Other Information. Lender will
have received such instruments or documents as Lender may reasonably request
relating to the existence and good standing of Borrower, Borrower's authority
for execution, delivery and performance of this Agreement and the creation and
perfection of the security interest created hereby.
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<PAGE> 4
3.2 No Default. No Event of Default or Potential Default will
exist.
3.3 Representations and Warranties Correct; Compliance with
Covenants. The representations and warranties set forth in Article 4 will be
true and correct in all material respects and Borrower will have complied in all
material respects with its covenants and agreements in this Agreement.
3.4 No Material Adverse Effect. Since July 1, 1997, no event
will have occurred that has had, or reasonably could be expected to have, a
Material Adverse Effect except as disclosed in Amendment No. 1 to the
Registration Statement on Form SB-2/A (File No. 333-23781) filed by Borrower
with the Securities and Exchange Commission and any decrease in Borrower's
working capital consistent with the decreases experienced in recent periods.
3.5 Verification of Use of Proceeds; Security. Borrower will
have provided to Lender evidence satisfactory to Lender as to the compliance by
Borrower with its covenant in Section 5.6 as to each advance of the Loan and
evidence of Borrower's compliance with Section 4.11.
ARTICLE 4
Representations and Warranties of Borrower
To induce Lender to enter into this Agreement and to make the
Loan, Borrower makes the following representations and warranties to Lender:
4.1 Due Organization. Borrower is a corporation duly
organized, validly existing and in good standing under the laws of Delaware.
4.2 Chief Executive Office. The chief executive office of
Borrower is at 67 Irving Place North, 4th Floor, New York, New York 10003.
4.3 Corporate Power. Each of Borrower and SonicNet and Demon
(as defined in Section 8.1) has all corporate power necessary to own and operate
its properties and to carry on its business as now conducted and to execute and
deliver, and to perform its obligations under, this Agreement, the Note and the
other instruments and agreements to be executed and delivered by Borrower
pursuant to this Agreement.
4.4 Authorization. All corporate action on the part of
Borrower necessary for the execution, delivery and performance of this Agreement
and the Note has been duly taken and is in full force and effect. The officer
executing this Agreement and the Note on behalf of Borrower is fully authorized
to execute and deliver the same.
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<PAGE> 5
4.5 Binding Nature. This Agreement and the Note are legal,
valid and binding obligations of Borrower, enforceable in accordance with their
terms, except as affected by bankruptcy, insolvency or similar laws and by
general equitable principles.
4.6 Litigation and Contingent Liabilities. There is no action,
suit, investigation or proceeding pending or, to the best of Borrower's
knowledge, threatened in writing against or affecting Borrower, SonicNet or
Demon or any of their property, the adverse determination of which reasonably
could be expected to have a Material Adverse Effect.
4.7 No Event of Default. No Event of Default or Potential
Default has occurred and is continuing or would result from the execution,
delivery and performance by Borrower of this Agreement or the Note.
4.8 Compliance With Laws; Consents. Each of Borrower, SonicNet
and Demon is in compliance in all material respects with all Legal Requirements
applicable to it or to its assets and business. No approvals by, or filings
with, any Person are required to be obtained or made in connection with the
execution and delivery of this Agreement or the Note, the consummation of the
transactions herein or therein contemplated or the performance of or compliance
with the terms and conditions hereof or thereof.
4.9 Absence of Conflicts. The execution, delivery and
performance of this Agreement and the Note will not (a) violate any Legal
Requirement, (b) conflict with or result in a breach of or a default under any
agreement or instrument to which Borrower is a party or by which any of its
properties is bound or (c) result in the creation or imposition of a Lien upon
any property (now owned or hereafter acquired) of Borrower, except for the
security interest granted hereby.
4.10 Title and Authority. Borrower has all rights in and good
title to the Collateral and has full power and authority to grant to Lender a
security interest in the Collateral pursuant to this Agreement and to execute,
deliver and perform its obligations in accordance with this Agreement, without
the consent or approval of any other Person other than any consent or approval
which has been obtained. The Pledged Shares (as defined in Section 8.2)
represent all of the issued and outstanding capital stock of Demon and SonicNet
and 25% of the issued and outstanding capital stock of Wingnut, are duly issued,
fully paid and nonassessable and are not subject to any Lien (except that the
shares of Wingnut owned by Borrower currently are held in escrow).
4.11 Pledged Stock; Filings. On the date of this Agreement
Borrower has delivered to Lender certificates evidencing all of the Pledged
Shares (other than the certificates representing the shares of Wingnut, which
will be delivered to Lender upon the release thereof from escrow), together with
stock assignments or powers in form acceptable to Lender. Executed Uniform
Commercial Code financing statements describing the Collateral have been filed
of record in every governmental office in which such filing is necessary to
establish a legal, valid and perfected security interest in favor of Lender in
respect of the Collateral in which a security interest may be perfected
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<PAGE> 6
by filing, and no other filing, refiling, recording, rerecording, registration
or reregistration is necessary in any such jurisdiction, except as provided
under applicable law with respect to the filing of Uniform Commercial Code
continuation statements.
4.12 Priority of Security Interest. The Collateral is and will
be owned by Borrower free and clear of any Lien other than the security interest
granted hereby. The security interest granted to Lender in this Agreement is a
legal, valid and perfected first priority security interest subject to no prior
Lien of any nature.
ARTICLE 5
Affirmative Covenants
Borrower will comply with the following provisions and with
its covenants set forth in the Letter Agreement so long as any Obligation is
outstanding:
5.1 Accounting Records. Borrower will maintain books and
accounts in accordance with GAAP. Within 45 days after the end of each of the
first three quarters of each fiscal year until the Maturity Date, Borrower will
deliver to Lender a copy of consolidated financial statements for such quarter
(consisting of at least a balance sheet and related statements of operations,
cash flows and stockholders equity), and within 90 days after the end of each
fiscal year until the Maturity Date Borrower will deliver a copy of audited
consolidated financial statements for such fiscal year (consisting of at least a
balance sheet and related statements of operations, cash flows and stockholders
equity). All such financial statements will be prepared in accordance with GAAP
applied on a basis consistent with prior periods (except as otherwise noted
therein) and Regulation S-X under the Securities Exchange Act of 1934, as
amended.
5.2 Corporate Existence. Borrower will preserve and maintain
its corporate existence and that of Demon and SonicNet and all its licenses,
privileges and franchises and other rights necessary or desirable in the normal
course of its businesses, except to the extent that the failure to preserve and
maintain its corporate existence and such rights would not be reasonably likely
to have a Material Adverse Effect.
5.3 Qualifications To Do Business. Each of Borrower, SonicNet
and Demon will qualify to do business and will be and remain in good standing in
each jurisdiction in which the nature of its business requires it to be so
qualified, or in which failure to be so qualified and in good standing would be
reasonably likely to have a Material Adverse Effect.
5.4 Compliance With Laws. Each of Borrower, SonicNet and Demon
will comply with all applicable Legal Requirements, except where the failure to
do so would not have a Material Adverse Effect.
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<PAGE> 7
5.5 Taxes and Other Liabilities. Borrower will pay and
discharge when due any and all Indebtedness and all taxes and assessments except
as may be subject to good faith contest or as to which a bona fide dispute
exists.
5.6 Use of Proceeds. Borrower will use the proceeds of the
Loan only for the purposes described in Schedule A to the Letter Agreement.
5.7 Protection of Security. Borrower will, at its own expense,
take any and all actions necessary to defend title to the Collateral against all
Persons and to defend the security interest of Lender in the Collateral and the
priority thereof, against any adverse Lien of any nature whatsoever.
5.8 Continuing Obligations of Borrower. Borrower will observe
and perform all the material conditions and obligations to be observed and
performed by it under each contract, agreement, interest or obligation relating
to the Collateral, all in accordance with the terms and conditions thereof.
5.9 Indemnification. Borrower will indemnify and hold Lender
and Lender's directors, officers, employees, affiliates, attorneys and agents
(collectively, the "Indemnitees") harmless from and against any and all
liabilities, obligations, losses, damages, penalties, actions, judgments, suits,
claims, costs, expenses and disbursements of any kind or nature whatsoever
(including, without limitation, the reasonable fees and disbursements of
counsel) which may be imposed on, incurred by or asserted against such
Indemnitees in any manner relating to or arising out of any breach by Borrower
of any of its representations, warranties, covenants or agreements in this
Agreement or the Note (collectively, the "Indemnified Matters"); provided,
however, that Borrower will have no obligation to an Indemnitee under this
Section 5.9 with respect to Indemnified Matters to the extent such Indemnified
Matters were caused by or resulted from the gross negligence or willful
misconduct of an Indemnitee.
ARTICLE 6
Negative Covenants
Borrower will comply with the following provisions so long as
any Obligation is outstanding:
6.1 No Merger, Etc. Borrower will not effect or enter into any
agreement to effect any merger, consolidation, reorganization, recapitalization
or similar transaction other than as contemplated by the Letter Agreement.
6.2 Indebtedness. Borrower will not incur, assume or suffer to
exist any Indebtedness, or cause or permit SonicNet or Demon to do so, except
(a) the Loan, (b) Indebtedness
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<PAGE> 8
for borrowed money and capital lease obligations outstanding as of the date of
this Agreement and reflected in the most recent balance sheet of Borrower
delivered to Lender and (c) Indebtedness for the purchase of goods or services
incurred in the ordinary course of business.
6.3 Loans and Investments. Borrower will not at any time make
or have outstanding any loan or advance to, or purchase, acquire or own any
stock, bonds, notes or securities of, or any partnership or other ownership
interest in, or make any capital contribution to, any other Person, or purchase
or acquire any assets (whether with cash or in exchange for other assets) or
make any other investment in any Person or agree, become or remain liable to do
any of the foregoing, except trade credit extended to subcontractors or
suppliers on usual and customary terms in the ordinary course of business and
except as required by the Letter Agreement.
6.4 No Transfer of Assets or Other Lien. None of Borrower,
SonicNet or Demon will sell or transfer any of the Collateral or, except for the
security interest herein granted to Lender, create, incur, assume or suffer to
exist any Lien on the Collateral.
ARTICLE 7
Events of Default
7.1 Events of Default. Each of the following will constitute
an Event of Default under this Agreement:
(a) Payments. Borrower fails to pay when due
any principal, interest or other amount due under this Agreement, the Note or
any other Obligation.
(b) Other Covenants. Borrower fails to perform
any other obligation under this Agreement, or the Note, or any other Obligation
and such failure continues uncured for a period of 10 days or more.
(c) Warranties. Any warranty or representation
made by Borrower is untrue in any material respect.
(d) Bankruptcy. Borrower (i) files a petition
seeking liquidation or reorganization under Chapter 7 or Chapter 11 of the
United States Bankruptcy Code or any similar proceeding under state or federal
law, or consents to the institution of an involuntary case thereunder against
it; (ii) applies for, or consents or acquiescences to an appointment with
respect to Borrower of, a receiver, liquidator, sequestrator, trustee or other
officer with similar powers; (iii) makes an assignment for the benefit of
creditors; (iv) admits in writing its inability to pay its debts generally as
they become due; or, (v) an involuntary case is commenced seeking the
liquidation or reorganization of Borrower under Chapter 7 or Chapter 11 of the
United States Bankruptcy Code, or any similar proceeding is commenced against
Borrower under any other applicable law, and (A)
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<PAGE> 9
the petition is not timely controverted by Borrower, (B) the petition is not
dismissed within 45 days after its filing, (C) an interim trustee is appointed
to take possession of all or a portion of the property, or to operate all or any
part of the business, of Borrower or (D) an order for relief or a decree or
order of a court having jurisdiction in the premises for the appointment of a
receiver, liquidator, sequestrator, trustee or other officer is issued or
entered therein.
(e) Cross-Default. Borrower is in default of
any obligation (other than the Obligations) under any other agreement or
instrument for the payment of Indebtedness in excess of $10,000 and such default
continues uncured for 10 days or more.
Borrower will give notice to Lender immediately if any Event of Default or
Potential Default occurs.
7.2 Acceleration; Other Remedies. If any Event of Default
occurs, all Obligations will become immediately due and payable without
presentment, demand, protest or other notice of any kind. If any Event of
Default occurs and is continuing, Lender will have, in addition to the remedies
set forth in this Agreement, all other remedies available at law or in equity.
ARTICLE 8
Security Interest
8.1 Grant of Security Interest. To secure the prompt payment
and performance of the Obligations, Borrower hereby grants to Lender a security
interest in all of Borrower's assets and properties now owned or hereafter
acquired, including but not limited to its furniture, fixtures, equipment,
inventory, general intangibles, accounts receivable, contract rights,
instruments, capital stock in other corporations, including all issued and
outstanding capital stock of SonicNet, Inc., a Delaware corporation
("SonicNet"), Purple Demon, Inc., a New York corporation ("Demon") and Wingnut
Records, Inc. ("Wingnut"), and equity interests in partnerships and limited
liability companies (collectively, the "Collateral"), and all proceeds from the
sale, exchange, lease or other disposition of any of the Collateral.
8.2 Collections.
(a) So long as no Event of Default has occurred
and is continuing, Borrower will have the right to exercise all voting and
consent rights as the holder of the capital stock of Demon, SonicNet and Wingnut
included in the Collateral (collectively, the "Pledged Shares") and to collect
all accounts receivable included in the Collateral in the ordinary course of its
business; provided that Borrower will, if Lender will so request, (i) arrange
for remittances on any such accounts to be made in such manner as Lender may
direct, and (ii) promptly deposit all payments received by Borrower on account
of such accounts receivable, whether in the form of cash, checks, notes, drafts,
bills of exchange, money orders or otherwise, in one or more accounts designated
by Lender in precisely the form received (but with any endorsements of Borrower
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<PAGE> 10
necessary for deposit or collection), subject to withdrawal by Lender only, as
hereinafter provided, and until they are deposited, such payments will be deemed
to be held in trust by Borrower for and as Lender's property and will not be
commingled with Borrower's other funds.
(b) Upon the occurrence and during the
continuance of an Event of Default, Lender will have the right, as the agent of
Borrower, with power of substitution for Borrower and in Borrower's name,
Lender's name or otherwise, for the use and benefit of Lender (i) to receive,
endorse, assign or deliver any and all notes, acceptances, checks, drafts, money
orders or other evidences of payment relating to the Collateral or any part
thereof; (ii) to demand, collect, receive payment of, give receipt for and give
discharges and releases of all or any of the Collateral; (iii) to sign the name
of Borrower on any invoice or bill of lading relating to any of the Collateral;
(iv) to send verifications of accounts receivable to any customer; (v) to
commence and prosecute any and all suits, actions or proceedings at law or in
equity in any court of competent jurisdiction to collect or otherwise realize on
all or any of the Collateral or to enforce any rights in respect of any
Collateral; (vi) to settle, compromise, adjust or defend any actions, suits or
proceedings relating to or pertaining to all or any of the Collateral; (vii) to
notify, or to require Borrower to notify, the account debtors obligated on any
accounts receivable to make payment thereof directly to Lender; and (viii) to
use, sell, assign, transfer, pledge, make any agreement with respect to or
otherwise deal with all or any of the Collateral, and to do all other acts and
things necessary to carry out the purposes of this Agreement, as fully and
completely as though Lender were the absolute owner of the Collateral for all
purposes.
(c) Nothing herein contained will be construed
as requiring or obligating Lender to make any commitment or to make any inquiry
as to the nature or sufficiency of any payment received by Lender, or to present
or file any claim or notice, or to take any action with respect to the
Collateral or any part thereof or the moneys due or to become due in respect
thereof or any property covered thereby. No action taken by Lender or omitted to
be taken with respect to the Collateral or any part thereof will give rise to
any defense, counterclaim or offset in favor of Borrower or to any claim or
action against Lender. The appointment of Lender as the agent of Borrower for
the purposes set forth in this Section 8.2 is coupled with an interest and is
irrevocable. The provisions of this Section 8.2 will in no event relieve
Borrower of any of its obligations under this Agreement with respect to the
Collateral or any part thereof or impose any obligation on Lender to proceed in
any particular manner with respect to the Collateral or any part thereof, or in
any way limit the exercise by Lender of any other or further right which it may
have on the date of this Agreement or hereafter.
8.3 Remedies upon Default.
(a) Upon the occurrence and during the
continuance of an Event of Default, Borrower will deliver each item of
Collateral to Lender on demand, and Lender will have the right to take any or
all of the following actions at the same or different times: (i) with or without
legal process and with or without previous notice or demand for performance, to
take possession of
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the Collateral and without liability for trespass as to the property of Borrower
to enter any premises where the Collateral may be located for the purpose of
taking possession of or removing the Collateral; (ii) to exercise all voting and
consent rights with respect to the Pledged Shares, and to act in all other
respects as the legal and beneficial holder thereof; and (iii) to exercise any
and all other rights afforded to a secured party under the Uniform Commercial
Code or other applicable Legal Requirement. Without limiting the generality of
the foregoing, Lender will have the right, subject to applicable Legal
Requirements, to sell or otherwise dispose of all or any part of the Collateral,
at public or private sale or at any broker's board or on any securities
exchange, for cash, upon credit or for future delivery as Lender deems
appropriate. As to any Collateral constituting a security, Lender will be
authorized at any such sale (if it reasonably deems it advisable to do so) to
restrict the prospective bidders or purchasers to Persons who will represent and
agree that they are purchasing the Collateral for their own account for
investment and not with a view to the distribution or sale thereof. Upon
consummation of any sale Lender will have the right to assign, transfer and
deliver to the purchaser thereof the Collateral so sold. Each purchaser at any
sale of Collateral will hold the property sold absolutely, free from any claim
or right on the part of Borrower, and Borrower hereby waives (to the extent
permitted by applicable Legal Requirements) all rights of redemption, stay and
appraisal which Borrower now has or may at any time in the future have under any
Legal Requirement now existing or hereafter enacted.
(b) Lender will give Borrower at least 10 days'
written notice (which Borrower agrees is reasonable notice within the meaning of
Section 9-504(3) of the Uniform Commercial Code) of Borrower's intention to sell
any Collateral. Such notice, in the case of a public sale, will state the time
and place for such sale and, in the case of a sale at a broker's board or on a
securities exchange, will state the board or exchange at which such sale is to
be made and the day on which the Collateral, or portion thereof, will first be
offered for sale at such board or exchange. Any such public sale will be held at
such time or times within ordinary business hours and at such place or places as
Lender may fix and state in the notice (if any) of such sale. At any such sale,
the Collateral, or portion thereof, to be sold may be sold in one lot as an
entirety or in separate parcels, as Lender may determine. Lender will not be
obligated to sell any Collateral if it determines not to do so, regardless of
the fact that notice of sale of such Collateral has been given. Lender may,
without notice or publication, adjourn any public or private sale or cause the
same to be adjourned from time to time by announcement at the time and place
fixed for sale, and such sale may, without further notice, be made at the time
and place to which the same was so adjourned. In case any sale of all or any
part of the Collateral is made on credit or for future delivery, the Collateral
so sold may be retained by Lender until the sale price is paid by the purchaser
or purchasers thereof, but Lender will not incur any liability in case any such
purchaser or purchasers fail to take up and pay for the Collateral so sold and,
in case of any such failure, such Collateral may be sold again upon like notice.
At any public sale, Lender may bid for or purchase, free (to the extent
permitted by applicable Legal Requirements) from any right of redemption, stay
or appraisal on the part of Borrower (all such rights being hereby irrevocably
waived and released by Borrower to the extent permitted by applicable Legal
Requirements), the Collateral or any part thereof offered for sale and may make
payment on account thereof by using any claim then due and payable to Lender
from Borrower as
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<PAGE> 12
a credit against the purchase price, and Lender may, upon compliance with the
terms of sale, hold, retain and dispose of such property without further
accountability to Borrower therefor. As an alternative to exercising the power
of sale herein conferred upon it, Lender may proceed by a suit or suits at law
or in equity to foreclose on and to sell the Collateral or any portion thereof
pursuant to a judgment or decree of a court or courts having competent
jurisdiction or pursuant to a proceeding by a court-appointed receiver. Upon any
sale of the Collateral by Lender (including, pursuant to a power of sale granted
by statute or under a judicial proceeding), the receipt of Lender or of the
officer making the sale will be a sufficient discharge to the purchaser of the
Collateral so sold and such purchaser will not be obligated to see to the
application of any part of the purchase money paid over to Lender or such
officer or be answerable in any way for the misapplication thereof.
8.4 Application of Proceeds. Lender will apply the proceeds of
any collection or sale of the Collateral as follows:
(a) First, to the payment of all costs and expenses
incurred by Lender in connection with such collection or sale or
otherwise in connection with this Agreement or any of the Obligations,
including all court costs and the reasonable fees and expenses of its
agents and legal counsel, the repayment of all advances made by Lender
hereunder on behalf of Borrower and any other reasonable costs or
expenses incurred by Lender in connection with the exercise of any
right or remedy hereunder;
(b) Second, to the payment of the Obligations; and
(c) Third, to Borrower or as a court of competent
jurisdiction may otherwise direct.
Lender will have absolute discretion as to the time of application of any such
proceeds, moneys or balances in accordance with this Agreement. Lender will have
the right to claim and collect from Borrower any deficiency remaining after the
sale of any Collateral.
8.5 Location of Collateral; Place of Business.
(a) Borrower hereby represents and warrants that
all the tangible Collateral is located at the locations listed on Schedule 8.5.
Borrower will not move any of the Collateral, or permit it to be moved, unless
all filings under the Uniform Commercial Code or otherwise which are required by
this Agreement to be made with respect to the Collateral have been made and
Lender has a valid, legal and perfected first priority security interest in the
Collateral as relocated. Upon Lender's request Borrower promptly will prepare
and deliver to Lender a certificate executed by the president of Borrower
showing the identity and location of the Collateral.
12
<PAGE> 13
(b) Borrower will not change, or permit to be
changed, the location of its chief executive office unless all filings under the
Uniform Commercial Code or otherwise which are required by this Credit Agreement
to be made have been made and Lender has a valid, legal and perfected first
priority security interest based on such relocated office.
ARTICLE 9
Miscellaneous
9.1 Successors and Assigns. This Agreement will be binding
upon, and the benefits thereof will inure to, the parties hereto and their
respective successors and assigns, except that Borrower may not assign or
transfer any of its rights or obligations hereunder.
9.2 No Implied Waiver. No delay or omission to exercise any
right, power or remedy accruing to Lender upon any breach or default of Borrower
under this Agreement will impair any such right, power or remedy of Lender, nor
will it be construed to be a waiver of any such breach or default, or an
acquiescence therein or any similar breach or default occurring thereafter, nor
will any waiver of any single breach or default be deemed a waiver of any other
breach or default occurring theretofore or thereafter.
9.3 Amendments; Waivers. No amendment, modification or waiver
of any provision of this Agreement will be effective unless the same is in
writing and signed by each party to be bound thereby. Any amendment,
modification or waiver hereunder will be effective only in the specific instance
and for the specific purpose for which given.
9.4 Severability. If any provision of this Agreement, or the
application of such provision to any Person or circumstance, is found by a court
of competent jurisdiction to be unenforceable for any reason, such provision may
be modified or severed from this Agreement to the extent necessary to make such
provision enforceable against such Person or in such circumstance. Neither the
unenforceability of such provision nor the modification or severance of such
provision will affect (i) the enforceability of any other provision of this
Agreement or (ii) the enforceability of such provision against any Person or in
any circumstance other than those against or in which such provision is found to
be unenforceable.
9.5 Notices. Any notice which Borrower or Lender may be
required or may desire to give to the other under any provision of this
Agreement or the Note will be in writing, and will be deemed to have been duly
given if (a) personally delivered (including delivery by Federal Express or
other nationally recognized overnight courier) or (b) sent by confirmed telecopy
as follows:
13
<PAGE> 14
To Borrower:
Paradigm Music Entertainment Company
67 Irving Place North
4th Floor
New York, New York 10003
Attention: President
Telecopy: (212) 387-8171
With a copy to:
Reid & Priest LLP
40 West 57th Street
New York, New York 10019
Attention: Michael Elkin
Telecopy: (212) 603-2001
To Lender:
TCI Music
5619 DTC Parkway
Englewood, Colorado 80111
Attention: President
Telecopy: (303) 721-5443
With a copy to:
Sherman & Howard L.L.C.
633 Seventeenth Street
Suite 3000
Denver, Colorado 80202
Attention: Charles Y. Tanabe, Esq.
Telecopy: (303) 298-0940
Any party may change the address to which all notices, requests and other
communications are to be sent to it by giving written notice of such address
change to the other parties in conformity with this paragraph, but such change
will not be effective until notice of such change has been received by the other
parties.
9.6 Interpretation. This Agreement, together with the Note and
the exhibits and schedules to this Agreement, is the final expression of their
agreement with respect to the subject matter hereof and is intended as a
complete statement of the terms and conditions of such agreement.
14
<PAGE> 15
9.7 Governing Law. The validity, construction and effect of
this agreement will be governed by the laws of the State of Colorado, without
regard to its laws regarding choice of applicable law.
9.8 Counterparts. This Agreement may be executed in
counterparts, each of which will be an original with the same effect as if the
signatures thereto and hereto were upon the same instrument.
9.9 Headings. Captions, headings and the table of contents
in this Agreement are for convenience only, and are not to be deemed part of
this Agreement.
9.10 Terms. Terms used with initial capital letters will have
the meanings specified, applicable to both singular and plural forms, for all
purposes of this Agreement. All pronouns (and any variation) will be deemed to
refer to the masculine, feminine or neuter, as the identity of the Person may
require. The singular or plural includes the other, as the context requires or
permits. The word "include" (and any variation) is used in an illustrative sense
rather than a limiting sense. The word "day" means a calendar day. The word
"year" means a calendar year.
9.11 Additional Waivers.
(a) Bankruptcy. If Borrower becomes insolvent or
files a petition for reorganization, arrangement, composition, discharge or
similar relief under any present or future provision of the Bankruptcy Code, or
if such a petition is filed against Borrower, to the extent that in any such
proceedings any payment of any of the Obligations previously made by Borrower to
Lender must be returned by Lender or some or all of the Obligations are
terminated, rejected, reduced or abrogated, Borrower agrees that, to the extent
permitted by applicable law, its liability to Lender hereunder will be
reinstated effective from the date of this Agreement and will continue in full
force and effect as if no such action or proceeding had occurred and as though
such payment had not been made to Lender.
(b) Statutes of Limitation. Borrower waives the
benefit of any statute of limitations affecting its liability hereunder or under
the Note or the enforcement thereof, to the extent permitted by law.
(c) Demands for Performance. Borrower acknowledges
that repeated and successive demands may be made, and payments or performance
made hereunder in response to such demands, from time to time and when Borrower
defaults in its performance of the Obligations. Notwithstanding any such
performance hereunder, this Agreement will remain in full force and effect and
will apply to any and all subsequent defaults by Borrower in payment or
performance of the Obligations.
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<PAGE> 16
(d) No Set-off. Borrower waives any defense
arising by reason of any disability of Borrower. Borrower waives as against
Lender any right of setoff, defense or counterclaim which Borrower may have or
claim to have against Lender. Until such time as the Obligations have been
satisfied in full, Borrower will not have any right of subrogation, and hereby
waives any right to enforce any remedy that Lender now has or may hereafter have
against Borrower, and waives any and all statutory or other rights to
participate in any security now or hereafter held by Lender.
Borrower acknowledges that Lender would not make the Loan in the absence of the
foregoing covenants and waivers by Borrower and the other covenants and waivers
of Borrower in this Agreement.
9.12 Further Assurances. Borrower, at its expense, will
execute, acknowledge, deliver and cause to be duly filed all such further
instruments and documents and take all such actions as Lender may from time to
time reasonably request to assure and preserve the security interests and the
rights and remedies created hereby, including the payment of any fees and taxes
required in connection with the execution and delivery of this Agreement, the
granting of the security interests created hereby and the filing of any
financing statements or other documents in connection herewith. If any amount
payable under or in connection with any of the Collateral is evidenced by any
promissory note or other instrument, such note or instrument will be immediately
pledged and delivered to Lender, duly endorsed in a manner satisfactory to
Lender. Borrower will notify Lender of any change in its corporate name or in
the location of its chief executive office, its chief place of business or the
office where it keeps its records relating to the accounts receivable owned by
it. Borrower will promptly notify Lender if any material portion of the
Collateral is damaged or destroyed. Borrower promptly will take any action
appropriate to perfect Lender's first priority security interest in any
Collateral acquired by Borrower after the date of this Agreement.
9.13 Expenses. Borrower will pay all costs and expenses,
including fees and disbursements of Lender's counsel, in connection with an
Event of Default or Potential Default, the enforcement of this Agreement or the
Note and collection and other proceedings resulting therefrom. Borrower will
indemnify Lender against any transfer taxes, filing fees, documentary taxes,
assessments or charges made by any governmental authority by reason of the
execution, delivery and performance of this Agreement or the Note.
9.14 Jurisdiction and Venue. The parties hereby irrevocably
agree that any legal action or proceeding with respect to this Agreement or the
Note may be brought in any state or federal court located in the State of
Colorado or in any other court having jurisdiction over the subject matter of
such action or proceeding, and by execution and delivery of this Agreement each
party hereby irrevocably consents and submits to each such jurisdiction and
hereby irrevocably waives any and all objections which it may have as to venue
in any of the above courts. Borrower and Lender hereby waive personal service
and any and all other process, and consent that all such services of process be
made by registered or certified mail, return receipt requested, directed to the
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<PAGE> 17
addresses provided for in this Agreement and service so made will be deemed to
be completed three Business Days after the same will have been deposited in the
United States mail, postage prepaid.
9.15 Waiver of Jury Trial. EACH PARTY HEREBY WAIVES ITS RIGHTS
TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF
THIS AGREEMENT OR THE NOTE, OR ANY DEALINGS BETWEEN BORROWER AND LENDER RELATING
TO THE LOAN. This waiver is intended to encompass 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 this Agreement, and that each party will
continue to rely on this waiver in any future dealings with the other. Each
party further warrants and represents that 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 AND
MAY BE MODIFIED ONLY IN WRITING, AND THIS WAIVER WILL APPLY TO ANY SUBSEQUENT
AMENDMENT, RENEWAL, SUPPLEMENT OR MODIFICATION OF OR TO THIS AGREEMENT. In the
event of litigation, this Agreement may be filed as a written consent to a trial
by the court.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date and year first above written.
PARADIGM MUSIC ENTERTAINMENT COMPANY
By: /s/ Thomas McPartland
---------------------------------
Name: Thomas McPartland
Title: President
TCI MUSIC, INC.
By: /s/ David B. Koff
---------------------------------
Name: David B. Koff
Title: President
17
<PAGE> 18
SCHEDULE 8.5
LOCATION OF COLLATERAL
67 Irving Place
New York, NY 10003
Sonic Net
632 Broadway
New York, NY 10012
SonicNet - Addicted to Noise
375 Alabama Street
Suite 480
San Francisco, CA 94110
<PAGE> 19
PROMISSORY NOTE
$3,833,169 September 18, 1997
New York, New York
FOR VALUE RECEIVED, Paradigm Music Entertainment Company, a
Delaware corporation ("Maker"), promises to pay to the order of TCI Music, Inc.,
a Delaware corporation ("Holder"), at 5619 DTC Parkway, Englewood, Colorado
80111 or at such other place as from time to time may be designated by Holder to
Maker in writing, the principal sum of $3,833,169 (or such lesser amount as is
loaned to Maker by Holder under the Loan Agreement, as defined below) plus
interest at the rate of 10% per annum, compounded annually. Interest shall be
computed and paid based on the actual number of days elapsed in a year
consisting of 365 (or 366, if applicable) days.
The principal of and accrued interest on this Note shall be
due and payable in lawful money of the United States of America on (a) December
31, 1997 if either the Merger Agreement (as defined in the letter agreement
dated September 18, 1997 between Maker and Holder) terminates without
consummation of the merger described therein or prior to the effective time of
such merger any condition to the obligation of Holder to consummate such merger
fails (or it is evident that any such condition will not be satisfied) or (b) if
the merger is consummated, June 30, 1998.
Maker shall have the right to make prepayments, in whole or in
part at any time and from time to time, of the unpaid balance and accrued
interest hereof, free of premium or penalty. All prepayments shall be applied by
Holder first to any costs or expenses, including, without limitation, reasonable
attorneys' fees and costs incurred by Holder in enforcing Holder's rights under
this Note, then to interest accrued hereon and then to the remaining outstanding
principal balance hereof.
This Note is secured pursuant to the Loan and Security
Agreement of even date herewith between Maker and Holder (the "Loan Agreement").
Time is of the essence hereof. Maker will be in default under
this Note upon the occurrence and continuance beyond any applicable cure period
of an Event of Default, as defined in the Loan Agreement. Upon any Event of
Default, all unpaid principal of and accrued interest on this Note shall become
at once due and payable automatically and without notice and the unpaid balance
of this Note shall from that date forward bear interest at 11% per annum,
compounded quarterly, until fully paid.
Maker agrees to pay all costs of collection of this Note,
including reasonable attorney's fees, whether suit is brought or not, including
fees associated with bankruptcy and appellate proceedings.
Maker, for itself and its successors and assigns, expressly
waives presentment, demand, protest, notice of dishonor, notice of nonpayment,
notice of maturity, notice of protest,
<PAGE> 20
presentment, presentment for the purposes of accelerating maturity, diligence in
collection, and the benefit of any exemption under any exemption or insolvency
laws. Holder, without notice, may release or surrender, exchange or substitute,
any property now held or which may hereafter be held as security for the payment
of this Note, may extend the time for payment or otherwise modify the terms of
payment of any part or the whole of the debt evidenced hereby, and may renew
this Note.
The exercise or non-exercise by Holder of any rights or
remedies hereunder shall not preclude Holder's exercise of any other rights or
remedies provided herein, in the Loan Agreement or by law or equity. The failure
of Holder at any time to exercise any rights or remedies hereunder shall not
constitute a waiver of the right to exercise the same or other remedies at any
other time.
This Note may not be changed, altered, modified or terminated
orally, but only by agreement or discharge in writing signed by Maker and the
holder of this Note at the time of any such change, alteration, modification or
discharge.
In no event shall the amount paid or agreed to be paid to
Holder as interest hereunder exceed the highest lawful rate permissible under
applicable law. If, due to any circumstance, the interest payable hereunder is
deemed to exceed the highest rate of interest permitted by applicable law, then
the interest payable hereunder shall be reduced to the maximum rate so
permitted. If Holder shall ever receive interest on this Note which would exceed
the highest lawful rate, the interest which would be excessive shall be applied
to the reduction of the principal balance remaining unpaid and not to the
payment of interest. This provision shall supersede all contrary agreements
between Maker and Holder with respect to the calculation and payment of interest
on this Note.
Any reference in this Note to "Holder" will be deemed to
include any successor or assign of Holder.
If the last day for the making of any payment or the taking of
any other action is not a day on which banks in Denver, Colorado are open for
business, the time for making such payment or taking such action will be
extended to the next business day.
The provisions of this Note shall be construed and interpreted
and all rights and obligations of the parties hereunder determined in accordance
with the laws of the State of Colorado without regard to any choice of law
principles. At the option of Holder, an action may be brought to enforce this
Note in any court located in the State of Colorado, or in any other court in
which venue and jurisdiction are proper. Maker irrevocably consents to venue and
jurisdiction in the state and federal courts located in the State of Colorado
and to service of process by mail in any such action. Maker further consents to
the bringing of an action to recognize and enforce any judgment rendered by the
above courts in any jurisdiction in which Maker has assets or may be found, and
irrevocably waives, to the full extent permitted by law, any defense based on
lack of jurisdiction or inconvenience of forum.
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<PAGE> 21
IN WITNESS WHEREOF, Maker has signed and delivered this Note
the day and year first above written.
PARADIGM MUSIC ENTERTAINMENT COMPANY
By: /s/ Thomas McPartland
---------------------------------
Name: Thomas McPartland
Title: President
3
<PAGE> 1
EXHIBIT 10.8
VOTING AGREEMENT
This Voting Agreement (this "Agreement") is entered into as of
September 18, 1997, by and among Paradigm Music Entertainment Company, a
Delaware corporation (the "Company"), TCI Music, Inc., a Delaware corporation
("TCI Music"), and the Company Stockholders (as defined below).
Recitals
TCI Music and the Company are entering into a letter agreement
(the "Letter Agreement") dated as of the date of this Agreement, providing,
among other things, for the merger (the "Merger") of a wholly owned subsidiary
of TCI Music ("Merger Sub") with and into the Company and conversion of the
shares of capital stock of the Company outstanding at the time of the Merger, on
a fully diluted basis, into shares of Series A Common Stock of TCI Music ("TCI
Music Shares"). As an inducement to TCI Music and the Company to enter into the
Letter Agreement, the Company Stockholders have agreed to enter into this
Agreement.
Agreement
For good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties agree as follows:
1. Certain Definitions. For the purposes of this
Agreement, the following terms will have the meanings set forth below:
"Affiliate" and "Associate" when used with reference
to any Person will have the meanings assigned to such terms in Rule 12b-2 of the
Exchange Act as in effect on the date hereof. A Person will be deemed the
"Beneficial Owner", and to have "Beneficial Ownership" of, and to "Beneficially
Own," any securities as to which such Person is or may be deemed to be the
beneficial owner pursuant to Rule 13d-3 and 13d-5 under the Exchange Act, as
such rules are in effect on the date of this Agreement, as well as any
securities as to which such Person has the right to become a Beneficial Owner
(whether such right is exercisable immediately or only after the passage of time
or the occurrence of conditions) pursuant to any agreement, arrangement or
understanding or upon the exercise of conversion rights, exchange rights,
warrants, options or other acquisition rights or otherwise.
"Bankruptcy and Equity Exception" means an exception
to enforceability of an obligation because of the application of (i) bankruptcy,
insolvency, fraudulent transfer, reorganization, moratorium and similar laws of
general applicability relating to or affecting creditors' rights and (ii)
general equity principles.
"Company Stockholders" means the Persons named on
Schedule 1 to this Agreement.
<PAGE> 2
"Merger Agreement" means the Letter Agreement and, if
applicable, the definitive Agreement of Merger contemplated thereby.
"Person" means any human being or any partnership,
limited liability company, corporation, business trust, joint stock company,
trust, unincorporated association, joint venture, government (including any
authority or agency thereof), or other entity.
"Shares" means shares of Class A Common Stock, Class
B Common Stock and Class E Common Stock of the Company, and any other shares of
capital stock or other voting securities of the Company.
2. Representations and Warranties of the Company. The
Company represents and warrants to TCI Music and to each of the Company
Stockholders that:
(a) The Company has all requisite corporate power and
authority and, subject to approval by its stockholders, has taken all corporate
action necessary in order to execute and deliver, and to perform its obligations
under, the Merger Agreement and this Agreement.
(b) Each of the Merger Agreement and this Agreement
has been (or, when executed, will be) duly executed and delivered by the Company
and is (or will be) a valid and binding agreement of the Company enforceable
against the Company in accordance with its terms, subject to the Bankruptcy and
Equity Exception.
(c) As of the date of this Agreement, the authorized
capital stock of the Company consists of (i) 31,999,900 shares of Class A Common
Stock, of which 1,596,704 shares are outstanding (6,000 of which currently are
held in escrow), (ii) 1,000,100 shares of Class B Common Stock, of which
1,000,005 shares are outstanding (566,670 of which currently are held in
escrow), (iii) 2,000,000 shares of Class E Common Stock, of which 1,226,715
shares are outstanding (none of which currently is held in escrow) and (iv)
5,000,000 shares of Preferred Stock, none of which are outstanding. All issued
and outstanding shares of capital stock of the Company were validly issued and
are fully paid and nonassessable. Except as described on Schedule 2(c), there
are no (and at no time prior to the Merger will there be any) options, warrants,
calls, subscriptions, rights or other commitments of any kind obligating the
Company to issue (or reserve for issue), transfer or sell any capital stock of
the Company.
3. Representations and Warranties of TCI Music. TCI
Music represents and warrants to the Company and to each of the Company
Stockholders that:
(a) TCI Music has all requisite corporate power and
authority and has taken all corporate action necessary in order to execute and
deliver, and to perform its obligations under, this Agreement.
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<PAGE> 3
(b) Each of the Merger Agreement and this Agreement
has been (or, when executed, will be) duly executed and delivered by TCI Music
and is (or will be) a valid and binding agreement of TCI Music enforceable
against TCI Music in accordance with its terms, subject to the Bankruptcy and
Equity Exception.
4. Representations and Warranties of the Company
Stockholders. Each of the Company Stockholders severally represents and warrants
to TCI Music and to the Company that:
(a) Such Company Stockholder Beneficially Owns the
number of Shares set forth on Schedule 4, free and clear of any lien,
encumbrance or other adverse claim.
(b) Each record holder of any Shares Beneficially
Owned by such Company Stockholder is identified on Schedule 4.
(c) Such Company Stockholder, either alone or with
one or more other Company Stockholders, has (i) the right to vote, or to direct
the voting of, the Shares Beneficially Owned by such Company Stockholder and
(ii) the right to dispose, or to direct the disposition of, the Shares
Beneficially Owned by such Company Stockholder.
(d) Such Company Stockholder has all requisite power
and authority (corporate or otherwise) and has taken all action (corporate or
otherwise) necessary in order to execute and deliver, and to perform its
obligations under, this Agreement.
(e) This Agreement has been duly executed and
delivered by such Company Stockholder and is a valid and binding agreement of
such Company Stockholder enforceable against such Company Stockholder in
accordance with its terms, subject to the Bankruptcy and Equity Exception.
(f) No notices, reports or other filings are required
to be made by such Company Stockholder with, and no consents, registrations,
approvals, permits or authorizations are required to be obtained by such Company
Stockholder from, any Person, in connection with the execution and delivery of
this Agreement by such Company Stockholder, except those that the failure to
make or obtain is not, individually or in the aggregate, reasonably likely to
prevent, delay or impair the ability of such Company Stockholder to perform such
Company Stockholder's obligations under this Agreement.
(g) The execution, delivery and performance of this
Agreement by such Company Stockholder do not, and the consummation by such
Company Stockholder of the transactions contemplated hereby will not, constitute
or result in (i) a breach or violation of, or a default under (in the case of
any Company Stockholder that is not a human being), the articles or certificate
of incorporation or bylaws, or any comparable governing instruments, of such
Company Stockholder, or (ii) a breach or violation of, a default under, the
acceleration of any obligations of or the creation of a Lien on the assets of
such Company Stockholder (with or without notice, lapse
- 3 -
<PAGE> 4
of time or both) pursuant to, any instrument, agreement or Legal Requirement
binding on such Company Stockholder or to which such Company Stockholder is
subject, except, in the case of clause (ii) above, for any breach, violation,
default, acceleration, creation or change that, individually or in the
aggregate, is not reasonably likely to prevent, delay or impair the ability of
such Company Stockholder to perform such Company Stockholder's obligations under
this Agreement.
(h) Such Company Stockholder acknowledges that the
execution and delivery of this Agreement by such Company Stockholder may be
deemed to be a purchase by such Company Stockholder of TCI Music Shares within
the meaning of the Securities Act of 1933, as amended (the "Securities Act")
and, in that regard, the Company Stockholder represents and warrants to TCI
Music that: (i) the Company Stockholder is an "accredited investor" as defined
in Rule 501(a) of Regulation D under the Securities Act; (ii) such Company
Stockholder is acquiring the TCI Music Shares pursuant to the Merger Agreement
for such Company Stockholder's own account for investment only and without a
view to the distribution thereof except in a transaction permitted under the
following clause (iii); and (iii) such Company Stockholder will not sell or
otherwise dispose of such TCI Music Shares except in a transaction registered or
qualified under the Securities Act and applicable state securities laws or
unless an exemption from those requirements is available.
5. Agreement to Vote Shares. Each of the Company
Stockholders severally covenants and agrees with TCI Music and the Company: (a)
to vote or to cause to be voted all Shares that are Beneficially Owned by such
Company Stockholder in favor of (or to grant or to cause to be granted consents
with respect to such Shares for), and to cause any holder of record of Shares to
vote such Shares in favor of (or to grant consents with respect to such Shares
for), the adoption and approval of the Merger Agreement and the Merger at every
meeting of the Stockholders of the Company (or any solicitation of consents in
lieu thereof) at which such matters are considered and at every adjournment or
postponement thereof; (b) to vote or to cause to be voted such Shares against
(or to withhold or to cause to be withheld consents with respect to such Shares
for), and to cause any holder of record of Shares to vote such Shares against
(or to withhold or to cause to be withheld consents with respect to such Shares
for), any proposal that would compete or interfere with, or that would in any
way delay or otherwise inhibit the timely consummation of, the Merger and the
other transactions contemplated by the Merger Agreement; and (c) to vote or to
cause to be voted such Shares in favor of (or to grant or to cause to be granted
consents with respect to such Shares for), and to cause any holder of record of
Shares to vote such Shares in favor of (or to grant consents with respect to
such Shares for), the release of all shares of Class A, Class B and Class E
Common Stock of the Company held in escrow pursuant to the Company's Second
Restated Certificate of Incorporation, the Stock Escrow Agreement dated as of
November 21, 1995 among the Company, certain of its stockholders and American
Stock Transfer & Trust Company or otherwise from such escrow immediately prior
to the effective time of the merger contemplated by the Merger Agreement, all to
the extent such Shares are not disqualified by law or any contract existing
prior to the date of this Agreement from voting or from giving or withholding
consent with respect to such release.
6. No Voting Trusts or Transfers. Each Company
Stockholder will not, and will not permit any record holder of Shares to, (i)
deposit any Shares Beneficially Owned by such
- 4 -
<PAGE> 5
Company Stockholder in a voting trust or subject any Shares to any arrangement
with respect to the voting of such Shares other than this Agreement or any other
agreement entered into in furtherance of the Merger or (ii) sell, assign,
pledge, grant a lien on, or security interest in, or otherwise transfer any of
its interest in, any Shares to any Person unless such transferee agrees in
writing to be bound by this Agreement to the same extent as such Company
Stockholder.
7. Proxy. At the written request of TCI Music, each
Company Stockholder will appoint or will cause to be appointed TCI Music as its
true and lawful attorney and proxy, in the name, place and stead of such Company
Stockholder, to vote (consistent with this Agreement) as the proxy of the
Company Stockholders all of the Shares Beneficially Owned by such Company
Stockholder at any and all meetings of the stockholders of the Company, or any
adjournments thereof, at which votes of the Company's stockholders will be taken
in connection with the Merger or in connection with any proposal that would
compete or interfere with, or that would in any way delay or otherwise inhibit
the timely consummation of, the Merger and the other transactions contemplated
by the Merger Agreement, giving and granting to TCI Music all the powers such
Company Stockholder would possess if personally present. Such appointment also
will authorize TCI Music to execute (or to withhold) one or more written
consents solicited in lieu of any such meeting of stockholders of the Company.
Such proxy is coupled with an interest and will be irrevocable until the date on
which this Agreement terminates.
8. Miscellaneous.
(a) Governing Law. This agreement and the rights and
obligations of the parties under this agreement will be governed by and
construed in accordance with and subject to the laws of the State of Delaware,
without reference to conflicts of laws principles.
(b) Venue; Waiver of Jury Trial. The parties hereby
irrevocably submit to the jurisdiction of the courts of the State of Delaware
and the federal court of the United States of America located in the State of
Delaware solely in respect of the interpretation and enforcement of the
provisions of this Agreement and of the documents referred to in this Agreement
and in respect of the transactions contemplated hereby, and hereby waive, and
agree not to assert, as a defense in any action, suit or proceeding for the
interpretation or enforcement hereof or of any such document, that it is not
subject thereto or that such action, suit or proceeding may not be brought or is
not maintainable in such courts or that the venue thereof may not be appropriate
or that this Agreement or any such document may not be enforced in or by such
courts, and the parties irrevocably agree that all claims with respect to such
action or proceeding will be heard and determined in such a Delaware state or
federal court. Each party consents to and grants any such court jurisdiction
over the person of such party and over the subject matter of such dispute and
agrees that mailing of process or other papers in connection with any such
action or proceeding in the manner provided in paragraph (c) of this Section or
in such other manner as may be permitted by law will be valid and sufficient
service thereof.
- 5 -
<PAGE> 6
EACH PARTY ACKNOWLEDGES AND AGREES THAT ANY
CONTROVERSY THAT MAY ARISE UNDER THIS AGREEMENT IS LIKELY TO INVOLVE COMPLICATED
AND DIFFICULT ISSUES, AND THEREFORE EACH SUCH PARTY HEREBY IRREVOCABLY AND
UNCONDITIONALLY WAIVES ANY RIGHT SUCH PARTY MAY HAVE TO A TRIAL BY JURY IN
RESPECT OF ANY LITIGATION DIRECTLY OR INDIRECTLY ARISING OUT OF OR RELATING TO
THIS AGREEMENT, OR THE TRANSACTIONS CONTEMPLATED BY THIS AGREEMENT. EACH PARTY
CERTIFIES AND ACKNOWLEDGES THAT (i) NO REPRESENTATIVE, AGENT OR ATTORNEY OF ANY
OTHER PARTY HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT SUCH OTHER PARTY WOULD
NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVER, (ii) EACH
PARTY UNDERSTANDS AND HAS CONSIDERED THE IMPLICATIONS OF THIS WAIVER, (iii) EACH
PARTY MAKES THIS WAIVER VOLUNTARILY, AND (iv) EACH PARTY HAS BEEN INDUCED TO
ENTER INTO THIS AGREEMENT BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS AND
CERTIFICATIONS IN THIS PARAGRAPH (b).
(c) Notices. All notices, requests, claims, demands
and other communications required or permitted to be given or made pursuant to
this Agreement will be in writing and will be deemed given (i) on the first
business day following the date received, if delivered personally or by telecopy
(with telephonic confirmation of receipt by the addressee), (ii) on the business
day following timely deposit with an overnight courier service, if sent by
overnight courier specifying next day delivery and (iii) on the first business
day that is at least five days following deposit in the mails, if sent by first
class mail, to the parties at the following addresses (or at such other address
for a party as will be specified by like notice):
if to the Company: Paradigm Music Entertainment Company
67 Irving Place North
4th Floor
New York, New York 10003
Attn: President
Fax No.: (212) 603-2298
with a copy to: Reid & Priest L.L.P.
40 West 57th Street
New York, New York 10019
Attn: Michael Elkins, Esq.
Fax No.: (212) 603-2298
if to the Company
Stockholders: As set forth on Schedule 1
- 6 -
<PAGE> 7
if to TCI Music: c/o Liberty Media Corporation
8101 East Prentice Avenue
Suite 500
Englewood, Colorado 80111
Attn: David B. Koff, President
Fax No.: (303) 721-5443
with a copy to: Sherman & Howard L.L.C.
633 Seventeenth Street
Suite 3000
Denver, Colorado 80202
Attn: Charles Y. Tanabe, Esq.
Fax No.: (303) 298-0940
or to such other Persons or addresses as may be designated in writing by the
party to receive such notice as provided above.
(d) Severability. The provisions of this Agreement
will be deemed severable and the invalidity or unenforceability of any provision
will not affect the validity or enforceability of the other provisions hereof.
If any provision of this Agreement, or its application to any Person or any
circumstance, is invalid or unenforceable, (i) a suitable and equitable
provision will be substituted therefor in order to carry out, so far as may be
valid and enforceable, the intent and purpose of such invalid or unenforceable
provision and (ii) the remainder of this Agreement and the application of such
provision to other Persons or circumstances will not be affected by such
invalidity or unenforceability, nor will such invalidity or unenforceability
affect the validity or enforceability of such provision, or the application
thereof, in any other jurisdiction.
(e) Counterparts. This Agreement may be executed in
any number of counterparts, each of which will be deemed to be an original and
all of which will together constitute the same agreement.
(f) Termination; Survival. This Agreement will
terminate upon (i) the mutual written consent of all parties, (ii) the time the
Merger becomes effective or (iii) the termination of the Merger Agreement in
accordance with its terms, and all the provisions of this Agreement will
terminate at such time.
(g) Captions. All captions in this Agreement are for
convenience of reference only and are not part of this Agreement, and no
construction or reference will be derived therefrom.
(h) Specific Performance. Each party acknowledges
that it will be impossible to measure in money the damage to the other party if
such party fails to comply with any of the obligations imposed by this
Agreement, that each such obligation is material and that, in the
- 7 -
<PAGE> 8
event of any such failure, the other party will not have an adequate remedy at
law or damages. Accordingly, each party agrees that injunctive relief or any
other equitable remedy, in addition to remedies at law or damages, is the
appropriate remedy for any such failure and will not oppose the granting of such
relief on the basis that the other party has an adequate remedy at law or in the
form of damages. Each party agrees that it will not seek, and agrees to waive
any requirement for, the securing or posting of a bond in connection with any
other party's seeking or obtaining such equitable relief.
(i) Successors and Assigns. This Agreement will be
binding upon and inure to the benefit of the parties and their respective
successors and permitted assigns and will not be assignable without the written
consent of all other parties hereto.
(j) Entire Agreement; Amendment; Waiver. This
Agreement (including any schedules hereto) and the Merger Agreement (including
any exhibits and schedules thereto) supersede all prior agreements, written or
oral, among the parties with respect to the subject matter hereof and contain
the entire agreement among the parties with respect to the subject matter
hereof. This Agreement may not be amended, supplemented or modified, and no
provision hereof may be modified or waived, except by an instrument in writing
signed by all the parties or, in the case of a waiver, each party granting such
waiver. No waiver of any provision hereof by any party will be deemed a waiver
of any other provision hereof by any such party, nor will any such waiver be
deemed a continuing waiver of any provision hereof by such party.
(k) Further Assurances. The parties will execute and
deliver such additional instruments and other documents and will take such
further actions as may be necessary or appropriate to effectuate, carry out and
comply with all of the terms of this Agreement and the transactions contemplated
hereby.
(l) Third Party Beneficiaries. Nothing in this
Agreement, express or implied, is intended to confer upon any third party any
rights or remedies of any nature whatsoever under or by reason of this
Agreement.
- 8 -
<PAGE> 9
In witness whereof, the parties have executed and delivered
this Agreement as of the date first written above.
PARADIGM MUSIC ENTERTAINMENT COMPANY
By: /s/ Thomas McPartland
---------------------------------
Name: Thomas McPartland
Title: President
TCI MUSIC, INC.
By: /s/ David B. Koff
---------------------------------
Name: David B. Koff
Title: President
THE COMPANY STOCKHOLDERS:
/s/ Thomas McPartland
----------------------------------------
Name: Thomas McPartland
/s/ Robert B. Meyrowitz
----------------------------------------
Name: Robert B. Meyrowitz
/s/ Lou Falcigno
----------------------------------------
Name: Lou Falcigno
- 9 -
<PAGE> 10
SCHEDULE 1
COMPANY STOCKHOLDERS
Thomas McPartland
Robert B. Meyrowitz
Lou Falcigno
- 10 -
<PAGE> 11
SCHEDULE 2(C)
OUTSTANDING OPTIONS, ETC.
<TABLE>
<CAPTION>
EXERCISE OR
EXPIRATION CONVERSION NUMBER OF
DESCRIPTION DATE PRICE SHARES CLASS OF SHARES
----------- ---------- ----------- --------- ---------------
<S> <C> <C> <C> <C> <C>
1. All shares of Class E Not Applicable Not 2,000,000 Convertible into
Common Stock applicable authorized Class A
Common Stock
2. Shares held by Marc Roberts Not applicable Not 6,000 Class A
deposited in escrow pursuant applicable Common Stock
to the Escrow Agreement
3. Warrants held by investors January 2000 $3 per share 1,650,000 Class A
in the bridge financing Common Stock
4. Warrants held by Blair and 5th anniversary $3 per share 350,004 Class A
Affiliates of Blair of initial public Common Stock
offering
175,006 Class E
Common Stock
5. Warrants held by Blair and January 2000 $3 per share 165,000 Class A
Affiliates of Blair Common Stock
6. Shares reserved for issuance Not applicable Not 333,333, of which Class A
to directors, consultants and applicable 94,000 would be Common Stock
employees deposited in
escrow
7. Shares issuable in Not applicable Not 66,667 Class A
connection with Purple applicable Common Stock
Demon acquisition
8. Warrants issued to SonicNet January 13, $3 per share 100,000 Class A
in connection with SonicNet 2000 Common Stock
acquisition
9. Shares issuable in Not applicable Not Up to 75,000 Class A
connection with Addicted to applicable Common Stock
Noise acquisition
10. Shares of Class B Common Not applicable Not 566,670 Class B
Stock owned by the applicable Common Stock
individuals named in
Schedule 1, held in escrow
pursuant to the Escrow
Agreement
</TABLE>
- 11 -
<PAGE> 12
SCHEDULE 4
OWNERSHIP OF SHARES
<TABLE>
<CAPTION>
Company Shares
Stockholder Beneficially Owned Record Holder
----------- ------------------ -------------
<S> <C> <C>
Thomas McPartland 500,001 Class B Thomas McPartland
250,002 Class E
Robert B. Meyrowitz 250,002 Class B Robert Meyrowitz
125,001 Class E
Lou Falcigno 250,002 Class B Lou A. Falcigno
125,001 Class E
</TABLE>
- 12 -
<PAGE> 1
EXHIBIT 10.14
TCI MUSIC, INC.
1997 STOCK INCENTIVE PLAN
FORM OF NON-QUALIFIED STOCK OPTION AND
STOCK APPRECIATION RIGHTS AGREEMENT
THIS AGREEMENT (this "Agreement") is made as of the ___ day of July,
1997 (the "Effective Grant Date"), by and between TCI MUSIC, INC., a Delaware
corporation (the "Company"), and the person signing adjacent to the caption
"Grantee" on the signature page hereof (the "Grantee").
The Company has adopted the TCI Music, Inc. 1997 Stock Incentive Plan
(the "Plan"), a copy of which is attached to this Agreement as Exhibit A and by
this reference made a part hereof, for the benefit of certain eligible persons
as set forth in the Plan. Capitalized terms used and not otherwise defined
herein shall have the meaning ascribed thereto in the Plan.
Pursuant to the Plan, the Committee has determined that it is in the
interests of the Company and its stockholders to grant the options and rights
provided herein in order to provide Grantee with additional remuneration for
services rendered, to encourage Grantee to remain in the employ of the Company
or its Subsidiaries and/or to increase Grantee's personal interest in the
continued success and progress of the Company by providing a method whereby
Grantee is encouraged to invest in the capital stock of the Company.
The Company and Grantee therefore agree as follows:
1. GRANT OF OPTION; OPTION TERM. Subject to the terms and conditions
herein, the Company grants to the Grantee during the period commencing on the
Effective Grant Date and expiring at 5:00 p.m., Denver, Colorado time ("Close of
Business") on _________, 2007, the tenth anniversary of the Effective Grant Date
(the "Option Term"), subject to earlier termination as provided in paragraphs 8
and 12(b) below, an option to purchase from the Company, at the price per share
set forth on Schedule 1 hereto (the "Series A Stock Option Price"), the number
of shares of Series A Common Stock of the Company ("Series A Stock") set forth
on said Schedule 1 (the "Series A Stock Option Shares"). The Series A Stock
Option Price and Series A Stock Option Shares are subject to adjustment pursuant
to paragraph 12 below. This option is as a "Nonqualified Stock Option" and is
hereinafter referred to as the "Series A Stock Option".
2. GRANT OF STOCK APPRECIATION RIGHTS. Subject to the terms and
conditions herein and in tandem with the
1
<PAGE> 2
Series A Stock Option, the Grantee shall also have, during the Option Term,
subject to earlier termination as provided in paragraphs 8 and 12(b) below, a
stock appreciation right with respect to each Series A Stock Option Share
(individually, a "Series A Stock Tandem SAR" and collectively, the "Series A
Stock Tandem SARs"). Upon exercise of a Series A Stock Tandem SAR in accordance
with this Agreement, the Company shall, subject to paragraph 6 below, make
payment as follows:
(a) the amount of payment shall equal the amount by which the
Fair Market Value of the Series A Stock Option Share on the date of
exercise of the Series A Stock Tandem SAR exceeds the Series A Stock
Option Price; and
(b) payment of the amount determined in accordance with clause
(a) shall be made in the sole discretion of the Committee in shares of
Series A Stock (valued at their Fair Market Value as of the date of
exercise of such Series A Stock Tandem SAR), in cash, or partly in cash
and partly in shares of Series A Stock.
3. REDUCTION UPON EXERCISE. The exercise of any number of Series A
Stock Tandem SARs shall cause a corresponding reduction in the number of Series
A Stock Option Shares which shall apply against the Series A Stock Option Shares
then available for purchase. The exercise of the Series A Stock Option to
purchase any number of Series A Stock Option Shares shall cause a corresponding
reduction in the number of Series A Stock Tandem SARs.
4. CONDITIONS OF EXERCISE; VESTING. The Series A Stock Option and
Series A Stock Tandem SARs are exercisable only in accordance with the
conditions stated in this paragraph.
(a) Except as otherwise provided in paragraph 12(b) below or
in the last sentence of this subparagraph (a), the Series A Stock
Option may only be exercised to the extent the Series A Stock Option
Shares have become available for purchase in accordance with the
following schedule:
2
<PAGE> 3
<TABLE>
<CAPTION>
Percentage of Series A Stock Option
Date Shares Available for Purchase
---- -----------------------------------
<S> <C>
Effective Grant Date 20%
First Anniversary of Effective Grant Date 40%
Second Anniversary of Effective Grant Date 60%
Third Anniversary of Effective Grant Date 80%
Fourth Anniversary of Effective Grant Date 100%
</TABLE>
Notwithstanding the foregoing, all Series A Stock Option Shares shall
become available for purchase if during the Option Term Grantee's
employment with the Company and its Subsidiaries (i) shall terminate
by reason of (x) termination by the Company or any Subsidiary without
cause (as defined in Section 11.2(b) of the Plan), (y) termination by
Grantee for good reason (as defined herein) or (z) Disability, (ii)
shall terminate pursuant to provisions of a written employment
agreement, if any, between the Grantee and the Company which expressly
permits the Grantee to terminate such employment upon the occurrence
of specified events (other than the giving of notice and passage of
time), or (iii) shall terminate because Grantee dies while employed by
the Company or a Subsidiary.
(b) A Series A Stock Tandem SAR with respect to a Series A
Stock Option Share shall be exercisable only if the Series A Stock
Option Share is then available for purchase in accordance with
subparagraph (a).
(c) To the extent the Series A Stock Option or Series A Stock
Tandem SARs become exercisable, such Series A Stock Option or Series A
Stock Tandem SARs may be exercised in whole or in part (at any time or
from time to time, except as otherwise provided herein) until
expiration of the Option Term or earlier termination thereof.
3
<PAGE> 4
(d) Grantee acknowledges and agrees that the Committee may, in
its discretion and as contemplated by Section 7.5 of the Plan, adopt
rules and regulations from time to time after the date hereof with
respect to the exercise of Series A Stock Tandem SARs and that the
exercise by Grantee of the Series A Tandem SARs will be subject to the
further condition that such exercise is made in accordance with all
such rules and regulations as the Committee may determine are
applicable thereto.
5. MANNER OF EXERCISE. The Series A Stock Option or a Series A Stock
Tandem SAR may be exercised only by delivering to the Company all of the
following and shall be considered exercised (as to the number of Series A Stock
Option Shares or Series A Stock Tandem SARs specified in the notice referred to
in subparagraph (a) below) on the later of (i) the date of exercise designated
in the written notice referred to in subparagraph (a) below (or if the date so
designated is not a business day, the first business day following such date) or
(ii) the first business day on which the Company has received all of the
following:
(a) Written notice, in such form as the Committee may require,
stating that Grantee is exercising the Series A Stock Option and/or the
Series A Stock Tandem SAR, setting forth the date of such exercise and
designating, among other things, the date of exercise, the number of
Series A Stock Option Shares to be purchased and/or the number of
Series A Stock Tandem SARs to be exercised; the aggregate purchase
price to be paid by Grantee (in the case of the exercise of Series A
Stock Option Shares) and the manner in which such payment is being
paid;
(b) If the Series A Stock Option is to be exercised, payment
of the Series A Stock Option Price for each Series A Stock Option Share
to be purchased in cash or in such other form, or combination of forms,
of payment contemplated by Section 6.6(a) of the Plan as the Committee,
in its sole discretion, may permit;
(c) Payment of, or other provision acceptable to the Committee
for, any and all withholding taxes required to be withheld by the
Company upon such exercise in accordance with paragraph 6 hereof; and
(d) Any other documentation that the Committee may reasonably
require (including, without limitation, proof satisfactory to the
Committee that the Award is then exercisable for the number of Series A
Stock Option Shares or Series A Stock Tandem SARs).
4
<PAGE> 5
6. MANDATORY WITHHOLDING FOR TAXES. It shall be a condition precedent
to any exercise of the Series A Stock Option Shares or the Series A Stock Tandem
SARs that Grantee make provision acceptable to the Company and in accordance
with the Plan for the payment or withholding of any and all federal, state and
local taxes and other amounts required to be withheld by the Company to satisfy
the tax liability associated with such exercise, as determined by the Board.
7. DELIVERY BY THE COMPANY. As soon as practicable after receipt of all
items referred to in paragraph 5, and subject to the withholding referred to in
paragraph 6, the Company shall deliver to the Grantee certificates issued in
Grantee's name for the number of Series A Stock Option Shares purchased by
exercise of the Series A Stock Option and for the number of shares of Series A
Stock to which the Grantee is entitled by the exercise of Series A Stock Tandem
SARs and any cash payment to which the Grantee is entitled by the exercise of
Series A Stock Tandem SARs. If delivery is by mail, delivery of shares of Series
A Stock shall be deemed effected for all purposes when a stock transfer agent of
the Company shall have deposited the certificates in the United States mail,
addressed to the Grantee, and any cash payment shall be deemed effected when a
Company check, payable to Grantee and in an amount equal to the amount of the
cash payment, shall have been deposited in the United States mail, addressed to
the Grantee.
8. EARLY TERMINATION OF OPTION AND TANDEM SARS. Unless otherwise
determined by the Committee, in its sole discretion, the Series A Stock Option
and Series A Stock Tandem SARs shall terminate, prior to the expiration of the
Series A Stock Option Term, at the time specified below:
(a) If Grantee's employment with the Company and its
Subsidiaries terminates (i) other than (x) by the Company for "cause"
(as defined in Section 11.2(b) of the Plan) (see (d) below), (y) by the
Grantee with "good reason" (as defined herein) (see (e) below) or (z)
by the Company without cause (see (e) below), and (ii) other than (x)
by reason of death or Disability (see (b) and (c) below), (y) with the
written consent of the Company or the applicable Subsidiary (see (e)
below) or (z) without such consent if such termination is pursuant to
provisions of a written employment agreement (see (e) below), if any,
between the Grantee and the Company which expressly permit the Grantee
to terminate such employment upon the occurrence of specified events
(other than the giving of notice and passage of time), then the Series
A Stock Option and all Series A Stock Tandem SARs shall terminate at
the Close of Business on the first business day following the
expiration of the 90-day period which began on the date of termination
of Grantee's employment;
(b) If Grantee dies while employed by the Company or a
Subsidiary, or prior to the expiration of a period of time following
termination of Grantee's employment during which the Series A Stock
Option and Series A Stock Tandem SARs remain exercisable as provided in
paragraph (a), the Series A Stock Option and all Series A Stock Tandem
SARs shall terminate at the Close of Business on the first business day
following the expiration of the one-year period which began on the date
of death;
5
<PAGE> 6
(c) If Grantee's employment with the Company and its
Subsidiaries terminates by reason of Disability, then the Series A
Stock Option and all Series A Stock Tandem SARs shall terminate at the
Close of Business on the first business day following the expiration of
the one-year period which began on the date of termination of Grantee's
employment;
(d) If Grantee's employment with the Company and its
Subsidiaries is terminated by the Company for "cause" (as defined in
Section 11.2(b) of the Plan), then the Series A Stock Option and all
Series A Stock Tandem SARs shall terminate immediately upon such
termination of Grantee's employment; or
(e) If Grantee's employment (i) is terminated by Grantee (x)
with "good reason" (as defined herein), (y) with the written consent of
the Company or the applicable Subsidiary or (z) pursuant to provisions
of a written employment agreement, if any, between the Grantee and the
Company which expressly permit the Grantee to terminate such employment
upon the occurrence of specified events (other than the giving of
notice and passage of time), or (ii) by the Company without "cause" (as
defined in Section 11.2(b) of the Plan), then the Series A Stock Option
Term shall terminate early only as provided for in paragraph 8(b) above
or 12(b) below or as provided pursuant to the terms of any such written
employment agreement.
In any event in which the Series A Stock Option and Series A Stock
Tandem SARs remain exercisable for a period of time following the date of
termination of Grantee's employment as provided above, the Series A Stock
Option and Series A Stock Tandem SARs may be exercised during such period of
time only to the extent the same were exercisable as provided in paragraph 4
above on such date of termination of Grantee's employment. A change of
employment is not a termination of employment within the meaning of this
paragraph 8 provided that, after giving effect to such change, the Grantee
continues to be an employee of the Company or any Subsidiary. Notwithstanding
any period of time referenced in this paragraph 8 or any other provision of
this paragraph to the contrary, the Series A Stock Option and all Series A
Stock Tandem SARs shall in any event terminate upon the expiration of the
Option Term.
"Good reason" for purposes of the Agreement shall be deemed to have
occurred upon the happening of any of the following:
(i) any reduction in Grantee's annual rate of salary;
(ii) either (x) a failure of the Company to continue in effect
any employee benefit plan in which Grantee was participating or (y) the
taking of any action by the Company that would adversely affect
Grantee's participation in, or materially reduce Grantee's benefits
under, any such employee benefit plan, unless
6
<PAGE> 7
such failure or such taking of any action, adversely affects the
senior members of the corporate management of the Company generally;
(iii) the assignment to Grantee of duties and responsibilities
that are materially more oppressive or onerous than those attendant to
Grantee's position immediately after the date hereof;
(iv) the relocation of the office location as assigned to
Grantee by the Company to a location more than 20 miles from Grantee's
then current location without Grantee's consent; or
(v) the failure of the Company to obtain, prior to the time of
any reorganization, merger, consolidation, disposition of all or
substantially all of the assets of the Company or similar transaction
effective after the date hereof, in which the Company is not the
surviving person, the unconditional assumption in writing or by
operation of law of the Company's obligations to Grantee under this
Agreement by each direct successor to the Company in any such
transaction.
9. AUTOMATIC EXERCISE OF SERIES A STOCK TANDEM SARS. Immediately prior
to the termination of the Series A Stock Option, as provided in paragraph 8
above, or the expiration of the Option Term, all remaining Series A Stock Tandem
SARs shall be deemed to have been exercised by the Grantee.
10. NONTRANSFERABILITY OF SERIES A STOCK OPTION AND SERIES A STOCK
TANDEM SARS. During Grantee's lifetime, the Series A Stock Option and Series A
Stock Tandem SARs are not transferable (voluntarily or involuntarily) other than
pursuant to a domestic relations order and, except as otherwise required
pursuant to a domestic relations order, are exercisable only by the Grantee or
Grantee's court appointed legal representative. The Grantee may designate a
beneficiary or beneficiaries to whom the Series A Stock Option and Series A
Stock Tandem SARs shall pass upon Grantee's death and may change such
designation from time to time by filing a written designation of beneficiary or
beneficiaries with the Committee on the form annexed hereto as Exhibit B or such
other form as may be prescribed by the Committee, provided that no such
designation shall be effective unless so filed prior to the death of Grantee. If
no such designation is made or if the designated beneficiary does not survive
the Grantee's death, the Series A Stock Option and Series A Stock Tandem SARs
shall pass by will or the laws of descent and distribution. Following Grantee's
death, the Series A Stock Option and any Series A Stock Tandem SARs, if
otherwise exercisable, may be exercised by the person to whom such option or
right passes according to the foregoing and such person shall be deemed the
Grantee for purposes of any applicable provisions of this Agreement.
7
<PAGE> 8
11. NO SHAREHOLDER RIGHTS; NO GUARANTEE OF EMPLOYMENT.
(a) The Grantee shall not be deemed for any purpose to be, or
to have any of the rights of, a stockholder of the Company with respect
to any shares of Series A Stock as to which this Agreement relates
until such shares shall have been issued to Grantee by the Company.
Furthermore, the existence of this Agreement shall not affect in any
way the right or power of the Company or its stockholders to accomplish
any corporate act, including, without limitation, the acts referred to
in Section 11.17 of the Plan.
(b) Nothing contained in this Agreement, and no action by the
Company or the Committee with respect hereto, shall confer or be
construed to confer on Grantee any right to continue in the employ of
the Company or any Subsidiary or interfere in any way with the right of
the Company or any employing Subsidiary to terminate Grantee's
employment at any time, with or without "cause."
12. ADJUSTMENTS.
(a) The Series A Stock Option and Series A Stock Tandem SARs
shall be subject to adjustment (including, without limitation, as to
the number of Series A Stock Option Shares and the Series A Stock
Option Price per share) in the sole discretion of the Committee and in
such manner as the Committee may deem equitable and appropriate in
connection with the occurrence of any of the events described in
Section 4.2 of the Plan following the Effective Grant Date; provided,
however, that adjustments shall be made to the Series A Stock Option
if, and in the same manner that, adjustments are being made in
connection with the occurrence of any such event to any other option
granted under the Plan. Adjustments to the Option Price shall be made
on a per share basis so that the aggregate remaining Series A Stock
Option Price is unchanged.
(b) In the event of any Approved Transaction, Board Change or
Control Purchase, the Series A Stock Option and all Series A Stock
Tandem SARs shall become exercisable in full without regard to
paragraph 4(a); provided, however, that to the extent not theretofore
exercised the Series A Stock Option and all Series A Stock Tandem SARs
shall terminate upon the first to occur of the consummation of the
Approved Transaction, the expiration of the Series A Stock Option Term
or the earlier termination of the Series A Stock Option and Series A
Stock Tandem SARs pursuant to paragraph 8 hereof. Notwithstanding the
foregoing, the Committee may, in its discretion, determine that the
Series A Stock Option and Series A Stock Tandem SARs will not become
exercisable on an accelerated basis in connection with an Approved
Transaction and/or will not terminate if not exercised prior to
consummation of the Approved Transaction, if the Board or the surviving
or acquiring corporation, as the case may be, shall have taken or made
effective provision for the taking of such action as in the opinion of
the Committee is equitable and appropriate to substitute a new Award
for the Award evidenced by this Agreement or to assume this Agreement
and the Award evidenced hereby and in order to make such new or assumed
Award, as nearly as may be practicable, equivalent to the Award
8
<PAGE> 9
evidenced by this Agreement as then in effect (but before giving effect
to any acceleration of the exercisability hereof unless otherwise
determined by the Committee), taking into account, to the extent
applicable, the kind and amount of securities, cash or other assets
into or for which the Series A Stock may be changed, converted or
exchanged in connection with the Approved Transaction.
13. RESTRICTIONS IMPOSED BY LAW. Grantee acknowledges that neither the
Series A Stock Option nor any of the Series A Stock Option Shares has been
registered under the Securities Act of 1933 and that the Series A Stock Option
Shares may not be transferred in the absence of such registration or the
availability of an exemption therefrom under such Act or the rules and
regulations of the Securities and Exchange Commission promulgated thereunder.
Neither the Company nor any other person shall have any obligation to register
any Series A Stock Option Shares, or any transfer of Series A Stock Option
Shares, under the Securities Act of 1933, the Securities Exchange Act of 1934 or
any other state or federal securities law. Certificates representing Series A
Stock Option Shares purchased by Grantee hereunder may bear such restrictive and
other legends as counsel for the Company shall require in order to insure
compliance with any such law or any rule or regulation promulgated thereunder.
Without limiting the generality of Section 11.9 of the Plan, the Grantee agrees
that Grantee will not exercise the Series A Stock Option or any Series A Stock
Tandem SAR and that the Company will not be obligated to deliver any shares of
Series A Stock or make any cash payment, if counsel to the Company determines
that such exercise, delivery or payment would violate any applicable law or any
rule or regulation of any governmental authority or any rule or regulation of,
or agreement of the Company with, any securities exchange or association upon
which the Series A Stock is listed or quoted. The Company shall in no event be
obligated to take any affirmative action in order to cause the exercise of the
Series A Stock Option or any Series A Stock Tandem SAR or the resulting delivery
of shares of Series A Stock or other payment to comply with any such law, rule,
regulation or agreement.
14. NOTICE. Unless the Company notifies the Grantee in writing of a
different procedure, any notice or other communication to the Company with
respect to this Agreement shall be in writing and shall be:
9
<PAGE> 10
(a) delivered personally to the following address:
TCI Music, Inc.
c/o Liberty Media Corporation
8101 East Prentice Avenue
Suite 500
Englewood, Colorado 80111
or
(b) sent by first class mail, postage prepaid and addressed
as follows:
TCI Music, Inc.
c/o Tele-Communications, Inc.
5619 DTC Parkway
Englewood, Colorado 80111
Attention: Legal Department
Any notice or other communication to the Grantee with respect to this Agreement
shall be in writing and shall be delivered personally, or shall be sent by first
class mail, postage prepaid, to Grantee's address as listed in the records of
the Company on the Effective Grant Date, unless the Company has received written
notification from the Grantee of a change of address.
15. AMENDMENT. Notwithstanding any other provisions hereof, this
Agreement may be supplemented or
10
<PAGE> 11
amended from time to time as approved by the Committee as contemplated by
Section 11.8 of the Plan. Without limiting the generality of the foregoing,
without the consent of the Grantee,
(a) this Agreement may be amended or supplemented (i) to cure
any ambiguity or to correct or supplement any provision herein which
may be defective or inconsistent with any other provision herein, or
(ii) to add to the covenants and agreements of the Company for the
benefit of Grantee or surrender any right or power reserved to or
conferred upon the Company in this Agreement, subject, however, to any
required approval of the Company's stockholders and, provided, in each
case, that such changes or corrections shall not adversely affect the
rights of Grantee with respect to the Award evidenced hereby, or (iii)
to make such other changes as the Company, upon advice of counsel,
determines are necessary or advisable because of the adoption or
promulgation of, or change in or of the interpretation of, any law or
governmental rule or regulation, including any applicable federal or
state securities laws; and
(b) subject to Section 11.8 of the Plan and any required
approval of the Company's stockholders, the Award evidenced by this
Agreement may be cancelled by the Committee and a new Award made in
substitution therefor, provided that the Award so substituted shall
satisfy all of the requirements of the Plan as of the date such new
Award is made and no such action shall adversely affect the Series A
Stock Option or any Series A Stock Tandem SAR to the extent then
exercisable.
16. GOVERNING LAW. This Agreement shall be governed by, and construed
in accordance with, the internal laws of the State of Delaware.
17. CONSTRUCTION. References in this Agreement to "this Agreement" and
the words "herein," "hereof," "hereunder" and similar terms include all Exhibits
and Schedules appended hereto, including the Plan. This Agreement is entered
into, and the Award evidenced hereby is granted, pursuant to the Plan and shall
be governed by and construed in accordance with the Plan and the administrative
interpretations adopted by the Committee thereunder. All decisions of the
Committee upon questions regarding the Plan or this Agreement shall be
conclusive. Unless otherwise expressly stated herein, in the event of any
inconsistency between the terms of the Plan and this Agreement, the terms of the
Plan shall control. The headings of the paragraphs of this Agreement have been
included for convenience of reference only, are not to be considered a part
hereof and shall in no way modify or restrict any of the terms or provisions
hereof.
18. DUPLICATE ORIGINALS. The Company and the Grantee may sign any
number of copies of this Agreement. Each signed copy shall be an original, but
all of them together represent the same agreement.
19. RULES BY COMMITTEE. The rights of the Grantee and obligations of
the Company hereunder shall be subject to such reasonable rules and regulations
as the Committee may adopt from time to time hereafter.
11
<PAGE> 12
20. ENTIRE AGREEMENT. This Agreement is in satisfaction of and in lieu
of all prior discussions and agreements, oral or written, between the Company
and Grantee regarding the subject matter hereof. Grantee and the Company hereby
declare and represent that no promise or agreement not herein expressed has been
made and that this Agreement contains the entire agreement between the parties
hereto with respect to the Series A Stock Options and Series A Stock Tandem SARs
and replaces and makes null and void any prior agreements between Grantee and
the Company regarding the Series A Stock Options.
21. GRANTEE ACCEPTANCE. Grantee shall signify acceptance of the terms
and conditions of this Agreement by signing in the space provided at the end
hereof and returning a signed copy to the Company.
TCI MUSIC, INC.
By:
-------------------------------------
Name:
-----------------------------------
Title:
----------------------------------
ACCEPTED:
----------------------------------------
Name:
12
<PAGE> 13
Schedule 1 to Non-Qualified Stock Option
and Stock Appreciation Rights Agreement
dated as of July __, 1997
TCI MUSIC, INC. 1997 INCENTIVE PLAN
Grantee:
Grant Date: July __, 1997
Option Price: $6.25 per share
Option Shares: __________ shares of Series A TCI Music Common Stock
("Series A Stock"), $_____ par value per share.
13
<PAGE> 14
Exhibit A to Non-Qualified Stock Option
and Stock Appreciation Rights Agreement
dated as of July __, 1997
TCI MUSIC, INC. 1997 INCENTIVE PLAN
14
<PAGE> 15
Exhibit B to Non-Qualified Stock Option
and Stock Appreciation Rights Agreement
dated as of July __, 1997
TCI MUSIC, INC. 1997 INCENTIVE PLAN
DESIGNATION OF BENEFICIARY
I, (the "Grantee"), hereby declare
-----------------------------------
that upon my death (the "Beneficiary") of
-------------------------------------
Name
- -----------------------------------------------------------------------------,
Street Address City State Zip Code
who is my , shall be entitled to the
------------------------------------------
Relationship to Grantee
Series A Stock Option, Series A Stock Tandem SARs and all other rights accorded
the Grantee by the above-referenced grant agreement (the "Agreement").
It is understood that this Designation of Beneficiary is made pursuant
to the Agreement and is subject to the conditions stated herein, including the
Beneficiary's survival of the Grantee's death. If any such condition is not
satisfied, such rights shall devolve according to the Grantee's will or the laws
of descent and distribution.
It is further understood that all prior designations of beneficiary
under the Agreement are hereby revoked and that this Designation of Beneficiary
may only be revoked in writing, signed by the Grantee, and filed with the
Company prior to the Grantee's death.
- ------------------------------- -----------------------------------
Date Grantee
15
<PAGE> 1
EXHIBIT 10.15
TCI MUSIC, INC.
FORM OF NON-QUALIFIED STOCK OPTION AND
STOCK APPRECIATION RIGHTS AGREEMENT
THIS AGREEMENT (this "Agreement") is made as of the ____ day
of July, 1997 (the "Effective Grant Date"), by and between TCI MUSIC, INC., a
Delaware corporation (the "Company"), and the person signing adjacent to the
caption "Grantee" on the signature page hereof (the "Grantee").
The Board has determined that it is in the interests of the
Company and its stockholders to grant the options and rights provided herein in
order to encourage Grantee to serve in the capacity as a director of the Company
and to increase Grantee's personal interest in the continued success and
progress of the Company.
The Company and Grantee therefore agree as follows:
1. DEFINITIONS. Capitalized terms not defined elsewhere in the
Agreement shall have the following meanings (whether used in the singular or
plural):
"Approved Transaction" means any transaction in which the
Board (or, if approval of the Board is not required as a matter of law,
the stockholders of the Company) shall approve (i) any consolidation or
merger of the Company, or binding share exchange, pursuant to which
shares of Common Stock would be changed or converted into or exchanged
for cash, securities or other property, other than any such transaction
in which the holders of the Common Stock immediately prior to such
transaction have the same proportionate ownership of the Common Stock
of, and voting power with respect to, the surviving corporation
immediately after such transaction, (ii) any merger, consolidation or
binding share exchange to which the Company is a party as a result of
which the persons who are holders of the Common Stock immediately prior
thereto have less than a majority of the combined voting power of the
outstanding capital stock of the Company ordinarily (and apart from the
rights accruing under special circumstances) having the right to vote
in the election of directors immediately following such merger,
consolidation or binding share exchange, (iii) the adoption of any plan
or proposal for the liquidation or dissolution of the Company, or (iv)
any sale, lease, exchange or other transfer (in one transaction or a
series of related transactions) of all, or substantially all, of the
assets of the Company.
1
<PAGE> 2
"Award" means the grant of Series A Stock Options and Series A
Stock Tandem SARs under this Agreement.
"Board" means the Board of Directors of the Company.
"Board Change" means, during any period of two consecutive
years, individuals who at the beginning of such period constituted the entire
Board cease for any reason to constitute a majority thereof unless the election,
or the nomination for election, of each new director was approved by a vote of
at least two-thirds of the directors then still in office who were directors at
the beginning of the period.
"Code" means the Internal Revenue Code of 1986, as amended
from time to time, or any successor statute or statutes thereto.
"Common Stock" means the Series A Stock and the Series B
Stock.
"Control Purchase" means any transaction (or series of related
transactions) in which (i) any person (as such term is defined in Sections
13(d)(3) and 14(d)(2) of the Exchange Act), corporation or other entity (other
than Tele-Communications, Inc., the Company, any Subsidiary or any employee
benefit plan sponsored by the Company or any Subsidiary, or any Controlling
Person (as defined below)) shall purchase any Common Stock of the Company (or
securities convertible into common stock of the Company) for cash, securities or
any other consideration pursuant to a tender offer or exchange offer, without
the prior consent of the Board, or (ii) any person (as so defined), corporation
or other entity (other than Tele-Communications, Inc., the Company, any
Subsidiary, any employee benefit plan sponsored by the Company or any
Subsidiary, or any Controlling Person) shall become the "beneficial owner" (as
such term is defined in Rule 13d-3 under the Exchange Act), directly or
indirectly, of securities of the Company representing 20% or more of the
combined voting power of the then outstanding securities of the Company
ordinarily (and apart from rights accruing under special circumstances) having
the right to vote in the election of directors (calculated as provided in Rule
13d-3(d) under the Exchange Act in the case of rights to acquire the Company's
securities), other than in a transaction (or series of related transactions)
approved by the Board. For purposes of this definition, "Controlling Person"
means each of (a) the Chairman of the Board, the President and each of the
directors of the Company as of the Effective Date of this Plan, (b) John C.
Malone, (c) the respective family members, estates and heirs of each of the
persons referred to in clauses (a) and (b)
2
<PAGE> 3
above and any trust or other investment vehicle for the primary benefit of any
of such persons or their respective family members or heirs and (d)
Kearns-Tribune Corporation, a Delaware corporation. As used with respect to any
person, the term "family member" means the spouse, siblings and lineal
descendants of such person.
"Disability" means the inability to engage in any substantial
gainful activity by reason of any medically determinable physical or mental
impairment that (a) can be expected to result in death or (b) has lasted or can
be expected to last for a continuous period of not less than 12 months.
"Exchange Act" means the Securities Exchange Act of 1934, as
amended from time to time, or any successor statute or statutes thereto.
Reference to any specific Exchange Act section shall include any successor
section.
"Fair Market Value" of a share of Series A Stock or Series B
Stock on any day means the last sale price (or, if no last sale price is
reported, the average of the high bid and low asked prices) for a share of
Series A Stock or Series B Stock, as applicable, on such day (or, if such day is
not a trading day, on the next preceding trading day) as reported on NASDAQ or,
if not reported on NASDAQ, as quoted by the National Quotation Bureau
Incorporated, or if the Series A Stock or Series B Stock is listed on an
exchange, on the principal exchange on which the Series A Stock or Series B
Stock, as applicable, is listed. If for any day the Fair Market Value of a share
of Series A Stock or Series B Stock, as applicable, is not determinable by any
of the foregoing means, then the Fair Market Value for such day shall be
determined in good faith by the Board on the basis of such quotations and other
considerations as the Board deems appropriate.
"NASDAQ" means the NASDAQ Stock Market.
"Nonqualified Stock Option" means a stock option that is not
an incentive stock option under Section 422 of the Code.
"Subsidiary" of the Company means any present or future
Subsidiary (as defined in Section 424(f) of the Code) of the Company, or any
business entity in which the Company owns, directly or indirectly, 50% or more
of the voting, capital or profits interests. An entity shall be deemed a
Subsidiary of the Company for purposes of this definition only for such periods
as the requisite ownership or control relationship is maintained.
3
<PAGE> 4
2. GRANT OF OPTION; OPTION TERM. Subject to the terms and conditions
herein, the Company grants to the Grantee during the period commencing on the
Effective Grant Date and expiring at 5:00 p.m., Denver, Colorado time ("Close of
Business") on _________, 2007, the tenth anniversary of the Effective Grant Date
(the "Option Term"), subject to earlier termination as provided in paragraphs 9
and 13(b) below, an option to purchase from the Company, at the price per share
set forth on Schedule 1 hereto (the "Series A Stock Option Price"), the number
of shares of Series A Common Stock of the Company ("Series A Stock") set forth
on said Schedule 1 (the "Series A Stock Option Shares"). The Series A Stock
Option Price and Series A Stock Option Shares are subject to adjustment pursuant
to paragraph 13 below. This option is as a "Nonqualified Stock Option" and is
hereinafter referred to as the "Series A Stock Option".
3. GRANT OF STOCK APPRECIATION RIGHTS. Subject to the terms and
conditions herein and in tandem with the Series A Stock Option, the Grantee
shall also have, during the Option Term, subject to earlier termination as
provided in paragraphs 9 and 13(b) below, a stock appreciation right with
respect to each Series A Stock Option Share (individually, a "Series A Stock
Tandem SAR" and collectively, the "Series A Stock Tandem SARs"). Upon exercise
of a Series A Stock Tandem SAR in accordance with this Agreement, the Company
shall, subject to paragraph 7 below, make payment as follows:
(a) the amount of payment shall equal the amount by which the
Fair Market Value of the Series A Stock Option Share on the date of
exercise of the Series A Stock Tandem SAR exceeds the Series A Stock
Option Price; and
(b) payment of the amount determined in accordance with clause
(a) shall be made, in the sole discretion of the Board, in shares of
Series A Stock (valued at their Fair Market Value as of the date of
exercise of such Series A Stock Tandem SAR), in cash, or partly in cash
and partly in shares of Series A Stock.
4. REDUCTION UPON EXERCISE. The exercise of any number of Series A
Stock Tandem SARs shall cause a corresponding reduction in the number of Series
A Stock Option Shares which shall apply against the Series A Stock Option Shares
then available for purchase. The exercise of the Series A Stock Option to
purchase any number of Series A Stock Option Shares shall cause a corresponding
reduction in the number of Series A Stock Tandem SARs.
4
<PAGE> 5
5. CONDITIONS OF EXERCISE; VESTING. The Series A Stock Option and
Series A Stock Tandem SARs are exercisable only in accordance with the
conditions stated in this paragraph.
(a) Except as otherwise provided in paragraph 13(b) below or
in the last sentence of this subparagraph (a), the Series A Stock
Option may only be exercised to the extent the Series A Stock Option
Shares have become available for purchase in accordance with the
following schedule:
<TABLE>
<CAPTION>
Percentage of Series A Stock Option
Date Shares Available for Purchase
---- -----------------------------------
<S> <C>
Effective Grant Date 20%
First Anniversary of Effective Grant Date 40%
Second Anniversary of Effective Grant Date 60%
Third Anniversary of Effective Grant Date 80%
Fourth Anniversary of Effective Grant Date 100%
</TABLE>
5
<PAGE> 6
Notwithstanding the foregoing, all Series A Stock Option Shares shall
become available for purchase if during the Option Term Grantee's employment
with the Company and its Subsidiaries (i) shall terminate by reason of (x)
termination by the Company or any Subsidiary without "cause" (as defined
herein), (y) termination by Grantee for "good reason" (as defined herein) or (z)
Disability, (ii) shall terminate pursuant to provisions of a written employment
agreement, if any, between the Grantee and the Company which expressly permits
the Grantee to terminate such employment upon the occurrence of specified events
(other than the giving of notice and passage of time), or (iii) shall terminate
because Grantee dies while employed by the Company or a Subsidiary.
(b) A Series A Stock Tandem SAR with respect to a Series A
Stock Option Share shall be exercisable only if the Series A Stock
Option Share is then available for purchase in accordance with
subparagraph (a).
(c) To the extent the Series A Stock Option or Series A Stock
Tandem SARs become exercisable, such Series A Stock Option or Series A
Stock Tandem SARs may be exercised in whole or in part (at any time or
from time to time, except as otherwise provided herein) until
expiration of the Series A Stock Option Term or earlier termination
thereof.
(d) Grantee acknowledges and agrees that the Board may, in its
discretion, adopt rules and regulations from time to time after the
date hereof with respect to the exercise of Series A Stock Tandem SARs
and that the exercise by Grantee of the Series A Tandem SARs will be
subject to the further condition that such exercise is made in
accordance with all such rules and regulations as the Board may
determine are applicable thereto.
6. MANNER OF EXERCISE. The Series A Stock Option or a Series A Stock
Tandem SAR may be exercised only by delivering to the Company all of the
following and shall be considered exercised (as to the number of Series A Stock
Option Shares or Series A Stock Tandem SARs specified in the notice referred to
in subparagraph (a) below) on the later of (i) the date of exercise designated
in the written notice referred to in subparagraph (a) below (or if the date so
designated is not a business day, the first business day following such date) or
(ii) the first business day on which the Company has received all of the
following:
6
<PAGE> 7
(a) Written notice, in such form as the Board may require,
stating that Grantee is exercising the Series A Stock Option and/or the
Series A Stock Tandem SAR, setting forth the date of such exercise and
designating, among other things, the date of exercise, the number of
Series A Stock Option Shares to be purchased and/or the number of
Series A Stock Tandem SARs to be exercised, the aggregate purchase
price to be paid by Grantee (in the case of the exercise of Series A
Stock Option Shares) and the manner in which such payment is being
made;
(b) If the Series A Stock Option is to be exercised, payment
of the Series A Stock Option Price for each Series A Stock Option Share
to be purchased in such form, or combination of forms, as the Board, in
its sole discretion, may permit, including (i) cash, (ii) check, (iii)
promissory note, (iv) whole shares of Series A Stock or Series B Stock
already owned by Grantee, (v) the withholding of shares of Series A
Stock issuable upon such exercise of the Series A Stock Option, (vi)
the delivery, together with a properly executed exercise notice, of
irrevocable instructions to a broker to deliver promptly to the Company
the amount of sale or loan proceeds required to pay the purchase price,
(vii) any combination of the foregoing methods of payment, or (viii)
such other consideration and method of payment as may be permitted for
the issuance of shares under the Delaware General Corporation Law;
(c) Payment of, or other provision acceptable to the Board
for, any and all withholding taxes required to be withheld by the
Company upon exercise of such Award in accordance with paragraph 7
hereof; and
(d) Any other documentation that the Board may reasonably
require (including, without limitation, proof satisfactory to the Board
that the Award is then exercisable for the number of Series A Stock
Option Shares or Series A Stock Tandem SARs).
7. MANDATORY WITHHOLDING FOR TAXES. It shall be a condition precedent
to any exercise of the Series A Stock Option Shares or the Series A Stock Tandem
SARs that Grantee make provision acceptable to the Company for the payment or
withholding of any and all federal, state and local taxes and other amounts
required to be withheld by the Company to satisfy the tax liability associated
with such exercise, as determined by the Board.
7
<PAGE> 8
8. DELIVERY BY THE COMPANY. As soon as practicable after receipt of all
items referred to in paragraph 6, and subject to the withholding referred to in
paragraph 7, the Company shall deliver to the Grantee certificates issued in
Grantee's name for the number of Series A Stock Option Shares purchased by
exercise of the Series A Stock Option and for the number of shares of Series A
Stock to which the Grantee is entitled by the exercise of Series A Stock Tandem
SARs and any cash payment to which the Grantee is entitled by the exercise of
Series A Stock Tandem SARs. If delivery is by mail, delivery of shares of Series
A Stock shall be deemed effected for all purposes when a stock transfer agent of
the Company shall have deposited the certificates in the United States mail,
addressed to the Grantee, and any cash payment shall be deemed effected when a
Company check, payable to Grantee and in an amount equal to the amount of the
cash payment, shall have been deposited in the United States mail, addressed to
the Grantee.
9. EARLY TERMINATION OF OPTION AND TANDEM SARS. Unless otherwise
determined by the Board, in its sole discretion, the Series A Stock Option and
Series A Stock Tandem SARs shall terminate, prior to the expiration of the
Series A Stock Option Term, at the time specified below:
(a) If Grantee's employment with the Company and its
Subsidiaries terminates (i) other than (x) by the Company for
"cause"(as defined herein) (see (d) below), (y) by the Grantee with
"good reason" (as defined herein) (see (e) below) or (z) by the Company
without "cause", (see (e) below) and (ii) other than (x) by reason of
death or Disability, (see (b) and (c) below) (y) with the written
consent of the Company or the applicable Subsidiary or (z) without such
consent if such termination is pursuant to provisions of a written
employment agreement (see (e) below), if any, between the Grantee and
the Company which expressly permit the Grantee to terminate such
employment upon the occurrence of specified events (other than the
giving of notice and passage of time), then the Series A Stock Option
and all Series A Stock Tandem SARs shall terminate at the Close of
Business on the first business day following the expiration of the
90-day period which began on the date of termination of Grantee's
employment;
(b) If Grantee dies while employed by the Company or a
Subsidiary, or prior to the expiration of a period of time following
termination of Grantee's employment during which the Series A Stock
Option and Series A Stock Tandem SARs remain exercisable as provided in
subparagraph (a), the Series A Stock Option and all Series A Stock
Tandem SARs shall terminate at the Close of Business on the first
business day following the expiration of the one-year period which
began on the date of death;
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<PAGE> 9
(c) If Grantee's employment with the Company and its
subsidiaries terminates by reason of Disability, then the Series A
Stock Option and all Series A Stock Tandem SARs shall terminate at the
Close of Business on the first business day following the expiration of
the one-year period which began on the date of termination of Grantee's
employment;
(d) If Grantee's employment with the Company and its
Subsidiaries is terminated by the Company for "cause" (as defined
herein), then the Series A Stock Option and all Series A Stock Tandem
SARs shall terminate immediately upon such termination of Grantee's
employment; or
(e) If Grantee's employment (i) is terminated by Grantee (x)
with "good reason" (as defined herein), (y) with the written consent of
the Company or the applicable Subsidiary or (z) pursuant to provisions
of a written employment agreement, if any, between the Grantee and the
Company which expressly permit the Grantee to terminate such employment
upon the occurrence of specified events (other than the giving of
notice and passage of time), or (ii) by the Company without "cause" (as
defined herein), then the Series A Stock Option Term shall terminate
early only as provided for in paragraph 9(b) above or 13(b) below or as
provided pursuant to the terms of any such written employment
agreement.
In any event in which the Series A Stock Option and Series A Stock
Tandem SARs remain exercisable for a period of time following the date of
termination of Grantee's employment as provided above, the Series A Stock Option
and Series A Stock Tandem SARs may be exercised during such period of time only
to the extent the same were exercisable as provided in paragraph 5 above on such
date of termination of Grantee's employment. A change of employment is not a
termination of employment within the meaning of this paragraph 9 provided that,
after giving effect to such change, the Grantee continues to be an employee of
the Company or any Subsidiary. Notwithstanding any period of time referenced in
this paragraph 9 or any other provision of this paragraph that may be construed
to the contrary, the Series A Stock Option and all Series A Stock Tandem SARs
shall in any event terminate upon the expiration of the Option Term.
"Cause" for purposes of the Agreement shall have the meaning ascribed
thereto in any employment agreement to which Grantee is a party or, in the
absence thereof, shall include but not be limited to, insubordination,
dishonesty, incompetence, moral turpitude, other misconduct of any kind or
refusal to perform one's duties and responsibilities for any reason other than
illness or incapacity; provided, however, that if such termination occurs within
twelve (12) months after an Approved Transaction,
9
<PAGE> 10
Board Change or Control Purchase, "cause" shall mean only a felony conviction
for fraud, misappropriation or embezzlement.
"Good reason" for purposes of the Agreement shall be deemed to have
occurred upon the happening of any of the following:
(i) any reduction in Grantee's annual rate of salary;
(ii) either (x) a failure of the Company to continue in effect
any employee benefit plan in which Grantee was participating or (y) the taking
of any action by the Company that would adversely affect Grantee's participation
in, or materially reduce Grantee's benefits under, any such employee benefit
plan, unless such failure or such taking of any action, adversely affects the
senior members of the corporate management of the Company generally;
(iii) the assignment to Grantee of duties and responsibilities
that are materially more oppressive or onerous than those attendant to Grantee's
position immediately after the date hereof; or
(iv) the failure of the Company to obtain, prior to the time
of any reorganization, merger, consolidation, disposition of all or
substantially all of the assets of the Company or similar transaction effective
after the date hereof, in which the Company is not the surviving person, the
unconditional assumption in writing or by operation of law of the Company's
obligations to Grantee under this Agreement by each direct successor to the
Company in any such transaction.
10. AUTOMATIC EXERCISE OF SERIES A STOCK TANDEM SARS. Immediately prior
to the termination of the Series A Stock Option, as provided in paragraph 9
above, or the expiration of the Option Term, all remaining Series A Stock Tandem
SARs shall be deemed to have been exercised by the Grantee.
11. NONTRANSFERABILITY OF SERIES A STOCK OPTION AND SERIES A STOCK
TANDEM SARS. During Grantee's lifetime, the Series A Stock Option and Series A
Stock Tandem SARs are not transferable (voluntarily or involuntarily) other than
pursuant to a domestic relations order and, except as
10
<PAGE> 11
otherwise required pursuant to a domestic relations order, are exercisable only
by the Grantee or Grantee's court appointed legal representative. The Grantee
may designate a beneficiary or beneficiaries to whom the Series A Stock Option
and Series A Stock Tandem SARs shall pass upon Grantee's death and may change
such designation from time to time by filing a written designation of
beneficiary or beneficiaries with the Board on the form annexed hereto as
Exhibit B or such other form as may be prescribed by the Board, provided that no
such designation shall be effective unless so filed prior to the death of
Grantee. If no such designation is made or if the designated beneficiary does
not survive the Grantee's death, the Series A Stock Option and Series A Stock
Tandem SARs shall pass by will or the laws of descent and distribution.
Following Grantee's death, the Series A Stock Option and any Series A Stock
Tandem SARs, if otherwise exercisable, may be exercised by the person to whom
such option or right passes according to the foregoing and such person shall be
deemed the Grantee for purposes of any applicable provisions of this Agreement.
12. NO SHAREHOLDER RIGHTS; NO GUARANTEE OF EMPLOYMENT.
(a) The Grantee shall not be deemed for any purpose to be, or
to have any of the rights of, a stockholder of the Company with respect
to any shares of Series A Stock as to which this Agreement relates
until such shares shall have been issued to Grantee by the Company.
Furthermore, the existence of this Agreement shall not affect in any
way the right or power of the Company or its stockholders to accomplish
any corporate act.
(b) Nothing contained in this Agreement, and no action by the
Company or the Board with respect hereto, shall confer or be construed
to confer on Grantee any right to continue in the employ of the Company
or any Subsidiary or interfere in any way with the right of the Company
or any employing Subsidiary to terminate Grantee's employment at any
time, with or without "cause."
13. ADJUSTMENTS.
(a) The Series A Stock Option and Series A Stock Tandem SARs
shall be subject to adjustment (including, without limitation, as to
the number of Series A Stock Option Shares and the Series A Stock
Option Price per share) in the sole discretion of the Board and in such
manner as the Board may deem equitable and appropriate.
11
<PAGE> 12
(b) In the event of any Approved Transaction, Board Change or
Control Purchase, the Series A Stock Option and all Series A Stock
Tandem SARs shall become exercisable in full without regard to
paragraph 5(a); provided, however, that to the extent not theretofore
exercised the Series A Stock Option and all Series A Stock Tandem SARs
shall terminate upon the first to occur of the consummation of the
Approved Transaction, the expiration of the Series A Stock Option Term
or the earlier termination of the Series A Stock Option and Series A
Stock Tandem SARs pursuant to paragraph 9 hereof. Notwithstanding the
foregoing, the Board may, in its discretion, determine that the Series
A Stock Option and Series A Stock Tandem SARs will not become
exercisable on an accelerated basis in connection with an Approved
Transaction and/or will not terminate if not exercised prior to
consummation of the Approved Transaction, if the Board or the surviving
or acquiring corporation, as the case may be, shall have taken or made
effective provision for the taking of such action as in the opinion of
the Board is equitable and appropriate to substitute a new award for
the Award evidenced by this Agreement or to assume this Agreement and
the Award evidenced hereby and in order to make such new award or
assumed Award, as nearly as may be practicable, equivalent to the Award
evidenced by this Agreement as then in effect (but before giving effect
to any acceleration of the exercisability hereof unless otherwise
determined by the Board), taking into account, to the extent
applicable, the kind and amount of securities, cash or other assets
into or for which the Series A Stock may be changed, converted or
exchanged in connection with the Approved Transaction.
14. RESTRICTIONS IMPOSED BY LAW. Grantee acknowledges that neither the
Series A Stock Option nor any of the Series A Stock Option Shares has been
registered under the Securities Act of 1933 and that the Series A Stock Option
Shares may not be transferred in the absence of such registration or the
availability of an exemption therefrom under such Act or the rules and
regulations of the Securities and Exchange Commission promulgated thereunder.
Neither the Company nor any other person shall have any obligation to register
any Series A Stock Option Shares, or any transfer of Series A Stock Option
Shares, under the Securities Act of 1933, the Securities Exchange Act of 1934 or
any other state or federal securities law. Certificates representing Series A
Stock Option Shares purchased by Grantee hereunder may bear such restrictive and
other legends as counsel for the Company shall require in order to insure
compliance with any such law or any rule or regulation promulgated thereunder.
The Grantee agrees that Grantee will not exercise the Series
12
<PAGE> 13
A Stock Option or any Series A Stock Tandem SAR and that the Company will not be
obligated to deliver any shares of Series A Stock or make any cash payment, if
counsel to the Company determines that such exercise, delivery or payment would
violate any applicable law or any rule or regulation of any governmental
authority or any rule or regulation of, or agreement of the Company with, any
securities exchange or association upon which the Series A Stock is listed or
quoted. The Company shall in no event be obligated to take any affirmative
action in order to cause the exercise of the Series A Stock Option or any Series
A Stock Tandem SAR or the resulting delivery of shares of Series A Stock or
other payment to comply with any such law, rule, regulation or agreement.
15. NOTICE. Unless the Company notifies the Grantee in writing of a
different procedure, any notice or other communication to the Company with
respect to this Agreement shall be in writing and shall be:
(a) delivered personally to the following address:
c/o Liberty Media Corporation
8101 East Prentice Avenue, Suite 500
Englewood, Colorado 80111
or
(b) sent by first class mail, postage prepaid and addressed as
follows:
TCI Music, Inc.
c/o Tele-Communications, Inc.
5619 DTC Parkway
Englewood, Colorado 80111
Attn: Legal Department
13
<PAGE> 14
Any notice or other communication to the Grantee with respect to this Agreement
shall be in writing and shall be delivered personally, or shall be sent by first
class mail, postage prepaid, to Grantee's address as listed in the records of
the Company on the Effective Grant Date, unless the Company has received written
notification from the Grantee of a change of address.
16. AMENDMENT. Notwithstanding any other provisions hereof, this
Agreement may be supplemented or amended from time to time as approved by the
Board. Without limiting the generality of the foregoing, without the consent of
the Grantee,
(a) this Agreement may be amended or supplemented (i) to cure
any ambiguity or to correct or supplement any provision herein which
may be defective or inconsistent with any other provision herein, or
(ii) to add to the covenants and agreements of the Company for the
benefit of Grantee or surrender any right or power reserved to or
conferred upon the Company in this Agreement, subject, however, to any
required approval of the Company's stockholders and, provided, in each
case, that such changes or corrections shall not adversely affect the
rights of Grantee with respect to the Award evidenced hereby, or (iii)
to make such other changes as the Company, upon advice of counsel,
determines are necessary or advisable because of the adoption or
promulgation of, or change in or of the interpretation of, any law or
governmental rule or regulation, including any applicable federal or
state securities laws; and
(b) subject to any required approval of the Company's
stockholders, the Award evidenced by this Agreement may be canceled by
the Board and a new Award made in substitution therefor, provided that
no such action shall adversely affect the Series A Stock Option or any
Series A Stock Tandem SAR to the extent then exercisable.
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<PAGE> 15
17. GOVERNING LAW. This Agreement shall be governed by, and construed
in accordance with, the internal laws of the State of Delaware.
18. CONSTRUCTION. References in this Agreement to "this Agreement" and
the words "herein," "hereof," "hereunder" and similar terms include all Exhibits
and Schedules appended hereto. All decisions of the Board upon questions
regarding this Agreement shall be conclusive. The headings of the paragraphs of
this Agreement have been included for convenience of reference only, are not to
be considered a part hereof and shall in no way modify or restrict any of the
terms or provisions hereof.
19. DUPLICATE ORIGINALS. The Company and the Grantee may sign any
number of copies of this Agreement. Each signed copy shall be an original, but
all of them together represent the same agreement.
20. RULES BY BOARD. The rights of the Grantee and obligations of the
Company hereunder shall be subject to such reasonable rules and regulations as
the Board may adopt from time to time hereafter.
21. ENTIRE AGREEMENT. This Agreement is in satisfaction of and in lieu
of all prior discussions and agreements, oral or written, between the Company
and Grantee regarding the subject matter hereof. Grantee and the Company hereby
declare and represent that no promise or agreement not herein expressed has been
made and that this Agreement contains the entire agreement between the parties
hereto with respect to the Series A Stock Options and Series A Stock Tandem SARs
and replaces and makes null and void any prior agreements between Grantee and
the Company regarding the Series A Stock Options.
22. GRANTEE ACCEPTANCE. Grantee shall signify acceptance of the terms
and conditions of this Agreement by signing in the space provided at the end
hereof and returning a signed copy to the Company.
15
<PAGE> 16
TCI MUSIC, INC.
By:
-------------------------------------
Name:
-----------------------------------
Title:
----------------------------------
ACCEPTED:
----------------------------------------
16
<PAGE> 17
Schedule 1 to Non-Qualified Stock Option
and Stock Appreciation Rights Agreement
dated as of July __, 1997
TCI MUSIC, INC.
NON-QUALIFIED STOCK OPTION AND
STOCK APPRECIATION RIGHTS AGREEMENT
Grantee:
Grant Date: July __, 1997
Option Price: $6.25 per share
Option Shares: shares of Series A TCI Music Common Stock
- ------------- ("Series A Stock"), $_____ par value per share.
17
<PAGE> 18
Exhibit A to Non-Qualified Stock Option
and Stock Appreciation Rights Agreement
dated as of July __, 1997
TCI MUSIC, INC.
NON-QUALIFIED STOCK OPTION AND
STOCK APPRECIATION RIGHTS AGREEMENT
DESIGNATION OF BENEFICIARY
I, (the "Grantee"), hereby declare
-----------------------------------
that upon my death (the "Beneficiary") of
-------------------------------------
Name
- -----------------------------------------------------------------------------,
Street Address City State Zip Code
who is my , shall be entitled to the
------------------------------------------
Relationship to Grantee
Series A Stock Option, Series A Stock Tandem SARs and all other rights accorded
the Grantee by the above-referenced grant agreement (the "Agreement").
It is understood that this Designation of Beneficiary is made pursuant
to the Agreement and is subject to the conditions stated herein, including the
Beneficiary's survival of the Grantee's death. If any such condition is not
satisfied, such rights shall devolve according to the Grantee's will or the laws
of descent and distribution.
It is further understood that all prior designations of beneficiary
under the Agreement are hereby revoked and that this Designation of Beneficiary
may only be revoked in writing, signed by the Grantee, and filed with the
Company prior to the Grantee's death.
- ------------------------------- ----------------------------------------
Date Grantee
18
<PAGE> 1
EXHIBIT 10.16
TCI MUSIC, INC.
1997 STOCK INCENTIVE PLAN
FORM OF NON-QUALIFIED STOCK OPTION AND
STOCK APPRECIATION RIGHTS AGREEMENT
THIS AGREEMENT (this "Agreement") is made as of the ____ day
of July, 1997 (the "Effective Grant Date"), by and between TCI MUSIC, INC., a
Delaware corporation (the "Company"), and the person signing adjacent to the
caption "Grantee" on the signature page hereof (the "Grantee").
The Company has adopted the TCI Music, Inc. 1997 Stock
Incentive Plan (the "Plan"), a copy of which is attached to this Agreement as
Exhibit A and by this reference made a part hereof, for the benefit of certain
eligible persons as set forth in the Plan. Capitalized terms used and not
otherwise defined herein shall have the meaning ascribed thereto in the Plan.
Pursuant to the Plan, the Committee has determined that it is
in the interests of the Company and its stockholders to grant the options and
rights provided herein in order to provide Grantee with additional remuneration
for services rendered, to encourage Grantee to remain in the employ of the
Company or its Subsidiaries and to increase Grantee's personal interest in the
continued success and progress of the Company.
The Company and Grantee therefore agree as follows:
1. GRANT OF OPTION; OPTION TERM. Subject to the terms and
conditions herein, the Company grants to the Grantee during the period
commencing on the Effective Grant Date and expiring at 5:00 p.m., Denver,
Colorado time ("Close of Business") on _________, 2007, the tenth anniversary
of the effective Grant Date (the "Option Term"), subject to earlier termination
as provided in paragraphs 8 and 12(b) below, an option to purchase from the
Company, at the price per share set forth on Schedule 1 hereto (the "Series A
Stock Option Price"), the number of shares of Series A Common Stock of the
Company ("Series A Stock") set forth on said Schedule 1 (the "Series A Stock
Option Shares"). The Series A Stock Option Price and Series A Stock Option
Shares are subject to adjustment pursuant to paragraph 12 below. This option
is as a "Nonqualified Stock Option" and is hereinafter referred to as the
"Series A Stock Option."
2. GRANT OF STOCK APPRECIATION RIGHTS. Subject to the terms and
conditions herein and in tandem with the Series A Stock Option, the Grantee
shall also have, during the Option Term, subject to earlier termination as
provided in paragraphs 8 and 12(b) below, a stock appreciation right
1
<PAGE> 2
with respect to each Series A Stock Option Share (individually, a "Series A
Stock Tandem SAR" and collectively, the "Series A Stock Tandem SARs"). Upon
exercise of a Series A Stock Tandem SAR in accordance with this Agreement, the
Company shall, subject to paragraph 6 below, make payment as follows:
(a) the amount of payment shall equal the amount by which
the Fair Market Value of the Series A Stock Option Share on the date
of exercise of the Series A Stock Tandem SAR exceeds the Series A
Stock Option Price; and
(b) payment of the amount determined in accordance with
clause (a) shall be made, in the sole discretion of the Committee, in
shares of Series A Stock (valued at their Fair Market Value as of the
date of exercise of such Series A Stock Tandem SAR), in cash, or
partly in cash and partly in shares of Series A Stock.
3. REDUCTION UPON EXERCISE. The exercise of any number of Series
A Stock Tandem SARs shall cause a corresponding reduction in the number of
Series A Stock Option Shares which shall apply against the Series A Stock
Option Shares then available for purchase. The exercise of the Series A Stock
Option to purchase any number of Series A Stock Option Shares shall cause a
corresponding reduction in the number of Series A Stock Tandem SARs.
4. CONDITIONS OF EXERCISE; VESTING. The Series A Stock Option
and Series A Stock Tandem SARs are exercisable only in accordance with the
conditions stated in this paragraph.
(a) Except as otherwise provided in paragraph 12(b)
below, the Series A Stock Option shall not be exercisable until the
first anniversary of the Effective Grant Date and the Series A Stock
Option may only be exercised to the extent the Series A Stock Option
Shares have become available for purchase in accordance with the
following schedule:
<TABLE>
<CAPTION> Percentage of Series A Stock Option
Date Shares Available for Purchase
---- ------ --------- --- --------
<S> <C>
First Anniversary of Effective Grant Date 20%
Second Anniversary of Effective Grant Date 40%
Third Anniversary of Effective Grant Date 60%
Fourth Anniversary of Effective Grant Date 80%
Fifth Anniversary of Effective Grant Date 100%
</TABLE>
(b) A Series A Stock Tandem SAR with respect to a Series
A Stock Option Share shall be exercisable only if the Series A Stock
Option Share is then available for purchase in accordance with
subparagraph (a).
2
<PAGE> 3
(c) To the extent the Series A Stock Option or Series A
Stock Tandem SARs become exercisable, such Series A Stock Option or
Series A Stock Tandem SARs may be exercised in whole or in part (at
any time or from time to time, except as otherwise provided herein)
until expiration of the Option Term or earlier termination thereof.
(d) Grantee acknowledges and agrees that the Committee
may, in its discretion and as contemplated by Section 7.5 of the Plan,
adopt rules and regulations from time to time after the date hereof
with respect to the exercise of Series A Stock Tandem SARs and that
the exercise by Grantee of the Series A Tandem SARs will be subject to
the further condition that such exercise is made in accordance with
all such rules and regulations as the Committee may determine are
applicable thereto.
5. MANNER OF EXERCISE. The Series A Stock Option or a Series A
Stock Tandem SAR may be exercised only by delivering to the Company all of the
following and shall be considered exercised (as to the number of Series A Stock
Option Shares or Series A Stock Tandem SARs specified in the notice referred to
in subparagraph (a) below) on the later of (i) the date of exercise designated
in the written notice referred to in subparagraph (a) below (or if the date so
designated is not a business day, the first business day following such date)
or (ii) the first business day on which the Company has received all of the
following:
(a) Written notice, in such form as the Committee may
require, stating that Grantee is exercising the Series A Stock Option
and/or the Series A Stock Tandem SAR, setting forth the date of such
exercise and designating, among other things, the date of exercise,
the number of Series A Stock Option Shares to be purchased and/or the
number of Series A Stock Tandem SARs to be exercised, the aggregate
purchase price to be paid by Grantee (in the case of the exercise of
Series A Stock Option Shares) and the manner in which such payment is
being made;
(b) If the Series A Stock Option is to be exercised,
payment of the Series A Stock Option Price for each Series A Stock
Option Share to be purchased in cash or in such other form, or
combination of forms, of payment contemplated by Section 6.6(a) of the
Plan as the Committee, in its sole discretion, may permit;
(c) Payment of, or other provision acceptable to the
Committee for, any and all withholding taxes required to be withheld
by the Company upon such exercise in accordance with paragraph 6
hereof; and
(d) Any other documentation that the Committee may
reasonably require (including, without limitation, proof satisfactory
to the Committee that the Award is then exercisable for the number of
Series A Stock Option Shares or Series A Stock Tandem SARs).
3
<PAGE> 4
6. MANDATORY WITHHOLDING FOR TAXES. It shall be a condition
precedent to any exercise of the Series A Stock Option Shares or the Series A
Stock Tandem SARs that Grantee make provision acceptable to the Company and in
accordance with the Plan for the payment or withholding of any and all federal,
state and local taxes and other amounts required to be withheld by the Company
to satisfy the tax liability associated with such exercise, as determined by
the Board.
7. DELIVERY BY THE COMPANY. As soon as practicable after receipt
of all items referred to in paragraph 5, and subject to the withholding
referred to in paragraph 6, the Company shall deliver to the Grantee
certificates issued in Grantee's name for the number of Series A Stock Option
Shares purchased by exercise of the Series A Stock Option and for the number of
shares of Series A Stock to which the Grantee is entitled by the exercise of
Series A Stock Tandem SARs and any cash payment to which the Grantee is
entitled by the exercise of Series A Stock Tandem SARs. If delivery is by
mail, delivery of shares of Series A Stock shall be deemed effected for all
purposes when a stock transfer agent of the Company shall have deposited the
certificates in the United States mail, addressed to the Grantee, and any cash
payment shall be deemed effected when a Company check, payable to Grantee and
in an amount equal to the amount of the cash payment, shall have been deposited
in the United States mail, addressed to the Grantee.
8. EARLY TERMINATION OF OPTION AND TANDEM SARS. Unless otherwise
determined by the Committee, in its sole discretion, the Series A Stock Option
and Series A Stock Tandem SARs shall terminate, prior to the expiration of the
Series A Stock Option Term, at the time specified below:
(a) If Grantee's employment with the Company and its
Subsidiaries terminates other than (i) by the Company for "cause" (as
defined in Section 11.2(b) of the Plan) (see (d) below), (ii) by
reason of death or Disability (see (b) and (c) below) or (iii)
pursuant to provisions of a written employment agreement, if any,
between the Grantee and the Company which expressly permit the Grantee
to terminate such employment upon the occurrence of specified events
(other than the giving of notice and passage of time) (see (e) below),
then the Series A Stock Option and all Series A Stock Tandem SARs
shall terminate at the Close of Business on the first business day
following the expiration of the 90-day period which began on the date
of termination of Grantee's employment;
(b) If Grantee dies while employed by the Company or a
Subsidiary or prior to the expiration of a period of time following
termination of Grantee's employment during which the Series A Stock
Option and Series A Stock Tandem SARs remain exercisable, the Series A
Stock Option and all Series A Stock Tandem SARs shall terminate at the
Close of Business on the first business day following the expiration
of the one-year period which began on the date of death;
4
<PAGE> 5
(c) If Grantee's employment with the Company and its
Subsidiaries terminates by reason of Disability, then the Series A
Stock Option and all Series A Stock Tandem SARs shall terminate at the
Close of Business on the first business day following the expiration
of the one-year period which began on the date of termination of
Grantee's employment;
(d) If Grantee's employment with the Company and its
Subsidiaries is terminated by the Company for "cause" (as defined in
Section 11.2(b) of the Plan), then the Series A Stock Option and all
Series A Stock Tandem SARs shall terminate immediately upon such
termination of Grantee's employment; or
(e) If Grantee's employment is terminated by Grantee,
pursuant to provisions of a written employment agreement, if any,
between the Grantee and the Company which expressly permit the Grantee
to terminate such employment upon the occurrence of specified events
(other than the giving of notice and passage of time), then the Series
A Stock Option Term shall terminate early only as provided for in
paragraph 8(b) above or 12(b) below or pursuant to the terms of such
written employment agreement.
In any event in which the Series A Stock Option and Series A
Stock Tandem SARs remain exercisable for a period of time following the date of
termination of Grantee's employment as provided above, the Series A Stock
Option and Series A Stock Tandem SARs may be exercised during such period of
time only to the extent the same were exercisable as provided in paragraph 4
above on such date of termination of Grantee's employment. A change of
employment is not a termination of employment within the meaning of this
paragraph 8 provided that, after giving effect to such change, the Grantee
continues to be an employee of the Company or any Subsidiary. Notwithstanding
any period of time referenced in this paragraph 8 or any other provision of
this paragraph to the contrary, the Series A Stock Option and all Series A
Stock Tandem SARs shall in any event terminate upon the expiration of the
Option Term.
9. AUTOMATIC EXERCISE OF SERIES A STOCK TANDEM SARS. Immediately
prior to the termination of the Series A Stock Option, as provided in paragraph
8 above, or the expiration of the Option Term, all remaining Series A Stock
Tandem SARs shall be deemed to have been exercised by the Grantee.
10. NONTRANSFERABILITY OF SERIES A STOCK OPTION AND SERIES A STOCK
TANDEM SARS. During Grantee's lifetime, the Series A Stock Option and Series A
Stock Tandem SARs are not transferable (voluntarily or involuntarily) other
than pursuant to a domestic relations order and, except as otherwise required
pursuant to a domestic relations order, are exercisable only by the Grantee or
Grantee's court appointed legal representative. The Grantee may designate a
beneficiary or beneficiaries to whom the Series A Stock Option and Series A
Stock Tandem SARs shall pass upon Grantee's death and may change such
designation from time to time by filing a written designation of beneficiary or
beneficiaries with the Committee on the form annexed hereto as
5
<PAGE> 6
Exhibit B or such other form as may be prescribed by the Committee, provided
that no such designation shall be effective unless so filed prior to the death
of Grantee. If no such designation is made or if the designated beneficiary
does not survive the Grantee's death, the Series A Stock Option and Series A
Stock Tandem SARs shall pass by will or the laws of descent and distribution.
Following Grantee's death, the Series A Stock Option and any Series A Stock
Tandem SARs, if otherwise exercisable, may be exercised by the person to whom
such option or right passes according to the foregoing and such person shall be
deemed the Grantee for purposes of any applicable provisions of this Agreement.
11. NO SHAREHOLDER RIGHTS; NO GUARANTEE OF EMPLOYMENT.
(a) The Grantee shall not be deemed for any purpose to
be, or to have any of the rights of, a stockholder of the Company with
respect to any shares of Series A Stock as to which this Agreement
relates until such shares shall have been issued to Grantee by the
Company. Furthermore, the existence of this Agreement shall not
affect in any way the right or power of the Company or its
stockholders to accomplish any corporate act, including, without
limitation, the acts referred to in Section 11.17 of the Plan.
(b) Nothing contained in this Agreement, and no action by
the Company or the Committee with respect hereto, shall confer or be
construed to confer on Grantee any right to continue in the employ of
the Company or any Subsidiary or interfere in any way with the right
of the Company or any employing Subsidiary to terminate Grantee's
employment at any time, with or without "cause."
12. ADJUSTMENTS.
(a) The Series A Stock Option and Series A Stock Tandem
SARs shall be subject to adjustment (including, without limitation, as
to the number of Series A Stock Option Shares and the Series A Stock
Option Price per share) in the sole discretion of the Committee and in
such manner as the Committee may deem equitable and appropriate in
connection with the occurrence of any of the events described in
Section 4.2 of the Plan following the Effective Grant Date; provided,
however, that adjustments shall be made to the Series A Stock Option
if, and in the same manner that, adjustments are being made in
connection with the occurrence of any such event to any other option
granted under the Plan. Adjustments to the Option Price shall be made
on a per share basis so that the aggregate remaining Series A Stock
Option Price is unchanged.
(b) In the event of any Approved Transaction, Board
Change or Control Purchase, the Series A Stock Option and all Series A
Stock Tandem SARs shall become exercisable in full without regard to
paragraph 4(a); provided, however, that to the extent not theretofore
exercised the Series A Stock Option and all Series A Stock Tandem SARs
shall terminate
6
<PAGE> 7
upon the first to occur of the consummation of the Approved
Transaction, the expiration of the Series A Stock Option Term or the
earlier termination of the Series A Stock Option and Series A Stock
Tandem SARs pursuant to paragraph 8 hereof. Notwithstanding the
foregoing, the Committee may, in its discretion, determine that the
Series A Stock Option and Series A Stock Tandem SARs will not become
exercisable on an accelerated basis in connection with an Approved
Transaction and/or will not terminate if not exercised prior to
consummation of the Approved Transaction, if the Board or the
surviving or acquiring corporation, as the case may be, shall have
taken or made effective provision for the taking of such action as in
the opinion of the Committee is equitable and appropriate to
substitute a new Award for the Award evidenced by this Agreement or to
assume this Agreement and the Award evidenced hereby and in order to
make such new or assumed Award, as nearly as may be practicable,
equivalent to the Award evidenced by this Agreement as then in effect
(but before giving effect to any acceleration of the exercisability
hereof unless otherwise determined by the Committee), taking into
account, to the extent applicable, the kind and amount of securities,
cash or other assets into or for which the Series A Stock may be
changed, converted or exchanged in connection with the Approved
Transaction.
13. RESTRICTIONS IMPOSED BY LAW. Grantee acknowledges that
neither the Series A Stock Option nor any of the Series A Stock Option Shares
has been registered under the Securities Act of 1933 and that the Series A
Stock Option Shares may not be transferred in the absence of such registration
or the availability of an exemption therefrom under such Act or the rules and
regulations of the Securities and Exchange Commission promulgated thereunder.
Neither the Company nor any other person shall have any obligation to register
any Series A Stock Option Shares, or any transfer of Series A Stock Option
Shares, under the Securities Act of 1933, the Securities Exchange Act of 1934
or any other state or federal securities law. Certificates representing Series
A Stock Option Shares purchased by Grantee hereunder may bear such restrictive
and other legends as counsel for the Company shall require in order to insure
compliance with any such law or any rule or regulation promulgated thereunder.
Without limiting the generality of Section 11.9 of the Plan, the Grantee agrees
that Grantee will not exercise the Series A Stock Option or any Series A Stock
Tandem SAR and that the Company will not be obligated to deliver any shares of
Series A Stock or make any cash payment, if counsel to the Company determines
that such exercise, delivery or payment would violate any applicable law or any
rule or regulation of any governmental authority or any rule or regulation of,
or agreement of the Company with, any securities exchange or association upon
which the Series A Stock is listed or quoted. The Company shall in no event be
obligated to take any affirmative action in order to cause the exercise of the
Series A Stock Option or any Series A Stock Tandem SAR or the resulting
delivery of shares of Series A Stock or other payment to comply with any such
law, rule, regulation or agreement.
14. NOTICE. Unless the Company notifies the Grantee in writing of
a different procedure, any notice or other communication to the Company with
respect to this Agreement shall be in writing and shall be:
7
<PAGE> 8
(a) delivered personally to the following address:
TCI Music, Inc.
c/o Liberty Media Corporation
8101 East Prentice Avenue
Suite 500
Englewood, Colorado 80111
Attention: President
or
(b) sent by first class mail, postage prepaid and
addressed as follows:
TCI Music, Inc.
c/o Tele-Communications, Inc.
5619 DTC Parkway
Englewood, Colorado 80111
Attention: Legal Department
Any notice or other communication to the Grantee with respect to this Agreement
shall be in writing and shall be delivered personally, or shall be sent by
first class mail, postage prepaid, to Grantee's address as listed in the
records of the Company on the Effective Grant Date, unless the Company has
received written notification from the Grantee of a change of address.
15. AMENDMENT. Notwithstanding any other provisions hereof, this
Agreement may be supplemented or amended from time to time as approved by the
Committee as contemplated by Section 11.8 of the Plan. Without limiting the
generality of the foregoing, without the consent of the Grantee,
(a) this Agreement may be amended or supplemented (i) to
cure any ambiguity or to correct or supplement any provision herein
which may be defective or inconsistent with any other provision
herein, or (ii) to add to the covenants and agreements of the Company
for the benefit of Grantee or surrender any right or power reserved to
or conferred upon the Company in this Agreement, subject, however, to
any required approval of the Company's stockholders and, provided, in
each case, that such changes or corrections shall not adversely affect
the rights of Grantee with respect to the Award evidenced hereby, or
(iii) to make such other changes as the Company, upon advice of
counsel, determines are necessary or advisable because of the adoption
or promulgation of, or change in or of the interpretation of, any law
8
<PAGE> 9
or governmental rule or regulation, including any applicable federal
or state securities laws; and
(b) subject to Section 11.8 of the Plan and any required
approval of the Company's stockholders, the Award evidenced by this
Agreement may be cancelled by the Committee and a new Award made in
substitution therefor, provided that the Award so substituted shall
satisfy all of the requirements of the Plan as of the date such new
Award is made and no such action shall adversely affect the Series A
Stock Option or any Series A Stock Tandem SAR to the extent then
exercisable.
16. GOVERNING LAW. This Agreement shall be governed by, and
construed in accordance with, the internal laws of the State of Delaware.
17. CONSTRUCTION. References in this Agreement to "this
Agreement" and the words "herein," "hereof," "hereunder" and similar terms
include all Exhibits and Schedules appended hereto, including the Plan. This
Agreement is entered into, and the Award evidenced hereby is granted, pursuant
to the Plan and shall be governed by and construed in accordance with the Plan
and the administrative interpretations adopted by the Committee thereunder.
All decisions of the Committee upon questions regarding the Plan or this
Agreement shall be conclusive. Unless otherwise expressly stated herein, in
the event of any inconsistency between the terms of the Plan and this
Agreement, the terms of the Plan shall control. The headings of the paragraphs
of this Agreement have been included for convenience of reference only, are not
to be considered a part hereof and shall in no way modify or restrict any of
the terms or provisions hereof.
18. DUPLICATE ORIGINALS. The Company and the Grantee may sign any
number of copies of this Agreement. Each signed copy shall be an original, but
all of them together represent the same agreement.
19. RULES BY COMMITTEE. The rights of the Grantee and obligations
of the Company hereunder shall be subject to such reasonable rules and
regulations as the Committee may adopt from time to time hereafter.
20. ENTIRE AGREEMENT. This Agreement is in satisfaction of and in
lieu of all prior discussions and agreements, oral or written, between the
Company and Grantee regarding the subject matter hereof. Grantee and the
Company hereby declare and represent that no promise or agreement not herein
expressed has been made and that this Agreement contains the entire agreement
between the parties hereto with respect to the Series A Stock Options and
Series A Stock Tandem SARs and replaces and makes null and void any prior
agreements between Grantee and the Company regarding the Series A Stock
Options.
9
<PAGE> 10
21. GRANTEE ACCEPTANCE. Grantee shall signify acceptance of the
terms and conditions of this Agreement by signing in the space provided at the
end hereof and returning a signed copy to the Company.
TCI MUSIC, INC.
By:
----------------------------------
Name:
--------------------------------
Title:
-------------------------------
ACCEPTED:
-------------------------------------
Name:
--------------------------------
10
<PAGE> 11
Schedule 1 to Non-Qualified Stock Option
and Stock Appreciation Rights Agreement
dated as of July , 1997
--
TCI MUSIC, INC. 1997 INCENTIVE PLAN
Grantee:
Grant Date: July , 1997
--
Option Price: $6.25 per share
Option Shares: ---------- shares of Series A TCI Music Common Stock
("Series A Stock"), $ par value per share.
-----
11
<PAGE> 12
Exhibit A to Non-Qualified Stock Option
and Stock Appreciation Rights Agreement
dated as of July , 1997
--
TCI MUSIC, INC. 1997 INCENTIVE PLAN
12
<PAGE> 13
Exhibit A to Non-Qualified Stock Option
and Stock Appreciation Rights Agreement
dated as of July __, 1997
TCI MUSIC, INC.
1997 INCENTIVE PLAN
DESIGNATION OF BENEFICIARY
I, (the "Grantee"), hereby declare
-----------------------------------
that upon my death (the "Beneficiary") of
-------------------------------------
Name
- -----------------------------------------------------------------------------,
Street Address City State Zip Code
who is my , shall be entitled to the
------------------------------------------
Relationship to Grantee
Series A Stock Option, Series A Stock Tandem SARs and all other rights accorded
the Grantee by the above-referenced grant agreement (the "Agreement").
It is understood that this Designation of Beneficiary is made pursuant
to the Agreement and is subject to the conditions stated herein, including the
Beneficiary's survival of the Grantee's death. If any such condition is not
satisfied, such rights shall devolve according to the Grantee's will or the laws
of descent and distribution.
It is further understood that all prior designations of beneficiary
under the Agreement are hereby revoked and that this Designation of Beneficiary
may only be revoked in writing, signed by the Grantee, and filed with the
Company prior to the Grantee's death.
- ------------------------------- ----------------------------------------
Date Grantee
13
<PAGE> 1
EXHIBIT 10.53
SEPARATION AGREEMENT AND MUTUAL RELEASE
THIS SEPARATION AGREEMENT AND MUTUAL RELEASE (this "Agreement") is entered
into as of the 11th day of July, 1997, by and between DMX INC., a Delaware
corporation ("Company"), and JEROLD RUBINSTEIN, an individual ("Rubinstein").
WHEREAS, Rubinstein desires to terminate his employment relationship with
Company;
WHEREAS, Company desires to terminate Rubinstein's employment with Company
pursuant to the terms and conditions of this Agreement;
NOW, THEREFORE, in consideration of the mutual promises and other valuable
consideration contained herein, the parties hereto agree as follows:
1. Termination. The parties agree that Rubinstein's employment relationship
with Company is terminated as of the date hereof ("Separation Date").
2. Consideration. Company acknowledges that in full and final satisfaction
of all services rendered by Rubinstein to Company through the Separation Date,
Company is obligated to Rubinstein for payment of the sum of One Hundred Fifty
Thousand Dollars ($150,000) ("Company Liability"). Without limiting the
generality of the foregoing, this sum shall be in full and final satisfaction of
all obligations of Company to Rubinstein including without limitation all paid
vacation owed, all unreimbursed business expenses, and all compensation owed or
accruing to Rubinstein. Rubinstein acknowledges that he is obligated to Company
in the amount of Eighteen Thousand Five Hundred Twenty-three Dollars ($18,523)
in connection with the purchase by Rubinstein of certain equipment ("Equipment")
of Company as set forth on Schedule A, attached hereto ("Rubinstein Liability").
Company shall provide Rubinstein with a Bill of Sale for the Equipment in the
form set forth on Exhibit 1, attached hereto. The parties hereto agree that the
Rubinstein Liability shall be deducted from the Company Liability. Accordingly,
in consideration of the offsetting liabilities, Company shall be obligated to
pay to Rubinstein the sum of One Hundred Thirty-one Thousand, Four Hundred
Seventy-seven Dollars ($131,477). Such payment shall be made promptly after full
execution hereof and the "Receiver Payment" referred to in paragraph 3, below.
1
<PAGE> 2
3. Receiver Payment. Rubinstein acknowledges that Xtra Music is obligated
to Company in the amount of Fifty Eight Thousand Three Hundred Fifty-four and
42/100 Dollars ($58,354.42) in connection with the purchase by Xtra Music of
certain Comstream DBS Receivers, as set forth on the invoice attached hereto as
Schedule B. Rubinstein agrees that Xtra Music shall make payment to Company
("Receiver Payment") in the aforesaid amount promptly after the full execution
hereof.
4. Confidentiality; Results of Services.
(a) Rubinstein agrees that any confidential information of the Company
related to technologies which are trade secrets ("Proprietary Technology") is
proprietary to the Company and Rubinstein shall not for a period of one (1) year
from the date hereof use for the benefit of others than the Company, or disclose
to others, any such Proprietary Technology.
(b) Rubinstein acknowledges and agrees that any violation of the provisions
of this Paragraph 4 will create irreparable harm to Company for which it has no
adequate remedy at law, in that the total extent of the damages to Company can
never be fully measured, and that Company shall be entitled to seek injunctive
relief with respect to such violation.
(c) Notwithstanding anything contained in this Paragraph 4: (i) Rubinstein
shall not be restricted in any manner with respect to rights in or to
Proprietary Technology granted by Company in a separate written agreement to
Rubinstein, Xtra Music, or any other entity with which Rubinstein is or may
become affiliated, and (ii) Rubinstein shall be deemed to have the same rights
as any member of the public would have with respect to the Proprietary
Technology. For example, Rubinstein would not be restricted from using
Proprietary Technology which is distributed by a third party, or otherwise
becomes known or available to members of the public.
5. Consultations. Rubinstein agrees that for a period of one (1) year from
the date hereof he will, as reasonably requested by Company, consult with senior
executives of Company for the purpose of discussing the historical business and
transactions of the Company. It is understood and agreed that such consultations
shall (i) be subject to Rubinstein's availability; (ii) be conducted by
telephone unless otherwise agreed by Rubinstein; and (iii) not require extensive
time commitments by Rubinstein.
6. Release. In consideration of the promises set forth herein, and other
good and valuable consideration, each of the parties and their officers,
directors, employees, agents, attorneys, heirs, successors and assigns, shall
and hereby do forever release, relieve and discharge the other party and all of
their respective officers, directors, employees, agents, attorneys, heirs,
successors and assigns from any and all claims, actions,
2
<PAGE> 3
suits, debts, sums of money, controversies, damages, obligations and liabilities
of every kind and nature, whether known or unknown, suspected or unsuspected,
which either party shall have or may have against the other party (and/or their
respective officers, directors, employees, agents, attorneys, heirs, successors
and assigns) by reason of or arising out of the employment relationship of
Rubinstein with Company prior to and through the Separation Date.
The release set forth in this Agreement is a general release of all claims,
demands, causes of action, obligations, damages and liabilities of any nature
whatsoever that are described in the release and is intended to encompass all
known and unknown, foreseen and unforeseen claims which either party may have
against the other party (and/or their respective officers, directors, employees,
agents, attorneys, heirs, successors and assigns) as of the Separation Date.
Further, each party agrees to waive and relinquish all rights and benefits
its which he or it may have under Section 1542 of the California Civil Code or
any similar law or statute. That section reads as follows:
Section 1542. [Certain claims not affected by general release.] A general
release does not extend to claims which the creditor does not know or
suspect to exist in his favor at the time of executing the release, which
if known by him must have materially affected his settlement with the
debtor.
7. Heirs and Assigns. This Agreement and all the terms and provisions
hereof shall be binding upon and shall inure to the benefit of the parties and
their respective heirs, legal representatives, successors and assigns.
8. Rights Not Affected. Notwithstanding anything to the contrary contained
herein, this Agreement shall not affect Company or Rubinstein's rights or
obligations in connection with Rubinstein's ownership of stock and/or stock
options in the Company, or Rubinstein, or any entity in which Rubinstein owns
any interest, acting as a licensee of Company.
9. Severability. Should any portion, word, clause, phrase, sentence or
paragraph of this Agreement be declared void or unenforceable, such portion
shall be considered independent of and severable from the remainder, the
validity of which shall remain unaffected.
10. Entire Agreement. This Agreement constitutes the entire agreement
between the parties who have executed it relating to the subject matter hereof
and supersedes any and all other agreements, understandings, negotiations or
discussions, whether oral or in writing, express or implied, between the parties
to this Agreement
3
<PAGE> 4
relating to the subject matter hereof. The parties to this Agreement each
acknowledge that no representations, inducements, promises, agreements or
warranties, oral or otherwise, have been made to them or by them, or by anyone
acting on their behalf which are not embodied in this Agreement, that they have
not executed this Agreement in reliance on any such representation, inducement,
promise, agreement or warranty, and that no representation, inducement, promise,
agreement or warranty now not contained in this Agreement including, but not
limited to, any purported supplements, modifications, waivers, or terminations
of this Agreement shall be valid or binding unless executed in writing by both
parties to this Agreement.
11. Governing Law. This Agreement shall be construed and enforced in
accordance with the laws of the State of California.
12. Counterparts. This Agreement may be executed in multiple counterparts,
each of which shall be considered an original, but all of which shall constitute
one agreement.
IN WITNESS WHEREOF, the undersigned have executed this Agreement as of the
date set forth hereinabove.
DMX INC.
By: /s/ L.A. Troxel
-----------------------------
Its: President
----------------------------
/s/ Jerold Rubinstein
-----------------------------
JEROLD RUBINSTEIN
4
<PAGE> 5
EXHIBIT 1
BILL OF SALE
DMX, Inc. ("Seller") and Jerold Rubinstein ("Buyer") have executed and
delivered a Separation Agreement and Mutual Release dated as of July 11, 1997
(the "Agreement"), providing, inter alia, on the terms and conditions set forth
therein, for the transfer of certain assets and properties from Seller to Buyer.
This Bill of Sale is being executed and delivered in order to effect the
transfer of Assets (as defined below) from Seller to Buyer, all as provided for
in the Agreement.
NOW, THEREFORE, for good and valuable consideration, the sufficiency and
receipt of which is hereby acknowledged:
Seller hereby sells, conveys, transfers, assigns and delivers unto Buyer,
its successors and assigns, all right, title and interest of Seller in and to
the assets and properties (the "Assets") of Seller, as the same exist on the
date hereof, listed on Schedule A attached hereto and incorporated herein by
this reference.
TO HAVE AND TO HOLD all and singular, the assets and properties hereby
sold, conveyed, transferred, assigned and delivered, or intended so to be, unto
Buyer, and its successors and assigns, to and for its and their own use forever.
This Bill of Sale is executed pursuant to the Agreement and may be
simultaneously executed in two or more counterparts, each of which shall be
deemed to be an original, but all of which together shall constitute one and the
same instrument.
IN WITNESS WHEREOF, Buyer and Seller have caused this Bill of Sale to be
executed in their respective names by their respective, duly authorized
representatives on and as of the day and year first above written.
DMX INC.
By: /s/ L.A. Troxel
-----------------------------
Its: President
----------------------------
/s/ Jerold Rubinstein
-----------------------------
JEROLD RUBINSTEIN
-1-
<PAGE> 6
SCHEDULE A
DMX Inc.
General Ledger Listing
List of Equipment-Montecito
<TABLE>
<CAPTION>
GL Acct Apply Date Balance
------- ---------- -------
<S> <C> <C> <C>
(Row 100):
F&E-Montecito 01-00-820-1430
- -Fiscal 1993-
Adjusting Entries 06/30/93 $ 14,384.81
REE01 INTELLFAX 08/22/93 789.03
Adj to Form 10-K 09/30/93 (530.43)
- -Fiscal 1994-
DEM01 JHR'S CELLULAR PHONE FOR 01/20/94 $ 405.94
DES01 OFF-SITE PHONE SYSTEM 03/30/94 405.93
M/C BOSE SPEAKERS 03/31/94 429.72
SIG01 SATELLITE SYSTEM 06/01/94 2,360.45
SIG01 SOUND SYSTEM 06/01/94 6,726.34
COM03 JHR/MONTECITO,CA 08/01/94 536.95
SIG01 DBS/JHR 08/01/94 1,614.35
LAN03 MODEM/JHR 08/29/94 573.73
LAN03 CMPTR/JHR 08/30/94 2,652.13
SC101 MODULATOR/JHR 09/07/94 883.07
LAN01 JHR CMPTR INSTALL 09/08/94 819.15
LAN03 CMPTR/J&J 09/12/94 1,497.10
- -Fiscal 1995-
LAN01 CMPTR/JACQUE R 10/17/94 $ 677.63
SIG01 LEXICON RMTE/JHR 11/29/94 2,706.11
DIV01 DIRECT TV DISH 12/08/94 1,043.84
SIG01 JHR/DSS INSTALL 02/07/95 588.01
REE 21 COMPUTER/JHR 03/01/95 3,537.61
DBS ADJ THRU 03/31/95 06/30/95 240.00
- -Fiscal 1996-
PC&M SUPERSCAN 11/10/95 $ 345.95
JEF01 UPGRADE/JHR 11/10/95 454.65
JEF01 BLK LEATHER CASE 11/27/95 107.27
BRZ01 CDW-TV SUPERSCAN/JHR 11/30/95 326.28
BRZ01 PALMTOP FOR JHR 12/29/95 653.00
PC&M NEC MONITOR/JHR 01/30/96 834.95
PC&M NEC MONITOR/JHR 02/12/96 (779.95)
AMER4 MOTOROLA PHONE/JHR 06/20/96 2,164.61
J. RUBINSTEIN/MOTOROLA PHONE 07/11/96 (717.51)
- -Fiscal 1997-
Dell Computer Feb-97 3,056.07
Dell Computer Feb-97 170.45
USA Flex Computre Sales Apr-97 5,448.15
Sound Equipment-Montecito Jun-97 5,055.38
Sound Equipment Installation-Montecito Jun-97 4,966.54
USA Flex Computre Sales Jun-97 652.15
USA Flex Computre Sales Jun-97 629.00
Motorola Cell Sales & Service Jun-97 553.75
------------
Total F&E-Montecito 66,262.21
------------
Less: Accumulated Depreciation: (32,096.44)
------------
Net book value: 34,165.77
------------
</TABLE>
<PAGE> 1
EXHIBIT 10.54
BACKGROUND/FOREGROUND MUSIC SERVICE LICENSE AGREEMENT
AGREEMENT made between the AMERICAN SOCIETY OF COMPOSERS, AUTHORS AND
PUBLISHERS (hereinafter called "SOCIETY"), located at One Lincoln Plaza New
York, New York 10023 and International Cablecasting Technologies Inc.
(hereinafter called "LICENSEE"), located at 11400 W. Olympic Blvd., Los
Angeles, CA 90064
as follows:
1. SCOPE OF LICENSE. SOCIETY grants to LICENSEE and LICENSEE accepts for
the period commencing June 1, 1994 and ending May 31, 1999, a non-exclusive
license to perform publicly, or cause to be performed publicly, in the United
States, its territories and possessions, non-visually, by means of "Background/
Foreground Music Service" (as hereinafter defined) and not otherwise, in the
premises of "Subscribers of LICENSEE" (as hereinafter defined) and not
elsewhere, non-dramatic renditions of the separate musical compositions of which
SOCIETY shall, during the term hereof, have the right to license such performing
rights. This license does not extend to or include the public performance of any
rendition or performance of any opera, operetta, musical comedy, play, or like
production as such, in whole or in part.
Except as expressly herein otherwise provided, nothing herein contained
shall be construed as authorizing LICENSEE to grant to others any right to
reproduce or perform by any means, method or process whatsoever, any of the
musical compositions licensed hereunder, or as authorizing "Subscribers of
LICENSEE" to perform or reproduce compositions licensed hereunder by any method
or process whatsoever except the reproduction of such compositions by means of
equipment at the premises of such "Subscribers of LICENSEE" designated in the
agreement between each such respective Subscriber and LICENSEE.
The term "Background/Foreground Music Service" as used in this agreement
shall mean: (1) the transmission to the premises of "Subscribers of LICENSEE" of
renditions of musical compositions (whether vocal or instrumental); or (2) the
furnishing of the means to make such renditions in the premises of "Subscribers
of LICENSEE", or by transmissions to persons outside of the premises by means of
a music-on-hold telephone system operated by the Subscriber at its premises,
provided such renditions are limited to those made by the mechanical
reproduction of music by equipment made available by LICENSEE to its Subscribers
only, and not by equipment otherwise available to the general public.
The term "Subscribers of LICENSEE", as used in this agreement, shall mean
all persons, firms and corporations subscribing to the said
Background/Foreground Music Service. Any person, firm or corporation which is
furnished with a Background/Foreground Music Service by a third party, but which
is billed for such service only by LICENSEE, or which is billed for such service
by a third party authorized to perform such billing by LICENSEE for the benefit
of LICENSEE, shall be deemed to be a Subscriber of LICENSEE, provided that
LICENSEE shall cause such third party to furnish SOCIETY upon entering into this
Agreement and on or before each succeeding January 1, April 1, July 1 and
October 1 during the term hereof, a list of all Subscribers billed in such
manner. Such lists shall specify the name of each such Subscriber and the total
number of Subscribers of LICENSEE so billed.
2. LIMITATIONS ON LICENSE.
A. This license shall not extend to or be deemed to include or authorize
the recording of, or the manufacture of any recordings or any other device used
as a means of reproducing, any musical composition of which the right of
performance is licensed under this agreement.
B. This license shall not under any circumstance extend to (i) any premises
to which an admission fee is charged at the time LICENSEE'S
Background/Foreground Music Service is provided, or at which dancing in
conjunction with LICENSEE's Background/Foreground Music Service occurs; or (ii)
any broadcast transmission by any television station or radio station; or (iii)
any transmission by any cable television or cable radio operation, to any
private home, apartment, guest room in a hotel or motel, or other similar
location; or (iv) any transmission by any Background/Foreground Music Service to
any private home apartment, guest room in a hotel or motel, or other similar
location.
C. This license shall not extend to or be deemed to include or authorize
the public performance of any musical composition licensed hereunder at any
premises during any month in which the Subscriber uses commercial announcements
in conjunction with LICENSEE's Background/Foreground Music Service, if such
commercial announcements are provided by an entity wholly unrelated to LICENSEE,
and LICENSEE receives no consideration whatsoever for the performance of such
commercial announcements; provided, however that this license shall be deemed to
include and authorize such performances if LICENSEE shall have paid the
appropriate monthly license fee for such premises specified in Sub-Paragraph
"5.C." hereof, as provided in Paragraph "6" hereof. As used in this
Sub-Paragraph "2.C." the term "wholly unrelated to LICENSEE shall mean an entity
in which LICENSEE has no ownership interest, over which LICENSEE has no control
and with which LICENSEE has no contractual relation regarding the performance of
such commercial announcements at the premises of the subject Subscriber, and the
term "LICENSEE receives no consideration" shall mean that no compensation for
the performance of such commercial announcements (in money or any other form is
paid to LICENSEE, directly or indirectly, for such announcements.
3. LICENSEE'S WARRANTIES.
A. LICENSEE warrants, represents and agrees that the fees set forth in
Paragraph 5 of this agreement will be paid by LICENSEE with respect to all
premises to which any Background/Foreground Music Service is furnished directly
or indirectly by LICENSEE or any enterprise which controls, is controlled by, or
is under the same control as, LICENSEE.
B. LICENSEE further warrants and represents that each and every one of its
agreements with its Subscribers hereafter made, as well as all renewals or
extensions of existing agreements, will contain the following provision
"The Subscriber shall not transmit the programs nor use the service outside
the premises designated in this agreement."
4. LIST OF COMPOSITIONS.
LICENSEE agrees to furnish to SOCIETY during the term of this agreement,
commencing with the receipt of a written request therefor from SOCIETY, a list
of all the musical compositions included in LICENSEE's
<PAGE> 2
Background/Foreground Music Service and furnished to Subscribers of LICENSEE.
Such list shall specify the title of each composition, its composer and author,
and the date of performance at the premises of Subscribers of LICENSEE (if
known). Should SOCIETY request such list, it will be sufficient for LICENSEE to
furnish to SOCIETY any printed form of program furnished by LICENSEE to its
Subscribers; however, should SOCIETY notify LICENSEE in writing that such
printed form of program does not meet the requirements of this provision,
LICENSEE shall furnish to SOCIETY, no more than ninety days after such written
notification, a list which does meet those requirements.
5. LICENSE FEES.
In consideration of the license herein granted, LICENSEE agrees to pay
SOCIETY with respect to each premises of each Subscriber of LICENSEE to which
LICENSEE'S Background/Foreground Music Service is furnished, the following
license fees:
A. The appropriate annual license fee set forth below for each premises of
each Subscriber other than the premises specifically mentioned in Sub
Paragraphs "B" and "C" of this Paragraph "5", without exception or deduction
for any reason, including, but not limited to: hotels, motels, night clubs,
restaurants, bars, grills, taverns, cocktail lounges and other establishments
in which food or beverages are served, stores, shops, supermarkets, health
clubs, automobile showrooms, gasoline service stations and other establishments
where goods or services are sold or offered to the public at retail, and each
such premises located in a shopping center:
<TABLE>
<CAPTION>
CONTRACT YEAR ANNUAL LICENSE FEE
------------- ------------------
<S> <C>
June 1, 1994 - May 31, 1995 $46.25
June 1, 1995 - May 31, 1996 47.00
June 1, 1996 - May 31, 1997 48.00
June 1, 1997 - May 31, 1998 48.75
June 1, 1998 - May 31, 1999 49.50
</TABLE>
B. The appropriate annual license fee set forth below for each of the
following premises of each Subscriber only: an office, factory or plant; a bank;
an office or a professional building; a doctor's, dentist's or other
professional office; a hospital, clinic, nursing or rest home or rehabilitation
center; a funeral home or mortuary; a library, school, college or university; a
church; a private club owned and operated by the members as a non-commercial
venture; an apartment house or residence; a governmental office; a park or
recreation area owned and operated by the government excluding private or
commercial concessions or leased areas; a garage; a security or commodity
broker; an insurance or real estate agency; a finance or loan office; a savings
and loan association; a warehouse; a trucking terminal which is limited to
operators of such trucks and maintenance men and to which other members of the
public are not generally admitted; a research organization or laboratory; a room
occupied solely as a rest room (or lounge); a room occupied solely as a
reception or information area or an employee's cafeteria in such respective
premises; and each such premises located in a shopping center:
<TABLE>
<CAPTION>
CONTRACT YEAR ANNUAL LICENSE FEE
------------- ------------------
<S> <C>
June 1, 1994-May 31, 1995 5.00% of "gross billings," for
all such premises
June 1, 1995-May 31, 1996 5.00% of "gross billings," for
all such premises
June 1, 1996-May 31, 1997 5.00% of "gross billings," for
all such premises
June 1, 1997-May 31, 1998 5.00% of "gross billings," for
all such premises
June 1, 1998-May 31, 1999 5.00% of "gross billings," for
all such premises
</TABLE>
C. The appropriate monthly license fee set forth below for each premises of
each Subscriber which used commercial announcements in conjunction with
LICENSEE'S Background/Foreground Music Service, subject to the provisions of
Sub-Paragraph "2.C." hereof; provided, however, that should a subscriber insert
public address announcements concerning goods or services sold or offered to the
public at its premises, where no compensation (in money or any other form) is
paid to anyone, directly or indirectly, for such announcements, then the license
fee payable for said Subscriber shall be that specified in Sub-Paragraphs "A"
and "B" of this Paragraph "5", as appropriate:
<TABLE>
<CAPTION>
CONTRACT YEAR MONTHLY LICENSE FEE PER FLOOR
------------- -----------------------------
<S> <C>
June 1, 1994 - May 31, 1995 $5.14
June 1, 1995 - May 31, 1996 5.22
June 1, 1996 - May 31, 1997 5.33
June 1, 1997 - May 31, 1998 5.42
June 1, 1998 - May 31, 1999 5.50
</TABLE>
D. As used in this agreement, the term "gross billings" shall:
(i) include all sums (including the reasonable value of any merchandise,
service, or anything of value in lieu of or in addition to cash
consideration) due to LICENSEE from its Subscribers in connection with
(a) its provision of its Background/Foreground Music Service: and (b)
its lease (including conditional sale) of equipment to Subscribers
used in connection with such Background/Foreground Music Service;
(ii) exclude all sums due to LICENSEE from its Subscribers only for the
following: (a) bona fide sale (not including conditional sale) of
equipment; (b) the lease of equipment to Subscribers which is
extraneous and unrelated to such Background/Foreground Music Service;
(c) any sales, use or excise taxes which are collected from
Subscribers and actually paid to any Federal, State or local taxing
authority; (d) one-time installation charges billed not later than 90
days following completion of the subject installation work; (e) all ad
hoc charges (i.e., extraordinary or one-time charges) for service and
maintenance work actually performed on subscriber-leased or
subscriber-owned equipment provided that said ad hoc charges are
separately billed, not later than 90 days following the completion of
the subject service and maintenance work; (f) the license fees paid to
SOCIETY pursuant to this agreement; (g) the amount of any billings
(previously included as "gross billings") which are written off as
uncollectible, provided, however, that any amounts written off as
uncollectible that are later collected shall be reported as and when
collected; (h) any penalties, for late payments or finance or
interest charges imposed on Subscribers by LICENSEE.
E. For each premises for which a fee is payable under Sub-Paragraphs "A"
or "C" of this Paragraph "5", and for which the agreement between the
subscriber of LICENSEE and LICENSEE shall commence on any day from the first
through the fifteenth day of any month, or terminate on any day from the
sixteenth through the last day of any month, the fee shall be paid in full for
such month. For each such premises for which for such agreement shall commence
on any day from the sixteenth through the last day of any month, or terminate
on any day from the first through the fifteenth day of any month, no fee shall
be payable for such month.
<PAGE> 3
F. The minimum total due SOCIETY under this agreement shall be as follows:
<TABLE>
<CAPTION>
CONTRACT YEAR MINIMUM MONTHLY LICENSE FEE
------------- ----------------------------
<S> <C>
June 1, 1994 - May 31, 1995 $144
June 1, 1995 - May 31, 1996 148
June 1, 1996 - May 31, 1997 152
June 1, 1997 - May 31, 1998 156
June 1, 1998 - May 31, 1999 160
</TABLE>
If LICENSEE has not been engaged in the background/foreground music business for
six months, this provision shall not apply until LICENSEE shall have completed
six months in said business.
6. REPORTS AND PAYMENTS.
A. LICENSEE shall submit monthly reports to SOCIETY setting forth
separately the following:
(i) "Gross billings" to all Subscribers;
(ii) "Gross billings" to all Subscribers described in Paragraph "5.A.",
and the amounts excluded from "gross billings" for each item set
forth in Paragraph "5.D.ii.";
(iii) The number of all Subscribers described in Paragraph "5.A.";
(iv) "Gross billings" to all Subscribers described in Paragraph "5.B.",
and the amounts excluded from "gross billings" for each item set
forth in Paragraph "5.D.ii.";
(v) The number of all Subscribers described in Paragraph "5.B.";
(vi) "Gross billings" to all Subscribers described in Paragraph "5.C.",
and the amounts excluded from "gross billings" for each item set
forth in Paragraph "5.D.ii.";
(vii) The number of all subscribers described in Paragraph "5.C.";
(viii) The license fees payable to SOCIETY pursuant to the terms of this
agreement for the month covered by the report.
(ix) The names and addresses of all suppliers of music used in LICENSEE's
Background/Foreground Music Service.
B. LICENSEE shall submit said monthly reports on or before the last day of
each month, covering the period of the preceding calendar month.
C. SOCIETY shall supply forms for said monthly statements free of charge to
LICENSEE.
D. LICENSEE shall remit, with each monthly report, the full amount of
license fees shown due for the month covered by the report.
E. Accounting and payments shall be made on a billing basis. LICENSEE
shall have a right of reduction or rebate for all bad accounts which are
written off as uncollectible, provided, however, that any accounts that are
written off as uncollectible that are later collected in whole or in part shall
be reported and paid for as and when collected.
F. If any monthly payment required by Paragraph "5" or "6" is not received
by SOCIETY within fifteen days after the date it was due, LICENSEE agrees to pay
SOCIETY a finance charge of 1% per month from the date the payment was due.
7. AUDITS.
A. SOCIETY shall have the right by its duly authorized representatives, at
any time during customary business hours, to examine the books and records of
account of LICENSEE to such extent as may be necessary to verify any and all
statements rendered and accountings made hereunder, and under prior license
agreements with SOCIETY.
B. SOCIETY shall give LICENSEE not less than forty-five days' written
notice of its intention to make such an examination.
C. LICENSEE shall give SOCIETY's auditor full access to all relevant
records of LICENSEE, including names and addresses of, and any other pertinent
information concerning, the Subscribers of LICENSEE. SOCIETY agrees to instruct
its auditors not to make any list of names and addresses of Subscribers of
LICENSEE except insofar as necessary for the verification of LICENSEE'S
statements and accountings to SOCIETY, and to destroy any such list upon
completion of the audit or, if a deficiency be found as to which such data may
be relevant, upon the payment or other disposition of such audit deficiency.
D. In the event any such audit shows LICENSEE to have underpaid the license
fees due SOCIETY by 5% or more, LICENSEE shall pay a finance charge on the
license fees shown due of 1% per month from the date(s) the license fees should
have been paid pursuant to this agreement.
E. In the event any such audit shows LICENSEE to have underpaid the license
fees due SOCIETY by less than 5%, LICENSEE shall pay a finance charge on the
license fees shown due of 1% per month from the date SOCIETY demands payment of
such amount.
8. RIGHT TO RESTRICT. SOCIETY reserves the right, at any time and from time
to time, in good faith, to restrict the performance of compositions from musical
comedies, operas, operettas, and motion pictures, or any other composition
being excessively performed, only for the purpose of preventing harmful effect
upon such musical comedies, operas, operettas, motion pictures, or compositions
in respect of other interests under the copyrights thereof; provided, however,
that the maximum number of compositions which may be at any time thus restricted
shall not exceed three hundred and moreover that limited licenses will be
granted upon application entirely free of additional charge as to restricted
compositions, if and when the copyright owners thereof are unable to show
reasonable hazards to their major interests likely to result from such
performances; and provided further that SOCIETY shall not exercise such right to
restrict any such composition for the purpose of permitting the fixing or
regulating of fees for the recording or transcribing of such composition; and
provided further that in no case shall any charges, "free plugs" or other
consideration be requirements in respect of any permission granted to perform a
restricted composition; and provided further that in no event shall any
composition, after the initial radio or television broadcast thereof, be
restricted for the purpose of confining further performances thereof to a
particular program or licensee.
SOCIETY reserves the right, at any time and from time to time, in good
faith, to restrict the performance of any compositions, over and above the
number specified in the previous paragraph, only as to which any suit has been
brought or threatened on a claim that such composition infringes a composition
not contained in SOCIETY'S repertory or on a claim that SOCIETY does not have
the right to license the performing rights in such composition.
<PAGE> 4
9. BREACH AND DEFAULT. Upon any breach or default by LICENSEE of any terms
herein contained, SOCIETY may give LICENSEE thirty days notice in writing to
cure such breach or default, and in the event such breach or default has not
been cured within the said thirty days, SOCIETY may then forthwith terminate
this license.
10. INDEMNIFICATION. SOCIETY agrees to indemnify, save and hold LICENSEE and
the respective Subscribers of LICENSEE harmless, and defend LICENSEE and such
Subscribers from and against any claim, demand or suit that may be made or
brought against it with respect to renditions given on LICENSEE's programs
during the term hereof in accordance with this license, of the separate musical
compositions copyrighted or composed by members of SOCIETY and in SOCIETY'S
repertory.
In the event of the service upon LICENSEE or any such Subscriber of any
notice, process, paper or pleading, under which a claim, demand or action is
made or begun against LICENSEE or any such Subscriber on account of any such
matter as is hereinabove referred to, LICENSEE shall promptly give SOCIETY
written notice thereof, and SOCIETY at its own expense shall have sole charge of
the defense of any such action or proceeding. LICENSEE, however, shall have the
right to engage counsel of its own, at its own expense, who may participate in
the defense of any such action or proceeding and with whom counsel for SOCIETY
shall cooperate. LICENSEE shall cooperate with SOCIETY in every way in the
defense of any such action or proceeding, and in any appeals that may be taken
from any judgments or orders entered therein, and shall execute all pleadings,
bonds or other instruments, but at the sole expense of SOCIETY, that may be
required in order properly to defend and resist any such action or proceeding,
and prosecute any appeals taken therein.
In the event of the service upon LICENSEE of any notice, process, paper or
pleading under which a claim, demand or action is made or begun against LICENSEE
on account of the rendition of any musical composition contained in SOCIETY's
repertory but not copyrighted or composed by members of SOCIETY, SOCIETY agrees
at the request of LICENSEE to cooperate with and assist LICENSEE in the defense
of any such action or proceeding, and in any appeals that LICENSEE may elect to
take from any judgments or orders therein.
11. NOTICES. All notices required or permitted to be given by either of the
parties to the other hereunder shall be duly and properly given if mailed to
such other party by registered or certified United States mail, addressed to
such other party at its main office for the transaction of business.
12. LIMITED RIGHT OF ASSIGNMENT. If LICENSEE shall cease to operate the
Background/Foreground Music Service referred to in this agreement and if
LICENSEE shall have discharged all the obligations of LICENSEE to SOCIETY under
this agreement, then LICENSEE shall have the right to assign this agreement for
the balance of its term upon the express condition that such assignee shall
accept such assignment and shall agree to assume and to carry out and perform
all the terms and conditions of this agreement on the part of the LICENSEE to be
kept and performed for the balance of the term of this agreement. Upon such
acceptance and assumption LICENSEE shall be relieved of any future obligations
hereunder. Except as hereinabove expressly provided, LICENSEE shall have no
right to transfer or assign this agreement, the rights granted hereunder being
personal to LICENSEE.
13. LIMITED RIGHT OF TERMINATION. If LICENSEE shall cease to operate the
Background/Foreground Music Service referred to in this agreement and if
LICENSEE shall have discharged all the obligations of LICENSEE to SOCIETY under
this agreement, then LICENSEE may terminate the license granted by this
agreement upon thirty days prior written notice to SOCIETY, but no such
termination shall relieve LICENSEE of any obligations hereunder as to
performances rendered, acts done and obligations incurred prior to the effective
date of such termination.
IN WITNESS WHEREOF this agreement has been duly executed by SOCIETY and
LICENSEE, this 4th day of April , 1995.
AMERICAN SOCIETY OF COMPOSERS, /s/ ROBERT MANNING
AUTHORS AND PUBLISHERS ---------------------------
LICENSEE
By /s/ KEN HAYWARD By Robert M. Manning
------------------------- --------------------------
4/24/95
Executive Vice President
[SEAL] --------------------------
Title
<PAGE> 1
EXHIBIT 10.55
LICENSE AGREEMENT
AGREEMENT, made at New York, N.Y. on August 7, 1995, between BROADCAST
MUSIC, INC. (hereinafter called BMI), a New York corporation with principal
offices at 320 West 57th Street, New York, N.Y. 10019 and DMX, Inc. as successor
in interest to International Cablecasting Technologies, Inc. a Delaware
corporation doing business as Digital Music Express (hereinafter called
LICENSEE), with principal offices at 11400 West Olympic Boulevard, Suite 1100,
Beverly Hills, California 90064-7507 (the "Agreement").
IT IS AGREED AS FOLLOWS:
1. As used in this Agreement, the following terms shall have the following
respective meanings:
(a) "Term" shall mean the period beginning October 1, 1994 and ending
September 30, 1999. "Year" shall mean calendar year.
(b) "Distribution System" shall mean any digital cable audio
distribution system; microwave multi-point distribution system; pay system
including pay cable, "over the air" pay (i.e. DBS), "basic" cable, "basic" DBS
or any other pay cable audio system. Distribution System shall not include the
Internet.
(c) "Programming Service" shall mean an audio music service produced,
packaged, distributed or supplied by LICENSEE currently known as "Digital Music
Express" or "DMX" delivered via
1
<PAGE> 2
one or more Distribution Systems that transmit such service.
(d) "LICENSEE's Carriers" shall mean each and every Distribution System
which, at the time of the transmission in question, transmits the Programming
Service(s) supplied by LICENSEE pursuant to a contractual relationship with
LICENSEE.
(e) "Territory" shall mean the United States, its territories,
commonwealths and possessions.
2. (a) BMI hereby grants to LICENSEE, for the Term of this Agreement, a
through to the non-commercial subscriber non-exclusive license to use and
perform in and as part of the Programming Service wherever distributed or
supplied by LICENSEE for transmission by LICENSEE and by LICENSEE's Carriers
within the Territory, all musical works, the rights to grant public performance
licenses of which BMI may during the Term hereof control. This license shall not
include dramatic rights or the right to perform dramatico-musical works in whole
or in substantial part. In no event shall this license include transmission by
LICENSEE or by LICENSEE's Carriers to any commercial premises where LICENSEE's
Programming Service is used as a commercial music service (as that term is
currently understood in the industry). Such performances of BMI music shall be
subject to separate BMI licenses.
(b) This grant of rights does not include any public performance or
recording and/or distribution (i.e. mechanical) rights to the transmissions of
the Programming Service which are downloaded onto computers by LICENSEE's
Carriers, subscribers,
2
<PAGE> 3
listeners or any third party. In the event LICENSEE contemplates any such
distribution, LICENSEE shall notify BMI and the parties shall negotiate the
appropriate permissions and performing rights fees.
(c) This grant of rights includes the right, if authorized by LICENSEE
to use the Programming Service in direct connection with text channels,
provided, however, that the Programming Service shall be unaltered and unedited,
and that any of LICENSEE's Carriers so using the Programming Service shall be
limited to five channels on its system.
(d) Nothing herein shall be construed as the grant by BMI of any
license in connection with any transmission which is not part of a Programming
Service supplied by LICENSEE and distributed via a Distribution System by
LICENSEE or one of LICENSEE's Carriers; and, except as otherwise expressly
provided herein, nothing herein shall be construed as authorizing LICENSEE to
grant to others any right to reproduce or perform publicly by any means, method
or process whatsoever, any of the musical compositions licensed hereunder or as
authorizing any party other than LICENSEE or LICENSEE Carriers to publicly
perform the musical works licensed hereunder.
(e) The performances licensed hereunder may originate at any place,
whether or not such place is licensed to publicly perform the musical works
licensed hereunder.
3. (a) In consideration of the license granted herein, LICENSEE agrees to
pay to BMI annual license fees for the Term, as
3
<PAGE> 4
follows:
<TABLE>
<CAPTION>
Percentage of Gross Revenues
received by LICENSEE for
Contract Year the Programming Service
------------- ----------------------------
<S> <C>
Oct. 1, 1994 - Sept. 30, 1995 Three and three-quarters
percent (3.75%)
Oct. 1, 1995 - Sept. 30, 1996 Three and three-quarters
percent (3.75%)
Oct. 1, 1996 - Sept. 30, 1997 Four percent (4%)
Oct. 1, 1997 - Sept. 30, 1998 Four percent (4%)
Oct. 1, 1998 - Sept. 30, 1999 Four percent (4%)
</TABLE>
(b) For purposes of Paragraph 3(a) "gross revenues received by
LICENSEE" shall mean all monies derived from the operation of LICENSEE's
Programming Service and shall be comprised of the following: (1) monies received
by LICENSEE from LICENSEE's Carriers and directly from Subscribers for
LICENSEE's Programming Service; (2) LICENSEE's advertising revenues (as billed),
or other monies received from sponsors if any (less advertising agency
commissions not to exceed 15% actually incurred to a recognized advertising
agency not owned or controlled by LICENSEE); (3) monies received for the
provision of time on the Programming Service to any third party; (4) monies
received from sale of time to providers of paid programming such as
infomercials; (5) where merchandise or any thing or service of value is received
by LICENSEE in lieu of cash consideration for the use of LICENSEE's Programming
Service (i.e. "trade and barter" or "tradeouts"), the fair market value thereof
or LICENSEE's prevailing published rate, whichever is less; (6) monies or other
consideration received by LICENSEE from
4
<PAGE> 5
LICENSEE's Carriers (but not including monies received by LICENSEE's Carriers
from others and not accounted for by LICENSEE's Carriers to LICENSEE) for the
provision of hardware by anyone and used in connection with the Programming
Service; (7) monies or other consideration received for any references to or
inclusion of any product or service on the Programming Service; (8) bad debts
recovered regarding (l)-(7) above. Gross revenues shall include such payments
as set forth above to which LICENSEE is entitled but which are paid to a
parent, subsidiary, division, or affiliate of LICENSEE, in lieu of payment to
LICENSEE but not including payments to LICENSEE's Carriers for the Programming
Service. LICENSEE shall be allowed a deduction from Gross Revenues as defined
above for affiliate revenue returned during the reporting period and for bad
debts actually written off during reporting period and which are related to
billings previously reported to BMI.
(c) An estimated annual fee shall be payable in twelve (12) monthly
installments, in advance not later than the first day of each month. For the
first contract quarter, LICENSEE shall base its estimated fee on its gross
revenues from the prior quarter year of operation. For the subsequent quarters
of this Agreement, LICENSEE shall use as an estimated fee the prior quarter's
actual fee as reported and/or as audited. The monthly fee shall be one-third of
the quarterly fee.
4. After each calendar year hereof, LICENSEE shall submit to BMI on or
before April 30, (e.g. after Dec. 31, 1995, on or before April 30, 1996) a
certification by an officer of LICENSEE as to
5
<PAGE> 6
gross revenues received by LICENSEE as defined in Paragraph 3 (b) hereof for
said year. If said statement reflects that LICENSEE's total license fee for said
year has been underpaid, LICENSEE agrees to pay BMI, at the time the statement
is rendered, the difference between the fee due and the estimated fee actually
paid. If said statement reflects that the total fee for said year has been
overpaid, BMI agrees to credit the excess to the account of LICENSEE, and if
such excess shall occur in the last year of the Term hereof, BMI agrees to
return same promptly.
5. (a) BMI shall have the right to require such data or information as may
be necessary in order to ascertain the license fee hereunder from LICENSEE.
(b) BMI shall have the right by its authorized representatives, at any
time during customary business hours and upon thirty (30) days advance written
notice, to examine the books and records of account of LICENSEE as necessary to
verify any and all statements rendered and accountings made hereunder. BMI may
only conduct such an examination once in each calendar year, and such an
examination shall be limited to the prior four year period's statements and
accountings. BMI shall consider all data and information coming to its attention
as the result of any such examination of books and records as confidential.
(c) In the event BMI conducts an audit and such audit reveals that
LICENSEE underpaid license fees to BMI to the extent of ten percent (10%) or
more, then LICENSEE shall pay a late payment charge on the additional license
fees due as a result of
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<PAGE> 7
the audit(s) of one and one half percent (1 1/2%) per month, from the date(s)
the license fees should have been paid pursuant to this agreement.
6. BMI may impose a late payment charge of one and one half percent
(1 1/2%) per month from the date payment was due on any payment that is
received by BMI more than thirty (30) days after the due date.
7. (a) LICENSEE, as a matter of course, shall cause logs to be prepared
with respect to all programming produced by LICENSEE for distribution to
LICENSEE's Carriers and shall request logs from its licensors or outside
producers with respect to all programming produced by others and distributed by
LICENSEE as part of a Programming Service to its Carriers. Such logs shall list
the title, composer, author, artist, record label, length, type of use (i.e.,
theme and background or feature performance) and manner of performance (i.e.
instrumental or vocal) (or any other methodology agreed to by BMI and LICENSEE)
of all musical performances included in the Programming Service. LICENSEE shall
deliver to BMI all logs in its possession covering programs originally aired by
LICENSEE during each quarter on or before the thirtieth day following the end of
such quarter.
In addition, LICENSEE shall, at the time such logs are due, deliver to BMI
the following:
(1) program guides indicating the scheduled performances of each
program on each Programming Service channel distributed or supplied by LICENSEE
during such quarter to LICENSEE's Carriers, to
7
<PAGE> 8
the extent such program guides are prepared by or for LICENSEE,
(2) a list of all LICENSEE's Carriers (which list may be in the form of
additions to and deletions from the last such full list supplied to BMI) as of
the end of such quarter.
(b) In place of the logs required by Subparagraph (a) of this
Agreement, BMI may, if it so elects, at any time during the Term of this
Agreement, require that the logs be submitted to BMI electronically or in
computer readable form. In such case:
(1) BMI will provide LICENSEE sixty (60) days' written notice of its
election;
(2) BMI will provide either (a) appropriate specifications for computer use
and transmission or (b) computer software which will enable LICENSEE to enter
the data required by Subparagraph (a) on PC diskettes or magnetic tapes; and
(3) BMI will, at its option, either provide LICENSEE with PC diskettes free
of charge for the entry of the required data or credit LICENSEE for the cost of
the diskettes.
(4) If BMI exercises its election hereunder and LICENSEE does not report in
accordance with such requirements, LICENSEE shall pay to BMI a data entry charge
of $6.00 per page for each month that LICENSEE's reports are not made
electronically in computer readable form as provided herein.
(c) Notwithstanding anything to the contrary in this Paragraph, BMI and
LICENSEE will discuss and negotiate in good faith procedures for LICENSEE to
report its music use on a sampling basis.
8
<PAGE> 9
8. BMI shall indemnify, save harmless and defend LICENSEE, each of
LICENSEE's Carriers and their respective officers and employees from and against
any and all claims, demands or suits that may be made or brought against them or
any of them with respect to the performance of any material licensed under this
Agreement during the Term. Such indemnity shall be limited to works which are
licensed by BMI at the time of LICENSEE's performance. BMI will, upon reasonable
written request, advise LICENSEE whether particular musical works are available
for performance as part of BMI's repertory. LICENSEE shall provide the title and
the writer/composer of each musical composition requested to be identified.
LICENSEE agrees to give BMI prompt notice of any such claim, demand, or suit, to
deliver to BMI any papers pertaining thereto, and to cooperate with BMI with
respect thereto, and BMI shall have full charge of the defense of any such
claim, demand or suit, it being understood such notice shall be in a timely
fashion and not impede in any way BMI's obligations under this Paragraph.
9. Upon any breach or default of the terms and conditions of this
Agreement, BMI shall have the right to cancel this Agreement, but any such
cancellation shall become effective only if such breach or default continues
thirty (30) days after LICENSEE's receipt of written notice thereof. The right
to cancel shall be in addition to any and all other remedies which BMI may have.
No waiver by BMI of full performance of this Agreement by LICENSEE in any one or
more instances shall be a waiver of the right to require
9
<PAGE> 10
full and complete performance or this Agreement thereafter or of the right to
cancel this Agreement in accordance with the terms of this Paragraph.
10. All disputes of any kind, nature or description arising in connection
with the terms and conditions of this Agreement not cognizable by the court
under Article XIV of the BMI consent decree (but including, matters arising in
connection with Paragraph 10 hereof) shall be submitted to arbitration in the
City, County, and State of New York under the then prevailing rules of the
American Arbitration Association by an arbitrator or arbitrators to be selected
as follows: Each of the parties shall, by written notice to the other, have the
right to appoint one arbitrator. If, within ten (10) days following the giving
of such notice by one party the other shall not, by written notice, appoint
another arbitrator, the first arbitrator shall be the sole arbitrator. If two
arbitrators are so appointed, they shall appoint a third arbitrator. If ten (10)
days elapse after the appointment of the second arbitrator and the two
arbitrators are unable to agree upon the third arbitrator, then either party
may, in writing, request the American Arbitration Association to appoint the
third arbitrator. The award made in the arbitration shall be binding and
conclusive on the parties and judgment may be, but need not be, entered in any
court having jurisdiction. Such award shall include the fixing of costs,
expenses, and attorney's fees of arbitration.
11. In the event that BMI, at any time during the Term hereof, shall, for
the licensing of a music user of the same class
10
<PAGE> 11
and category as that of LICENSEE, issue a license granting rights on terms
similar to those in this Agreement on a more favorable basis, BMI shall,
retroactive to the time such other music user was accorded such more favorable
terms offer to LICENSEE an agreement with comparable terms. Notwithstanding
anything to the contrary herein, if BMI issues a voluntary license (not the
result of court proceedings or arbitration) for "basic" cable service or "basic"
DBS service on a more favorable basis, BMI shall offer such terms to LICENSEE
only as to LICENSEE'S comparable "basic" cable or "basic" DBS service.
12. BMI reserves the right at its discretion to withdraw from the license
granted hereunder any musical work as to which legal action has been instituted
or a claim made that BMI does not have the right to license the performing
rights in such work or that such work infringes another composition.
13. All notices given hereunder shall be duly and properly given if mailed
by regular first-class U.S. mail to BMI's or LICENSEE's as the case may be,
address set forth above or any other address which the parties hereto may from
time to time designate in writing for such purpose.
14. This Agreement shall enure to the benefit of and shall be binding upon
the parties hereto and their respective successors and assigns but no assignment
shall relieve the parties hereto of their respective obligations hereunder.
15. This Agreement constitutes the entire understanding between the parties
with respect to the subject matter hereof
11
<PAGE> 12
This Agreement cannot be waived or added to or modified orally and no waiver,
addition or modification shall be valid unless in writing and signed by the
parties. This Agreement, its validity, construction and effect, shall be
governed by the laws of the State of New York. The fact that any provisions
herein are found by a court of competent jurisdiction to be void or
unenforceable shall not affect the validity or enforceability of any other
provisions.
BROADCAST MUSIC, INC. DMX
By: /s/ John M. Shaker By: /s/ ROBERT M. MANNING
----------------------- --------------------------
(Signature) (Signature)
/s/ John Shaker Robert M. Manning
----------------------- --------------------------
(Print Name of Signer) (Print Name of Signer)
S.V.P. Licensing Executive Vice President
----------------------- --------------------------
(Title of Signer) (Title of Signer)
12
<PAGE> 1
EXHIBIT 21
SUBSIDIARIES OF TCI MUSIC, INC.
DMX Inc., TCI Music Acquisition Sub, Inc. and TCI Para Merger Sub, Inc. are
wholly owned subsidiaries of TCI Music, Inc. In connection with the Merger, TCI
Music Acquisition Sub, Inc. will merge with and into The Box Worldwide, Inc.,
with The Box Worldwide, Inc. as the surviving corporation. Subsidiaries of DMX
Inc. are 450714 B.C. Ltd., TEMPO Sound, Inc. and DMX-Europe N.V. DMX Europe (UK)
Limited is a subsidiary of DMX-Europe N.V.
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We consent to the reference to our firm under the caption "Experts" included in
the Proxy Statement of The Box Worldwide, Inc. (formerly Video Jukebox Network,
Inc.) that is made part of the Registration Statement (Form S-4) and Prospectus
of TCI Music, Inc. for the registration of 6,300,000 shares of its common stock
and 2,100,000 shares of its Series A Convertible Preferred Stock and to the
incorporation by reference therein of our report dated March 7, 1997, with
respect to the consolidated financial statements of The Box Worldwide, Inc.
included in its Annual Report (Form 10-KSB) for the year ended December 31,
1996, filed with the Securities and Exchange Commission.
/s/ Ernst & Young LLP
Miami, Florida
November 10, 1997
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
TCI Music, Inc.
We consent to the use of our report dated October 24, 1997 with respect to the
consolidated balance sheet of TCI Music, Inc. (a subsidiary of
Tele-Communications, Inc.) as of June 30, 1997 included herein and to the
reference to our firm under the heading "Experts" in the Prospectus.
/s/ KPMG Peat Marwick LLP
KPMG Peat Marwick LLP
Los Angeles, California
November 10, 1997
<PAGE> 1
EXHIBIT 23.3
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
DMX Inc.
We consent to the incorporation by reference in the registration statement on
Form S-4 and related Prospectus of TCI Music, Inc. (a subsidiary of
Tele-Communications, Inc.) of our report dated September 26, 1997, with respect
to the consolidated balance sheets of DMX Inc. and subsidiaries as of June 30,
1997 and September 30, 1996, and the related consolidated statements of
operations, stockholders' deficit and cash flows for the nine months ended June
30, 1997 and the years ended September 30, 1996 and 1995, which report appears
in TCI Music, Inc.'s Transition Report on Form 10-K dated October 9, 1997.
We also consent to the reference to our Firm under the heading "Experts" in the
Prospectus.
/s/ KPMG Peat Marwick LLP
KPMG Peat Marwick LLP
Los Angeles, California
November 10, 1997
<PAGE> 1
EXHIBIT 23.4
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Paradigm Music Entertainment Company:
We consent to the inclusion in the Proxy Statement/Prospectus of The Box
Worldwide, Inc. and in the Registration Statement on Form S-4 of TCI Music, Inc.
of our report, dated February 11, 1997 (except for Note J as to which the date
is February 14, 1997), relating to the balance sheet of Paradigm Music
Entertainment Company as of December 31, 1996, and the related statements of
operations, stockholders' equity, and cash flows for the year ended December 31,
1996 and for the period November 14, 1995 (date of inception) through December
31, 1995, and to the reference to our firm under the heading "Experts" in the
Proxy Statement/Prospectus included within the Registration Statement.
/s/ Janover Rubinroit, LLC
Janover Rubinroit, LLC
Garden City, New York
November 10, 1997
<PAGE> 1
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THE BOX WORLDWIDE, INC.
1221 COLLINS AVENUE
MIAMI BEACH, FLORIDA 33139
PROXY FOR SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD DECEMBER 16, 1997
The undersigned hereby appoints Tamara Walters and E. Paul Sartain, or
either of them, proxies and attorneys-in-fact for the undersigned, each with
full power of substitution, and hereby authorizes them to vote at the Special
Meeting of Shareholders of The Box Worldwide, Inc. (the "Company") to be held at
the Miami Beach Ocean Resort Hotel, located at 3025 Collins Avenue, Miami Beach,
Florida 33140 on December 16, 1997, starting at 10 a.m., local time, and at all
adjournments or postponements thereof, all the shares of common stock, par value
$.001 per share, and 6% convertible redeemable preferred stock, par value $.15
per share, of the Company standing in the name of the undersigned or which the
undersigned may be entitled to vote as follows:
1. Approval of the Agreement and Plan of Merger dated as of August 12, 1997,
described in the Proxy Statement/Prospectus and as set forth in Appendix I
thereto;
[ ] FOR [ ] AGAINST [ ] ABSTAIN
2. Approval of an amendment to the Fourth Amended and Restated Articles of
Incorporation of the Company, as amended, to increase the number of
authorized shares of the common stock, par value $.001 per share, of the
Company from 40,000,000 shares to 100,000,000 shares;
[ ] FOR [ ] AGAINST [ ] ABSTAIN
3. In their discretion, the proxies are authorized to vote on such other
business as may properly come before the Special Meeting or any adjournments
or postponements thereof;
hereby revoking any proxy or proxies heretofore given by the undersigned.
CONTINUED AND TO BE SIGNED ON REVERSE SIDE
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<PAGE> 2
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THIS PROXY IS BEING SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF THE COMPANY
AND MAY BE REVOKED PRIOR TO ITS EXERCISE. THIS PROXY, WHEN PROPERLY EXECUTED,
WILL BE VOTED AS DIRECTED HEREIN BY THE UNDERSIGNED. IF NO DIRECTION IS MADE, IT
WILL BE VOTED FOR PROPOSAL 1 AND PROPOSAL 2 AND IN THE PROXIES' DISCRETION ON
SUCH OTHER BUSINESS AS MAY PROPERLY COME BEFORE THE SPECIAL MEETING.
------------------------------
(Signature)
By:
------------------------------
(Signature)
Your signature should appear
exactly as your name appears
in the space at the left. For
joint accounts, all owners
should sign. When signing in a
fiduciary or representative
capacity, please give your
full title as such.
Date:
------------------------------, 1997
PLEASE SIGN AND RETURN THIS
PROXY CARD TODAY USING THE
ENCLOSED POSTAGE PAID
ENVELOPE.
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