<PAGE> 1
As Filed with the Securities and Exchange Commission on August 12, 1998
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________________ to ____________________
Commission File No. 0-22815
TCI MUSIC, INC.
------------------------------------------------------
(Exact name of Registrant as specified in its charter)
State of Delaware 84-1380293
------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
67 Irving Place North, 4th Floor
New York, NY 10003
- ---------------------------------------- ----------
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (212) 387-7700
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
The number of shares outstanding of the Registrant's common stock as of
July 31, 1998 was 18,481,997.
<PAGE> 2
PART I - FINANCIAL STATEMENTS
TCI MUSIC, INC. AND SUBSIDIARIES
(A Subsidiary of Tele-Communications, Inc.)
Consolidated Balance Sheets
(Unaudited)
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
--------------- ------------------
Assets amounts in thousands
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 3,759 7,915
Trade receivables:
Related party (note 5) 2,495 2,530
Other 10,409 6,275
Allowance for doubtful accounts (814) (563)
--------------- ------------------
12,090 8,242
-------------- ------------------
Prepaid expenses and other 4,621 2,993
Equipment inventory 6,929 6,713
-------------- ------------------
Total current assets 27,399 25,863
-------------- ------------------
Investment in affiliates,
accounted for under the equity method 1,033 1,201
Property and equipment:
Furniture and equipment 11,276 7,024
Leasehold improvements 565 543
Studio equipment 7,187 5,599
Other equipment 1,845 1,435
-------------- ------------------
20,873 14,601
Less accumulated depreciation (3,408) (1,113)
-------------- ------------------
17,465 13,488
-------------- ------------------
Intangible assets, at cost, net of amortization (note 6) 159,157 153,265
Other assets, at cost, net of amortization 829 910
-------------- ------------------
$ 205,883 194,727
================ ==================
</TABLE>
(continued)
I-1
<PAGE> 3
TCI MUSIC, INC. AND SUBSIDIARIES
(A Subsidiary of Tele-Communications, Inc.)
Consolidated Balance Sheets
(Unaudited)
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
-------------- ------------------
Liabilities and Stockholders' Equity amounts in thousands
<S> <C> <C>
Current liabilities:
Accounts payable $ 3,532 4,390
Accrued liabilities 12,611 10,561
Accrued loss on disposal - DMX-Europe N.V.
(notes 4 and 9) 1,469 2,827
Deferred revenue 29 186
Other notes payable (note 7) 655 3,354
Income taxes payable, related party (note 5) 156 1,762
-------------- ------------------
18,452 23,080
-------------- ------------------
Negative investment in DMX-Europe N.V.
(notes 4 and 9) 9,058 9,058
-------------- ------------------
Total current liabilities 27,510 32,138
-------------- ------------------
Debt:
Related party, including accrued interest (note 5) 956 4,359
Other (note 7) 77,736 53,236
Deferred income taxes 2,561 2,811
Other liabilities 2,599 2,357
-------------- ------------------
Total liabilities 111,362 94,901
-------------- ------------------
TCI Music, Inc. redeemable convertible preferred
stock, $.01 par value; Authorized 5,000,000 shares;
Issued 1,742,064 shares in 1998 and 1,742,484
shares in 1997; $35,642,000 and $35,490,000
liquidation preference and redemption value in
1998 and 1997, respectively
36,327 35,588
-------------- ------------------
Stockholders' equity (note 8):
TCI Music, Inc. common stock:
Series A Common Stock, $.01 par value;
Authorized 295,000,000 shares;
Issued 18,481,997 shares in 1998 and
18,098,983 shares in 1997 185 181
Series B Common Stock, $.01 par value;
Authorized 200,000,000 shares;
Issued 62,500,000 shares 625 625
Paid-in capital 68,310 63,899
Accumulated deficit (10,939) (465)
Accumulated other comprehensive income (loss) 13 (2)
-------------- ------------------
Total stockholders' equity 58,194 64,238
-------------- ------------------
Commitments and contingencies (note 9)
$ 205,883 194,727
============== ==================
</TABLE>
See accompanying notes to consolidated financial statements
I-2
<PAGE> 4
TCI MUSIC, INC. AND SUBSIDIARIES
(A Subsidiary of Tele-Communications, Inc.)
Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
---------------------------------- --------------------------------
1998 1997 1998 1997
---------------- ----------------- --------------- ----------------
TCI Music DMX TCI Music DMX
---------------- ----------------- --------------- ----------------
(note 1) (note 1) (note 1) (note 1)
amounts in thousands, except per share amounts
<S> <C> <C> <C> <C>
Subscriber fee revenue:
Related party (notes 3 and 5) $ 8,271 | 2,135 16,080 | 4,517
Other 5,057 | 2,693 9,170 | 4,909
---------- | ---------- ----------- | -----------
Total subscriber revenue 13,328 | 4,828 25,250 | 9,426
| |
Viewer revenue, net 2,727 | -- 5,165 | --
Advertising revenue, net 3,533 | -- 6,307 | --
Other revenue, net 2,031 | 261 3,546 | 487
Revenue - DMX-Europe N.V. (note 4) -- | 773 -- | 1,527
---------- | ----------- ------------ | -----------
Total revenue 21,619 | 5,862 40,268 | 11,440
---------- | ----------- ------------ | -----------
| |
Operating costs and expenses: | |
Operating expenses: | |
Related party (note 5) 2,028 | 1,149 4,026 | 2,279
Other 3,567 | 1,829 7,049 | 3,382
DMX-Europe N.V. (note 4) -- | 2,803 -- | 5,412
Selling, general and administrative 14,926 | 4,267 26,448 | 7,398
Stock compensation 199 | -- 241 | --
Depreciation and amortization 5,556 | 596 10,807 | 1,198
Writedown of inventories 1,102 | -- 1,102 | --
Loss on disposal of DMX-Europe N.V. (note 4) -- | 1,738 -- | 1,738
---------- | ----------- ------------ | -----------
Total operating costs 27,378 | 12,382 49,673 | 21,407
---------- | ----------- ------------ | -----------
| |
Operating loss (5,759) | (6,520) (9,405) | (9,967)
| |
Other income (expense): | |
Interest expense: | |
Related party (note 5) (22) | (105) (109) | (167)
DMX-Europe N.V. (note 4) -- | (75) -- | (130)
Other, net (1,287) | (12) (2,170) | (22)
---------- | ----------- ------------ | -----------
(1,309) | (192) (2,279) | (319)
| |
Share of (losses) earnings of affiliates (105) | 32 (243) | 109
Other, net 29 | (197) (15) | (198)
---------- | ----------- ------------ | -----------
Loss before income taxes (7,144) | (6,877) (11,942) | (10,375)
| |
Income tax benefit 1,096 | -- 1,468 | --
---------- | ----------- ------------ | -----------
| |
Net loss $ (6,048) | (6,877) (10,474) | (10,375)
=========== | =========== ============ | ===========
| |
Basic and diluted loss per common share $ (.08) | (.12) (.13) | (.17)
=========== | =========== ============ | ===========
| |
Weighted average number of common shares 80,981 | 59,587 80,981 | 59,587
=========== | =========== ============ | ===========
| |
Comprehensive loss $ (5,995) | (7,251) (10,459) | (10,328)
=========== | =========== ============ | ===========
</TABLE>
See accompanying notes to consolidated financial statements
I-3
<PAGE> 5
TCI MUSIC, INC. AND SUBSIDIARIES
(A Subsidiary of Tele-Communications, Inc.)
Consolidated Statement of Stockholders' Equity
Six Months ended June 30, 1998
(Unaudited)
<TABLE>
<CAPTION>
Accumulated
Common Stock other
--------------------- Paid in Accumulated comprehensive
Series A Series B capital deficit losses Total
-------- -------- -------- -------- ------- ---------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1998 $ 181 625 63,899 (465) (2) 64,238
Accretion of put option -- -- 2,425 -- -- 2,425
(note 3)
Issuance of common stock 4 -- 2,734 -- -- 2,738
Accretion of redeemable
convertible preferred stock -- -- (748) -- -- (748)
Foreign currency translation
adjustment -- -- -- -- 15 15
Net loss -- -- -- (10,474) -- (10,474)
-------- -------- -------- -------- ------- ---------
Balance at June 30, 1998 $ 185 625 68,310 (10,939) 13 58,194
======== ======== ======== ======== ======= =========
</TABLE>
See accompanying notes to consolidated financial statements
I-4
<PAGE> 6
TCI MUSIC, INC. AND SUBSIDIARIES
(A Subsidiary of Tele-Communications, Inc.)
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
TCI Music DMX
(note 1) (note 1)
---------------------- ---------------------
Six months Six months
ended ended
June 30, 1998 June 30, 1997
---------------------- ---------------------
amounts in thousands
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (10,474) | (10,375)
Adjustments to reconcile net loss to net cash used in operating |
activities: |
Depreciation and amortization 10,807 | 1,627
Share of earnings of affiliates 243 | 41
Writedown of inventories 1,102 | --
Loss on disposal of DMX-Europe N.V. -- | 1,738
Loss on disposal of property and equipment -- | 46
Stock compensation 241 | --
Provision for doubtful accounts 250 | 469
Deferred income tax expense 138 | --
Changes in operating assets and liabilities, net of |
acquisitions: |
Trade receivables (3,377) | (1,384)
Prepaid expenses and other current assets (2,062) | (160)
Other assets 112 | (28)
Deferred revenue (186) | 32
Accounts payable, accrued |
liabilities and other (1,182) | 6,206
---------------------- | ---------------------
|
Net cash used in operating activities (4,388) | (1,788)
---------------------- | ---------------------
|
Cash flows from investing activities: |
Cash paid for acquisitions (10,367) | --
Capital expended for property and equipment, net (5,272) | (754)
Investments in affiliates (75) | --
---------------------- | ---------------------
|
Net cash used in investing activities (15,714) | (754)
---------------------- | ---------------------
|
Cash flows from financing activities: |
Borrowings from related party -- | 2,517
Repayment of principal and interest to related party (3,402) | --
Decrease in income taxes payable, related party (1,606) | --
Borrowing on note payable to bank 24,500 | --
Repayment of note payable (3,535) | --
Repayments of principal portion of capital lease |
obligation (11) | (128)
---------------------- | ---------------------
|
Net cash provided by financing activities 15,946 | 2,389
---------------------- | ---------------------
|
Net decrease in cash and cash equivalents (4,156) | (153)
|
Cash and cash equivalents, beginning of period 7,915 | 986
---------------------- | ---------------------
|
Cash and cash equivalents, end of period $ 3,759 | 833
====================== | =====================
</TABLE>
See accompanying notes to consolidated financial statements
I-5
<PAGE> 7
TCI MUSIC, INC. AND SUBSIDIARIES
(A Subsidiary of Tele-Communications, Inc.)
Notes to Consolidated Financial Statements
June 30, 1998
(Unaudited)
(1) Organization
TCI Music, Inc. ("TCI Music" or the "Company") was incorporated on
January 21, 1997, and on January 24, 1997 one share of TCI Music Series
B common stock, $.01 par value per share ("TCI Music Series B Common
Stock"), was issued to Tele-Communications, Inc. ("TCI") for a capital
contribution of $1. On July 11, 1997, DMX Inc. ("DMX") and TCI Music
consummated a merger pursuant to an Agreement and Plan of Merger, dated
February 6, 1997, as amended by Amendment One to Merger Agreement dated
May 29, 1997 (the "DMX Merger Agreement"), among DMX, TCI, TCI Music,
and TCI Merger Sub ("Merger Sub"), a wholly-owned subsidiary of TCI
Music, whereby Merger Sub was merged with and into DMX (the "DMX
Merger"), with DMX as the surviving corporation, and TCI Music became
the successor registrant to DMX. The DMX Merger was deemed effective
July 1, 1997 for accounting purposes. See note 3.
TCI Music has three classes of stock outstanding at June 30, 1998, the
TCI Music Series A Convertible Preferred Stock, $.01 par value per
share ("TCI Music Preferred Stock"), TCI Music Series A Common Stock,
$.01 par value per share ("TCI Music Series A Common Stock") and TCI
Music Series B Common Stock, $.01 par value per share. The TCI Music
Series A Common Stock, the TCI Music Series B Common Stock and the TCI
Music Preferred Stock are collectively referred to as the "TCI Music
Stock". TCI beneficially owns approximately 4.8% of the outstanding TCI
Music Preferred Stock, 36.9% 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 represents approximately
80.7% of the outstanding shares of TCI Music Stock, representing 97.4%
of the voting power of the outstanding shares of TCI Music Stock, in
each case assuming conversion of the TCI Music Preferred Stock.
Basis of Presentation
In the accompanying financial statements and in the following text,
references are made to DMX and TCI Music. The consolidated statements
of operations for the six months and three months ended June 30, 1997
reflect the consolidated results of operations of DMX and is referred
to as "DMX" (the predecessors' operations). The financial statements as
of December 31, 1997 and for the six months and three months ended June
30, 1998 reflect the consolidated results of operations and financial
condition of TCI Music. All significant intercompany accounts and
transactions have been eliminated for the periods presented. As a
result of the DMX Merger, the consolidated financial information for
the periods after the DMX Merger are presented on a different cost
basis than that for the periods before the DMX Merger and, therefore,
are not comparable.
The accompanying interim consolidated financial statements are
unaudited and, in the opinion of management, reflect all adjustments
necessary for a fair presentation of the results for such periods. The
results of operations for any interim period are not necessarily
indicative of results for the full year. The accompanying financial
information for the six months and three months ended June 30, 1998 and
1997 should be read in conjunction with the audited consolidated
financial statements and notes thereto included in the Company's Annual
report filed on Form 10-K for the year ended December 31, 1997.
Reclassifications
Certain reclassifications of prior period amounts have been made to
conform to the current year's reporting format.
I-6 (continued)
<PAGE> 8
TCI MUSIC, INC. AND SUBSIDIARIES
(A Subsidiary of Tele-Communications, Inc.)
Notes to Consolidated Financial Statements
June 30, 1998
(Unaudited)
Derivative Financial Instruments
The Financial Accounting Standards Board recently issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities," ("SFAS 133"), which is effective
for all fiscal years beginning after June 15, 1999. SFAS 133
establishes accounting and reporting standards for derivative
instruments and hedging activities by requiring that all derivative
instruments be reported as assets or liabilities and measured at their
fair values. Under SFAS 133, changes in the fair values of derivative
instruments are recognized immediately in earnings unless those
instruments qualify as hedges of the (1) fair values of existing
assets, liabilities, or firm commitments, (2) variability of cash flows
of forecasted transactions, or (3) foreign currency exposures on net
investments in foreign operations. As of June 30, 1998, the Company has
not entered into any derivative contracts nor does it hold any
derivative financial instruments. The TCI right described in note 3 is
not considered a derivative instrument under SFAS 133 as it is indexed
to the price of TCI Music Series A Common Stock and is classified as a
component of additional paid in capital. Therefore, SFAS 133 will not
have a material impact on the Company's consolidated results of
operations or financial position.
Reporting Comprehensive Income
Effective January 1, 1998, the Company adopted the provisions of
Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" ("SFAS 130"). The Company has reclassified its
prior period consolidated balance sheet and consolidated statement of
operations to conform to the requirements of SFAS 130. SFAS 130
requires that all items which are components of comprehensive earnings
be reported in a financial statement in the period in which they are
recognized. The Company has included cumulative foreign currency
translation adjustments in other comprehensive earnings, which had been
recorded directly in stockholders' equity. Pursuant to SFAS 130, this
item is reflected, as a component of other comprehensive earnings in
the Company's consolidated statements of operations, and is included in
accumulated other comprehensive losses in the Company's consolidated
balance sheets and statements of stockholders' equity.
(2) Supplemental Disclosures to Consolidated Statements of Cash Flows
Cash paid for interest was $2,254,000 and $319,000 for the six months
ended June 30, 1998 and 1997, respectively. Cash paid for taxes for
periods presented was not material.
Significant noncash investing and financing activities are as
follows for the period ended June 30, 1998 (amounts in thousands):
<TABLE>
<S> <C>
Cash paid for acquisitions:
Fair value of assets acquired $ 2,509
Net liabilities assumed (1,123)
Equity interest issued to acquired entities (2,730)
Debt issued (775)
Excess of cost paid over fair value of net assets acquired 12,486
-----------
Cash paid for acquisitions $ 10,367
===========
Noncash accretion of stockholders' put option (note 3) $ 2,425
===========
</TABLE>
(3) Mergers and Related Transactions
DMX Merger
In connection with the DMX Merger, TCI and TCI Music entered into a
Contribution Agreement dated July 11, 1997, as amended by the Amended
and Restated Contribution Agreement (the "Amended Contribution
Agreement"). Pursuant to the Amended Contribution Agreement: (i) TCI
Music issued to
I-7 (continued)
<PAGE> 9
TCI MUSIC, INC. AND SUBSIDIARIES
(A Subsidiary of Tele-Communications, Inc.)
Notes to Consolidated Financial Statements
June 30, 1998
(Unaudited)
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 (repaid on December 30, 1997), (ii) TCI is
required to deliver, or cause certain of its subsidiaries to deliver,
to TCI Music monthly payments aggregating $18 million annually,
adjusted annually through 2017 (the "Annual TCI Payments"), which
represent revenue of certain subsidiaries of TCI that is attributable
to the distribution and sale of the DMX service to certain cable
subscribers who receive the DMX service (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
compensation to TCI Music and DMX for various other rights; (iii) TCI
contributed to TCI Music certain digital commercial tuners that are not
in service, and (iv) TCI granted to each stockholder of DMX who became
a stockholder of TCI Music pursuant to the DMX Merger one right (a "TCI
Right") with respect to each whole share of TCI Music Series A Common
Stock acquired by such stockholder in the DMX Merger pursuant to the
terms of the Rights Agreement among TCI, TCI Music and the Bank of New
York (the "Rights Agreement"). Each TCI 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 Group Series A
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 DMX 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. The TCI Rights are exercisable from July 11,
1998 through August 13, 1998. On June 23, 1998, TCI elected to pay the
holders of TCI Rights $8.00 in cash for each share of TCI Music Series
A Common Stock, with respect to which such rights are exercised.
Accordingly, the TCI Rights will expire on August 13, 1998 pursuant to
the Rights Agreement. The Shares of TCI Music Series A Stock issued in
the DMX Merger are quoted together with the associated TCI Rights on
the Nasdaq SmallCap Market under the symbol "TUNE".
The number of shares of TCI Music Series A Common Stock and TCI Rights
issued were based upon DMX Common Stock ownership as of June 30, 1997.
The estimated fair value of the consideration issued to stockholders
not controlled by TCI ("Unaffiliated Stockholders") in the DMX Merger
was accreted to the value of $8.00 per share (the equivalent of $2.00
per share of DMX Common Stock) during the one-year period beginning on
the effective date of the DMX Merger. Such accretion is reflected as an
increase in excess cost with a corresponding increase to additional
paid-in capital. The TCI Rights have been fully accreted as of June 30,
1998.
The Box Merger
Effective December 16, 1997, The Box Worldwide Inc. ("The Box") and TCI
Music consummated a merger pursuant to an Agreement and Plan of Merger,
dated August 12, 1997 (the "Box Merger Agreement"), among The Box, TCI
Music, and TCI Music Acquisition Sub, Inc., a wholly-owned subsidiary
of TCI Music, whereby TCI Music Acquisition Sub, Inc. was merged into
The Box (the "Box Merger"), with The Box as the surviving corporation
and a wholly-owned subsidiary of TCI Music.
Pursuant to the Box Merger Agreement, each of the 24,892,623
outstanding shares of common stock of The Box were converted into the
right to receive 0.07 of a share of TCI Music Preferred Stock and cash
in lieu of fractional shares of TCI Music Preferred Stock. Each share
of TCI Music Preferred Stock is convertible at the option of the holder
into three shares of TCI Music Series A Common Stock without associated
TCI Rights, subject to certain antidilution adjustments and certain
adjustments for dividends and distributions, if any. Each share of TCI
Music Preferred Stock is entitled to vote on all matters submitted to a
vote of the holders of the TCI Music Series A Common Stock and to the
number of votes equal to the number of shares of TCI Music Series A
Common Stock into which such share is convertible as of the record date
for the matter to be voted upon. The Box's 6% Convertible Redeemable
Preferred Stock, par value $.15 per share and stated value of $1.50 per
share ("Box Preferred Stock"), was purchased by the Company for
$2,652,000. The shares of TCI Music Series A Common Stock into which
the TCI Music Preferred Stock is convertible will be eligible for
quotation on the NASDAQ SmallCap Market under the symbol "TUNE" after
the TCI Rights terminate on August 13, 1998, provided that the company
continues to meet the maintenance requirement of the Nasdaq SmallCap
Market.
I-8 (continued)
<PAGE> 10
TCI MUSIC, INC. AND SUBSIDIARIES
(A Subsidiary of Tele-Communications, Inc.)
Notes to Consolidated Financial Statements
June 30, 1998
(Unaudited)
The Company has performed a preliminary allocation of the purchase
price to excess cost over the fair value of net assets acquired as the
net book values of The Box's assets and liabilities were estimated to
approximate their respective fair values, and is awaiting information
and evaluation at which point it will finalize such allocation.
Paradigm Merger
Effective December 31, 1997, Paradigm Music Entertainment Company
("Paradigm") and TCI Music consummated a merger pursuant to an
Agreement and Plan of Merger, dated December 8, 1997 (the "Paradigm
Merger Agreement"), among Paradigm, TCI Music and TCI Para Merger Sub,
Inc., ("TCI Para Merger Sub"), a wholly-owned subsidiary of TCI Music,
whereby TCI Para Merger Sub was merged into Paradigm (the "Paradigm
Merger"), with Paradigm as the surviving corporation and a wholly-owned
subsidiary of TCI Music.
Pursuant to the Paradigm Merger Agreement, each outstanding share of
common stock of Paradigm ("Paradigm Common Stock") was converted into
the right to receive 0.61217 of a share, and each outstanding warrant
to acquire shares of Paradigm Common Stock was converted into the right
to receive, for each share of Paradigm Common Stock underlying such
warrants, 0.211878 of a share of TCI Music Series A Common Stock
without the TCI Rights and cash in lieu of fractional shares. The
shares of TCI Music Series A Common Stock issued in the Paradigm Merger
do not have the associated TCI Rights attached and will be eligible for
quotation on the Nasdaq SmallCap Market under the symbol "TUNE" after
the TCI Rights terminate on August 13, 1998, provided that the Company
continues to meet the maintenance requirements of the Nasdaq SmallCap
Market.
The Paradigm Merger was effective December 31, 1997 and was accounted
for under the purchase method of accounting. The estimated aggregate
fair value of the TCI Music Series A Common Stock issued in the
Paradigm Merger equaled approximately $22.3 million and has been
allocated to excess cost over fair value of net assets acquired as the
net book values of Paradigm's assets and liabilities were estimated to
approximate their respective fair values. The number of shares issued
was based upon Paradigm's Common Stock ownership as of December 30,
1997.
Other Acquisitions
During the six months ended June 30, 1998 the Company acquired owned
and operated commercial subscriber businesses. Funding for these
acquisitions was provided by borrowings from the revolving loan
agreement totaling $10.4 million and issuance of 381,754 shares of TCI
Music Series A Common Stock.
(4) Investment in and Disposition of DMX-Europe N.V. and Subsidiary
On May 17, 1996, DMX consummated the merger of TCI-Euromusic, Inc.
("TCI-E"), an indirect affiliate of TCI ("the TCI-E Merger") pursuant
to the terms of the Agreement and Plan of Merger, dated August 28,
1995, as amended on November 1, 1995 and January 17, 1996 among DMX,
TCI-E and United Artists Programming International, Inc. ("UAPI"), an
indirect affiliate of TCI and owner of the outstanding shares of TCI-E.
As a result of the TCI-E Merger, DMX acquired the remaining 49%
interest in DMX-Europe N.V. ("DMX-E NV") and its subsidiary DMX-Europe
(UK) Limited ("DMX-E UK"), collectively ("DMX-E").
DMX-E ceased operation on July 1, 1997. DMX-E UK was placed into
receivership on July 1, 1997 and into liquidation on July 18, 1997.
DMX-E NV, although inactive since July 1, 1997, was placed into
receivership on December 23, 1997. Accordingly, the accompanying
balance sheets as of June 30, 1998 and December 31, 1997 and the
statements of operations for the six months and three months ended June
30, 1998 and cash flows for the six months ended June 30, 1998 give
effect to the deconsolidation of DMX-E.
I-9 (continued)
<PAGE> 11
TCI MUSIC, INC. AND SUBSIDIARIES
(A Subsidiary of Tele-Communications, Inc.)
Notes to Consolidated Financial Statements
June 30, 1998
(Unaudited)
(5) Related Party Transactions
Pursuant to an Amended and Restated Contribution Agreement between TCI
and TCI Music to be effective as of July 1, 1997 (the "Amended
Contribution Agreement") TCI is required to deliver, or cause certain
of its subsidiaries to deliver, to TCI Music monthly revenue payments
aggregating $18 million annually, adjusted annually through 2017 (the
"Annual TCI Payments"). Pursuant to the Amended Contribution Agreement,
the Annual TCI payments represent (i) revenue of certain subsidiaries
of TCI that is attributable to the distribution and sale of the DMX
service to certain cable subscribers (net of an amount equal to 10% of
such revenue derived from residential customers and license fees
otherwise payable to DMX pursuant to the Affiliation Agreement) and
(ii) compensation to TCI Music and DMX for various other rights. During
the six months ended June 30, 1998, TCI Music recognized $10 million of
subscriber fee revenue and $1 million, which was charged to operating
expense pursuant to the Amended Contribution Agreement.
Pursuant to an affiliation agreement (the "Affiliation Agreement")
between Satellite Services, Inc., a wholly-owned subsidiary of TCI
("SSI") and DMX effective as of July 1, 1997, SSI has the non-exclusive
right to distribute and subdistribute the DMX service to commercial and
residential customers for a 10-year period in exchange for licensing
fees paid by SSI to DMX. Under the Affiliation Agreement, SSI will pay
an annual fee to DMX of $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 changes in the number of
subscribers, as a result of divestiture or acquisition of cable
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 an
increasing percentage of the increase in actual number of subscribers
above or below a specified number of residential and commercial
subscribers, provided that such fees cannot be reduced below a
specified minimum license fee, which minimum fee is decreased each year
in years four through ten. For the six months ended June 30, 1998, the
Company recognized $4.3 million of licensing fees, which is included in
subscriber fee revenue, related party.
On February 6, 1997 the Company entered into a loan and security
agreement with TCI which provided $3.5 million. The loan was paid in
full on March 2, 1998.
The Company has an equipment lease with the National Digital Television
Center, Inc. ("NDTC"), a subsidiary of TCI, for the equipment at the
studio and uplinking facility in Littleton, Colorado. The outstanding
principal balance of the capital lease obligation at June 30, 1998 and
December 31, 1997 was approximately $933,000 and $1,171,000,
respectively, with terms that extend through the year 2000, at an
interest rate of 9.5% per annum. The related studio equipment had a net
book value of approximately $509,000 and $728,000 at June 30, 1998 and
December 31, 1997, respectively, and is included in property and
equipment in the accompanying consolidated balance sheets. Additionally
the Company leases certain office space and uplinking and satellite
services from NDTC. Total expenses under these leases were $2,615,000
and $1,052,000 for the six months ended June, 1998 and 1997,
respectively and are included in operating expenses, related party and
selling, general and administrative expenses, related party.
I-10 (continued)
<PAGE> 12
TCI MUSIC, INC. AND SUBSIDIARIES
(A Subsidiary of Tele-Communications, Inc.)
Notes to Consolidated Financial Statements
June 30, 1998
(Unaudited)
The components of related party debt at June 30, 1998 and December 31,
1997, respectively, were as follows (amounts in thousands):
<TABLE>
<CAPTION>
Accrued
Principal interest Total
------------ ----------- -----------
<S> <C> <C> <C>
June 30, 1998
Capital lease obligation $ 933 | 23 | 956
============ |=========== | ===========
| |
December 31, 1997 | |
$3.5 million equipment loan $ 3,117 | 32 | 3,149
Capital lease obligation 1,171 | 39 | 1,210
----------- |----------- | ----------
$ 4,288 | 71 | 4,359
=========== |=========== | ===========
</TABLE>
TCI Music is included in the consolidated federal income tax return of
TCI. Income tax expense or benefit for TCI Music is based on those
items in the consolidated calculation applicable to TCI Music.
Intercompany tax allocation represents an apportionment of tax expense
or benefit (other than deferred taxes) among the subsidiaries of TCI in
relation to their respective amounts of taxable earnings or losses.
(6) Intangible Assets
The balance of intangible assets as of June 1998 principally consists
of the excess of cost over the fair value of the net assets acquired in
the acquisitions of DMX, The Box and Paradigm (see note 3). Such
intangibles are being amortized over a 10 year period.
(7) Debt
On December 30, 1997 the Company entered into a revolving loan
agreement (the "Revolving Loan Agreement") with several banks, which
provides for borrowings up to $100 million. Interest on borrowings
under the agreement is tied to London Interbank Offered Rate ("LIBOR"),
plus an applicable margin dependent upon the Company's leverage ratio,
(as defined in the Revolving Loan Agreement), for the preceding quarter
or at the bank's base rate. The Revolving Loan Agreement matures on
June 30, 2005 with principal reductions beginning semi-annually on June
30, 2000 based on a scheduled percentage of the total commitment. A
commitment fee is charged on the unborrowed portion of the Revolving
Loan Agreement commitment, $22.3 million as of June 30, 1998, ranging
from .25% to .375% based upon the leverage ratio for the preceding
quarter. Included in accrued liabilities are $216,000 and $13,000 at
June 30, 1998 and December 31, 1997, respectively, of accrued interest
on the revolving loan.
The Company assumed debt consisting of two auto loans and a lease
obligation, and issued three notes payable to former owners in
connection with acquisitions made during the six months ended June 30
1998. The notes bear interest ranging from 5% to the Prime Rate and are
all classified as current in the accompanying consolidated balance
sheet. The balance of the debt is $611,000 at June 30, 1998.
In connection with the Paradigm Merger, the Company assumed debt
consisting of two bridge loans and a note payable to an individual. The
notes bear interest at 10% per annum and were paid in full, including
accrued interest, in January 1998. The balance of the debt is $44,000
at June 30, 1998.
The fair market value of TCI Music's debt approximated its carrying
value at June 1998.
I-11 (continued)
<PAGE> 13
TCI MUSIC, INC. AND SUBSIDIARIES
(A Subsidiary of Tele-Communications, Inc.)
Notes to Consolidated Financial Statements
June 30, 1998
(Unaudited)
(8) Stockholders' Equity
Stock Options and Stock Appreciation Rights
Estimates of the compensation relating to options and/or stock
appreciation rights granted to employees of TCI Music and members of
the Board have been recorded in the accompanying financial statements,
but are subject to future adjustment based upon vesting and the market
value of TCI Music Series A Common Stock and, ultimately, on the final
determination of market value when the rights are exercised. The
payable or receivable arising from the compensation related to the
options and/or stock appreciation rights is included in other
liabilities.
Capital Stock
The Company has the authority to issue 500 million shares of capital
stock consisting of (i) 295 million shares of TCI Music Series A Common
Stock; (ii) 200 million shares of TCI Music Series B Common Stock; and
(iii) 5 million shares of TCI Music preferred stock. The TCI Music
Series A Common Stock and TCI Music Series B Common Stock are identical
except for voting and conversion rights. Each share of TCI Music Series
A Common Stock entitles the holder to one vote and each share of TCI
Music Series B Common Stock entitles the holder to ten votes, on each
matter submitted to stockholders for a vote. Each share of TCI Music
Series B Common Stock is convertible, at the option of the holder, at
any time into one share of TCI Music Series A Common Stock. The TCI
Music Series A Common Stock is not convertible into TCI Music Series B
Common Stock.
Earnings (Loss) Per Common and Potential Common Share
Basic earnings per share ("basic EPS") is measured as the income or
loss available to common stockholders divided by the weighted average
outstanding common shares for the period. Diluted earnings per share
("diluted EPS") is similar to basic EPS but presents the dilutive
effect on a per share basis of potential common shares as if they had
been converted at the beginning of the periods presented. Potential
common shares that have an anti-dilutive effect are excluded from
diluted EPS.
The basic and diluted loss attributable to TCI Music and DMX
stockholders per common share was computed by dividing the net loss
attributable to TCI Music and DMX stockholders by the weighted average
number of common shares outstanding of TCI Music and DMX stock for the
six months and three months ended June 30, 1998 and 1997. Potential
common shares were not included in the computation of weighted shares
outstanding because their inclusion would be anti-dilutive.
At June 30, 1998, there were 5.1 million potential common shares
consisting of performance awards that could potentially dilute future
EPS calculations in periods of net income. Such potential common share
amount does not take into account the assumed number of shares that
would be repurchased by TCI Music upon exercise of the fixed and
nonvested performance awards. No material changes in the weighted
average outstanding shares or potential common shares occurred after
June 30, 1998.
I-12 (continued)
<PAGE> 14
TCI MUSIC, INC. AND SUBSIDIARIES
(A Subsidiary of Tele-Communications, Inc.)
Notes to Consolidated Financial Statements
June 30, 1998
(Unaudited)
(9) Commitments and Contingencies
Year 2000
During the six months ended June 30, 1998, TCI continued its
enterprise-wide comprehensive efforts to review and correct computer
systems, equipment and related software to ensure they properly
recognize, process and store business information. The computer
systems, equipment and software being evaluated include systems which
are integral to the distribution of the Company's products and
services, systems that support operations of the Company and protect
its assets, and all internal use software. The Company is utilizing
both internal and external resources, including the establishment of a
year 2000 enterprise program management office accountable to TCI's
executive management, to identify and remediate or replace systems for
year 2000 readiness.
During the six months ended June 30, 1998, TCI began the process of
testing and replacing or remediating critical components of its cable
systems' headend equipment, which is critical to TCI Music's ability to
earn revenue from the distribution of its services. Although no
assurance can be given, TCI expects to conclude such testing by
December 1998 with replacement or remediation completed by the end of
the first quarter of 1999. The Company's business and financial systems
and software which will continue to be utilized by the Company beyond
the year 1999 should be capable of recognizing the year 2000 and
therefore will not require material remediation or replacement.
Significant third party vendors whose systems are critical to the
Company's operations have been identified and surveyed and
confirmations from such parties have been received indicating that they
are either year 2000 ready or have plans in place to become ready.
Also, the Company has developed and initiated a plan with key suppliers
who provide systems which are integral to the distribution of the
Company's products and services to upgrade or replace non-year 2000
compliant systems on a product-by-product and site-by-site basis by
mid-1999.
Management of the Company intends to have further communication with
primary vendors identified as having systems that are not year 2000
compliant to assess those vendors' plans for remediating their own year
2000 issues and to assess the impact on the Company if such vendors
fail to remediate their year 2000 issues. The Company continues to
evaluate the level of validation it will require of third parties to
ensure their year 2000 readiness.
Management of the Company has not yet determined the full cost
associated with its year 2000 readiness efforts and the related
potential impact on the Company's financial position, results of
operations or cash flows but has identified certain cost elements that,
in the aggregate, are not expected to be less than $400,000. Although
there can be no assurance, the Company anticipates that the costs
ultimately required to be paid to ensure the Company's year 2000
readiness will not have a material adverse effect on the Company's
financial position, results of operations or cash flows. However, there
can be no assurance that the Company's systems or the systems of other
companies on which the Company relies will be converted in time or that
any such failure to convert by the Company or other companies will not
have a material adverse effect on its financial position, results of
operations or cash flows.
Lease Agreement
On July 17, 1998, DMX entered into a four year transponder lease
agreement with Microspace Communications Corporation beginning January
1, 1999 for the sublease of transponder space on the Galaxy IIIR
Ku-band satellite operated by PanAmSat Corporation to allow DMX to
deliver two channels of DMX music programming formerly provided by 3M.
The aggregate payments over the term of the lease amount to $1.1
million.
I-13 (continued)
<PAGE> 15
TCI MUSIC, INC. AND SUBSIDIARIES
(A Subsidiary of Tele-Communications, Inc.)
Notes to Consolidated Financial Statements
June 30, 1998
(Unaudited)
Vendor Commitments
DMX 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 was not obligated to purchase or guarantee the
purchase of any minimum number of tuners or DMX.DJ's, and S-A was
the exclusive tuner manufacturer in the United States and Canada and
earned a royalty of approximately five percent (5%) of DMX's premium
audio service revenues until August 1996. No payments are required
until DMX achieves "operating break-even", as defined in the agreement
with S-A.
Accrued Music Rights Royalties
DMX and The Box license rights to re-record and distribute music from a
variety of sources and pay 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. The Box has
separate agreements with ASCAP, BMI, and various similar international
organizations. Certain of the agreements are being negotiated on an
industry wide basis mainly over new rate structures that may require
retroactive rate increases. DMX and The Box have continued to accrue
royalties that are under negotiations based on their best estimates,
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") 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 services. The 1995 Act
provides a compulsory license for noninteractive subscription services.
An arbitration proceeding before the United States Copyright Office 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 commenced August 2,
1996. The royalty rate will be retroactive to February 1996. Effective
May 8, the Librarian of Congress, upon recommendation of the Register
of Copyrights, issued an order setting the royalty rate at 6.5%. The
Recording Industry Association of America ("RIAA") has appealed the
order, and, DMX has been granted the right to intervene. If the Company
is required to pay a license royalty rate on a retroactive basis in
excess of 6.5% as a result of negotiations with the RIAA, no assurance
can be given that such outcome will not have a material adverse effect
on the Company's consolidated financial position, results of
operations, or cash flows.
Parent Guarantees
As described in note 4, "Investment in and Disposition of DMX-Europe
N.V. and Subsidiary", DMX-E ceased operations and DMX-E UK was put into
receivership on July 1, 1997 and into liquidation proceedings on July
18, 1997. DMX-Europe N.V. has been inactive since July 1, 1997, and was
placed into receivership on December 23, 1997. As a result claims may
be filed under the following guarantees.
The Company has guaranteed certain contracts of DMX-E related to
DMX-E's uplink services agreement and subscriber management services
agreement. To the extent DMX-E is unable to perform under the
agreements, certain creditors of DMX-E may pursue claims against the
Company under the guarantees. During the six months ended June 30,
1998, the company paid a $1.3 million claim to an affiliated company
under the guaranty of DMX-E's obligation in accordance with a satellite
uplink services agreement. Such claim is reflected in the accompanying
consolidated statement of operations as of June 30, 1997. The Company
has also guaranteed certain other obligations of DMX-E under the
Subscriber Management Services Agreement between DMX-E and Selco
Servicegesellschaft fur elektronische Kommunikation GmbH ("Selco"), and
the related side letter agreement (the "Selco Agreement"). The Company
cannot estimate the amount of any potential claims at this time under
such guarantee.
I-14 (continued)
<PAGE> 16
TCI MUSIC, INC. AND SUBSIDIARIES
(A Subsidiary of Tele-Communications, Inc.)
Notes to Consolidated Financial Statements
June 30, 1998
(Unaudited)
DMX has received a letter from counsel for 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-E N.V. under the Selco Agreement. TCI Music
cannot estimate or determine the extent of any liability, based on the
facts available as of the date of this Form 10-Q, 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.
Legal Actions
From time to time the Company may be a party to legal actions arising
in the ordinary course of business, including claims by former
employees. In the opinion of the Company's management, after
consultation with counsel, disposition of such matters are not expected
to have a material adverse effect upon the financial position, results
of operations or liquidity of the Company.
(10) Proposed Merger
TCI and AT&T Corp. ("AT&T") have agreed to a merger (the "Merger")
pursuant to, and subject to the terms and conditions set forth in, the
Agreement and Plan of Restructuring and Merger, dated as of June 23,
1998. In the Merger, TCI will become a wholly-owned subsidiary of AT&T.
In addition, TCI has announced its intention, subject to stockholder
approval, to combine the assets and businesses of Liberty Media Group
and TCI Ventures Group (the "Liberty/Ventures Combination"). Assuming
the Liberty/Ventures Combination occurs prior to the merger, the shares
of "Liberty/Ventures Stock" to be issued in the Merger will be a newly
authorized class of common stock of AT&T which will be intended to
reflect the separate performance of the businesses and assets
attributed to the "Liberty/Ventures Group." Subject to certain asset
transfers, the Liberty/Ventures Group following the Merger will be made
up of the corporations, partnerships and other entities and interests,
including TCI Music, which comprise Liberty Media Group and TCI
Ventures Group at the time of the Merger. Certain agreements to be
entered into at the time of the Merger as contemplated by the Merger
Agreement will, among other things, provide preferred vendor status to
Liberty/Ventures Group for digital basic distribution on AT&T's systems
of new programming services created by Liberty/Ventures Group and its
affiliates, provide for a renewal of existing affiliation agreements
and provide for the business of the Liberty/Ventures Group to continue
to be managed following the Merger by certain members of TCI's
management who currently manage the businesses of Liberty Media Group
and TCI Ventures Group.
Consummation of the Merger is subject to the satisfaction or waiver of
customary conditions to closing, including but not limited to, the
separate approvals of the stockholders of AT&T and TCI, receipt of all
necessary governmental consents and approvals, and effectiveness of the
registration statement registering the AT&T Common Stock and
Liberty/Ventures Stock to be issued to TCI stockholders in the Merger.
As a result, there can be no assurance that the Merger will be
consummated or, if the Merger is consummated, as to the date of such
consummation.
I-15
<PAGE> 17
TCI MUSIC, INC. AND SUBSIDIARIES
(A Subsidiary of Tele-Communications, Inc.)
Management's Discussion and Analysis of
Financial Condition and Results of Operations
The following discussion and analysis provides information
concerning the results of operations and financial condition of the
Company. Such discussion should be read in conjunction with the
accompanying consolidated financial statements and notes thereto of the
Company. Additionally, the following discussion and analysis should be
read in conjunction with Management's Discussion and Analysis of
Financial Condition and Results of Operations and financial statements
included in Part IV of the Company's Annual Report on Form 10-K for the
year ended December 31, 1997. The following discussion focuses on
material trends, risks and uncertainties affecting the results of
operations and financial condition of the Company.
Certain statements in this Quarterly Report on Form 10-Q
constitute forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. In particular, some of the
statements contained under this caption are forward-looking. Such
forward-looking statements involve known and unknown risks,
uncertainties and other important factors that could cause the actual
results, performance or achievements of the Company to differ
materially from 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 regulatory and
competitive environment of the industries in which the Company has
interests or operations; uncertainties inherent in new business
strategies, uncertainties inherent in the Company's year 2000
remediation efforts, new product launches and development plans; rapid
technological changes; development and provisions of programming for
new television and telecommunications technologies; future financial
performance, including availability, terms and deployment of capital;
the ability of vendors to deliver required equipment, software and
services; availability of qualified personnel; changes in, or failure
or inability to comply with, government regulations; changes in the
nature of key strategic relationships with partners and joint
venturers; competitor responses to the Company's products and services,
and the products and services of the entities in which the Company has
interests, and the overall market acceptance of such products and
services; and other factors. These forward-looking statements (and such
risks, uncertainties and other factors) speak only as of the date of
this Report, and 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 other change in
events, conditions or circumstances on which any such statement is
based.
TCI Music's assets include businesses which are principally
engaged in: (i) programming, distributing, and marketing continuous
commercial-free compact disc-quality music programming; (ii)
programming, distributing, and marketing an interactive music video
television programming service; and (iii) distributing and marketing
music entertainment products through traditional and non-traditional
channels.
Year 2000
During the six months ended June 30, 1998, TCI continued its
enterprise-wide comprehensive efforts to review and correct computer
systems, equipment and related software to ensure they properly
recognize, process and store business information. The computer
systems, equipment and software being evaluated include systems which
are integral to the distribution of the Company's products and
services, systems that support operations of the Company and protect
its assets, and all internal use software. The Company is utilizing
both internal and external resources, including the establishment of a
year 2000 enterprise program management office accountable to TCI's
executive management, to identify and remediate or replace systems for
year 2000 readiness.
I-16
<PAGE> 18
TCI MUSIC, INC. AND SUBSIDIARIES
(A Subsidiary of Tele-Communications, Inc.)
During the six months ended June 30, 1998, TCI began the
process of testing and replacing or remediating critical components of
its cable systems' headend equipment, which is critical to TCI Music's
ability to earn revenue from the distribution of its services. Although
no assurance can be given, TCI expects to conclude such testing by
December 1998 with replacement or remediation completed by the end of
the first quarter of 1999. The Company's business and financial systems
and software which will continue to be utilized by the Company beyond
the year 1999 should be capable of recognizing the year 2000 and
therefore will not require material remediation or replacement.
Significant third party vendors whose systems are critical to
the Company's operations have been identified and surveyed and
confirmations from such parties have been received indicating that they
are either year 2000 ready or have plans in place to become ready.
Also, the Company has developed and initiated a plan with key suppliers
who provide systems which are integral to the distribution of the
Company's products and services to upgrade or replace non-year 2000
compliant systems on a product-by-product and site-by-site basis by
mid-1999.
Management of the Company intends to have further
communication with primary vendors identified as having systems that
are not year 2000 compliant to assess those vendors' plans for
remediating their own year 2000 issues and to assess the impact on the
Company if such vendors fail to remediate their year 2000 issues. The
Company continues to evaluate the level of validation it will require
of third parties to ensure their year 2000 readiness.
Management of the Company has not yet determined the full cost
associated with its year 2000 readiness efforts and the related
potential impact on the Company's financial position, results of
operations or cash flows but has identified certain cost elements that,
in the aggregate, are not expected to be less than $400,000. Although
there can be no assurance, the Company anticipates that the costs
ultimately required to be paid to ensure the Company's year 2000
readiness will not have a material adverse effect on the Company's
financial position, results of operations or cash flows. However, there
can be no assurance that the Company's systems or the systems of other
companies on which the Company relies will be converted in time or that
any such failure to convert by the Company or other companies will not
have a material adverse effect on its financial position, results of
operations or cash flows.
Revenue
Total revenue, increased to $40.3 million for the six months
ended June 30, 1998 from $11.4 million for the six months ended June
30, 1997. The $28.9 million increase was attributed to $10.0 million of
revenue from sales of DMX services to TCI's residential and commercial
subscribers (the "Annual TCI Payments") as a result of the DMX Merger
and pursuant to a Contribution Agreement dated July 11, 1997, as
amended by the Amended and Restated Contribution Agreement (the
"Amended Contribution Agreement"), $11.5 million of viewer and
advertising revenue from The Box as a result of The Box Merger which
was effective December 16, 1997, $1.5 million of other revenue as a
result of the Paradigm Merger which was effective December 31, 1997,
and increased subscriber revenue of $5.6 million from DMX primarily
resulting from continued growth in its residential and commercial
subscriber bases and expansion into and acquisitions of businesses in
six new markets, which occurred in the last quarter of the fiscal year
1997 through the first quarter of 1998. In the last quarter of the
fiscal year 1997, DMX expanded its owned and operated commercial sales
business to Miami, Florida, Atlanta, Georgia, and Phoenix, Arizona.
During the first quarter of 1998, DMX acquired owned and operated
operations in Massachusetts, Minnesota and Northern California. During
the second quarter of 1998, no such acquisitions occurred.
Additionally, DMX increased other revenue by $1.8 million primarily
from equipment and installation sales attributable to the increased
subscriber base. Offsetting the increase in revenue was $1.5 million
resulting from the de-consolidation of DMX-Europe N.V. ("DMX-E NV") and
its subsidiary DMX-Europe (UK) Limited ("DMX-E UK", and together with
DMX-E NV, "DMX-E") as of June 30, 1997.
I-17
<PAGE> 19
TCI MUSIC, INC. AND SUBSIDIARIES
(A Subsidiary of Tele-Communications, Inc.)
Total revenue increased to $21.6 million for the three months
ended June 30, 1998 from $5.9 million for the three months ended June
30, 1997. The $15.7 million increase was attributed to $5.0 million of
revenue from the Annual TCI Payments, $6.1 million of viewer and
advertising revenue from The Box as a result of the Box Merger, $1.0
million of other revenue as a result of the Paradigm Merger, and
increased subscriber revenue of $3.3 million from DMX primarily
resulting from growth in its commercial subscriber base and expansion
into new markets as described above. Additionally, DMX increased other
revenue by $1.0 million primarily from equipment and installation sales
attributable to the increased subscriber base. Offsetting the increase
in revenue was $700,000 resulting from the de-consolidation of DMX-E as
of June 30, 1997.
Operating Expenses
Operating expenses, exclusive of DMX-E NV operating expenses
of $5.4 million for the six months ended June 30, 1997, increased to
$11.1 million for the six months ended June 30, 1998 from $5.7 million
for the six months ended June 30, 1997. The $5.4 million increase was
comprised of the increase in related party operating expenses of $1.7
million, which represented fees of $1.0 million paid to TCI as
compensation for services rendered in generating the Annual TCI
Payments pursuant to the Amended Contribution Agreement and The Box
payment of a related party charge for uplink and affiliated fees
amounting $700,000, and an increase in operating expenses - other of
$3.7 million which primarily represented the inclusion of The Box and
Paradigm operating expenses of $3.3 million and $400,000, respectively,
for the current period.
Operating expenses, exclusive of DMX-E, of $2.8 million for
the three months ended June 30, 1997, increased to $5.6 million for the
three months ended June 30, 1998 from $3.0 million for the three months
ended June 30, 1997. The $2.6 million increase was comprised of the
increase in related party operating expenses of $800,000 which
represented fees of $400,000 paid to TCI as compensation for services
rendered in generating the Annual TCI Payments pursuant to the Amended
Contribution Agreement and The Box payment of a related party charge of
$400,000 for uplink and affiliate fees, and an increase in operating
expenses - other which primarily represented the inclusion of the Box
and Paradigm operating expenses of $1.6 million and $200,000,
respectively, for the current period.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased to
$26.4 million for the six months ended June 30, 1998 from $7.4 million
for the six months ended June 30, 1997. The $19.0 million increase
primarily represented additional corporate, general and administrative
expenses of $1.9 million as a result of expansion of the Company, The
Box selling, general and administrative expenses of $10.6 million,
Paradigm selling, general and administrative expenses of $4.5 million,
and an increase in DMX selling, general and administrative expenses of
$2.0 million attributed to an increase in personnel associated with
DMX's growth in subscriber revenues and expansion related to the
commercial businesses' six market launch.
I-18
<PAGE> 20
TCI MUSIC, INC. AND SUBSIDIARIES
(A Subsidiary of Tele-Communications, Inc.)
Selling, general and administrative expenses increased to
$14.9 million for the three months ended June 30, 1998 from $4.3
million for the three months ended June 30, 1997. The $10.6 million
increase primarily represented additional corporate, general and
administrative expenses of $1.1 million as a result of expansion of the
Company, The Box selling, general and administrative expenses of $6.3
million, Paradigm selling, general and administrative expenses of $2.3
million, and an increase in DMX selling, general and administrative
expenses of $900,000, attributed to an increase in personnel associated
with DMX's growth in subscriber revenues and expansion related to the
commercial businesses' six market launch.
Depreciation and Amortization
Depreciation and amortization expense increased to $10.8
million for the six months ended June 30, 1998 from $1.2 million for
the six months ended June 30, 1997. Such increase is primarily
attributable to an increase in the balance of property and equipment
and intangibles resulting from the DMX Merger, the Box Merger, the
Paradigm merger, and the acquisitions made during the first quarter of
1998. Depreciation and amortization expense increased to $5.6 million
for the three months ended June 30, 1998 from $596,000 for the three
months ended June 30, 1997. Such increase is primarily attributable to
an increase in the balance of property and equipment and intangibles
resulting from the DMX Merger, the Box Merger, the Paradigm Merger, and
the acquisitions made during the first quarter of 1998.
Inventory Writedown
During the second quarter of 1998, certain digital commercial
tuners were written down by $1.1 million as a result of physical
inventory adjustments at the field locations and pricing adjustments
to lower of cost or market.
Operating Expenses and Disposal of DMX-E
DMX-E NV and DMX-E UK 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 has been inactive since July 1,
1997 and entered liquidation proceedings in December 1997. DMX-E has
been de-consolidated since June 30, 1997. The loss on disposal of DMX-E
of $1.7 million recorded for the three months and for the six months
ended June 30, 1997 represented the writedown of assets to their net
realizable values.
Liquidity and Capital Resources
The decrease in cash of $4.2 million for the six months ended
June 30, 1998 was the net result of funds used in operating activities
of $4.4 million and net funds provided by financing activities of $15.9
million offset by cash used in investing activities of $15.7 million,
including the growth and acquisitions of the owned and operated
commercial subscriber businesses which expanded the DMX business into
six new markets. For additional information concerning the cash flow of
TCI Music, see the consolidated cash flow statement included in the
accompanying consolidated financial statements. A significant portion
of the Company's revenue is derived from the Annual TCI Payments. For
additional information concerning the Annual TCI Payments, see note 5
to the accompanying consolidated financial statements. TCI Music
believes that cash provided by the Annual TCI Payments and the
available capacity of $22.3 million, pursuant to the Revolving Loan
Agreement as of June 30, 1998 will provide adequate sources of
liquidity for the next year. For additional information concerning the
Revolving Loan Agreement, see note 7 to the accompanying consolidated
financial statements.
I-19
<PAGE> 21
TCI MUSIC, INC. AND SUBSIDIARIES
(A Subsidiary of Tele-Communications, Inc.)
At June 30, 1998, the Company had $77.7 million of
variable-rate debt. Accordingly, in an environment of rising interest
rates, the Company expects that it would experience an increase in
interest expense.
As described in notes 4 and 9 to TCI Music's consolidated
financial statements and as discussed 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 entered into liquidation proceedings in December 1997. During the
three months ended June 30, 1998, the company paid a $1.3 million claim
to an affiliated company under the guaranty of DMX-E's obligation in
accordance with a satellite uplink services agreement. Such claim is
reflected in the accompanying consolidated statement of operations for
the six months ended June 30, 1997.
The Company accrues music rights royalties at 6.5 percent. If
the company is required to pay a license royalty rate on a retroactive
basis in excess of 6.5 percent as a result of negotiations with the
RIAA, no assurance can be given that such outcome will not have a
material adverse effect on the Company's consolidated financial
position, results of operations, or cash flows.
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<PAGE> 22
TCI MUSIC, INC. AND SUBSIDIARIES
(A Subsidiary of Tele-Communications, Inc.)
PART II - OTHER INFORMATION
Item 2. Changes in Securities.
None
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<PAGE> 23
TCI MUSIC, INC. AND SUBSIDIARIES
(A Subsidiary of Tele-Communications, Inc.)
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits -
3.2 By Laws of TCI Music, as amended July 13, 1998
(27) TCI Music, Inc. Financial Data Schedule
(b) Reports on Form 8-K filed during the quarter ended June 30, 1998:
None.
II-2
<PAGE> 24
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TCI MUSIC, INC.
Date: August 12, 1998 By: /s/ Thomas McPartland
----------------------
Thomas McPartland
President and
Chief Executive Officer
Date: August 12, 1998 By: /s/ Ralph J. Sorrentino
------------------------
Ralph J. Sorrentino
Executive Vice President and
Chief Financial Officer
II-3
<PAGE> 25
EXHIBIT INDEX
Exhibit No. Description
----------- -----------
3.2 By Laws of TCI Music, as amended July 13, 1998
(27) TCI Music, Inc. Financial Data Schedule
<PAGE> 1
TCI MUSIC, INC.
A DELAWARE CORPORATION
BYLAWS
--------------------------
ARTICLE I
STOCKHOLDERS
Section I.1 Annual Meeting.
An annual meeting of stockholders for the purpose of electing
directors and of transacting such other business as may come before it shall be
held each year at such date, time, and place, either within or without the State
of Delaware, as may be specified by the Board of Directors in the notice of
meeting.
Section I.2 Special Meetings.
Except as otherwise provided in the terms of any class or
series of preferred stock or unless otherwise provided by law or by the
Certificate of Incorporation, special meetings of stockholders of the
Corporation, for any purpose or purposes, shall be called by the Secretary of
the Corporation (i) upon written request of the holders of not less than 66_% of
the total voting power of the shares of outstanding capital stock of the
Corporation entitled to vote at such meeting or (ii) at the request of not less
than 75% of the members of the Board of Directors then in office. Special
meetings of stockholders for any purpose or purposes may be held at such time
and place either within or without the State of Delaware as may be stated in the
notice of meeting.
Section I.3 Notice of Meetings.
Written notice of stockholders meetings, stating the place,
date, and hour thereof, and, in the case of a special meeting, the purpose or
purposes for which the meeting is called, shall be given by the Chairman of the
Board, the President, any Vice President, the Secretary, or an Assistant
Secretary, to each stockholder entitled to vote thereat at least ten days but
not more than sixty days before the date of the meeting, unless a different
period is prescribed by law.
<PAGE> 2
Section I.4 Notice of Nominations for the Election of
Directors.
I.4.1 Annual Meetings of Stockholders.
(a) Nominations of persons for election to the Board of
Directors of the Corporation and the proposal of business to be considered by
the stockholders may be made at an annual meeting of stockholders (i) pursuant
to the Corporation's notice of meeting delivered pursuant to Section 1.3 of
these Bylaws, (ii) by or at the direction of the Chairman of the Board or the
Board of Directors or (iii) by any stockholder of the Corporation who is
entitled to vote at the meeting, who complied with the procedures set forth in
this Bylaw and who was a stockholder of record at the time such notice is
delivered to the Secretary of the Corporation.
(b) For nominations or other business to be properly brought
before an annual meeting by a stockholder pursuant to clause (iii) of Section
1.4.1(a) of this Bylaw, the stockholder must have given timely notice thereof in
writing to the Secretary of the Corporation. To be timely, a stockholder's
notice shall be delivered to the Secretary at the principal executive offices of
the Corporation not less that seventy days nor more than ninety days prior to
the first anniversary of the preceding year's annual meeting; provided, however,
that in the event that the date of the annual meeting is advanced by more than
twenty days, or delayed by more than seventy days, from such anniversary date,
notice by the stockholder to be timely must be so delivered not earlier than the
ninetieth day prior to such annual meeting and not later than the close of
business on the later of the seventieth day prior to such annual meeting or the
tenth day following the day on which public announcement of the day of such
meeting is first made. Such stockholder's notice shall set forth (a) as to each
person whom the stockholder proposes to nominate for election or reelection as a
director all information relating to such person that is required to be
disclosed in solicitations of proxies for election of directors, or is otherwise
required, in each case pursuant to Regulation 14A under the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), including such person's written
consent to being named in the proxy statement as a nominee and to serving as a
director if elected; (b) as to any other business that the stockholder proposes
to bring before the meeting, a brief description of the business desired to be
brought before the meeting, the reasons for conducting such business at the
meeting and any material interest in such business of such stockholder and the
beneficial owner, if any, on whose behalf the proposal is made; and (c) as to
the stockholder giving the notice and the beneficial owner, if any, on whose
behalf the nomination or proposal is made (i) the name and address of such
stockholder, as they appear on the Corporation's books, and of such beneficial
owner, (ii) the class or series and number of shares of the Corporation which
are owned beneficially and of record by such stockholder and such beneficial
owner and (iii) a representation that such stockholder is entitled to vote at
the meeting and intends to appear in person or proxy at the meeting to nominate
the person specified in the notice.
(c) Notwithstanding anything in the second sentence of Section
1.4.1(b) of this Bylaw to the contrary, in the event that the number of
directors to be elected to the Board
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<PAGE> 3
of Directors of the Corporation is increased and there is no public announcement
naming all of the nominees for director or specifying the size of the increased
Board of Directors made by the Corporation at least eighty days prior to the
first anniversary of the preceding year's annual meeting, a stockholder's notice
required by this Bylaw shall also be considered timely, but only with respect to
nominees for any new positions created by such increase, if it shall be
delivered to the Secretary at the principal executive offices of the Corporation
not later than the close of business on the tenth day following the day on which
such public announcement is first made by the Corporation.
I.4.2 Special Meetings of Stockholders.
Only such business shall be conducted at a special meeting of
stockholders as shall have been brought before the meeting pursuant to the
Corporation's notice of meeting pursuant to Section 1.3 of these Bylaws.
Nominations of persons for election to the Board of Directors may be made at a
special meeting of stockholders at which directors are to be elected pursuant to
the Corporation's notice of meeting (a) by or at the direction of the Board of
Directors or (b) by any stockholder of the Corporation who is entitled to vote
at the meeting, who complies with the notice procedures set forth in this Bylaw
and who is a stockholder of record at the time such notice is delivered to the
Secretary of the Corporation. Nominations by stockholders of persons for
election to the Board of Directors may be made at such a special meeting of
stockholders if the stockholder's notice as required by Section 1.4.1(b) of this
Bylaw shall be delivered to the Secretary at the principal executive offices of
the Corporation not earlier than the ninetieth day prior to such special meeting
and not later than the close of business on the later of the seventieth day
prior to such special meeting or the tenth day following the day on which public
announcement is first made of the date of the special meeting and of the
nominees proposed by the Board of Directors to be elected at such meeting.
I.4.3 General.
(a) Only persons who are nominated in accordance with the
procedures set forth in this Bylaw shall be eligible to serve as directors and
only such business shall be conducted at a meeting of stockholders as shall have
been brought before the meeting in accordance with the procedures set forth in
this Bylaw. Except as otherwise provided by law, the Certificate of
Incorporation or these Bylaws, the chairman of the meeting shall have the power
and duty to determine whether a nomination or any business proposed to be
brought before the meeting was made in accordance with the procedures set forth
in this Bylaw and, if any proposed nomination or business is not in compliance
with this Bylaw, to declare that such defective proposal or nomination shall be
disregarded.
(b) For purposes of this Bylaw, "public announcement" shall
mean
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<PAGE> 4
disclosure in a press release reported by the Dow Jones News Service, Associated
Press or comparable national news service or in a document publicly filed by the
Corporation with the Securities and Exchange Commission pursuant to Section 13,
14 or 15(d) of the Exchange Act.
(c) Notwithstanding the foregoing provisions of this Bylaw, a
stockholder shall also comply with all applicable requirements of the Exchange
Act and the rules and regulations thereunder with respect to the matters set
forth in this Bylaw. Nothing in this Bylaw shall be deemed to affect any rights
of stockholders to request inclusion of proposals in the Corporation's proxy
statement pursuant to Rule 14a-8 under the Exchange Act.
Section I.5 Quorum.
Subject to the rights of the holders of any class or series of
preferred stock and except as otherwise provided by law or in the Certificate of
Incorporation or these Bylaws, at any meeting of stockholders, the holders of a
majority in total voting power of the outstanding shares of capital stock
entitled to vote at the meeting shall be present or represented by proxy in
order to constitute a quorum for the transaction of any business. In the absence
of a quorum, the holders of a majority in total voting power of the shares that
are present in person or by proxy or the chairman of the meeting may adjourn the
meeting from time to time in the manner provided in Section 1.6 of these Bylaws
until a quorum shall attend.
Section I.6 Adjournment.
Any meeting of stockholders, annual or special, may adjourn
from time to time to reconvene at the same or some other place, and notice need
not be given of any such adjourned meeting if the time and place thereof are
announced at the meeting at which the adjournment is taken. At the adjourned
meeting, the Corporation may transact any business which might have been
transacted at the original meeting. If the adjournment is for more than thirty
days, or if after the adjournment a new record date is fixed for the adjourned
meeting, a notice of the adjourned meeting shall be given to each stockholder of
record entitled to vote at the meeting.
Section I.7 Organization.
The Chairman of the Board, or in his absence the President, or
in their absence any Vice President, shall call to order meetings of
stockholders and shall act as chairman of such meetings. The Board of Directors
or, if the Board fails to act, the stockholders, may appoint any stockholder,
director, or officer of the Corporation to act as chairman of any meeting in the
absence of the Chairman of the Board, the President, and all Vice Presidents.
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<PAGE> 5
The Secretary shall act as secretary of all meetings of
stockholders, but, in the absence of the Secretary, the chairman of the meeting
may appoint any other person to act as secretary of the meeting.
Section I.8 Voting
Subject to the rights of the holders of any class or series of
preferred stock and except as otherwise provided by law, the Certificate of
Incorporation or these Bylaws and except for the election of directors, at any
meeting duly called and held at which a quorum is present, the affirmative vote
of the majority of the combined voting power of shares present in person or
represented by proxy at the meeting and entitled to vote on the subject matter
shall be the act of the stockholders. Subject to the rights of the holders of
any class or series of preferred stock, at any meeting duly called and held for
the election of directors at which a quorum is present, directors shall be
elected by a plurality of the votes of the shares present in person or
represented by proxy at the meeting and entitled to vote on the election of
directors.
Section I.9 Voting List.
(a) A complete list of the stockholders of the Corporation
entitled to vote at the meeting, arranged in alphabetical order, and showing the
address of each stockholder and the number and class or series of shares
registered in the name of each stockholder shall be prepared by the officer who
has charge of the stock ledger of the Corporation at least 10 days before every
meeting of stockholders. Such list shall be open to the examination of any
stockholder, for any purpose germane to the meeting, during ordinary business
hours, for a period of at least 10 days prior to the meeting, either at a place
within the city where the meeting is to be held, which place shall be specified
in the notice of the meeting, or, if not so specified, at the place where the
meeting is to be held. The list shall also be produced and kept at the time and
place of the meeting during the whole time thereof, and may be inspected by any
stockholder who is present.
(b) Upon the willful neglect or refusal of the directors to
produce such a list at any meeting for the election of directors, they shall be
ineligible for election to any office at such meeting.
(c) The stock ledger shall be the only evidence as to the
identity of the stockholders entitled to examine the stock ledger, the list
required by this section or the books of the Corporation or to vote in person or
by proxy at any meeting of stockholders.
Section I.10 Stockholder Action Without a Meeting.
Subject to the rights of the holders of any class or series of
preferred stock, stockholder action may be taken only at an annual or special
meeting. Except as otherwise
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provided in the terms of any class or series of preferred stock, no action
required to be taken or which may be taken at any annual meeting or special
meeting of stockholders may be taken without a meeting, and the power of
stockholders to consent in writing, without a meeting, is specifically denied.
Section I.11 Inspectors of Election. The Corporation may, and
shall if required by law, in advance of any meeting of stockholders, appoint one
or more inspectors of election, who may be employees of the Corporation, to act
at the meeting or any adjournment thereof and to make a written report thereof.
The Corporation may designate one or more persons as alternate inspectors to
replace any inspector who fails to act. In the event that no inspector so
appointed or designated is able to act at a meeting of stockholders, the person
presiding at the meeting shall appoint one or more inspectors to act at the
meeting. Each inspector, before entering upon the discharge of his or her
duties, shall take and sign an oath to execute faithfully the duties of
inspector with strict impartiality and according to the best of his or her
ability. The inspector or inspectors so appointed or designated shall (i)
ascertain the number of shares of capital stock of the Corporation outstanding
and the voting power of each such share, (ii) determine the shares of capital
stock of the Corporation represented at the meeting and the validity of proxies
and ballots, (iii) count all votes and ballots, (iv) determine and retain for a
reasonable period a record of the disposition of any challenges made to any
determination by the inspectors, and (v) certify their determination of the
number of shares of capital stock of the Corporation represented at the meeting
and such inspectors' count of all votes and ballots. Such certification and
report shall specify such other information as may be required by law. In
determining the validity and counting of proxies and ballots cast at any meeting
of stockholders of the Corporation, the inspectors may consider such information
as is permitted by applicable law. No person who is a candidate for an office at
an election may serve as an inspector at such election.
ARTICLE II
BOARD OF DIRECTORS
Section II.1 Number and Term of Office.
(a) The governing body of the Corporation shall be a Board of
Directors. Subject to any rights of the holders of any class or series of
preferred stock to elect additional directors, the Board of Directors shall be
comprised of not less than three members. 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.
Directors need not be stockholders of the Corporation.
(b) Except as otherwise fixed by the Certificate of
Incorporation relating to the rights of the holders of any class or series of
preferred stock to separately elect additional directors, which additional
directors are not required to be classified pursuant to the terms of
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<PAGE> 7
such class or series of preferred stock, the Board of Directors shall be divided
into three classes: Class I, Class II and Class III. Each class shall consist,
as nearly as possible, of a number of directors equal to onethird of the then
authorized number of members of the Board of Directors. The term of office of
the initial Class I directors shall expire at the annual meeting of stockholders
in 1998; the term of office of the initial Class II directors shall expire at
the annual meeting of stockholders in 1999; and the term of office of the
initial Class III directors shall expire at the annual meeting of stockholders
in 2000. At each annual meeting of stockholders of the Corporation, the
successors of that class of directors whose term expires at that meeting shall
be elected to hold office for a term expiring at the annual meeting of
stockholders held in the third year following the year of their election. The
directors of each class will serve until their respective successors are elected
and qualified.
Section II.2 Resignations.
Any director of the Corporation, or any member of any
committee, may resign at any time by giving written notice to the Board of
Directors, the Chairman of the Board, the President or the Secretary of the
Corporation. Any such resignation shall take effect at the time specified
therein or, if the time be not specified therein, then upon receipt thereof. The
acceptance of such resignation shall not be necessary to make it effective
unless otherwise stated therein.
Section II.3 Removal of Directors.
Subject to the rights of the holders of any class or series of
preferred stock, directors may be removed from office only for cause (as
hereinafter defined), but not without cause, upon the affirmative vote of the
holders of not less than 66_% of the total voting power of the then outstanding
capital stock of the Corporation entitled to vote thereon, voting together as a
single class. Except as may otherwise be provided by law, "cause" for removal,
for purposes of this Bylaw, shall exist only if: (i) the director whose removal
is proposed has been convicted of a felony, or has been granted immunity to
testify in an action 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 of the Corporation, as determined by not less than 66_% of the members
of the Board of Directors then in office (other than such director); or (iii)
such director's actions or failure to act have been determined by not less than
66_% of the members of the Board of Directors then in office (other than such
director) to be in derogation of the director's duties.
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Section II.4 Newly Created Directorships and Vacancies.
Subject to the rights of the holders of any class or series of
preferred stock, vacancies on the Board of Directors resulting from death,
resignation, removal, disqualification or other cause, and newly created
directorships resulting from any increase in the number of directors on the
Board of Directors, shall be filled by the affirmative vote of a majority of the
remaining directors then in office (even though less than a quorum) or by the
sole remaining director. Any director elected in accordance with the preceding
sentence shall hold office for the remainder of the full term of the class of
directors in which the vacancy occurred or to which the new directorship is
apportioned, and until such director's successor shall have been elected and
qualified. No decrease in the number of directors constituting the Board of
Directors shall shorten the term of any incumbent director, except as may be
provided in the terms of any class or series of preferred stock with respect to
any director elected by the holders of such class or series of preferred stock.
Section II.5 Chairman of the Board.
The directors shall elect one of their members to be Chairman
of the Board of Directors. He shall perform such duties as may from time to time
be assigned to him by the Board of Directors.
Section II.6 Meetings.
A regular meeting of the Board of Directors shall be held
without notice immediately after and at the same place as the annual meeting of
stockholders. The Board of Directors may provide by resolution the time and
place, either within or outside Colorado, for the holding of additional regular
meetings without other notice.
Special meetings of the Board of Directors shall be held at
such time and place as shall be designated in the notice of the meeting. Special
meetings of the Board of Directors may be called by the Chairman of the Board,
and shall be called by the President or Secretary of the Corporation upon the
written request of not less than 75% of the members of the Board of Directors
then in office.
Section II.7 Notice of Special Meetings.
The Secretary, or in his absence any other officer of the
Corporation, shall give each director notice of the time and place of holding of
special meetings of the Board of Directors by mail at least 10 days before the
meeting, or by telegram, cable, radiogram, or personal service at least 3 days
before the meeting unless such notice requirement is waived in writing by each
member. Unless otherwise stated in the notice thereof, any and all business may
be transacted at any meeting without specification of such business in the
notice.
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Section II.8 Quorum and Organization of Meetings.
A majority of the total number of members of the Board of
Directors as constituted from time to time shall constitute a quorum for the
transaction of business, but, if at any meeting of the Board of Directors
(whether or not adjourned from a previous meeting) there shall be less than a
quorum present, a majority of those present may adjourn the meeting to another
time and place, and the meeting may be held as adjourned without further notice
or waiver. Except as otherwise provided by law, the Certificate of Incorporation
or these Bylaws, a majority of the directors present at any meeting at which a
quorum is present may decide any question brought before such meeting. Meetings
shall be presided over by the Chairman of the Board, or in his absence by such
other person as the directors may select. The Board of Directors shall keep
written minutes of its meetings. The Secretary of the Corporation shall act as
secretary of the meeting, but in his absence the chairman of the meeting may
appoint any person to act as secretary of the meeting.
Section II.9 Indemnification.
The Corporation shall indemnify members of the Board of
Directors and officers of the Corporation and their respective heirs, personal
representatives and successors in interest for or on account of any action
performed on behalf of the Corporation, to the fullest extent permitted by the
laws of the State of Delaware and the Certificate of Incorporation, as now or
hereafter in effect.
Section II.10 Executive Committee of the Board of
Directors.
The Board of Directors, by the affirmative vote of not less
than 75% of the members of the Board of Directors then in office, may designate
an executive committee, all of whose members shall be directors, to manage and
operate the affairs of the Corporation or particular properties or enterprises
of the Corporation. Subject to the limitations of the laws of the State of
Delaware, the Certificate of Incorporation and these Bylaws, such executive
committee shall exercise all powers and authority of the Board of Directors in
the management of the business and affairs of the Corporation 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 Board of Directors in respect
of a particular transaction. The executive committee shall keep minutes of its
meetings and report to the Board of Directors not less often than quarterly on
its activities and shall be responsible to the Board of Directors for the
conduct of the enterprises and affairs entrusted to it.
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Section II.11 Other Committees of the Board of Directors.
The Board of Directors may by resolution establish committees
other than an executive committee and shall specify with particularity the
powers and duties of any such committee. Subject to the limitations of the laws
of the State of Delaware, the Certificate of Incorporation and these Bylaws, any
such committee shall exercise all powers and authority specifically granted to
it by the Board of Directors, which powers may include the 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 Board of Directors in respect of a particular transaction. Such committees
shall serve at the pleasure of the Board; keep minutes of their meetings; and
have such names as the Board of Directors by resolution may determine and shall
be responsible to the Board of Directors for the conduct of the enterprises and
affairs entrusted to them.
Section II.12 Committees Generally.
The Board of Directors may designate one or more directors as
alternate members of any committee, who may replace any absent or disqualified
member of any meeting of such committee. In the absence or disqualification of a
member of a committee, the member or members thereof present at any meeting and
not disqualified from voting, whether or not he or they constitute a quorum, may
unanimously appoint another member of the Board of Directors to act at the
meeting in place of any such absent or disqualified member. Each committee which
may be established by the Board of Directors pursuant to these Bylaws may fix
its own rules and procedures. Notice of meetings of committees, other than of
regular meetings provided for by such rules, shall be given to committee
members.
Section II.13 Directors' Compensation.
Directors shall receive such compensation for attendance at
any meetings of the Board of Directors and any expenses incidental to the
performance of their duties as the Board of Directors shall determine by
resolution. Such compensation may be in addition to any compensation received by
the members of the Board of Directors in any other capacity.
Section II.14 Action Without Meeting.
Nothing contained in these Bylaws shall be deemed to restrict
the power of members of the Board of Directors or any committee designated by
the Board of Directors to take any action required or permitted to be taken by
them without a meeting.
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Section II.15 Telephone Meetings.
Nothing contained in these Bylaws shall be deemed to restrict
the power of members of the Board of Directors, or any committee designated by
the Board of Directors, to participate in a meeting of the Board of Directors,
or committee, by means of conference telephone or similar communications
equipment by means of which all persons participating in the meeting can hear
each other.
ARTICLE III
OFFICERS
Section III.1 Executive Officers.
The officers of the Corporation shall be a Chairman of the
Board, a President, one or more Vice Presidents, a Treasurer, and a Secretary,
each of whom shall be elected by the Board of Directors. The Chairman of the
Board shall be elected from among the members of the Board of Directors. The
Board of Directors may elect or appoint from time to time such other or
additional officers as in its opinion are desirable for the conduct of the
business of the Corporation. Each officer shall hold office until the first
meeting of the Board of Directors following the next annual meeting of
stockholders following their respective election. Any person may hold at one
time two or more offices.
Section III.2 Powers and Duties of Officers.
The Chairman of the Board shall have overall responsibility
for the management and direction of the business and affairs of the Corporation
and shall exercise such duties as customarily pertain to the office of Chairman
of the Board and such other duties as may be prescribed from time to time by the
Board of Directors. He shall be the senior officer of the Corporation and in
case of the inability or failure of the President to perform his duties, he
shall perform the duties of the President. He may appoint and terminate the
appointment or election of officers, agents, or employees other than those
appointed or elected by the Board of Directors. He may sign, execute and
deliver, in the name of the Corporation, powers of attorney, contracts, bonds
and other obligations which implement policies established by the Board of
Directors. The Chairman of the Board shall preside at all meetings of
stockholders and of the Board of Directors at which he is present, and shall
perform such other duties as may be prescribed from time to time by the Board of
Directors or these Bylaws.
The President shall be the chief executive officer of the
Corporation and shall be responsible for the active direction of the daily
business of the Corporation and shall exercise such duties as customarily
pertain to the office of President and chief executive officer and such other
duties as may be prescribed from time to time by the Board of Directors. He may
appoint and terminate the appointment or election of officers, agents, or
employees other than those appointed or elected by the Board of Directors or the
Chairman of the Board. The
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<PAGE> 12
President may sign, execute and deliver, in the name of the Corporation, powers
of attorney, contracts, bonds and other obligations which implement policies
established by the Board of Directors. In the absence or disability of the
Chairman of the Board, the President shall perform the duties and exercise the
powers of the Chairman of the Board.
Vice Presidents shall have such powers and perform such duties
as may be assigned to them by the Chairman of the Board, the President, the
executive committee, if any, or the Board of Directors. A Vice President may
sign and execute contracts and other obligations pertaining to the regular
course of his duties which implement policies established by the Board of
Directors.
The Treasurer shall be the chief financial officer of the
Corporation. Unless the Board of Directors otherwise declares by resolution, the
Treasurer shall have general custody of all the funds and securities of the
Corporation and general supervision of the collection and disbursement of funds
of the Corporation. He shall endorse for collection on behalf of the Corporation
checks, notes and other obligations, and shall deposit the same to the credit of
the Corporation in such bank or banks or depository as the Board of Directors
may designate. He may sign, with the Chairman of the Board, the President, or
such other person or persons as may be designated for the purpose by the Board
of Directors, all bills of exchange or promissory notes of the Corporation. He
shall enter or cause to be entered regularly in the books of the Corporation a
full and accurate account of all moneys received and paid by him on account of
the Corporation; shall at all reasonable times exhibit his books and accounts to
any director of the Corporation upon application at the office of the
Corporation during business hours; and, whenever required by the Board of
Directors or the President, shall render a statement of his accounts. He shall
perform such other duties as may be prescribed from time to time by the Board of
Directors or by these Bylaws. He may be required to give bond for the faithful
performance of his duties in such sum and with such surety as shall be approved
by the Board of Directors. Any Assistant Treasurer shall, in the absence or
disability of the Treasurer, perform the duties and exercise the powers of the
Treasurer and shall perform such other duties and have such other powers as the
Board of Directors may from time to time prescribe.
The Secretary shall keep the minutes of all meetings of the
stockholders and of the Board of Directors. The Secretary shall cause notice to
be given of meetings of stockholders, of the Board of Directors, and of any
committee appointed by the Board of Directors. He shall have custody of the
corporate seal, if any, minutes and records relating to the conduct and acts of
the stockholders and Board of Directors, which shall, at all reasonable times,
be open to the examination of any director. The Secretary or any Assistant
Secretary may certify the record of proceedings of the meetings of the
stockholders or of the Board of Directors or resolutions adopted at such
meetings; may sign or attest certificates, statements or reports required to be
filed with governmental bodies or officials; may sign acknowledgments of
instruments; may give notices of meetings; and shall perform such other duties
and have such other powers as the Board of Directors may from time to time
prescribe.
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<PAGE> 13
Section III.3 Bank Accounts.
In addition to such bank accounts as may be authorized in the
usual manner by resolution of the Board of Directors, the Treasurer, with
approval of the Chairman of the Board or the President, may authorize such bank
accounts to be opened or maintained in the name and on behalf of the Corporation
as he may deem necessary or appropriate, provided payments from such bank
accounts are to be made upon and according to the check of the Corporation,
which may be signed jointly or singularly by either the manual or facsimile
signature or signatures of such officers or bonded employees of the Corporation
as shall be specified in the written instructions of the Treasurer or Assistant
Treasurer of the Corporation with the approval of the Chairman of the Board or
the President of the Corporation.
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<PAGE> 14
Section III.4 Proxies.
Unless otherwise provided in the Certificate of Incorporation
or directed by the Board of Directors, the Chairman of the Board or the
President or their designees shall have full power and authority on behalf of
the Corporation to attend and to vote upon all matters and resolutions at any
meeting of stockholders of any corporation in which the Corporation may hold
stock, and may exercise on behalf of the Corporation any and all of the rights
and powers incident to the ownership of such stock at any such meeting, whether
regular or special, and at all adjournments thereof, and shall have power and
authority to execute and deliver proxies and consents on behalf of the
Corporation in connection with the exercise by the Corporation of the rights and
powers incident to the ownership of such stock, with full power of substitution
or revocation.
ARTICLE IV
CAPITAL STOCK
Section IV.1 Stock Certificates.
Each stockholder of the Corporation shall be entitled to a
certificate certifying the class or series and number of shares represented
thereby and in such form, not inconsistent with the laws of the State of
Delaware, the Certificate of Incorporation or these Bylaws, as the Board of
Directors may from time to time prescribe.
The certificates of stock shall be signed by the Chairman of
the Board or the President and by the Secretary or the Treasurer, and sealed
with the seal of the Corporation. Such seal may be a facsimile, engraved or
printed. Where any certificate is manually signed by a transfer agent or by a
registrar, the signatures of any officers upon such certificate may be
facsimiles, engraved or printed. In case any officer, transfer agent or
registrar who has signed or whose facsimile signature has been placed upon any
certificate shall have ceased to be such before the certificate is issued, it
may be issued by the Corporation with the same effect as if such officer,
transfer agent or registrar had not ceased to be such at the time of its
issuance.
Section IV.2 Transfer of Shares.
(a) Shares of the capital stock of the Corporation may be
transferred on the books of the Corporation only by the holder of such shares or
by his duly authorized attorney, upon the surrender to the Corporation or its
transfer agent of the certificate representing such stock properly endorsed.
(b) The person in whose name shares of stock stand on the
books of the
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<PAGE> 15
Corporation shall be deemed by the Corporation to be the owner thereof for all
purposes, and the Corporation shall not be bound to recognize any equitable or
other claim to or interest in such share or shares on the part of any other
person, whether or not it shall have express or other notice thereof, except as
otherwise provided by the laws of the State of Delaware.
Section IV.3 Fixing Record Date.
In order that the Corporation may determine the stockholders
entitled to notice of or to vote at any meeting of stockholders or any
adjournment thereof, or to express consent to corporate action in writing
without a meeting, or entitled to receive payment of any dividend or other
distribution or allotment of any rights, or entitled to exercise any rights in
respect of any change, conversion or exchange of stock, or for the purpose of
any other lawful action, the Board of Directors may fix a record date, which
record date shall not precede the date upon which the resolution fixing the
record date is adopted by the Board of Directors, and which record date: (1) in
the case of determination of stockholders entitled to vote at any meeting of
stockholders or adjournment thereof, shall, unless otherwise required by law,
not be more than sixty nor less than ten days before the date of such meeting;
(2) in the case of determination of stockholders entitled to express consent to
corporate action in writing without a meeting, shall not be more than ten days
from the date upon which the resolution fixing the record date is adopted by the
Board of Directors; and (3) in the case of any other action, shall not be more
than sixty days prior to such other action. If no record date is fixed: (1) the
record date for determining stockholders entitled to notice of or to vote at a
meeting of stockholders shall be at the close of business on the day immediately
preceding the day on which notice is given, or, if notice is waived, at the
close of business on the day immediately preceding the day on which the meeting
is held; (2) the record date for determining stockholders entitled to express
consent to corporate action in writing without a meeting, when no prior action
of the Board of Directors is required by law, shall be the first date on which a
signed written consent setting forth the action taken or proposed to be taken is
delivered to the Corporation in accordance with applicable law, or, if prior
action by the Board of Directors is required by law, shall be at the close of
business on the day on which the Board of Directors adopts the resolution taking
such prior action; and (3) the record date for determining stockholders for any
other purpose shall be at the close of business on the day on which the Board of
Directors adopts the resolution relating thereto. A determination of
stockholders of record entitled to notice of or to vote at a meeting of
stockholders shall apply to any adjournment of the meeting; provided, however,
that the Board of Directors may fix a new record date for the adjourned meeting.
Section IV.4 Lost Certificates.
The Board of Directors or any transfer agent of the
Corporation may direct a new certificate or certificates representing stock of
the Corporation to be issued in place of any
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<PAGE> 16
certificate or certificates theretofore issued by the Corporation, alleged to
have been lost, stolen, or destroyed, upon the making of an affidavit of that
fact by the person claiming the certificate to be lost, stolen, or destroyed.
When authorizing such issue of a new certificate or certificates, the Board of
Directors (or any transfer agent of the Corporation authorized to do so by a
resolution of the Board of Directors) may, in its discretion and as a condition
precedent to the issuance thereof, require the owner of such lost, stolen, or
destroyed certificate or certificates, or his legal representative, to give the
Corporation a bond in such sum as the Board of Directors (or any transfer agent
so authorized) shall direct to indemnify the Corporation against any claim that
may be made against the Corporation with respect to the certificate alleged to
have been lost, stolen, or destroyed or the issuance of such new certificates,
and such requirement may be general or confined to specific instances.
Section IV.5 Transfer Agent and Registrar.
The Board of Directors may appoint one or more transfer agents
and one or more registrars, any may require all certificates for shares to bear
the manual or facsimile signature or signatures of any of them.
Section IV.6 Regulations.
The Board of Directors shall have power and authority to make
all such rules and regulations as it may deem expedient concerning the issuance,
transfer, registration, cancellation, and replacement of certificates
representing stock of the Corporation.
ARTICLE V
GENERAL PROVISIONS
Section V.1 Offices.
The Corporation shall maintain a registered office in the
State of Delaware as required by law. The Corporation may also have offices in
such other places, either within or without the State of Delaware, as the Board
of Directors may from time to time designate or as the business of the
Corporation may require.
Section V.2 Corporate Seal.
The corporate seal shall have inscribed thereon the name of
the Corporation, the year of its organization, and the words "Corporate Seal"
and "Delaware."
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<PAGE> 17
Section V.3 Fiscal Year.
The fiscal year of the Corporation shall be determined by
resolution of the Board of Directors.
Section V.4 Notices and Waivers Thereof.
Whenever any notice whatever is required by law, the
Certificate of Incorporation or these Bylaws to be given to any stockholder,
director or officer, such notice, except as otherwise provided by law, may be
given personally, or by mail, or, in the case of directors or officers, by
telegram, cable or facsimile transmission, addressed to such address as appears
on the books of the Corporation. Any notice given by telegram, cable or
facsimile transmission shall be deemed to have been given when it shall have
been transmitted, and any notice given by mail shall be deemed to have been
given three business days after it shall have been deposited in the United
States mail with postage thereon prepaid.
Whenever any notice is required to be given by law, the
Certificate of Incorporation, or these Bylaws, a written waiver thereof signed
by the person entitled to such notice, whether before or after the meeting or
the time stated therein, shall be deemed equivalent in all respects to such
notice to the full extent permitted by law.
Section V.5 Saving Clause.
These Bylaws are subject to the provisions of the Certificate
of Incorporation and applicable law. In the event any provision of these Bylaws
is inconsistent with the Certificate of Incorporation or the corporate laws of
the State of Delaware, such provision shall be invalid to the extent only of
such conflict, and such conflict shall not affect the validity of any other
provision of these Bylaws.
Section V.6 Amendments.
In furtherance and not in limitation of the powers conferred
by the laws of the State of Delaware, the Board of Directors, by action taken by
the affirmative vote of not less than 75% of the members of the Board of
Directors then in office, is hereby expressly authorized and empowered to adopt,
amend or repeal any provision of these Bylaws.
Subject to the rights of the holders of any class or series of
preferred stock, these Bylaws may be adopted, amended or repealed by the
affirmative vote of the holders of not less than 66_% of the total voting power
of the then outstanding capital stock of the Corporation entitled to vote
thereon; provided, however, that this paragraph shall not apply to, and no vote
of the stockholders of the Corporation shall be required to authorize, the
adoption, amendment or repeal of any provision of these Bylaws by the Board of
Directors in accordance with the preceding paragraph.
- 17 -
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