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As filed with the Securities and Exchange Commission on March 31, 1998.
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from ________________ to ________________.
COMMISSION FILE NUMBER 0-22815
TCI MUSIC, INC.
(Exact name of registrant as specified in its charter)
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DELAWARE 84-1380293
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
8101 EAST PRENTICE AVENUE, SUITE 500
ENGLEWOOD, CO 80111
(Address of principal executive offices) Zip code
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Registrant's telephone number, including area code: (303) 267-5500
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act: Common Stock, $0.01
Par Value
Indicate by check mark whether registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [X]
Unless otherwise specifically indicated, all monetary references in this filing
are in U.S. dollars.
As of January 31, 1998 the aggregate market value of the Common Stock held by
non-affiliates of TCI Music, Inc. was approximately $18,469,509.
Number of shares of Common Stock of TCI Music, Inc. outstanding as of January
31, 1997: 18,237,356 shares.
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TABLE OF CONTENTS Page
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PART I
Item 1. Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Item 2. Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Item 3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Item 4. Submission of Matters to a Vote of Security Holders . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
PART II
Item 5. Market for TCI Music, Inc.'s Common Equity and Related Stockholder Matters . . . . . . . . . . . . . . . . 17
Item 6. Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations . . . . . . . . . . 20
Item 8. Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Item 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure . . . . . . . . . . . 26
PART III
Item 10. Directors and Executive Officers. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Item 11. Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
Item 12. Security Ownership of Certain Beneficial Owners and Management . . . . . . . . . . . . . . . . . . . . . . 34
Item 13. Certain Relationships and Related Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . 47
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PART I
ITEM 1. BUSINESS.
GENERAL DEVELOPMENT OF BUSINESS.
TCI Music, Inc. , a Delaware corporation("TCI Music" or the "Company")
was incorporated in January 1997 as a wholly-owned subsidiary of
Tele-Communications, Inc. ("TCI") for the purpose of acquiring DMX Inc., a
Delaware corporation ("DMX"). Since its formation, the Company has acquired
three businesses: DMX on July 11, 1997, The Box Worldwide, Inc. a Florida
corporation ("The Box") on December 16, 1997, and Paradigm Music Entertainment
Company, a Delaware Corporation ("Paradigm") on December 31, 1997. DMX is
primarily engaged in programming, distributing and marketing an audio digital
music service, which provides continuous commercial-free CD-quality music
programming. The Box is primarily engaged in programming, distributing and
marketing an interactive music video television programming service to cable
television systems and low power television stations and full power broadcast
stations via satellite delivery. Paradigm operates two music distribution web
sites: SonicNet and Addicted to Noise. The Company acquired DMX to provide
digital audio services to both residential and commercial markets; The Box to
serve as the platform for music video; and Paradigm to provide music-related
content to DMX and The Box and to position itself to take advantage of
developments in music distribution through the Internet. TCI Music's business
for the six months ended December 31, 1997 consisted principally of the
business of DMX.
DMX Merger.
On July 11, 1997, 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 Music 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.
Pursuant to the DMX Merger, TCI Music became the successor registrant to DMX.
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 TCI (as designee
of certain of its indirect subsidiaries), 62,500,000 shares of TCI Music Series
B Common Stock, par value $.01 per share ("TCI Music Series B Common Stock"),
and a promissory note in the amount of $40 million, (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"); (iii) TCI contributed to TCI Music certain digital
commercial tuners that were 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 Series A
Common Stock, $.01 par value per share, of TCI Music ("TCI Music Series A Common
Stock") acquired by such stockholder in the DMX Merger pursuant to the terms of
a Rights Agreement among TCI, TCI Music and The Bank of New York to require TCI
to purchase from such holder one share of TCI Music Series A Common Stock at a
purchase price of $8.00 per share payable at the election of TCI, in cash, a
number of shares of Tele-Communications, Inc. Series A TCI Group Common Stock,
par value $.01 per share, ("TCI Group Series A 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 with associated TCI Rights does not equal or exceed $8.00 per share
for a period of at least 20 consecutive trading days.
Upon consummation of the DMX Merger, each outstanding share of Common
Stock of DMX, $.01 par value per share ("DMX Common Stock"), was converted into
the right to receive (i) one-quarter of a share of TCI Music Series A Common
Stock, (ii) one TCI Right with respect to each whole share of TCI Music Series
A Common Stock and (iii) cash in lieu of fractional shares of TCI Music Series
A Common Stock and TCI Rights.
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Effective July 11, 1997, TCI Music, as the successor registrant to
DMX, changed its fiscal year end from September 30 to December 31, and reported
the nine month transition period ended June 30, 1997 on the Transition Report
on Form 10-K filed on October 9, 1997.
The Box Merger.
On December 16, 1997, TCI Music, TCI Music Acquisition Sub, Inc., a
Florida corporation and a wholly-owned subsidiary of TCI Music, and The Box,
consummated a merger pursuant to an Agreement and Plan of Merger dated as of
August 12, 1997 (the "Box Merger Agreement"), whereby 24,892,623 outstanding
shares of common stock of The Box were converted into the right to receive a
fraction of a share of TCI Music Series A Convertible Preferred Stock, $.01 par
value per share ("TCI Music Preferred Stock"), equal to the quotient of $1.50
divided by three times the average of the average daily closing bid and asked
prices of one share of TCI Music Series A Common Stock trading with an
associated TCI Right, for a period of 20 consecutive trading days ending on the
third trading day prior to the closing of the Box Merger as reported on the
Nasdaq SmallCap Market and cash in lieu of fractional shares of Music Series A
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. 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 $2,652,466.
Paradigm Merger.
On December 31, 1997, TCI Music, Inc., TCI Para Merger Sub, Inc., a
wholly-owned subsidiary of TCI Music, and Paradigm, consummated a merger
pursuant to an Agreement of Merger, dated as of December 8, 1997 (the "Paradigm
Merger Agreement"), whereby, an aggregate of 4,272,174 outstanding shares of
Class A Common Stock, Class B Common Stock and Class E Common Stock of Paradigm
were converted into a number of shares of TCI Music Series A Common Stock
without TCI Rights determined by dividing $24,000,000 by the average of the
average daily closing bid and asked prices of one share of TCI Music Series A
Common Stock trading with an associated TCI Right, for a period of 20
consecutive trading days ending on the third day prior to the closing of the
Paradigm Merger as reported on the Nasdaq SmallCap Market and cash in lieu of
fractional shares. Additionally, under the terms of the Paradigm Merger
Agreement, TCI Music made a cash payment of approximately $5,332,000 to Paradigm
for working capital needs and payment of Paradigm debt.
The TCI Rights are not separable from and trade together with the TCI
Music Series A Common Stock issued in the DMX Merger on the Nasdaq SmallCap
Market under the symbol "TUNE". Accordingly, the market price of one share of
TCI Music Series A Common Stock, includes the value, if any, ascribed by the
market to a TCI Right. The shares of TCI Music Series A Common Stock issued in
the Paradigm Merger and into which the TCI Music Preferred Stock issued in the
Box Merger is convertible do not have any such associated TCI Rights. If a
holder of TCI Music Preferred Stock converts shares of TCI Music Preferred Stock
into shares of TCI Music Series A Common Stock prior to the termination or
expiration of the TCI Rights, the TCI Music Series A Common Stock without the
TCI Rights received upon conversion will not be tradable on the Nasdaq SmallCap
Market under the Symbol "TUNE" with the TCI Music Series A Common Stock that
includes the TCI Rights until such TCI Rights terminate or expire.
TCI Music had three classes of stock outstanding at December 31, 1997:
TCI Music Series A Common Stock and TCI Music Series B Common Stock and the TCI
Music Preferred Stock (collectively the "TCI Music Stock"). TCI beneficially
owns approximately 4.8% of the outstanding TCI Music Preferred Stock, 37.7% of
the outstanding shares of TCI Music Series A Common Stock and 100% of the
outstanding shares of TCI Music Series B Common Stock, which collectively
represents 97.5% of the voting power of the outstanding shares of TCI Music
Stock.
Certain statements in this Annual Report on Form 10-K (this "Report")
constitute "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. Such forward-looking statements
involve known and unknown risks, uncertainties and other important factors that
could cause the actual results, performance or achievements of TCI Music and
subsidiaries or industry results, to differ materially from any future results,
performance or achievements expressed or implied by such forward-looking
statements. Such risks, uncertainties and other factors include, among others:
general economic and business conditions and industry trends; the continued
strength of the multichannel video programming distribution industry and the
satellite services industry; uncertainties inherent in proposed business
strategies and development plans; rapid technological changes; future financial
performance, including availability,
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terms and deployment of capital; availability of qualified personnel; changes
in, or the failure or the inability to comply with, government regulation,
including, without limitation, regulations of the Federal Communications
Commission, and adverse outcomes from regulatory proceedings; changes in the
nature of key strategic relationships with partners and joint venturers;
competitor responses to the Company's products and services, and the overall
market acceptance of such products and services, including acceptance of the
pricing of such products and services; and other factors referenced in this
Report. These forward-looking statements speak only as of the date of this
Report. The Company expressly disclaims any obligation or undertaking to
disseminate any updates or revisions to any forward-looking statement contained
herein to reflect any change in the Company's expectations with regard thereto
or any change in events, conditions or circumstances on which any such
statement is based.
DESCRIPTION OF BUSINESS.
The Company, through its subsidiaries DMX, The Box and Paradigm, is 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.
Digital Audio - DMX.
DMX is primarily engaged in programming, distributing and marketing a
digital music service (the "DMX Service"), Digital Music Express(R) ("DMX
Service"), which provides continuous, commercial-free, CD-quality music
programming. The DMX music formats are programmed within various music genres
which include: Classical, Jazz, Rock, Oldies, Country, Latin, Urban, Pop/Adult
Contemporary, Instrumental, International and Specialty. Within each music
genre, DMX offers a variety of format selections which are more unique and
narrowly defined than typically would be found on a commercial radio station.
DMX services are delivered by cable, Ku-Band direct broadcast satellite ("DBS")
or via on-premise disc. DMX currently offers 30 and 97 formats for cable
distribution and DBS, respectively. In addition, DMX currently has over 200
titles in its library catalogue for DMX-Disc distribution where cable and DBS
are not available ("DMX-Disc"). DMX programs each DMX format to provide more
music within each music format than a consumer typically would find on a radio
station, without the high level of repetition commonly found in radio
programming. DMX also offers subscribers the ability to match a "mood" or
social environment with music at the touch of a button. As an example, a
restaurant may choose to play Chamber Music at breakfast, Lite Jazz at lunch,
and Great Singers at dinner. DMX delivers its DMX Service by three different
distribution methods: Cable Distribution, Satellite Distribution and DMX-Disc.
Cable Distribution - Cable operators generally offer the DMX Service
to their subscribers for a separate a la carte fee. Customers who subscribe to
the DMX Service receive the DMX signal through the same coaxial cable used to
distribute video cable signals, which is connected through a separate DMX tuner
(Tuner Distribution) to a customer's stereo system. In order to receive the
DMX Service via Tuner Distribution, residential subscribers must subscribe to
cable video programming from their cable operator; commercial subscribers may,
but do not need to, subscribe to video programming to receive the DMX Service.
Under DMX's affiliation agreements with cable operators, the operators
generally have the right, but not the obligation, to distribute the DMX Service
to subscribers, and pay a per subscriber license fee to DMX for each paying
subscriber receiving the DMX Service. The cable operator sets the fees charged
to its commercial and residential subscribers, which are generally higher than
the corresponding license fees paid by the cable operator to DMX. License fees
vary depending on whether the subscriber is a commercial establishment or a
private residence.
For example, a cable operator might charge a residential DMX
subscriber $9.00 per month for DMX music service and, pursuant to its
affiliation agreement with DMX, pay DMX $3.00 per paying subscriber as a
license fee. A similar fee structure exists with cable operators with respect
to commercial subscribers, but both subscriber fees and license fees are
significantly higher for commercial subscribers, with DMX's license fee often
based on the greater of a minimum fee or a percentage of the fee charged to the
commercial subscriber.
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Satellite Distribution - DMX Service is delivered, for a monthly
subscriber fee, by DBS to small satellite dishes transmitted from the Ku-Band
satellite directly to residential and commercial subscribers or as part of a
package of video and music programming delivered by DBS distributors, such as
PRIMESTAR or cable digital program providers such as Headend in the Sky
("HITS") by TCI ("Satellite Distribution"). DMX's affiliation agreements with
the DBS operators and cable digital program providers generally provide for a
relatively small per subscriber license fee attributable to the DMX Service and
payable to DMX for each subscriber that purchases a package of video and music
services.
DMX-Disc - DMX Service is offered as an on-premise business music
service via DMX-Disc. The DMX-Disc service offers flexibility in situations
where rooftop DBS installations are not possible, or where another building
might block the signal path from DMX's satellite, through the use of on-premise
equipment and custom DMX programmed CDs. DMX-Disc uses a compact disc
interactive player and a custom programmed library of CDs. These CDs are
manufactured by DMX using a compression scheme which allows for over four hours
of pre-recorded music to be played from one CD. Through the distribution and
rotation of library CDs, a DMX-Disc customer is ensured of always having a fresh
DMX playlist, mirroring the playlist from the DBS feed.
DMX serves more than 900 affiliates comprised of cable systems, owned
and operated offices, DBS program providers and independent franchises in 50
states. DMX currently is accessible to more than 18 million cable subscribers
and 11 million businesses in the United States. DMX distributes music
throughout the United States, Canada, Mexico, Latin America, the Caribbean and
Sub-Sahara Africa.
Digital Compression Technology. Cable operators have recently begun
to offer a new method of distributing video and other programming using digital
compression technology ("Digital Distribution"). Digital compression
technology can compress, on average, as many as 12 of the current analog video
signals into the space normally occupied by one. Such technology improves
picture quality and allows for carriage of significantly more video product
offerings without cable operators having to build new cable plant. The
technology is distributed through TCI's HITS, that enables TCI and each other
participating cable operator to increase their program offerings and create new
packages that could include, if they so choose, the DMX Service as part of a
package of video and music services. Digital Distribution permits subscribers
to receive video and music signals through a single standard set-top-tuner or
"box" without the use of a separate tuner for music, as is currently the case
with Tuner Distribution. TCI began offering such service to selected markets
during 1997.
The launch of digital compression technology has the potential to
provide an additional distribution market for the DMX Service. If cable
operators utilizing Digital Distribution, such as TCI, elect to offer DMX
Services as part of one or more digital video programming packages, the DMX
Service will be provided to customers who might not otherwise elect to
subscribe to DMX Services as a separate premium service. However, the launch
of and the transition to Digital Distribution may also have the effect of
materially reducing DMX's residential subscriber fee revenues from Tuner
Distribution as a result the expected change from the separate fee structure
currently in effect for Tuner Distribution to a small per subscriber fee
structure similar to that in effect for Satellite Distribution. TCI Music
expects that license fees paid by cable operators for Digital Distribution that
include DMX Services in their digital packages will be in the range of $.25 to
$.50 per subscriber, which are much lower than the separate fees for the DMX
Service now paid to DMX under affiliation agreements currently in effect.
While a substantial increase in the overall number of residential subscribers
purchasing digital packages that include the DMX Service could result in
revenues equal to or exceeding the revenues from residential subscribers
currently electing to purchase the DMX Service for a separate fee, such a
result depends on a number of factors over which TCI Music has no control,
including whether cable operators elect to include the DMX Service as part of
their digital packages, the acceptance by consumers of the digital products and
whether those electing to purchase the digital packages are already DMX
subscribers. TCI Music cannot predict the number of DMX residential
subscribers that will elect to receive a digital package that includes DMX when
it is offered.
The new license fee structure for Digital Distribution will not affect
the Annual TCI Payments that TCI will pay to TCI Music or DMX under the Amended
Contribution Agreement. Although no assurances can be given, TCI Music does
not expect the launch of Digital Distribution to affect the current rate
structure of commercial cable subscribers or Satellite Distribution.
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TCI Music expects that Tuner Distribution will continue to be
available in markets where Digital Distribution has not been introduced.
However, because Tuner Distribution utilizes more of the cable spectrum than is
currently used to deliver one video channel, it is likely that some cable
operators, including TCI, may decide to eliminate Tuner Distribution of DMX
Services in certain markets to recover or maintain channel capacity for Digital
Distribution. If TCI or any other cable operator other than TCI that pays DMX
a flat fee for distribution of the DMX Service terminates Tuner Distribution in
any market, all revenues from residential and commercial subscribers receiving
the DMX Service via Tuner Distribution in such market would terminate, unless
such residential subscribers elect to purchase a video and music programming
package through Digital Distribution, and Digital Distribution and other
distribution means were made available to commercial subscribers. Accordingly,
DMX's and TCI Music's revenues could be materially adversely affected if Tuner
Distribution were terminated by cable operators.
Likewise, although cable operators may not as readily terminate Tuner
Distribution to commercial DMX subscribers, because they generally enter into
short term written contracts with commercial subscribers that obligate them to
provide such services, they may still choose to recover channel capacity by
terminating such agreements. In such event, all revenues from commercial
subscribers receiving the DMX Service would also be eliminated unless
alternative delivery means such as Satellite Distribution or Digital
Distribution were made available to and accepted by the commercial subscriber.
If Tuner Distribution were to be eliminated, TCI Music expects that substantial
additional expenses would be incurred to retain such commercial subscribers,
such as marketing and equipment expenses, which could offset the revenues
retained. In addition, an available alternative distribution method may result
in increased costs to the subscriber in monthly fees and/or equipment. As a
result, there would be a substantial risk that some commercial subscribers
would choose to terminate the DMX Service. Accordingly, DMX's and TCI Music's
revenues could be materially adversely affected if Tuner Distribution were
terminated by cable operators.
Music Video - The Box.
The Box (formerly Video Jukebox Network, Inc.) is primarily engaged in
programming, distributing and marketing an interactive music video television
programming service known as THE BOX(R) (the "BOX Service"), operating on a
continuous basis. The Box currently exhibits its television programming
through 102 box units installed in cable television systems, 46 box units
installed in low power television stations and 11 boxes installed in full power
broadcast stations. The BOX Service is available to approximately 41.4 million
households in 155 cities located in 35 states and in Washington, D.C., Puerto
Rico, Argentina, Aruba, Chile, Holland, Italy, New Zealand, Peru, and
Venezuela.
The Box also broadcasts a national satellite version of the BOX
Service on Transponder 13 on the Hughes satellite Galaxy 7. An additional
estimated 2.2 million households are presently receiving the BOX Service
through its digital satellite delivery. Transponder and uplink services are
provided by National Digital Television Center, Inc., a wholly owned subsidiary
of TCI ("NDTC").
Viewers of the BOX Service can passively watch The Box programming or
can actively participate in determining its programming by selecting specific
music videos. Viewers make their selections by dialing a 900 telephone number
(or comparable telephone technology) and entering, via touch-tone telephone, a
three-digit code assigned to the music video. This allows the viewer to
directly communicate with The Box's local box computer. When the computer
receives the viewer's request, an acknowledgment appears on all television
screens in the local system tuned to the BOX Service. Viewers selecting music
videos aired on the BOX Service are charged a fee. Viewers who watch the BOX
Service passively pay no charges above their cost for cable service. The BOX
Service presents approximately eight minutes of advertising each hour
integrated between videos.
Transmission of The Box programming can be accomplished through the
use of only one cable television channel, one broadcast television channel or
through satellite delivery, none of which requires addressable technology.
Viewers do not need additional hardware to watch the BOX Service or to select
music videos interactively. The one exception is that a digital receiver is
necessary for home satellite dishes to pick up the satellite transmission.
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The Box is one of the only companies to deliver an interactive
television product to millions of homes in the United States and around the
globe. The Box has advanced the original analog technology to a new digital
format and has converted all U.S. boxes to this format except for low
performing boxes, which were switched to The Box's satellite feed. This new
digital technology allows the Company to further localize all programming,
deliver an improved on-air look, expand advertising inventory due to random
access of digital files, eliminate significant operating expenditures and
provide refurbished analog boxes necessary for international expansion.
Internet and Other Music Products - Paradigm.
Paradigm is an entertainment company with a limited operating history,
having commenced operations in November 1995. Its primary focus has been on
its operations through its subsidiary SonicNet, Inc.'s ("SonicNet"), two music
web sites, SonicNet (http://www.sonicnet.com) and Addicted to Noise ("ATN")
(http://www.addict.com). These sites provide artist interviews, music
performances, editorial music industry and consumer news product reviews and
related interactive consumer directed programming. Paradigm also operates
Paradigm Associated Labels ("PAL"), a portfolio of genre specific record labels
which produce record releases of new artists, compilations and catalog
reissues.
The emphasis of SonicNet's web site is to inform consumers of new
artists and their performances and provide interviews and chats with artists,
product samples and reviews and the option to purchase related artist music
products and merchandise. SonicNet currently utilizes Music Boulevard, a
third-party online distribution service, to effect sales of artist music
products and merchandise. Paradigm intends to develop its own online direct
selling capabilities within the next 12-24 months in conjunction with third
parties. ATN is an online music magazine and music news and information
provider. ATN's main feature is the "Daily Music News of the World" (updated
several times daily with breaking news items) which provides viewers with news
associated with the music industry, artists, products, etc. Album reviews are
also included on the site. In addition to music news, ATN also has feature
stories and/or interviews with top artists such as Pearl Jam, REM, Oasis,
Phish, Smashing Pumpkins and Bruce Springsteen, which are enhanced with audio
and video clips. SonicNet also offers cybercast concerts and launched a series
of cybercasts during the summer of 1997 called "Supercasts" which included
cybercasts of numerous festivals such as the Tibetan Freedom Festival, the
Lilith Fair, Lolapalooza, WARP Tour, H.O.R.D.E., Further Festival, Oz Fest, and
ROAR Festival.
Since acquiring SonicNet in 1997, Paradigm has also launched a
syndicated music news service whose initial customers include Pointcast, Inc.
(the leading push technology service), "The Hub," (a destination feature of
America Online), and Yahoo (Internet search service). As part of its music
news services, SonicNet repackages and syndicates the music news content of the
ATN website, which is linked to SonicNet's website, and procures advertisers to
be included on such website. SonicNet has also commenced publishing
www.trouserpress.com, the exclusive online edition of the definitive music
guide to new wave, punk and alternative music and the Alternative Buyers Guide,
an online electronic guide for new music consumers. SonicNet's revenues, which
to date have been minimal, are currently derived solely from advertising and
syndication fees. Companies advertising their goods and services on SonicNet's
website currently include Levi Strauss & Co., Sony Station, Carter-Wallace,
Inc., Ford Motor Company, J Crew, Microsoft, Kenwood and Intel Corp. Paradigm
has expanded SonicNet overseas through an agreement with Japan's Digital Garage
to provide exclusive SonicNet feed, translated into Japanese and custom
packaged for the Japanese youth market and an agreement with Telstra (the
national telephone company of Australia) for Australia and parts of the Far
East.
PAL's focus has been the development of new artist releases and
related artist development, encompassing modern rock, alternative, power-pop,
dance and techno artists. PAL currently has three wholly-owned Independent
Labels: Paradigm Records, Big Deal and Mutant Sound Systems ("Mutant"), each of
which maintains a separate roster of artists with a separate and distinct
repertoire focus. PAL's primary focus for 1998 will shift to the creation,
production, marketing, sale and distribution of compilation projects and
special product development for both SonicNet and The Box.
Paradigm initially recruited new and emerging artists from the
alternative rock/pop genre but has diversified into the electronic music genre
in 1997 through Mutant. In addition, Paradigm may purchase outright or license
a finished single or album by an artist in these or other genres.
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Paradigm has also developed a catalog of classic rock archival
recordings to which Paradigm has the exclusive right to own, control or
exploit. Rights have been acquired to approximately 2,000 master recordings by
way of catalog acquisitions and related license agreements. Paradigm intends
to acquire rights to additional master recordings. Paradigm will also attempt
to enter into license agreements with the major labels in order to more
fully exploit its catalog.
TECHNOLOGY.
DMX has rights to use the technology used in the origination,
distribution and reception of DMX via cable, DBS, and DMX-Disc. Affiliated
cable operators use special equipment designed to receive the DMX signal and
then deliver it over the existing cable network to cable subscribers in the
affiliated operator's system. Each subscriber (other than those receiving DMX
via Digital Distribution) must be equipped with a special DMX cable tuner (the
"DM-2000" tuner), which is designed to connect to the existing coaxial cable
used for other cable programming services and to any commercial stereo system
using industry standard audio jacks. Subscribers receiving DMX via direct
broadcast satellite must be equipped with a small satellite dish antenna and a
DMX DBS receiver (the "DR-200" receiver), which like the DM-2000 tuner
connects directly to any stereo system. Either tuner allows the subscriber to
select any of the available formats at any time. The tuner can be controlled
manually, or by a hand held remote control device. One such remote control
device, the DMX*DJ(R), compatible with both tuners, provides the subscriber
with complete programming information about any song being heard on DMX. The
information is shown in a display window on the DMX*DJ using a liquid crystal
display. Programming information provided includes: song title, artist,
composer, album title, record company label, DMX identification number and
chart position, if any. A basic remote control is also available which
controls the necessary functions on each tuner, but does not include the
display of programming information.
DMX is transmitted using multiple distribution technologies based on
various compression algorithms which allow the signal to be delivered to the
subscriber in CD quality fidelity. These compression technologies are known as
SuperSound, AC-3 and MUSICAM. The SuperSound scheme is currently used for U.S.
cable transmission and was also used for European cable transmission. AC-3 is
currently used for U.S. DBS transmission. MUSICAM was used for European DTH
transmission and could ultimately replace SuperSound for European cable
transmission. DMX expects to be in a position to offer the U.S. Cable
operators currently using SuperSound the option of migrating to AC-3 or
MUSICAM, based on the standard adopted for the U.S. market as digital
compression technology becomes widely-used.
RESEARCH & DEVELOPMENT.
The Company views its research and development efforts as a key
component of maintaining its leadership position in digital audio. In order to
keep its technology at the forefront and to deliver DMX using multiple
distribution paths, the Company is continuing research and development
activities which include refinements to its residential and commercial DBS
technology and the development of AC-3 and MUSICAM compression compatible
technology for use in distributing its cable delivered signal.
SATELLITES.
There are a limited number of satellites with orbital positions
suitable for transmission of DMX's and The Box's signals and a limited number
of available transponders on those satellites. Satellite transponders receive
signals, translate signal frequencies and transmit signals to receiving
satellite dish antennas. DMX and The Box (in connection with a national
version of its programming) sublease transponder capacity form NDTC, which also
provides facilities for uplink transmission of DMX's and The Box's signals to
the transponders. NDTC in turn, leases the satellite transponder capacity on
the satellite known as Satcom C-3 (Transponder 24) from GE American
Communications, Inc., the satellite known as Loral Telstar 4, formerly known as
AT&T Telstar 402R, from AT&T Skynet in connection with the transmission of
DMX's signals and the Hughes satellite known as Galaxy 7 (Transponder 13) in
connection with the transmission of The Box's signals. The term of DMX's
principal transponder sublease with NDTC for the Satcom satellite runs through
the end of the life of that satellite or April 2005, whichever is earlier. The
term of DMX's transponder sublease with NDTC for the Loral Telstar 4 runs
through February 2000. Although there has never been sustained interruption of
DMX's or The Box's signals due to transponder failure or satellite
unavailability, failure or loss, no assurance can be given that any such event
will not occur in the future. If such an event were to occur or if NDTC were
unable to provide transponder services to DMX or The Box, DMX or The Box would
have to seek alternative transponder or satellite facilities. However,
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<PAGE> 10
alternative facilities may not be available on a timely or cost-effective basis
and may require the expense of repositioning each DBS subscriber's satellite
dish in order to receive signals from another satellite. Any one or more of
these events could require DMX or The Box, as the case may be, to incur
additional expenditures and could degrade DMX's or The Box's ability to serve
its customer base and have a material adverse effect on the Company's financial
condition and results of operations. If DMX or The Box is required to enter
into new transponder lease agreements, no assurance can be given that it will
be able to do so on terms as favorable as those in its current agreements with
NDTC.
COMPUTER SYSTEMS AND SOFTWARE COMPATIBILITY IN THE YEAR 2000.
Many existing computer programs use only two digits to identify a year
in a date. If not corrected, many computer applications and systems could fail
or create erroneous results by or at the year 2000. Additionally, TCI Music is
planning a program of communications with its significant suppliers, customers
and affiliated companies to determine the readiness of these third parties and
the impact on the Company as a consequence of their own year 2000 issues. TCI
Music's manual assessment of the impact of the year 2000 date change should be
complete by mid-1999. TCI Music is in the process of identifying computer
systems and software that may not function correctly in the year 2000. TCI
Music believes that it will be able to identify, and, if necessary, modify or
replace such systems and software before any year 2000 associated problems
arise. No assurances can be given that such modification and replacement will
be completed before any year 2000 associated problems arise or that increased
costs arising from unanticipated problems will not have a material adverse
effect on the Company.
MUSIC RIGHTS.
DMX has entered into agreements or is operating under interim
agreements with the American Society of Composers, Authors and Publishers
("ASCAP"), Broadcast Music Inc. ("BMI"), and the Society of European Stage
Authors and Composers ("SESAC"). The agreements provide for performance
royalties to be paid by DMX for all music played on DMX in the United States.
DMX has an agreement with ASCAP for commercial distribution with a
term through May 1999. The residential agreement with ASCAP is currently
governed by an interim, industry-wide agreement that will remain in effect
until such time as new industry rates are determined. During 1995, DMX entered
into a new residential agreement with BMI, with a term extending through
September 30, 1999. DMX's agreement with BMI for commercial distribution has
expired, and DMX is currently operating under a month-to-month extension. DMX
is part of an industry-wide negotiating group currently discussing renewal
terms, and expects terms to be finalized in the near future. DMX's agreements
with SESAC for residential and commercial distribution both expired in June
1997. Certain of the agreements that are being negotiated on an industry wide
basis over new rate structures may require retroactive rate increases. DMX has
continued to accrue royalties that are under negotiations based on its best
estimates, after consultation with legal counsel and consideration of the terms
and rates of the expired contracts.
DMX was involved in an arbitration proceeding with the Recording
Industry Association of America regarding royalty rates which will be payable
to the sound recordings owners pursuant to the Digital Performance Right in
Sound Recordings Act of 1995 (the "1995 Digital Act") (see "Business -
Government Regulation").
Music videos on The Box are played through negotiated license
agreements with organizations that represent composers. The Company currently
pays no fee to the distributors of these music videos played in the Untied
States; however, there can be no assurance that the Company will continue to
obtain music videos for airing in the United States at no charge or on terms
deemed satisfactory to the Company. Fees are paid for performance and composer
rights in international markets where the Company operates.
COMPETITION.
TCI Music, DMX, The Box and Paradigm each face significant competition
in their respective industries. TCI Music and DMX compete with other providers
of cable television and DBS programming (including competitors who provide
digital music programming similar to the DMX Service) for subscribers of,
relationships with, and channel space on, cable television and DBS systems and
The Box competes with other music programming providers.
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DMX currently has one main competitor in the residential marketplace,
Music Choice. DMX principally competes for third party cable and DBS
affiliations with Music Choice. Most of DMX's affiliation agreements prohibit
a distributor from offering a competitive music service and it is also unlikely
that a cable operator or other affiliated distributor would introduce a
competitive digital audio service because of channel capacity. As a result,
DMX does not directly compete with Music Choice for subscribers once an
affiliation agreement is signed.
In the direct-to-home residential DBS marketplace, DMX is carried by
PRIMESTAR networks. Music Choice is carried on DirecTV. Muzak, one of DMX's
competitors in the commercial marketplace, secured residential DBS distribution
with Echostar Communication Corporation's DISH Network. DMX entered into an
agreement with Sky-LA and DMX is currently being offered in Mexico and Latin
America.
DMX also competes in the commercial marketplace, through its
Commercial Division DMX for Business(R) with other programmed business music
providers, such as Muzak and AEI. However, the distribution technology and the
quality and quantity of music programming is significantly different. As an
example, Muzak does not offer cable distribution and only has 16 channels on
its standard analog DBS system. Although Muzak does have 60 channels on the
Echostar DISH Network, that service does not provide the management control
functions required by the commercial marketplace. AEI only offers 6 channels
from its analog DBS service. All other competitors offer fewer music
programming options, compared to DMX's 97 options available on DBS. DMX for
Business is competitively priced with other business music services.
The television programming business in the United States is highly
competitive. The Box competes for channel space and viewers with several music
video television programmers, including MTV, VH-1, BET Jazz, M2 and Much Music.
In addition, The Box competes with a large number of other cable programming
services for the limited amount of channel space presently available on cable
systems, including, among others, the History Channel and the Home and Garden
Channel. Substantially all of The Box's competitors are larger and possess
greater financial resources than The Box. The Box is not aware of any
competitor which currently offers and operates a service comparable to the
interactive component of The Box's programming.
Paradigm competes with other companies that manufacture and distribute
music recordings, many of which have substantially greater resources, including
established distribution channels, than Paradigm. In addition, Paradigm faces
competition from other providers of products, services and information
available through the Internet and Online services. Further, Paradigm relies
to a significant extent upon, and competes for, licensing arrangements which
allow Paradigm to produce and distribute its products, services and
information, In light of Paradigm's limited operating history, no assurances
can be given that Paradigm will be able to successfully compete in these
industries.
GOVERNMENT REGULATION.
In addition to regulations routinely applicable to any business,
certain segments of the Company's operations are directly regulated or
substantially affected by regulations adopted by the Federal Communications
Commission ("FCC"). For example, satellite cable video programming services,
cable television and satellite distribution systems and television stations are
subject to the Communications Act of 1934, as amended, the Cable Communications
Policy Act of 1984 (the "1984 Cable Act"), the Cable Television Consumer
Protection and Competition Act of 1992 (the "1992 Cable Act"), and/or the
Telecommunications Act of 1996 (the "1996 Telecom Act"), and rules and
regulations under such acts. The Copyright Act of 1976 also directly affects
certain Company operations.
Cable Television Systems.
The FCC regulates the providers of satellite communications services
and facilities for the transmission of satellite programming services, the
cable television systems that carry such services and to some extent the video
programming services themselves. Cable television systems are also regulated
by municipalities or other state and local government authorities.
Municipalities generally have the jurisdiction to grant and to review the
transfer of franchises, to review rates charged to subscribers, and to require
public, educational and governmental channels, except to the extent that such
jurisdiction is pre-empted by federal law. Any such rate regulations or other
franchise conditions could place downward pressure on subscriber fees earned by
the providers of cable television programming, and regulatory carriage
requirements could adversely affect the number of channels available to carry
such programming.
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Cable television systems are subject to extensive rate regulations,
which control, among other things, rate increases for changes in costs,
including programming costs, and for additional channels. The FCC's rate
regulations have impaired the willingness and ability of cable operators to add
programming services and to invest in additional cable plant to expand channel
capacity. Consequently, the cumulative impact of the FCC's rate regulation is
likely to continue to have an adverse effect on the Company's programming
interests. The 1996 Telecom Act eliminates rate regulation of non-basic tiers
in all cable systems as of March 31, 1999. However, certain members of
Congress and FCC officials have called for an extension of such rate regulation
and also have urged more rigorous rate regulation (including the imposition of
limits on pass-throughs of programming cost increases).
The 1992 Cable Act also imposed obligations upon cable operators to
carry "local" broadcast stations which choose a "must carry" right, as
distinguished from a "retransmission consent" right. The rules adopted by the
FCC generally provide for mandatory carriage by cable systems of all local
full-power commercial television broadcast signals selecting must carry status
and, depending on a cable system's channel capacity, non-commercial television
broadcast signals. On March 31, 1997, the United States Supreme Court upheld
the constitutionality of the must carry regulations. Such statutorily mandated
carriage of broadcast stations, coupled with the provisions of the 1984 Cable
Act, which require cable television systems with 36 or more "activated"
channels to reserve a percentage of such channels for commercial use by
unaffiliated third parties (leased access) and permit franchise authorities to
require the cable operator to provide channel capacity for public, educational
and governmental access, could adversely affect the Company's programming
interests by limiting the carriage of such services in cable systems with
limited channel capacity. The channel capacity devoted to must carry could
increase dramatically if television broadcast stations proceed with planned
conversions to digital transmission and the FCC determines that cable systems
must carry all analog and digital signals transmitted by television stations.
Carriage Agreements.
Under the 1992 Cable Act, the FCC adopted regulations prohibiting
cable operators from requiring a financial interest in a program service as a
condition of carriage of such service, coercing exclusive rights in a video
programming service or favoring affiliated programmers so as to restrain
unreasonably the ability of an unaffiliated video programmer to compete.
Video Programming Ownership and Carriage.
The 1992 Cable Act required the FCC to, among other things, (1)
prescribe rules and regulations establishing reasonable limits on the number of
channels on a cable system that will be allowed to carry video programming in
which the owner of such cable system has an attributable interest; and (2)
consider the necessity and appropriateness of imposing limitations on the
degree to which multichannel video programming distributors (including cable
operators) may engage in the creation or production of video programming. In
1993, the FCC adopted regulations limiting carriage by a cable operator of
national programming services in which that operator holds an attributable
interest to 40% of the first 75 activated channels on each of the cable
operator's systems. The rules provide for the use of two additional channels
or a 45% limit, whichever is greater, provided that the additional channels
carry minority controlled programming services. The regulations also
grandfather existing carriage arrangements which exceed the channel limits, but
require new channel capacity to be devoted to unaffiliated programming services
until the system achieves compliance with the regulations. Channels beyond the
first 75 activated channels are not subject to such limitations, and the rules
do not apply to local or regional programming services. These rules may limit
carriage of the Company's video programming services on certain systems of
cable operators affiliated with the Company, such as TCI. In the same
rulemaking, the FCC concluded that additional restrictions on the ability of
multichannel distributors to engage in the creation or production of video
programming presently are unwarranted.
Closed Captioning.
The 1996 Telecom Act also required the FCC to establish rules and an
implementation schedule to ensure that video programming is fully accessible to
the hearing impaired through closed captioning. On August 22, 1997, the FCC
released new rules which will require substantial closed
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captioning over an eight to ten year phase-in period with only limited
exemptions. As a result, the Company's video programming operations are
expected to incur additional costs for closed captioning.
Copyright and Royalty Payments.
The 1995 Digital Act amends U.S. copyright law to provide sound
recording owners with an exclusive performance right in sound recordings that
are performed by means of subscription service digital transmissions. The 1995
Digital Act provides a compulsory license for non-interactive subscription
services, but it does not provide a compulsory license for interactive services
which allow the listener to select performance of a musical piece based on a
menu or schedule. As a general matter, the digital performance right does not
apply to traditional radio and TV broadcasts, background music services such as
MUZAK(R), or to music transmitted at restaurants, department stores, hotels or
amusement parks in the traditional manner.
An arbitration panel formed to determine the statutory license royalty
rate to be paid under the 1995 Digital Act by the Company (and other digital
music residential subscription services) on services transmitted to
non-business subscribers rendered a decision before the United States Copyright
Office. On November 28, 1997, the arbitration panel issued a report
recommending a royalty rate of 5%. However, on January 27, 1998, the Librarian
of Congress released a notice stating that, as recommended by the Register of
Copyrights, they had decided not to adopt the "determination of the arbitration
panel in its entirety," was reviewing the arbitration panel's report and the
record, and would render his decision in the next several weeks. The final
royalty rate could have an adverse effect on the Company if the Company is
required to pay a higher license royalty rate than the rate at which the
Company has been accruing. Because the royalty rate will be retroactive to
February 1996, the Company has accrued 5% of residential subscriber fee revenue
since such date.
Television Stations.
The Company, through its wholly-owned subsidiary VJN LPTV Corp., is
authorized by the FCC to operate 20 low power television ("LPTV") stations (the
"LPTV Stations"), of which the Company is currently operating 19 LPTV Stations.
An FCC license for the ownership or operation of an LPTV station is effective
for a maximum period of five years. These licenses are renewable for another
five years if the licensee is in compliance with FCC rules. FCC regulations
require the Company to obtain approval from the FCC prior to acquiring or
selling an LPTV station. The Company also is subject to certain FCC
regulations and policies regulating the content of its programming and the
operation of its stations.
When the FCC established LPTV service, it determined that LPTV
stations would have secondary status to full- service television stations. The
Commission has concluded that, during the upcoming transition to digital
television, there is insufficient available spectrum to preserve all existing
LPTV Stations. In order to provide full service television stations with a
second digital channel, a number of LPTV stations will be displaced, especially
in the major markets. On February 23, 1998, the FCC released the final table
of digital allotments. The Company has not yet determined the impact of the
final allotment upon the LPTV Stations and its LPTV station affiliates.
"900" Telecommunications Services.
Certain Company operations are subject to rules adopted by the FCC and
Federal Trade Commission ("FTC") with respect to interstate 900
telecommunications services. The rules provide, among other things, that:
specific price and product identification information must be given before a
consumer incurs a charge in excess of $2.00 for a 900 call; where technically
feasible, local exchange carriers must provide customers with the option of
blocking all 900 calls; and a subscriber's telephone service cannot be
disconnected for failure to pay interstate 900 service charges. Several states
also are considering legislation similar to the rules adopted by the FCC.
Because the Company has taken steps to reduce chargebacks by instituting
certain credit limits and call blocking of non-paying customers, the Company
believes that the FCC and FTC rules presently do not have a material adverse
effect on the Company's business.
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Internet.
The applicability to the Internet of existing laws in various
jurisdictions governing issues such as property ownership, sales and other
taxes, libel, personal privacy, rights of publicity, language requirements and
content restrictions, is uncertain and could expose the Company to liability.
The laws of certain foreign countries provide the owner of copyrighted products
with the exclusive right to expose, through sound and video samples,
copyrighted items for sale to the public and the right to distribute such
products. Any new legislation or regulation, or the application of existing
laws and regulations to the Internet could have a material adverse effect on
the Company. For example, major U.S.-based online services (and personnel)
have been challenged by German authorities for making certain content
accessible in Germany. If the Company were alleged to violate federal, state
or foreign, civil or criminal law, even if the Company successfully defended
such claims, it could have a material adverse effect on the Company.
The Company believes that its use of third party material on its
Internet Web sites is permitted under current provisions of copyright law.
However, legal rights to certain aspects of Internet content and commerce are
not clearly settled and the Company's ability to rely upon one or more
exemptions or defenses under copyright law is uncertain. There can be no
assurance that the Company will be able to continue to provide rights to
information, including downloadable music samples and artist record and other
information. The failure to be able to offer such information could have a
material adverse effect on the Company.
Although the FCC decided on May 7, 1997 not to allow local telephone
companies to impose per-minute Internet access charges, several
telecommunications carriers are seeking to have Internet telecommunications
services regulated by the FCC in the same manner as other telecommunications
services. In addition, because the growing popularity and use of the Internet
purportedly has burdened the existing telecommunications infrastructure, local
telephone carriers have petitioned the FCC to regulate Internet service
providers and online service providers in a manner similar to long distance
telephone carriers and to impose access fees on such providers. If any of
these petitions is granted, or the relief sought therein is otherwise granted,
the costs of communicating on the Internet could increase substantially,
potentially slowing the growth in use of the Internet. Any such new
legislation or regulation or application or interpretation of existing laws
could have a material adverse effect on the Company's Internet businesses.
Proposed Changes in Regulation.
The regulation of cable television systems, satellite programming
services, and television stations is subject to the political process and has
been in constant flux over the past decade. Regulation of Internet-related
business is now developing. This process continues in the context of
legislative proposals for new laws and the adoption or deletion of
administrative regulations and policies. Further material changes in the law
and regulatory requirements must be anticipated, and there can be no assurance
that the Company's business will not be affected adversely by future
legislation, new regulation or deregulation.
TRADEMARKS AND COPYRIGHTS.
DMX has filed for worldwide trademark registration (including DMX,
Digital Music Express, DMX for Business, DMX*DJ and, through its joint venture
with Jones, Superaudio). DMX believes that its trademarks are valuable
properties and intends to defend them vigorously.
Under DMX's agreements with XTRA Music Limited, a corporation under
the laws of England, the European company will have the right to use DMX's
trademarks for two years.
The Box owns two United States copyrights on certain software. Since
a copyright primarily protects written expression but not ideas, concepts or
principles, The Box's copyrights may not afford protection against competitors
who independently develop comparable software. In addition, The Box has
obtained United States registrations for its trademarks "THE BOX (with
design)", "Music Television You Control", "THE BOX - Music Television You
Control (with design)", "THE BOX", "BOXtunes", "The Jukebox Network", and "The
Jukebox Network (with design)". Applications have been filed for registration
in the United States of its trademarks "Xposure", "Big Phat Ones", "BOXtalk",
and "The Box Worldwide". The Box has also obtained registration s for "THE BOX
(with design)", "THE BOX -
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Music Television You Control (with design)", "BOXtops", "BOXtalk", and certain
other marks in the following countries: Benelux, France, Germany, Sweden and
Peru. The Box has also filed in or is in the process of filing for trademark
registration of "THE BOX (with design)", "THE BOX - Music Television You Control
(with design)", "THE BOX (with design)", "THE BOX -Music Television You Control
(with design)", "BOXtops", "BOXtalk", and certain other marks in the following
countries: Argentina, Australia, Brazil, Canada, Chile, Finland, Italy, Japan,
Mexico, New Zealand, Norway, Portugal, Spain Venezuela and the United Kingdom
and the Republic of Ireland.
The Box has licensed VJNIL, its former subsidiary that is now owned by
a United Kingdom media company, EMAP, to a 99 year license for use of its
trademarks in the United Kingdom and the Republic of Ireland. Although one
trademark has been registered, the major filings related to "THE BOX (with
design) and "THE BOX - Music Television You Control (with design)" have not
completed registration.
The Box also holds three United States patents relating to its
telephone access display systems, which enable viewers to telephonically select
music videos. The systems may also have other interactive television
applications such as shopping, trivia, comedy, sports and general information.
The Box has also received patents for its telephone access display system in
Italy and Canada and has a pending application in France. In May 1995, May
1996 and June 1996, The Box filed new patent applications and addendum for the
interactive video system, The Digital Box. Further, in May 1996, The Box filed
an international patent with the European Union and the United Kingdom for this
same digital technology. The Box plans on filing additional applications for
patents in other foreign countries. There can be no assurance as to the
breadth or degree of protection which such copyrights, trademarks and patents
may afford The Box.
PERSONNEL.
As of December 31, 1997, The Company had 326 full-time employees. The
Company considers its relations with its employees to be satisfactory.
ITEM 2. PROPERTIES.
TCI Music's principal executive offices are located at 8101 East
Prentice Avenue, Suite 500, Englewood, Colorado 80111.
TCI Music does not own or lease any real or personal property other
than through its interests in its operating subsidiaries. TCI Music's
operating companies own or lease fixed assets necessary for the operation of
their respective businesses, including office space, transponder space,
headends, and customer equipment. TCI Music believes that all the Company's
facilities are adequate for its current and anticipated needs.
ITEM 3. LEGAL PROCEEDINGS.
From time to time the Company may be a party to legal actions arising
in the ordinary course of business, including claims by former employees.
Although some of these actions could be expected to involve claims for
substantial amounts, except as set forth in the next paragraph, the Company
does not believe that any currently pending litigation to which it is a party
will have a materially adverse effect on its financial condition or results of
operations.
On September 8, 1996, a purported class action lawsuit entitled
Brickell Partners v. Jerold H. Rubinstein, Donne F. Fisher, Leo J. Hindery, Jr.,
James R. Shaw, Sr., Kent Burkhart, J.C. Sparkman, Bhaskar Menon, DMX Inc., and
Tele-Communications, Inc. (Civil Action No. 15206) was filed in the Delaware
Chancery Court alleging, among other things, that the proposed acquisition of
DMX by TCI is wrongful, unfair and harmful to DMX's public stockholders and
seeking to enjoin the consummation of the Merger. DMX believes that this action
is without merit and intends to defend it vigorously.
On July 23, 1997, Jeri L. Amstutz, a former employee of DMX Inc.,
filed a complaint in Superior Court of California, County of Los Angeles, Jeri
L. Amstutz v. DMX Inc., Otis Smith, Jerold Rubinstein and Does 1 to 100. The
plaintiff alleges certain wrongful employment practices. The plaintiff seeks
compensatory damages for lost wages and benefits, foreseeable consequential and
incidental damages in an unspecified amount, as well as attorneys' fees, costs
and prejudgment
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interest. The plaintiff also seeks punitive damages and damages for emotional
distress (and similar harm) in unspecified amounts which the plaintiff claims
to believe will exceed $2,000,000.
On July 23, 1997, Marnie Tenden, a former employee of DMX Inc., filed
a complaint in Superior Court of California, County of Los Angeles, Marnie
Tenden v. DMX Inc., Otis Smith, Jerold Rubinstein and Does 1 to 100, which
alleges sex discrimination and retaliatory harassment. The plaintiff seeks
compensatory damages for lost wages and benefits, foreseeable consequential and
incidental damages, as well as attorneys' fees, costs and prejudgment interest.
The plaintiff also seeks punitive damages and damages for emotional distress
(and similar harm) in unspecified amounts which the plaintiff claims to believe
will exceed $500,000.
DMX has received a letter from counsel for Selco Servicegesellschaft
fur elektronische Kommunikation mbH ("Selco") requesting that DMX make a
proposal to settle claims alleged by Selco for damages in the amount of
approximately $3.5 million with respect to a guaranty by DMX of obligations of
DMX-Europe N.V., a subsidiary of DMX ("DMX-E") under a Subscriber
Management Services Agreement between DMX-E and Selco. TCI Music and
DMX do not believe that DMX has any liability to Selco under that guaranty.
Nevertheless, neither TCI Music nor DMX can estimate, based on the facts
available as of the date of this Report, 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There were no matters submitted to a vote of TCI Music's security
holders during the fourth quarter of December 31, 1997.
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PART II
ITEM 5. MARKET FOR TCI MUSIC'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
Since July 14, 1997, The TCI Music Series A Common Stock (with
associated TCI Rights) was quoted on the Nasdaq SmallCap Market under the
symbol "TUNE".
The following table sets forth the range of high and low sales prices
of TCI Music Series A Common Stock since July 14, 1997 for the periods
indicated:
<TABLE>
<CAPTION>
QUARTER ENDED HIGH LOW
------------- ---- ---
<S> <C> <C>
September 30, 1997 (from July 14, 1997) 7.7500 6.7500
December 31, 1997 7.8125 7.3750
</TABLE>
The prices reflect inter-dealer quotations without adjustments for
retail markup, markdown or commission; and do not necessarily reflect actual
transactions.
On December 31, 1997, the closing price for the TCI Music Series A
Common Stock (with associated TCI Rights) reported by Nasdaq was $7.625. As of
December 31, 1997 there were 175 Stockholders of record of TCI Music, Inc. with
approximately 31% of the shares held in "street name."
Each share of TCI Music Series A Common Stock issued in the DMX Merger
trades together with the TCI Right granted by TCI in connection with the DMX
Merger. Each TCI Right entitles the holder to require TCI to purchase from such
holder one share of TCI Music Series A Common Stock for $8.00 (subject to
reduction by the aggregate amount per share of any dividend and certain other
distributions, if any, made by TCI Music to its stockholders), payable at the
election of TCI, in cash, a number of shares of TCI Group Series A Stock having
an equivalent value, or a combination thereof, if during the one-year period
beginning on July 11, 1997 the price of the TCI Music Series A Common Stock
trading with associated TCI Rights does not equal or exceed $8.00 (as adjusted)
for a period of at lease 20 consecutive trading days. If the TCI Rights are not
earlier terminated upon satisfaction of such price requirement, they will be
exercisable for a 30-day period commencing on July 11, 1998 and will expire on
the last day of such 30 day period unless extended by their terms. Because the
TCI Rights trade together with the shares of TCI Music Series A Common Stock,
the current market price of one share of TCI Music Series A Common Stock
necessarily includes a value for the associated TCI Right. Accordingly, no
assurances can be made that the market price per share of TCI Music Series A
Common Stock will be maintained at or near its current level upon termination or
expiration of the TCI Rights.
There currently is no established public trading market for the TCI
Music Series A Common Stock without TCI Rights. The TCI Music Series A Common
Stock issued in the Paradigm Merger and into which the TCI Music Preferred
Stock issued in the Box Merger is convertible do not have any associated TCI
Rights. Such a market may begin when the TCI Rights expire or terminate. TCI
Music Series A Common Stock without attached TCI Rights will trade under the
symbol "TUNE" after the TCI Rights expire or terminate, if the TCI Music Series
A Common Stock remains eligible for continued listing on the Nasdaq SmallCap
Market. In order to continue to be listed on the Nasdaq SmallCap Market, the
TCI Music Series A Common Stock must comply with certain maintenance
requirements of the Nasdaq SmallCap Market, which require that TCI Music
maintain (i) at least $2 million in net tangible assets, $35 million in market
capitalization or $500,000 of net income in the latest fiscal year, (ii) a
public float of 500,000 shares valued at $1 million or more, (iii) a minimum
bid price of $1.00 per share, (iv) two market makers and (v) at least 300
shareholders. Although TCI Music believes that TCI Music Series A Common Stock
currently satisfies these standards, no assurances can be made that TCI Music
will continue to comply with these maintenance requirements. In particular, if
the TCI Rights become exercisable as of July 11, 1998, the number of
stockholders exercising TCI Rights and the number of TCI Rights that are
exercised may cause the TCI Music Series A Common Stock to fail to satisfy one
or more of the Nasdaq SmallCap Market maintenance standards. Failure to
satisfy Nasdaq's maintenance requirements may result in the TCI Music Series A
Common Stock being de-listed from Nasdaq and trading would thereafter be
conducted on the over-the-counter market.
DIVIDENDS.
No dividends have been paid by TCI Music, Inc. as of December 31,
1997. The Company does anticipate paying cash dividends in the foreseeable
future.
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<PAGE> 18
ITEM 6. SELECTED FINANCIAL DATA.
The following is a summary of selected financial information relating
to the financial condition and results of operation of TCI Music and its
predecessor. (Amounts in thousands, except per share data.)
<TABLE>
<CAPTION>
SIX MONTHS NINE MONTHS
ENDED ENDED
---------------------------------------------------------------------------------
DECEMBER 31, JUNE 30, SEPTEMBER 30,
1997 1997 1996 1995 1994 1993
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA
Revenue $ 22,955 16,594 17,326 12,773 9,377 4,793
Operating, selling, general and administrative
expenses 14,294 27,437 30,459 22,166 20,559 17,726
Depreciation and amortization 6,317 1,789 1,884 1,342 1,065 790
Loss on disposal of DMX-Europe N.V -- 1,738 7,153 -- -- --
---------------------------------------------------------------------------------
Net operating income (loss) 2,344 (14,370) (22,170) (10,735) (12,247) (13,723)
Share of earnings of affiliates 76 203 197 307 224 144
Equity loss in DMX-Europe N.V -- -- (11,854) (13,271) (4,746) (3,554)
Interest income (expense), net (280) (422) (300) (209) 38 85
Other income (expense), net (223) (119) 272 829 226 640
----------------------------------------------------------------------------------
Net earnings (loss) before income taxes 1,917 (14,708) (33,855) (23,079) (16,505) (16,408)
Income tax expense (2,382) -- -- -- -- --
----------------------------------------------------------------------------------
Net loss $ (465) (14,708) (33,855) (23,079) (16,505) (16,408)
==================================================================================
Basic and diluted loss per common share(a)
$ (0.01) (0.25) (0.68) (0.60) (0.48) (0.52)
==================================================================================
Weighted average number of common shares
77,423 59,587 49,676 38,585 34,436 31,648
</TABLE>
(a) Loss per common share has been restated for all periods to reflect the
adoption of Statements of Financial Accounting Standards No. 128, "Earnings
per Share". See note 11 to the accompanying consolidated financial
statements.
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<TABLE>
<CAPTION>
SEPTEMBER 30,
----------------------------------------------------------------------------------
DECEMBER 31, JUNE 30,
1997 1997 1996 1995 1994 1993
----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA
Current assets $ 25,863 6,186 7,719 12,123 9,651 3,103
Investments in affiliates, accounted for under 1,201 558 504 457 450 476
the equity method
Intangibles, net 153,265 -- 4,536 -- -- 16
Other assets, net 910 110 99 166 55 54
Property and equipment, net 13,488 4,132 5,894 4,336 4,444 3,225
----------------------------------------------------------------------------------
Total assets $ 194,727 10,986 18,752 17,082 14,600 6,874
==================================================================================
Current liabilities $ 23,080 14,705 16,932 3,626 3,824 3,715
Other liabilities 2,063 2,082 1,773 1,252 713 268
Capital lease obligation -- 23 1,401 1,446 1,503 --
Notes payable 53,236 -- -- -- 201 382
Related party debt 4,359 3,887 -- -- -- --
Deferred income tax 2,811 -- -- -- -- --
Investment in and advances to DMX-Europe
9,058 6,591 -- 15,886 8,175 3,429
----------------------------------------------------------------------------------
Total liabilities 94,607 27,288 20,106 22,210 14,416 7,794
Convertible preferred stock 35,588 -- -- -- -- --
Stockholders' (deficit) equity 64,532 (16,302) (1,354) (5,128) 184 (920)
----------------------------------------------------------------------------------
Total liabilities and stockholders' equity
(deficit) $ 194,727 10,986 18,752 17,082 14,600 6,874
==================================================================================
</TABLE>
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<PAGE> 20
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
GENERAL.
On July 11, 1997, 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 Music 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.
Pursuant to the DMX Merger, TCI Music became the successor registrant to DMX.
Upon consummation of the DMX Merger, each outstanding share of Common Stock of
DMX, $.01 par value per share ("DMX Common Stock"), was converted into the
right to receive (i) one-quarter of a share of TCI Music Series A Common Stock,
(ii) one TCI Right with respect to each whole share of TCI Music Series A
Common Stock and (iii) cash in lieu of fractional shares of TCI Music Series A
Common Stock and TCI Rights. The acquisition was accounted for by the purchase
method effective July 1, 1997.
On December 16, 1997, shareholders of The Box voted to approve an
Agreement and Plan of Merger dated as of August 12, 1997, the Box Merger,
pursuant to which The Box became a wholly-owned subsidiary of TCI Music and
each outstanding share of common stock of The Box was converted into the right
to receive .07 of a share of TCI Music Preferred Stock. Each share of TCI
Music Preferred is convertible into three shares of TCI Music Series A Common
Stock without an associated TCI Right.
Effective December 31, 1997, shareholders of Paradigm voted to approve
an Agreement and Plan of Merger dated as of December 9, 1997, the Paradigm
Merger, pursuant to which Paradigm became a wholly-owned subsidiary of TCI
Music and shareholders of Paradigm received 0.61 restricted shares of TCI Music
Series A Common Stock, without an associated TCI Right for each share of
Paradigm common stock held. The acquisition of the Box and Paradigm were
accounted for by the purchase method. Accordingly, the results of operations
of such acquired entities have been included in the financial results of TCI
Music since their respective dates of acquisition. See notes 1 and 4 to the
accompanying consolidated financial statements.
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.
Due to the consummation of the DMX Merger, and related change in fiscal
year ends by TCI Music to December 31, 1997, the results of operations include
a transition period. Accordingly, to provide a meaningful basis for
comparison, for purpose of the following analysis and discussion, the six month
period ended December 31, 1997 will be compared with the corresponding period
ended December 31, 1996, the nine month period ended June 30, 1997 will be
compared with the corresponding period ended June 30, 1996, and the year ended
September 30, 1996 will be compared to the corresponding period ended September
30, 1995.
ACCOUNTING STANDARDS.
The Financial Accounting Standards Board ("FASB") issued Statement of
Financial Accounting Standards No. 128, Earnings Per Share, ("SFAS 128") in
February of 1997. SFAS 128 establishes a new computation, presentation and
disclosure requirements for earnings per share ("EPS"). SFAS 128 requires
companies with complex capital structures to present basic and diluted EPS.
Basic EPS is measured as the income or loss available to common stockholders
divided by the weighted average outstanding shares for the period. Diluted EPS
is similar to basic EPS but presents the dilutive effect on a per share basis
of potential common shares (e.g., convertible securities, options, etc.) as if
they had been converted at the beginning of periods presented. Potential
common shares that have an anti-dilutive effect (i.e., those that increase
income per share or decrease loss per share) are excluded from diluted EPS.
The Company adopted SFAS 128 as of December 31, 1997 and has restated all prior
period EPS data, as required. SFAS 128 did not have a material impact on EPS
for any period presented.
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<PAGE> 21
During 1997, the FASB also issued Statement of Financial Accounting
Standards No. 130, Reporting Comprehensive Income ("SFAS 130"). SFAS 130
establishes standards for reporting and displaying of comprehensive income and
its components in the financial statements. It does not, however, require a
specific format for the statement, but requires the Company to display an
amount representing total comprehensive income for the period in that financial
statement. The Company is in the process of determining its preferred format.
This Statement is effective for fiscal years beginning after December 15, 1997.
YEAR 2000.
Many existing computer programs use only two digits to identify a year
in a date. If not corrected, many computer applications and systems could fail
or create erroneous results by or at the year 2000. TCI Music is in the
process of identifying computer systems and software that may not function
correctly in the year 2000. Additionally, TCI Music is planning a program of
communications with its significant suppliers, customers and affiliated
companies to determine the readiness of these third parties and the impact on
the Company as a consequence of their own year 2000 issues. TCI Music's manual
assessment of the impact of the year 2000 dated change should be complete by
mid-1999. TCI Music believes that it will be able to identify, and, if
necessary, modify or replace such systems and software before any year 2000
associated problems arise. No assurances can be given that such modification
and replacement will be completed before any year 2000 associated problems
arise or that costs arising from unanticipated problems will not have a
material adverse effect on the Company.
SUMMARY OF OPERATIONS.
REVENUE.
Total revenues, exclusive of revenue from DMX-Europe N.V. and
subsidiary ("DMX-E"), for the six months ended December 31, 1997 increased to
$22.9 million from $9.0 million for the six months ended December 31, 1996. The
$13.9 million or 155% increase was primarily attributed to $9.9 million of
revenue from sales of DMX Music services to TCI's residential and commercial
subscribers as a result of the DMX Merger and the Amended Contribution
Agreement. Pursuant to the Amended Contribution Agreement, 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"). Pursuant to the Amended Contribution Agreement, the
Annual TCI payments will represent (a) 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 (b) compensation to TCI Music and DMX for various
other rights. The remaining increase is attributable to continued growth in
commercial subscriber fee revenue of $2.7 million, the inclusion of 15 days of
viewer revenue of $460,000 and advertising revenue of $365,000 from the Box
Merger on December 16, 1997 and approximately $400,000 from increased equipment
lease and sales revenue.
Exclusive of the Annual TCI Payments, the commercial subscriber fees
represented 52% as compared to 41% of total subscriber fee revenue for the six
months ended December 31, 1997 and 1996, respectively. Residential subscriber
fees, exclusive of the Annual TCI Payments, represented approximately 48% as
compared to 59% of total subscriber fee revenue for the six months ended
December 31, 1997 and 1996, respectively. Subscriber fee revenue from TCI and
its affiliates, exclusive of the Annual TCI Payments, represented approximately
49% and 55% of total subscriber fees for the six months ended December 31, 1997
and 1996, respectively.
Total revenue, exclusive of revenue from DMX-E, for the nine months
ended June 30, 1997 increased to $14.4 million from $12 million for the nine
months ended June 30, 1996. The $2.4 million or 20% increase was primarily
attributed to: (i) continued growth in commercial subscriber fee revenue as a
result of increased sales and marketing activity in the affiliate sales,
national accounts, and Owned and Operated ("O&O") groups; (ii) continued
growth in DMX residential subscriber fees from PRIMESTAR subscribers; and (iii)
increased other revenue representing equipment sales and lease revenue related
to the growth and increased sales and marketing activity of the commercial
sales group.
21
<PAGE> 22
Commercial subscriber fees represented approximately 44% and 34% of
total subscriber fee revenue for the nine months ended June 30, 1997 and 1996,
respectively. Residential subscriber fees represented approximately 56% and
66% of total subscriber fee revenue for the nine months ended June 30, 1997,
and 1996, respectively. Subscriber fee revenue from TCI and its affiliates
represented approximately 50% and 57% of total subscriber fees, for the nine
months ended June 30, 1997 and 1996, respectively.
Total revenue, exclusive of revenue from DMX-E, for the fiscal year
ended September 30, 1996 increased to $16.5 million from $12.8 million for the
fiscal year ended September 30, 1995. The $3.7 million or 29% increase was
primarily attributed to: (i) increased residential subscriber fees resulting
from the launch of DMX on PRIMESTAR in the first fiscal quarter of 1996; (ii)
continued growth in commercial subscriber fee revenue as a result of increased
sales and marketing activity in the affiliate sales, national accounts, and O&O
groups; and (iii) increased other revenue representing equipment sales and
lease revenue related to the growth and increased sales and marketing activity
of the commercial sales group. In June, 1994, DMX launched its DMX Service on
the Ku-Band satellite which enabled DMX for Business to gain access to nearly
100% of the business marketplace in the United States. Concurrent with this
launch, DMX's commercial division implemented its national accounts sales
program, and in May 1995 launched its first O&O sales group in the Southern
California business market.
Commercial subscriber fees represented approximately 36% and 31% of
total subscriber fee revenue for the fiscal years ended September 30, 1996 and
1995, respectively. Residential subscriber fees represented approximately 64%
and 69% of total subscriber fee revenue for the fiscal years ended September
30, 1996, and 1995, respectively. Subscriber fee revenue from TCI and its
affiliates represented approximately 55% and 61% of total subscriber fees, for
the years ended September 30, 1996 and 1995, respectively.
Cable operators continue to develop and launch Digital Distribution, a
new method of distributing video and other programming using digital
compression technology. Sensor technology enables TCI and other participating
cable operators to increase their program offerings and create new packages
that could include, if they so choose, DMX Services.
The launch of digital compression technology has the potential to
provide an additional distribution market for DMX Services if cable operators
utilizing Digital Distribution elect to offer DMX Services as part of one or
more digital video programming packages, thereby capturing as subscribers,
customers who might not otherwise elect to subscribe to DMX Services as a
separate pay premium service. However, the launch of and the transition to
Digital Distribution may also have the effect of materially reducing
residential subscriber fee revenues as a result of a change from the current
fee structure in which audio subscribers pay a separate fee for DMX.
DMX expects that license fees paid by cable operators for Digital
Distribution that include DMX Services in their digital packages will be much
lower than the separate fees now paid under affiliation agreements. While a
substantial increase in the overall number of residential subscribers purchasing
digital packages that include DMX Services could result in revenue equal to or
exceeding the revenue from residential subscribers currently electing to
purchase DMX Services for a separate fee, such a result depends on a number of
factors over which TCI Music has no control, including whether cable operators
elect to include DMX Services as part of their digital packages, the acceptance
by consumers of the digital products and whether those electing to purchase the
digital packages are already DMX subscribers. TCI Music cannot predict the
effect of digital compression technology on DMX revenue.
The new license fee structure for Digital Distribution will not affect
the Annual TCI Payments that TCI will pay to TCI Music or DMX under the Amended
Contribution Agreement. Although no assurances can be given, TCI Music does
not expect the launch of Digital Distribution to affect the current rate
structure of commercial cable subscribers or Satellite Distribution.
TCI Music derives operating revenues from interactive music video
television programming services through its wholly-owned subsidiary, The Box.
The Box has entered into program affiliation agreements with approximately 68
percent of the cable system operators that presently carry The Box's
programming in the United States. Pursuant to such agreements, The Box pays
cable operators the greater of a guaranteed minimum monthly fee per subscriber
or a specified percentage of the gross revenues generated by each cable
operator's system. Substantially all such cable operators are
22
<PAGE> 23
presently receiving the guaranteed minimum monthly fee, which fee bears no
direct relationship to the revenues generated by The Box's programming. TCI
Music periodically evaluates available alternatives to affiliation agreements
that do not generate revenues in excess of direct costs. Such alternatives may
include the cancellation of program affiliation agreements, which will reduce
net viewer revenues and advertising sales, unless The Box is able to replace
these program affiliation agreements with affiliation agreements with other
cable operators.
Consistent with industry practice, The Box's written programming
affiliation agreements with cable system operators may be canceled by either
party upon 90 days prior written notice. In addition, approximately 41 percent
of The Box's domestic subscribers are carried by cable system operators that
have not entered into written programming affiliation agreements with The Box.
Therefore, no assurance can be given that The Box's programming will continue
to be carried by the cable operators who currently carry the Box Service. If
The Box were to experience a high rate of terminations, operating revenues from
interactive music video television programming would be adversely affected.
OPERATING EXPENSES.
Operating expenses increased to $6.5 million for the six months ended
December 31, 1997 from $5.1 million for the six months ended December 31, 1996.
The $1.4 million or 27% increase was primarily attributed to (i) $900,000 of
fees paid to TCI as compensation for services rendered in generating the TCI
Annual Payments pursuant to the Amended Contribution Agreement, (ii) $300,000 of
operating expenses from the inclusion of The Box from the acquisition date on
December 16, 1997 consisting of domestic and international transport fees, site
costs and satellite uplink fees, (iii) $300,000 net increase of DMX studio and
programming expenses consisting of a $400,000 increase in music rights, which
was commensurate with the increase in subscriber fee revenue and offset by a
$100,000 decrease of salaries and consultant fees, and (iv) $100,000 decrease in
research and development.
Operating expenses increased to $8.2 million for the nine months ended
June 30, 1997 from $7.2 million for the nine months ended June 30, 1996. The
increase of $1.0 million or 12% is primarily attributed to increased music
rights expense of $765,000 commensurate with the growth in subscribers and fee
revenue and $334,000 relating to programming expenses incurred on behalf of
DMX-E for the nine months ended June 30, 1997. Prior to consolidation of
DMX-E's results of operations with DMX, these expenses were charged to DMX-E,
however, the benefit of DMX-E's reimbursement has been eliminated in the
consolidated financial statements for the nine months ended June 30, 1997.
These increases were offset by reductions in satellite and uplinking fees of
$275,000 due to the migration to a new satellite.
Operating expenses increased to $9.8 million for the fiscal year ended
September 30, 1996 from $8.7 for the fiscal year ended September 30, 1995. The
$1.1 million or 13% increase represented increased music rights expense of
$776,000 commensurate with the growth in subscribers and fee revenue, increased
uplink and satellite cost of $156,000 and an additional $231,000 for salaries,
program consultant expenses and the direct costs related to increasing
available music formats from 69 to over 90.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES.
Selling, general and administrative expenses increased to $7.5 million
for the six months ended December 31, 1997 from $6.9 million for the six months
ended December 31, 1996. The $600,000 increase was primarily attributable to
increases in (i) corporate expenses of $300,000, which includes salaries and
professional services resulting from merger-related expenses, (ii) $800,000 of
operating expenses of The Box for 16 day period ended December 31, 1997, (iii)
and $635,000 of DMX salaries related to an increase in sales and marketing
personnel. Such increases were offset by decreases of $871,000 in the
provision for doubtful accounts and a $240,000 reduction in DMX trade show
expenses.
23
<PAGE> 24
Selling, general and administrative expenses of $10.6 million for the
nine months ended June 30, 1997 were consistent with the nine months ended June
30, 1996. Increases in legal expenses associated with the DMX Merger and
restructuring of DMX-E, the provision for doubtful accounts, and rent expense
were offset by decreases in salary expenses associated with a performance bonus
paid to an executive officer in the prior year, expiration of a royalty
agreement and other individually insignificant items.
Selling, general and administrative expenses increased to $14.3
million for the fiscal year ended September 30, 1996 from $12.9 for the fiscal
year ended September 30, 1995. The $1.4 increase was primarily attributed to
(i) $767,000 in salaries and commissions resulting from a performance bonus
paid to a former executive officer of DMX and additional sales and marketing
staff and efforts in the commercial division, (ii) $363,000 expenses related to
direct marketing activities for both the residential and commercial divisions,
including marketing activities related to the 1996 Summer Olympics, (iii) and
other individually insignificant items.
DEPRECIATION AND AMORTIZATION.
Depreciation and amortization expense increased $5.3 million or 495%
for the six months ended December 31, 1997 compared with the corresponding
period ended December 31, 1996. Such increase is directly attributable to an
increase in the balance of property and equipment and intangibles resulting
from the DMX Merger and The Box Merger.
Depreciation and amortization increased $488,000 or 37% for the nine
month period ended June 30, 1997 as compared with the corresponding period
ended June 30, 1996. Such increase was primarily attributable to amortization
of excess cost over the fair value of net assets acquired related to the
purchase of the 49% interest in DMX-E in May 1996.
Depreciation and amortization expense increased to $542,000 or 40% for
the fiscal year ended September 30, 1996 as compared to the corresponding prior
fiscal year end. Such increase was attributable to amortization of excess cost
over the fair value of net assets acquired related to the purchase of the 49%
interest in DMX-E in May 1996 and increased depreciation resulting from
purchases of subscriber equipment.
OPERATING EXPENSES - DMX-E.
The results of operations of DMX-E for 1996 represent the activities
from acquisition date of DMX-E on May 17, 1996 through September 30, 1996 and
were consolidated with DMX's results of operations. As discussed below, DMX-E
was deconsolidated as of June 30,1997 and ceased operations on July 1, 1997.
DISPOSAL OF DMX-E.
DMX-E and its subsidiary DMX-Europe (UK) Limited ("DMX-E UK"), ceased
operation on July 1, 1997. DMX-E UK was placed into receivership on July 1,
1997 and into liquidation proceedings on July 18, 1997. DMX-Europe N.V.
("DMX-E NV") has been inactive since July 1, 1997 and entered liquidation
proceedings in December 1997.
The Company has accounted for the effect of the disposal of DMX-E and
has estimated the loss on the disposal of DMX-E in the consolidated statements
of operations. At June 30, 1997 the loss on disposal of DMX-E of $1.7 million
represented the write down of assets to their net realizable values. At
September 30, 1996 and December 31, 1996, the estimated loss on disposal of
$7.1 million of DMX-E was accounted for in DMX's consolidated financial
statements. The estimated loss on the disposal of DMX-E includes DMX's net
investment in these subsidiaries of $5.7 million and other obligations
guaranteed by DMX of $1.4 million.
The net loss from DMX-E operations decreased to $6.4 million for the
nine months ended June 30, 1997 compared to $14 million for the nine months
ended June 30, 1996. In the fourth quarter ended September 30, 1996, DMX
ceased funding the operations of DMX-E. The net losses since that period were
primarily related to accrued expenses for their uplink and satellite business
and associated advertising and marketing commitments.
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<PAGE> 25
The net loss from DMX-E operations increased to $16.8 million for the
fiscal year ended September 30, 1996 from $13.3 million for 1995. The increase
of $3.5 million was attributed to DMX recording 100% of DMX-E net loss for the
fiscal year ended September 30, 1996 as compared to recording 100% of DMX-E
loss for the fourth quarter of the fiscal year ended September 30, 1995 and 51%
for the first three quarters of the fiscal year 1995. In the fiscal year ended
September 30, 1995, DMX-E fully utilized all funds available under the $25
million credit facility provided by TCI Euromusic, Inc., an indirect affiliate
of TCI. In the fourth quarter of the fiscal year ended September 30, 1995, DMX
funded operating losses of DMX-E and accordingly the equity in loss of DMX-E
included operating losses funded by DMX in excess of its guaranteed portion of
the debt.
INTEREST EXPENSE AND INTEREST INCOME.
TCI Music incurred related party interest expense of $385,000 for the
six months ended December 31, 1997 which related to intercompany debt, a $3.5
million equipment loan, capital lease obligation and amounts borrowed related
to the purchase of DMX, The Box and Paradigm. Other interest income represents
earnings on funds held in a money market account and interest on notes
receivable.
LIQUIDITY AND CAPITAL RESOURCES.
On December 31, 1997, TCI Music entered into a revolving loan
agreement with several banks to provide up to $100 million. The agreement
provides for interest charges at LIBOR or at the banks base rate. $53.2
million was drawn to pay related party debts and costs associated with the DMX
Merger, the Box Merger and the Paradigm Merger. At December 31, 1997, TCI
Music had approximately $47 million available under the revolving loan
agreement. For additional information concerning TCI Music's debt see note 10
to the accompanying consolidated financial statements.
In connection with the Box Merger, TCI Music issued the TCI Music
Preferred Stock. For additional information concerning the terms of the TCI
Music Preferred Stock, see notes 4 and 11 to the accompanying consolidated
financial statements.
The increase in cash of $7.9 million for the six months ended December
31, 1997 was the net results of funds provided by operating activities of $3.2
million and net funds provided by financing activities of $13.7 million offset
by cash used in investing activities of $9.0 million.
During the six months ended December 31, 1997, the Annual TCI Payments
were a primary source of the net cash generated by operating activities of $3.3
million. Together, with the funds provided by financing activities of $13.7
million, which was initially provided by intercompany debt and subsequently
replaced with the revolving loan agreement, the Company funded its inventory
activities of $9.1 million which primarily consisted of the cash used for the
acquisitions of the DMX Merger, the Box Merger and the Paradigm Merger.
TCI Music believes that net cash provided by operating activities
(including the Annual TCI Payments) and available capacity pursuant to the
revolving loan agreement will provide adequate sources of liquidity for the
next year and intermediate future. As previously described, TCI Music is
entitled to receive the Annual TCI Payments through 2017.
As described in notes 5 and 11 to DMX's consolidated financial
statements and in the disposal of DMX-E above, DMX-E has ceased operations on
July 1, 1997. DMX-E UK was placed into receivership on July 1, 1997 and into
liquidation proceedings on July 18, 1997. DMX-E NV, has entered into
liquidation proceedings in December 1997. In such circumstances, claims may be
filed under the guarantees. Such adjustments could have a material adverse
effect upon the financial position and results of operations of DMX.
25
<PAGE> 26
INFLATION.
Management believes that the effect of inflation has not been material
to the Company. However, inflation in the costs of personnel, marketing,
programming or certain other operating expenses could significantly affect the
Company's future operations. Current economic conditions indicate a relatively
low inflationary period and as a result, inflation is not expected to
materially affect the Company in 1998.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
See Item 14. Exhibits, Financial Statement Schedules and Reports on
Form 8-K for TCI Music, Inc.'s Consolidated Financial Statements, the notes
thereto and Schedules filed as part of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
26
<PAGE> 27
PART III.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The following lists the directors and executive officers of TCI Music,
Inc. ("TCI Music" or the "Company"), their birth dates, and a description of
their business experience and positions held with the Company as of March 1,
1998. Directors of TCI Music are elected to staggered three year terms with
approximately one-third elected annually. The date the present term of office
expires for each director is the date of the Annual Meeting of the Company's
stockholders held during the year footnoted opposite their names. All officers
are appointed for an indefinite term, serving at the pleasure of the Board of
Directors.
Directors of TCI Music
<TABLE>
<CAPTION>
Name Positions
---- ---------
<S> <C>
Robert R. Bennett (2) Has served as a director of TCI Music since January 1997, and served as
Born April 19, 1958 acting Chief Financial Officer of TCI Music from June 1997 until July 1997.
Mr. Bennett has served as an Executive Vice President of Tele-Communications,
Inc. ("TCI") since April 1997. Mr. Bennett has served as President and Chief
Executive Officer of Liberty Media Corporation ("Liberty"), a subsidiary of
TCI, since April 1997. From June 1995 through March 1997, Mr. Bennett was an
Executive Vice President, Chief Financial Officer, Secretary and Treasurer of
Liberty. Mr. Bennett served as Senior Vice President of Liberty from
September 1991 to June 1995. Mr. Bennett also serves as a director of BET
Holdings, Inc., a Delaware corporation, which is engaged in the distribution
of certain programming.
Donne F. Fisher (1) Has served as a director of TCI Music since January 1997. Mr. Fisher was an
Born May 24, 1938 Executive Vice President of TCI from January 1994 through January 1, 1996.
On January 1, 1996, Mr. Fisher resigned his position as Executive Vice
President of TCI and has been providing consulting services to TCI since
January 1996. Mr. Fisher served as an Executive Vice President of TCI
Communications, Inc. ("TCIC"), a subsidiary of TCI and predecessor company of
TCI, from December 1991 to October 1994. Mr. Fisher has served as a director
of TCI since June 1994, has served as a TCIC director since 1980, and has
served as a director of TCI Pacific Communications, Inc. ("TCI Pacific"), a
subsidiary of TCI, since July 1996. Mr. Fisher is a director of General
Communication, Inc.
</TABLE>
27
<PAGE> 28
<TABLE>
<CAPTION>
Name Positions
---- ---------
<S> <C>
Leo J. Hindery, Jr. (3) Has served as Chairman of the Board of TCI Music since January 1997.
Born October 31, 1947 Mr. Hindery has served as a director of TCI since May 1997. Mr. Hindery has
served as the President and Chief Operating Officer of TCI since March 1997.
Mr. Hindery has served as President and Chief Executive Officer of TCIC since
March 1997 and has served as President and Chief Executive Officer of TCI
Pacific since September 1997. Mr. Hindery has served as a director of TCIC
since March 1997, and has served as a director of TCI Pacific since September
1997. In addition, Mr. Hindery is President, Chief Executive Officer and/or
a director of many of TCI's subsidiaries. Mr. Hindery was previously
founder, Managing General Partner and Chief Executive Officer of InterMedia
Partners, a cable TV operator, and its affiliated entities from 1988 until
March 1997. Mr. Hindery was a director of DMX Inc. ("DMX") from May 1996 to
July 1997. Mr. Hindery is a director of United Video Satellite Group, Inc.
and At Home Corporation, both of which are consolidated subsidiaries of TCI.
Mr. Hindery is also a director of TCI Satellite Entertainment, Inc. and
Cablevision Systems Corporation.
Peter M. Kern (2) Has served as a director of TCI Music since January 1997. Mr. Kern also
Born June 2, 1967 provides consulting services to TCI. Mr. Kern has served as President of
Gemini Associates Inc., a firm that provides strategic advisory services
primarily to media companies, since April 1996. From December 1993 to January
1996, he served as Senior Vice President of Strategic Development and
Corporate Finance of Home Shopping Network, Inc. and served as its Vice
President of Strategic Development and Assistant to the Chief Executive
Officer from March 1993 to December 1993. Prior to joining Home Shopping
Network, Inc., he served as Vice President of Corporate Finance and Strategic
Development for Whittle Communications, L.P. and worked at the New York
investment banking firm, Bear, Stearns & Co., Inc.
David B. Koff (3) Has served as a director of TCI Music since May 1997. Mr. Koff was interim
Born December 26, 1958 President and Chief Executive Officer of TCI Music from May 1997 to December
31, 1997. Since December 31, 1997, Mr. Koff has served as a Vice President
and Assistant Secretary of TCI Music. He has been a Senior Vice President of
Liberty since February 1998. He was Vice President - Corporate Development
of Liberty from August 1994 to February 1998. From March 1993 to August 1994,
he was special counsel to Liberty. From August 1992 to March 1993, he was
special counsel to Brownstein Hyatt Farber & Strickland, a Denver law firm.
</TABLE>
28
<PAGE> 29
<TABLE>
<CAPTION>
Name Positions
---- ---------
<S> <C>
Thomas McPartland (2) Has served as a director and President and Chief Executive Officer of
Born June 30, 1958 TCI Music since December 31, 1997. Mr. McPartland served as Chairman of the
Board, President and Chief Executive Officer of Paradigm Music Entertainment
Company ("Paradigm") since its formation in November 1995. Prior to
co-founding Paradigm, from April 1995 he served as Executive Vice President
and a director for the Zomba Group of Companies, North America, a privately-
held worldwide music entertainment company. From January 1994 to April 1995,
Mr. McPartland was Senior Vice President, Worldwide Business Development, for
BMG Entertainment a division of Bertelsmann AG, an international media
company. From October 1992 to January 1994, Mr. McPartland served as Senior
Vice President of BMG Ventures, a division of BMG Entertainment.
J C Sparkman (1) Has served as a director of TCI Music since May 1997. He has served as a
Born September 12, 1932 director of TCI since December 1996. Mr. Sparkman served as an Executive
Vice President of TCI from January 1994 to March 1995. Mr. Sparkman retired
in March 1995 and has provided consulting services to TCI since March 1995.
Mr. Sparkman served as an Executive Vice President of TCIC from 1987 to
October 1994 and as a director of DMX from 1989 to July 1997. Mr. Sparkman is
a director of Shaw Communications, Inc. ("Shaw").
Lon A. Troxel (1) Has served as a director of TCI Music since May 1997. Mr. Troxel was
Born October 14, 1947 appointed President and Chief Executive Officer of DMX in July 1997.
Mr. Troxel served as Chief Operating Officer of DMX from April 1997 to July
1997, and served as Executive Vice President, Commercial Division from
October 1991 to April 1997.
</TABLE>
- ------------------
(1) Director's term expires in 1998.
(2) Director's term expires in 1999.
(3) Director's term expires in 2000.
29
<PAGE> 30
Non-Director Executive Officers of TCI Music
<TABLE>
<CAPTION>
Name Positions
---- ---------
<S> <C>
Stephen M. Brett Has served as Vice President, General Counsel and Secretary of TCI Music
Born September 20, 1940 since January 1997, and has been a director, Vice President and Secretary of
DMX since July 1997. Mr. Brett has served as Executive Vice President,
General Counsel and Secretary of TCI since January 1994, as an Executive Vice
President of TCIC since October 1997, and as the General Counsel and
Secretary of TCIC since October 1991. Mr. Brett served as Senior Vice
President of TCIC from 1991 to October 1997. Mr. Brett is a Vice President
and Secretary of most of TCI's subsidiaries.
Joanne Wendy Kim Has served as Vice President-Finance and Treasurer since July 1997, and as
Born March 2, 1955 Acting Chief Financial Officer since December 1997. Ms. Kim has served as
Corporate Secretary and Chief Financial Officer of DMX since 1995, and
Executive Vice President since July 1997. Prior to joining DMX she served as
Senior Vice President, Chief Financial Officer of Bank of San Pedro from
1992 to 1994.
</TABLE>
There are no family relationships, of first cousin or closer, among TCI
Music's directors or executive officers, by blood, marriage or adoption.
During the past five years, none of the above persons have had any
involvement in such legal proceedings as would be material to an evaluation of
his or her ability or integrity.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
TCI Music's executive officers and directors, and persons who own more than ten
percent of a registered class of TCI Music's equity securities to file reports
of ownership and changes in ownership with the Securities and Exchange
Commission ("SEC"). Executive officers, directors and greater-than-ten-percent
shareholders are required by SEC regulation to furnish TCI Music with copies of
all Section 16(a) forms they file.
Based solely on a review of the copies of such Section 16(a) forms filed on
Forms 3, 4 and 5, and amendments thereto furnished to TCI Music with respect to
its most recent fiscal year, TCI Music believes that, during the year ended
December 31, 1997, its executive officers, directors and
greater-than-ten-percent beneficial owners complied on a timely basis with all
Section 16(a) filing requirements.
30
<PAGE> 31
ITEM 11. EXECUTIVE COMPENSATION.
(a) Summary Compensation Table
The following table shows, for the period from July 1, 1997 (the beginning
of the month in which the Company became a public company) through December 31,
1997 (the "Reporting Period"), a summary of certain information regarding all
forms of compensation for the Chief Executive Officer and the only other
executive officer (the "named executive officers") whose total annual salary
and bonus exceeded $100,000 during the Reporting Period.
<TABLE>
<CAPTION>
Annual Compensation Long Term
------------------- Compensation
Awards
----------------
Securities
Underlying
Name and Stock All Other
Principal Salary Bonus Other Annual Options/ Compensation
Compensation SARs(1)
Position Year ($) ($) $ (#) $
- ------------ ---- --------- --------- ---------------- ------------ ---------------
<S> <C> <C> <C> <C> <C> <C>
David B. Koff (2) 1997 --- --- --- 100,000 ---
President and Chief
Executive Officer
Lon A. Troxel 1997 $ 189,660 --- ---(3) 200,000 ---
President and CEO, DMX
</TABLE>
(1) For information concerning these awards see "Option/SAR-Grants in Last
Fiscal Year" set forth below. There were no grants of restricted stock or
payments from other long term incentive plans; therefore columns for
"Restricted Stock Awards" and "LTIP Payouts" are omitted.
(2) Mr. Koff is an executive officer of Liberty and is compensated by Liberty
for his services. No salary, bonus or other annual compensation was paid
to Mr. Koff for his services to TCI Music during the Reporting Period.
(3) Certain perquisites and other personal benefits did not exceed the lesser
of $50,000 or 10% of the total amounts reported in the Salary and Bonus
columns during the Reporting Period.
31
<PAGE> 32
(b) Option/SAR Grants in Last Fiscal Year
The following table shows all individual grants of stock options and stock
appreciation rights ("SARs") by the Company to each of the named executive
officers during the Reporting Period.
<TABLE>
<CAPTION>
Number of
Securities
Underlying % of Total
Options/ Options/SARs to Exercise
SARs Employees Price Expiration
Name Granted(1) in Fiscal Year ($/sh)(2) Date Grant Date Present Value ($)(3)
---- ------- -------------- -------- ------------- ----------------------------
<S> <C> <C> <C> <C> <C>
David B. Koff, 100,000 10.7% $6.25 7/11/2007 338,000
President and Chief
Executive Officer
Lon A. Troxel, 200,000 21.3% $6.25 7/11/2007 676,000
President and CEO,
DMX
</TABLE>
(1) All grants of stock options were options to purchase Series A Common Stock,
$.01 par value per share of TCI Music ("TCI Music Series A Common Stock").
All stock options were granted in tandem with SARs. All options were
granted pursuant to the TCI Music 1997 Stock Incentive Plan (the "1997
Plan") effective July 11, 1997, vest in 20% cumulative increments, with the
first increment vesting as of July 11, 1997, with each additional increment
vesting on each of the next four anniversaries thereof. Notwithstanding
the vesting schedule, the option shares become available for purchase if
grantee's employment with the Company terminates as a result of the total
disability or death of the grantee. Further, the option shares will become
available for purchase in the event of an Approved Transaction, Board
Change, or Control Purchase (each as defined in the 1997 Plan), unless, in
the case of an Approved Transaction, the compensation committee under the
circumstances specified in the 1997 Plan, determines otherwise. In
addition, Mr. Koff's options become available for purchase if he ceases to
be a director of TCI Music for any reason other than voluntary termination,
and Mr. Troxel's options become available for purchase if his employment is
terminated by the Company without "cause" or by him for "good reason" (as
defined in his option agreement.)
(2) There was no market for the shares of the TCI Music Series A Common Stock
on July 11, 1997, the date of grant. Each share of TCI Music Series A
Common Stock issued in connection with the merger of DMX and a subsidiary
of TCI Music (the "DMX Merger") trades together with a right granted by TCI
to each such holder of TCI Music Series A Common Stock (a "TCI Right").
The shares of TCI Music Series A Common Stock (with associated TCI Rights)
commenced trading on the Nasdaq SmallCap Market on July 14, 1997. There is
no public trading market for TCI Music Series A Common Stock without
associated TCI Rights. The options are exercisable for TCI Music Series A
Common Stock without associated TCI Rights.
(3) The values shown are based on the Black-Scholes model and are stated in
current annualized dollars on a present value basis. The key assumptions
used in the model for purposes of this calculation include the following:
(a) a 6.1% risk-free interest rate; (b) a 50% volatility factor; (c) a
60-month expected life term;
32
<PAGE> 33
and (d) the closing market price of a unit consisting of one share of TCI
Music Series A Common Stock and its associated TCI Right (which trade
together on the Nasdaq SmallCap Market under the symbol "TUNE") on
December 31, 1997, or $7.625, resulting in a fair value of the options
granted during the Reporting Period of $3.38. The actual value the
executive may realize will depend upon the extent to which the stock price
exceeds the exercise price on the date the option is exercised.
Accordingly, the value, if any, realized by the executive will not
necessarily be the value determined by the model.
(c) Aggregated Option/SAR Exercises in Last Fiscal Year and FY-End Option/SAR
Values
The following table shows certain information with respect to the
exercise of stock options/SARs by the named executive officers during the
Reporting Period and year-end value of unexercised stock options/SARs at
December 31, 1997.
<TABLE>
<CAPTION>
Number of Unexercised Value of Unexercised In
Securities Underlying the Money Options/SARs
Shares Valued Options/SARs at at FY-End ($)(1)
Acquired on Realize FY-End (#)
Name Exercise (#) ($) Exercisable/Unexercisable Exercisable/Unexercisable
---- ----------- --------- ------------------------- -------------------------
<S> <C> <C> <C> <C>
David B. Koff, -- -- 20,000/80,000 $27,500/$110,000
President and
Chief Executive
Officer
Lon A. Troxel, -- -- 40,000/160,000 $55,000/$220,000
President and
CEO, DMX
</TABLE>
(1) The values indicated are based upon the closing trading price of a unit
consisting of one share of TCI Music Series A Common Stock and its
associated TCI Right (which trade together on the Nasdaq SmallCap Market
under the symbol "TUNE") on December 31, 1997, or $7.625. The shares of
TCI Music Series A Common Stock underlying such options will not have any
associated TCI Rights, and accordingly the value of a share of TCI Music
Series A Common Stock, without an attached TCI Right, may be substantially
lower than the market value of TCI Music Series A Common Stock trading with
associated TCI Rights.
(d) Compensation of Directors
(1) Standard Arrangements. Members of the Board of TCI Music who
are also full-time employees of TCI Music or TCI, or any of their respective
subsidiaries, do not receive any additional compensation for their services as
directors. TCI Music has not established any fees for directors who are not
full-time employees of TCI Music or TCI or any of their respective
subsidiaries. All members of the TCI Music Board are reimbursed for expenses
incurred to attend any meetings of the TCI Music Board and any committee
thereof.
(2) Other Arrangements. The TCI Music Board granted, effective as
of July 11, 1997, (i) to each of Messrs. Hindery, Kern and Fisher, options to
purchase 833,334 shares of TCI Music Series A Common
33
<PAGE> 34
Stock at a price of $6.25 per share, (ii) to Mr. Troxel, options to purchase
200,000 shares of TCI Music Series A Common Stock at a price of $6.25 per
share, (iii) to each of Messrs. Sparkman, Bennett and Koff, options to purchase
100,000 shares of TCI Music Series A Common Stock at a price of $6.25 per
share. Such options will vest in 20% cumulative increments, with the first
increment vesting as of July 11, 1997, and each additional increment vesting on
each anniversary date thereafter, and will be exercisable for up to ten years
following July 11, 1997. No TCI Rights will be issued in connection with any
TCI Music Series A Common Stock issued upon exercise of any such option.
(e) Employment Agreements, Termination of Employment and Change of Control
Arrangements
In connection with the merger of Paradigm and a subsidiary of TCI
Music (the "Paradigm Merger"), TCI Music agreed to appoint Mr. McPartland as
TCI Music's President and Chief Executive Officer pursuant to the terms of Mr.
McPartland's Employment Agreement with Paradigm at a compensation level to be
determined between Mr. McPartland and TCI Music (but not to be less than
$375,000 per annum). TCI Music also agreed that Mr. McPartland is entitled to
participate in bonus, incentive stock option and other benefit programs on a
basis consistent with the practice of TCI Music in compensating senior
executives. Mr. McPartland's Employment Agreement with Paradigm is for a
three-year period terminating on December 31, 1998. The Employment Agreement
provides that if Paradigm terminates Mr. McPartland's employment agreement
other than for cause (as defined in the Employment Agreement), Mr. McPartland
is entitled to receive his base annual salary for the unexpired term of the
agreement, plus benefits and bonus, if any, along with any salary accrued to
the date of his termination.
DMX and Lon A. Troxel are parties to an Employment Agreement dated
October 1, 1991, as amended, pursuant to which Mr. Troxel receives annual
salary of $300,000 from June 1, 1998 through May 31, 1999 and $325,000 during
the years ending May 31, 2000, 2001 and 2002. Pursuant to the Employment
Agreement Mr. Troxel has agreed not to acquire more than a 10% direct or
indirect ownership in any cable company, other than DMX, without the prior
written consent of DMX. Mr. Troxel receives basic and extended benefits
commensurate with other senior management employees such as vacation pay and
other fringe benefits. If Mr. Troxel becomes disabled during the term of the
agreement, he will receive the same compensation he is entitled to under the
Employment Agreement for a time period not exceeding six months.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
(a) Security Ownership of TCI Music
The following table sets forth information with respect to the
beneficial ownership of the common and preferred stock of TCI Music as of
December 31, 1997 by: (i) each person who is known by TCI Music to be the
beneficial owner of more than five percent of any class of the outstanding
shares of the TCI Music Series A Common Stock, the Series B Common Stock, $.01
par value per share, of TCI Music ("TCI Music Series B Common Stock") and the
Series A Convertible Preferred Stock, $.01 par value per share, of TCI Music
("TCI Music Preferred Stock"); (ii) each director of TCI Music; (iii) the named
executive officers; and (iv) all of TCI Music's directors and executive
officers as a group. Shares issuable upon exercise or conversion of
convertible securities are deemed to be outstanding for the purpose of
computing the percentage ownership of persons beneficially owning such
convertible securities, but have not been deemed to be outstanding for the
purpose of computing the percentage ownership of any other person. Voting power
in the table is computed with respect to a general election of directors. So
far as is known to TCI Music, the persons indicated below
34
<PAGE> 35
have sole voting and investment power with respect to the shares indicated as
owned by them, except as otherwise stated in the notes to the table. All
information is taken from or based upon ownership filings made by such persons
with the SEC or upon information provided by such persons to the Company. The
address of the directors and named executive officers of TCI Music is 8101 East
Prentice Avenue, Suite 500, Englewood, Colorado 80111.
<TABLE>
<CAPTION>
Amount and
Nature of
Name and Address of Beneficial Percent of Voting
Beneficial Owner Title of Class Ownership Class(1) Power(1)
-------------------------- -------------- --------- -------- --------------
<S> <C> <C> <C> <C>
Tele-Communications, Inc. Series A Common 6,812,393(2) 37.6 97.5
5619 DTC Parkway Series B Common 62,500,000(2) 100.0
Englewood, CO 80111 Series A Preferred 84,242 4.8
Shaw Communications, Inc. Series A Common 1,900,000(3) 10.5 *
630 Third Avenue Series B Common -- --
Suite 900 Series A Preferred -- --
Calgary, Alberta
CANADA T2P 4L4
JR Shaw Series A Common 2,095,125(4) 11.6 *
c/o Shaw Communications, Series B Common -- --
Inc. Series A Preferred -- --
H.F. Lenfest Series A Common -- -- *
c/o StarNet, Inc. Series B Common -- --
1332 Enterprise Drive Series A Preferred 501,292(5) 28.8
Suite 200
West Chester, PA 19380
Chris Blackwell Series A Common -- -- *
c/o Island Trading Series B Common -- --
Company Series A
400 Lafayette Street Preferred 175,000(7) 10.0
New York, NY 10003
Louis Wolfson, III Series A Common -- -- *
c/o Venture Corporation Series B Common -- --
9350 S. Dixie Hwy., Suite Series A Preferred 96,651 5.5
900
Miami, FL 33156
J. Patrick Michaels, Jr. Series A Common -- -- *
c/o CEA Investors, Inc. Series B Common -- --
101 E. Kennedy Blvd., Series A 321,379(6) 18.4
Suite 3300 Preferred
Tampa, FL 33602
CEA Investors, Inc. Series A Common -- -- *
101 E. Kennedy Blvd., Series B Common -- --
Suite 3300 Series A 315,484(6) 18.1
Tampa, FL 33602 Preferred
Robert R. Bennett Series A Common 100,000(9) * *
Series B Common -- --
Series A -- --
Preferred
Donne F. Fisher Series A Common 833,334(8) 4.4 *
Series B Common -- --
Series A -- --
Preferred
Leo J. Hindery, Jr. Series A Common 833,334(8) 4.4 *
Series B Common -- --
Series A -- --
Preferred
</TABLE>
35
<PAGE> 36
<TABLE>
<CAPTION>
Amount and
Nature of
Name and Address of Beneficial Percent of Voting
Beneficial Owner Title of Class Ownership Class(1) Power(1)
-------------------------- -------------- --------- -------- --------------
<S> <C> <C> <C> <C>
Peter M. Kern Series A Common 833,334(8) 4.4 *
Series B Common -- --
Series A Preferred -- --
David B. Koff Series A Common 100,000(9) * *
Series B Common -- --
Series A Preferred -- --
Thomas McPartland Series A Common 454,552 2.5 *
Series B Common -- --
Series A Preferred -- --
J C Sparkman Series A Common 137,500(9) * *
Series B Common -- --
Series A Preferred -- --
Lon A. Troxel Series A Common 200,000(10) 1.1% *
Series B Common -- --
Series A Preferred -- --
All Directors and
Executive Officers
as a Group
(10 PERSONS)
Series A Common 3,542,054(11) 19.6 *
Series B Common -- --
Series A Preferred -- --
- -------
</TABLE>
* Less than 1%
(1) Based upon 18,098,983 shares of TCI Music Series A Common Stock,
62,500,000 shares of TCI Music Series B Common Stock and 1,742,484
shares of TCI Music Preferred Stock outstanding on December 31, 1997.
(2) Effective July 1, 1997, TCI transferred 2,587,222 shares of TCI Music
Series A Common Stock and 62,500,000 shares of Series B Common Stock
(all the shares of TCI Music Series A Common Stock and TCI Music Series
B Common Stock beneficially owned by TCI, excluding 1,514,766 shares of
TCI Music Series A Common Stock indirectly owned by Liberty and
2,710,406 shares of TCI Music Series A Common Stock indirectly owned by
a TCI subsidiary, Tele-Communications International, Inc.) to Liberty.
In exchange for the TCI Music Series A Common Stock and TCI Music
Series B Common Stock acquired from TCI, Liberty (i) agreed to
reimburse TCI for all amounts paid by TCI to holders of TCI Rights to
the extent that TCI Rights are exercised and (ii) issued a promissory
note to TCI in the amount of $80,000,000. Of the total consideration,
$21,000,000 was allocable to the TCI Music Series A Common Stock (with
associated TCI Rights) acquired by Liberty. The note may be reduced by
the value of shares of Tele-Communications, Inc. Series A Liberty Media
Group Common Stock, par value $.01 per share ("Liberty Group Series A
Common Stock") or Tele-Communications, Inc. Series B Liberty Media
Group Stock, par value $.01 per share ("Liberty Group Series B Stock")
issued by TCI for the benefit of any TCI entity other than an entity
within the Liberty Media Group. Liberty also may elect to pay
$50,000,000 of that note by delivery of a Stock Appreciation Rights
Agreement that will give TCI the right to receive 20% of the
appreciation in value of Liberty's investment in TCI Music, to be
determined as of July 11, 2002. The Stock Appreciation Rights Agreement
will provide that TCI will receive at least $73,500,000 if Liberty's
investment in TCI Music is to be valued on that date; if by mutual
agreement of TCI and Liberty, such investment is to be valued (and
payment made to TCI) before July 11, 2002, the minimum amount payable
to TCI will be $50,000,000, plus an accretion to the agreed upon
valuation date equal to 8% per annum, compounded annually.
(3) Does not include 69,020 shares of TCI Music Series A Common Stock held
by James R. Shaw Securities Limited, 32,145 shares of TCI Music Series
A Common Stock held by Brasha Holdings Ltd., 29,670 shares of TCI
Music Series A Common Stock held by Jay-Shaw Holdings Ltd., 32,145
shares of TCI Music Series A Common Stock held by Julmar Holdings
Ltd., and 32,145 shares of TCI Music Series A Common Stock held by
Shawana Estates Ltd., which entities are affiliates of
36
<PAGE> 37
Shaw. Shaw is a public company whose non-voting securities are listed
on the Toronto Stock Exchange and the Alberta Stock Exchange. Mr.
Shaw, members of his family and members of Leslie E. Shaw's (Mr.
Shaw's brother) family hold directly and indirectly, a majority of the
voting shares of Shaw and such shares are governed by the terms of a
voting trust. Mr. Shaw and members of his family do not, directly or
indirectly, hold a majority of the publicly traded non-voting shares
of Shaw.
(4) Includes the following shares of TCI Music Series A Common Stock, of
which Mr. Shaw disclaims beneficial ownership: 1,900,000 shares held
by Shaw, 69,020 shares held by James R. Shaw Securities Limited,
32,145 shares held by Brasha Holdings Ltd., 29,670 shares held by
Jay-Shaw Holdings Ltd., 32,145, shares held by Julmar Holdings Ltd.,
32,145 shares held by Shawana Estates Ltd. Mr. Shaw holds a majority
of the shares of Jay-Shaw Holdings Ltd., Brasha Holdings Ltd. and
Shawana Estates Ltd. The remaining shares of each such entities,
other than certain preferred shares held by Julmar Holdings Ltd., a
corporation wholly owned by Mr. Shaw, are held by children of Mr.
Shaw. Each of the children has reached the age of majority. Mr. Shaw
holds 48% of the voting shares of James R. Shaw Securities Limited.
The balance of voting shares are held by and for the benefit of Mr.
Shaw's family members.
(5) StarNet Interactive Entertainment, Inc., a Delaware corporation
("StarNet Interactive"), is a wholly-owned subsidiary of StarNet, Inc.
("StarNet"), which is a wholly-owned subsidiary of Lenfest
Communications, Inc. ("LCI"). H.F. Lenfest (together with his
children) and TCI each beneficially own 50% of the common stock of
LCI. Mr. Lenfest is the sole director of StarNet and StarNet
Interactive and President, Chief Executive Officer and a director of
LCI. Through contractual arrangements among the stockholders of LCI,
Mr. Lenfest has the exclusive right to control a majority of the Board
of Directors of LCI and the management and business affairs of LCI,
StarNet and StarNet Interactive. TCI has disclaimed beneficial
ownership of the shares of TCI Music Preferred Stock beneficially
owned by Mr. Lenfest, LCI, StarNet and StarNet Interactive (the
"StarNet Group"). The StarNet Group has disclaimed beneficial
ownership of the shares of capital stock of TCI Music beneficially
owned by TCI.
(6) CEA Investors, Inc. ("CEA Investors"), a Florida corporation, is
the sole general partner of CEA Investors Partnership II, Ltd. ("CEA
II"). J. Patrick Michaels, Jr. ("Michaels") is the sole director
and the President of CEA Investors. Michaels is the sole trustee of
The J. Patrick Michaels, Jr. Family Trust, the sole stockholder of CEA
Investors. Michaels has sole power to vote or direct the vote of
320,496 shares of TCI Music Preferred Stock, shared power to vote or
direct the vote of 883 shares of TCI Music Preferred Stock, sole
power to dispose or direct the disposition of 320,496 shares of TCI
Music Preferred Stock, and shared power to dispose or direct the
disposition of 883 shares of TCI Music Preferred Stock. Michaels
shares voting and dispositive power with the Kimberly Lynn Michaels
Trust with respect to 883 shares. Michaels disclaims beneficial
ownership of any shares of TCI Music Preferred Stock held by CEA II,
CEA Investors or The Kimberly Lynn Michaels Trust, except to the
extent of his pecuniary interest therein.
(7) Island Trading Company ("Island") is a wholly-owned subsidiary of
Island International Limited, the capital stock of which is held in
trust by The Island Settlement, both of which have disclaimed
beneficial ownership of the shares of TCI Music Preferred Stock
beneficially owned by Island. Mr. Blackwell has shared voting power
and shared dispositive power with respect to such shares.
(8) Assumes the exercise in full of stock options to acquire 833,334
shares of TCI Music Series A Common Stock, 166,667 of which are
currently exercisable.
(9) Assumes the exercise in full of stock options to acquire 100,000
shares of TCI Music Series A Common Stock, 20,000 of which are
currently exercisable.
(10) Assumes the exercise in full of options to acquire 200,000 shares of
TCI Music Series A Common Stock, 40,000 of which are currently
exercisable.
(11) Assumes the exercise in full of options held by such persons to
acquire 3,050,002 shares of TCI Music Series A Common Stock, 610,001
of which are currently exercisable.
(b) Security Ownership of TCI
The following table sets forth, as of December 31, 1997, the ownership
of Tele-Communications, Inc. Series A TCI Group Common Stock, par value $.01 per
share ("TCI Group Series A Stock"), Tele-Communications, Inc. Series B TCI Group
Common Stock, par value $.01 per share ("TCI Group Series B Stock"), Liberty
37
<PAGE> 38
Group Series A Stock, Liberty Group Series B Stock, Tele-Communications, Inc.
Series A TCI Ventures Group Common Stock, par value $.01 per share ("Ventures
Group Series A Stock"), Tele-Communications, Inc. Series B TCI Ventures Group
Common Stock, par value $.01 per share ("Ventures Group Series B Stock"), Class
B 6% Cumulative Redeemable Exchangeable Junior Preferred Stock, par value $.01
per share, of TCI ("Class B Preferred Stock"), Convertible Preferred Stock,
Series C - TCI Group ("TCOMA Series C Preferred Stock"), Convertible Preferred
Stock, Series C - Liberty Media Group ("LBTYA Series C Preferred Stock"),
Redeemable Convertible TCI Group Preferred Stock, Series G, par value $.01 per
share ("Series G Preferred Stock") and Redeemable Convertible Liberty Media
Group Preferred Stock, Series H, par value $.01 per share ("Series H Preferred
Stock"), held by (i) each person known by TCI Music to own beneficially more
than 5% of any such class or series outstanding on that date, (ii) each person
who is a director or named executive officer of TCI Music and (iii) all of the
directors and executive officers of TCI Music as a group. Shares issuable upon
exercise or conversion of convertible securities are deemed to be outstanding
for the purpose of computing the percentage ownership of persons beneficially
owning such convertible securities, but have not been deemed to be outstanding
for the purpose of computing the percentage ownership of any other person.
Voting power in the table is computed with respect to a general election of
directors and, therefore, the Class B Preferred Stock, the Series G Preferred
Stock and the Series H Preferred Stock are included in the calculation
notwithstanding the fact that the Class B Preferred Stock, the Series G
Preferred Stock and the Series H Preferred Stock do not generally vote with
respect to matters submitted to a vote of stockholders. So far as is known to
TCI Music, the persons indicated below have sole voting and investment power
with respect to the shares indicated as owned by them except as otherwise stated
in the notes to the table and except for the shares held by the trustee of TCI's
Employee Stock Purchase Plan (the "TCI ESPP") for the benefit of such person,
which shares are voted at the discretion of the trustee.
Effective February 6, 1998, TCI issued a stock dividend to holders of
Liberty Group Series A Stock and Liberty Group Series B Stock consisting of one
share of Liberty Group Series A Stock for every two shares of Liberty Group
Series A Stock owned and one share of Liberty Group Series B Stock for every two
shares of Liberty Group Series B Stock owned (the "1998 Liberty Group Stock
Dividend"). As a result of the 1998 Liberty Group Stock Dividend, the number of
shares underlying options granted to purchase Liberty Group Series A Stock and
the price to purchase such shares have been adjusted. Effective February 6,
1998, TCI issued a stock dividend to holders of Ventures Group Series A Stock
and Ventures Group Series B Stock consisting of one share of Ventures Group
Series A Stock for each share of Ventures Group Series A Stock owned and one
share of Ventures Group Series B Stock for each share of Ventures Group Series B
Stock owned (the "1998 Ventures Group Stock Dividend"). As a result of the 1998
Ventures Group Stock Dividend, the number of shares underlying options granted
to purchase Ventures Group Series A Stock and Ventures Group Series B Stock and
the price to purchase such shares have been adjusted. The information in the
table has been adjusted for the 1998 Liberty Group Stock Dividend and the 1998
Ventures Group Stock Dividend. All information is taken from or based upon
ownership filings made by such persons with the SEC Commission or upon
information provided by such persons to the Company.
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<PAGE> 39
<TABLE>
<CAPTION>
Amount and
Nature
Name of of Beneficial Percent Voting
Beneficial Owner Title of Class Ownership of Class(1) Power (1)
---------------- -------------- --------- ----------- ---------
<S> <C> <C> <C> <C>
Robert R. Bennett TCI Group Common Stock
Series A 131,185(2) * *
Series B ___ ___
Liberty Media Group Common
Stock
Series A 1,776,805(2) *
Series B ___ ___
Ventures Group Common Stock
Series A 77,910(2) *
Series B ___ ___
TCI Preferred Stock
Class B 482 *
Series C ___ ___
Series G ___ ___
Series H ___ ___
Donne F. Fisher TCI Group Common Stock
Series A 433,732(3) * *
Series B 183,012(3) *
Liberty Media Group Common
Stock
Series A 381,838(3) *
Series B 93,402 *
Ventures Group Common Stock
Series A 306,184(3) *
Series B 268,738 *
TCI Preferred Stock
Class B 4,299(3) *
Series C ___ ___
Series G ___ ___
Series H
Leo J. Hindery, TCI Group Common Stock
Jr.
Series A 1,924,534(4) * 1.60%
Series B 1,684,775(5) 3.49%
Liberty Media Group Common
Stock
Series A 1,125,000(4) *
Series B ___ ___
Ventures Group Common Stock
Series A 1,550,932(4) *
Series B 1,721,360(5) 3.89%
TCI Preferred Stock
Class B ___ ___
Series C ___ ___
Series G ___ ___
Series H ___ ___
Peter M. Kern TCI Group Common Stock
Series A 70,000(6) * *
Series B 24,069(7) *
Liberty Media Group Common
Stock
Series A ___ ___
Series B ___ ___
Ventures Group Common Stock
Series A 60,000(6) *
Series B 12,296(7) *
TCI Preferred Stock
Class B ___ ___
Series C ___ ___
Series G ___ ___
Series H ___ ___
</TABLE>
39
<PAGE> 40
<TABLE>
<CAPTION>
Amount and
Nature
Name of of Beneficial Percent of Voting
Beneficial Owner Title of Class Ownership Class (1) Power (1)
---------------- -------------- --------- --------- ---------
<S> <C> <C> <C> <C>
David B. Koff TCI Group Common Stock
Series A 19,839(8) * *
Series B ___ ___
Liberty Media Group Common Stock
Series A 269,865(8) ___
Series B ___ ___
Ventures Group Common Stock 15,596(8) ___
Series A ___ ___
Series B ___ ___
TCI Preferred Stock
Class B ___ ___
Series C ___ ___
Series G ___ ___
Series H ___ ___
Thomas McPartland TCI Group Common Stock
Series A ___ ___ ___
Series B ___ ___
Liberty Media Group Common Stock
Series A ___ ___
Series B ___ ___
Ventures Group Common Stock
Series A ___ ___
Series B ___ ___
TCI Preferred Stock
Class B ___ ___
Series C ___ ___
Series G ___ ___
Series H ___ ___
J C Sparkman TCI Group Common Stock
Series A 200,921(9) * *
Series B ___ ___
Liberty Media Group Common Stock
Series A 141,751(9) *
Series B ___ ___
Ventures Group Common Stock
Series A 107,102(9) *
Series B ___ ___
TCI Preferred Stock
Class B ___ ___
Series C ___ ___
Series G ___ ___
Series H ___ ___
Lon A. Troxel TCI Group Common Stock
Series A ___ ___ ___
Series B ___ ___
Liberty Media Group Common Stock
Series A ___ ___
Series B ___ ___
Ventures Group Common Stock
Series A ___ ___
Series B ___ ___
TCI Preferred Stock
Class B ___ ___
Series C ___ ___
Series G ___ ___
Series H ___ ___
</TABLE>
40
<PAGE> 41
<TABLE>
<CAPTION>
Amount and
Nature
Name of of Beneficial Percent of Voting
Beneficial Owner Title of Class Ownership Class (1) Power (1)
---------------- -------------- --------- --------- ---------
<S> <C> <C> <C> <C>
All Directors and Executive TCI Group Common Stock
Officers as a Group Series A 3,574,956 * 2.4%
(10 Persons) Series B 1,896,856 3.9%
Liberty Media Group Common Stock
Series A 3,966,379 1.3%
Series B 93,402 *
Ventures Group Common Stock
Series A 2,117,724 *
Series B 2,002,394 4.5%
TCI Preferred Stock
Class B 4,781(3) *
Series C ___ ___
Series G ___ ___
Series H ___ ___
</TABLE>
- ----------
* Less than 1%
(1) Based on 458,473,123 shares of TCI Group Series A Stock, 48,230,923
shares of TCI Group Series B Stock, 313,225,982 shares of Liberty
Group Series A Stock, 31,681,124 shares of Liberty Group Series A
Stock, 365,719,524 shares of Ventures Group Series A Stock, 44,228,902
shares of Ventures Group Series B Stock, 1,552,490 shares of Class B
Preferred Stock, 70,575 shares of TCOMA Series C Preferred Stock,
70,575 shares of LBTYA Series C Preferred Stock, 6,567,344 shares of
Series G Preferred Stock, and 6,567,894 shares of Series H Preferred
Stock outstanding at December 31, 1997, in each case after elimination
of shares held by TCI and its subsidiaries. In addition, such numbers
have been adjusted for the February 9, 1998 transactions with Dr.
Malone and the Estate of Bob Magness. As a result of such February 9,
1998 transactions, the following adjustments to the December 31, 1997
outstanding share numbers were made: (i) a reduction of 10,201,040
shares in the outstanding number of TCI Group Series A Stock, (ii) an
increase of 10,017,145 shares in the outstanding number of TCI Group
Series B Stock, (iii) a reduction of 11,666,508 shares in the
outstanding number of Ventures Group Series A Stock, and (iv) an
increase of 12,034,298 shares in the outstanding number of Ventures
Group Series B Stock.
(2) Assumes the exercise in full of stock options granted in tandem with
stock appreciation rights in November 1994 to acquire 35,000 shares of
TCI Group Series A Stock, 28,125 shares of Liberty Group Series A
Stock, 30,000 shares of Ventures Group Series A Stock, 21,000 shares,
16,875 shares and 18,000 shares of which, respectively, were
exercisable as of December 31, 1997. Additionally assumes the exercise
in full of stock options granted in tandem with stock appreciation
rights in December 1995 to acquire 1,125,000 shares of Liberty Group
Series A Stock, 450,000 shares of which were exercisable as of
December 31, 1997. Also assumes the exercise in full of stock options
granted in tandem with stock appreciation rights in July 1997 to
acquire 80,000 shares of TCI Group Series A Stock, 600,000 shares of
Liberty Group Series A Stock and 30,000 shares of Ventures Group
Series A Stock, none of which were exercisable as of December 31,
1997. Does not include stock appreciation rights with respect to
150,000 shares of TCI Group Series A Stock, 150,000 shares of Liberty
Group Series A Stock or 130,000 shares of Ventures Group Series A
Stock. Upon exercise, such stock appreciation rights are payable, at
TCI's election, in cash or in shares of TCI Group Series A Stock or
Liberty Group Series A Stock, as applicable. Also includes 2,332
shares of TCI Group Series A Stock, 1,929 shares of Liberty Group
Series A Stock and 2,068 shares of Ventures Group Series A Stock held
in trust by the TCI ESPP for the benefit of Mr. Bennett.
(3) Assumes the exercise in full of stock options granted in tandem with
stock appreciation rights in November 1994 to acquire 140,000 shares
of TCI Group Series A Stock, 112,500 shares of Liberty Group Series A
Stock and 120,000 shares of Ventures Group Series A Stock, 84,000
shares, 67,500 shares and 72,000 shares of which, respectively, were
exercisable as of December 31, 1997. Additionally assumes the exercise
of stock options granted in January 1996 to acquire 50,000 shares of
TCI Group Series A Stock and 28,125 shares of Liberty Group Series A
Stock, 10,000 shares and 5,625 shares of which, respectively, were
exercisable as of December 31, 1997. Includes 210 shares of Class B
Preferred Stock held by Mr. Fisher's wife.
(4) Assumes the exercise in full of options granted in tandem with stock
appreciation rights in February 1997 to acquire 700,000 shares of TCI
Group Series A Stock, 375,000 shares of Liberty Group Series A Stock
and 600,000 shares of Ventures Group Series A Stock, none of which are
exercisable until February 1998. Also assumes the exercise in full of
options granted in tandem with stock appreciation rights in July 1997
to acquire 1,050,000 shares of TCI Group Series A Stock, 750,000
shares of Liberty Group Series A Stock and 900,000 shares of Ventures
Group Series A Stock, none of which are exercisable until July 1998.
Also includes 174,534 shares of restricted TCI Group Series A Stock
and 50,932 shares of restricted Ventures Group Series A Stock. Such
shares vest as to 50% in July 2001 and as to the remaining 50% in July
2002.
41
<PAGE> 42
(5) Includes 1,684,775 shares of TCI Group Series B Stock and 1,721,360
shares of Ventures Group Series B Stock held by trusts, to which Mr.
Hindery is the trustee and over which Dr. Malone has the power to
direct the voting. Dr. Malone also has a right of first refusal with
respect to any proposed transfer of such shares. Such right of first
refusal may be exercised by Dr. Malone either by the payment of cash
or, subject to certain exceptions, by the exchanging of shares of TCI
Group Series A Stock for such TCI Group Series B Stock or Ventures
Group Series A Stock for such Ventures Group Series B Stock. If not
exercised by Dr. Malone, such right of first refusal may be exercised
by TCI.
(6) Assumes the exercise in full of stock options to acquire 70,000 shares
of TCI Group Series A Stock and 60,000 shares of Ventures Group Series
A Stock, none of which were exercisable as of December 31, 1997.
(7) All of these shares are held in a series of trusts of which Mr.
Hindery is the trustee.
(8) Assumes the exercise in full of stock options granted in tandem with
stock appreciation rights in November 1994 to acquire 17,500 shares of
TCI Group Series A Stock and 14,063 shares of Liberty Group Series A
Stock and 15,000 shares of Ventures Group Series A Stock, 10,500
shares, 8,437 shares and 9,000 shares of which, respectively, were
exercisable as of December 31, 1997. Additionally assumes the exercise
of stock options granted in tandem with stock appreciation rights in
December 1995 to acquire 180,000 shares of Liberty Group Series A
Stock, 72,000 shares of which were exercisable as of December 31, 1997.
Also assumes the exercise in full of stock options granted in tandem
with stock appreciation rights in July 1997 to acquire 75,000 shares of
Liberty Group Series A Stock, none of which were exercisable as of
December 21, 1997. Excludes 1,312 shares of Liberty Group Series A
Stock and 200 shares of Class B Preferred Stock beneficially owned by
Judith R. Koff, Mr. Koff's wife, of which Mr. Koff disclaims beneficial
ownership.
(9) Assumes the exercise in full of stock options granted in tandem with
stock appreciation rights to acquire 70,000 shares of TCI Group Series
A Stock, 30,000 shares of Liberty Group Series A Stock and 60,000
shares of Ventures Group Series A Stock, all of which were exercisable
as of December 31, 1997. Also assumes the exercise in full of stock
options granted in tandem with stock appreciation rights in December
1996 to acquire 50,000 shares of TCI Group Series A Stock and 28,125
shares of Liberty Group Series A Stock, 10,000 shares and 5,625 shares
of which, respectively, were exercisable as of December 31, 1997.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
TCI beneficially owns approximately 37.6% of the outstanding shares of
TCI Music Series A Common Stock, 100% of the outstanding shares of TCI Music
Series B Common Stock, and 4.8% of the outstanding shares of the TCI Music
Preferred Stock, collectively representing 97.5% of the aggregate voting power
related to the outstanding shares of the TCI Music Series A Common Stock, the
TCIM Series B Common Stock and the TCIM Preferred Stock. TCI acquired such
shares of TCI Music Series A Common Stock and TCI Music Series B Common Stock
upon the consummation of the DMX Merger on July 11, 1997 and the TCI Music
Preferred Stock upon consummation of the merger of The Box Worldwide, Inc. ("The
Box") with a subsidiary of TCI Music (the "Box Merger") on December 16, 1997.
DMX, under an agreement with National Digital Television Center, Inc.,
a wholly-owned subsidiary of TCI ("NDTC"), has a capital lease to lease
equipment at NDTC's studio and uplinking facility in Littleton, Colorado, with
terms which extend to 2000 at an interest rate of 9.5%. DMX is also obligated
to NDTC under various operating leases for uplinking and satellite services.
On December 10, 1996, DMX entered into a letter agreement with Sky
Entertainment Services in Latin America ("Sky-LA") pursuant to which Sky-LA was
granted the right to carry up to 40 DMX music formats on the Mexican,
Brazilian, North South American and South American platforms of Sky-LA. Sky
Entertainment Services is the brand name for the direct-to-home service offered
by the strategic alliance formed by Organzacoes Globo, Brazil's leading
entertainment group; Mexico's Grupo Televisa S.A.; The News Corporation
Limited; and Tele-Communications International, Inc., a subsidiary of TCI.
Shaw beneficially owns approximately 10.5% of the outstanding shares
of TCI Music Series A Common Stock, which it acquired upon the consummation of
the DMX Merger on July 11, 1997, in exchange for the shares of common stock of
DMX it owned prior to the DMX Merger. JR Shaw, President and Chief Executive
Officer of Shaw, was a director of DMX prior to the DMX Merger. Mr. Shaw
beneficially owns 11.6% of TCI Music Series A Common Stock, which he acquired
upon the consummation of the DMX Merger
42
<PAGE> 43
in exchange for the shares of common stock of DMX he beneficially owned prior
to the DMX Merger. Mr. Sparkman, a former director of DMX and a director of
TCI Music, is a director of Shaw. In addition, a subsidiary of Shaw and a
subsidiary of DMX, 450714 B.C. Ltd., each own a 50% interest in DMX-Canada,
Ltd. In March 1992, Shaw, the second largest cable operator in Canada, entered
into a licensing and distribution agreement with DMX which grants to DMX-Canada
Ltd. the exclusive license and right to distribute DMX's premium service in
Canada, which was amended on November 1, 1994 by the Commercial License and
Distribution Agreement and on April 14, 1997 by the Residential License and
Distribution Agreement. Such licensing and distribution agreement, as amended,
provides DMX with a monthly, per subscriber programming royalty for both
residential and commercial distribution.
During 1995, DMX and Shaw entered into a series of agreements to
accomplish a reorganization by which Shaw could take full advantage of the
Canadian tax losses incurred in Canada during the market development period and
based on Shaw's commitment to fund such development costs. This was
accomplished through the transfer of each company's respective equity interests
and the formation of a new Canadian partnership (also referred to herein as
"DMX-Canada"). DMX continues to hold an equity interest in the new partnership
through its wholly-owned subsidiary, a British Columbia corporation, 450714
B.C. Ltd. There is no impact from the reorganization on the operations of
DMX-Canada, other than to accomplish the tax structure as outlined above.
After Shaw recoups its initial funding, each company will share in the profits
based on their respective equity interests.
In April 1996, DMX entered into two capital leases with DMX-Canada the
proceeds of which were used to purchase DMX Disc equipment leased to two DMX
customers, Nine West and Coach. The obligation under the capital lease was for
a term which extended to May 2001 at an effective interest rate of 27.21%. In
May 1997, the lease balance of $268,625 was paid in full through an offset of
license fees due to DMX totaling $220,714 and cash for the balance of $47,911.
In August 1994, the Canadian Radio - Television and Telecommunications
Commission ("CRTC") which regulates the broadcast industry in Canada, revoked
the license previously granted to DMX-Canada for Canadian distribution of DMX.
DMX-Canada reapplied to the CRTC during 1995 for a license to distribute DMX to
Canadian residential cable subscribers. The CRTC issued a favorable ruling in
December 1995 and requires a one to one ratio of Canadian content to
non-Canadian content. DMX-Canada and DMX have negotiated an agreement to
distribute DMX's digital music services (the "DMX Services") to the Canadian
residential cable market. The service will include a total of 30 formats and
will be distributed through Shaw Cable Systems and their affiliates.
DMX-Canada will also license other Canadian third party distributors such as
Star Choice. The launch of the DMX Service for residential distribution was
July 1997.
The CRTC does not regulate programming delivered to commercial
establishments by direct broadcast satellite, and DMX-Canada has been
distributing the DMX Service to the commercial sector since 1994. DMX and
DMX-Canada have negotiated a new license and distribution agreement which
grants an exclusive license and right to distribute the DMX Service to
commercial establishments in Canada. The term of the new agreement coincides
with the original agreement dated March 9, 1992, and terminates March 31, 2012.
DMX received total license fees of approximately $212,000 for the six months
ended December 31, 1997 under the agreements.
On April 21, 1994, The Box entered into a Lease Agreement with Island,
pursuant to which The Box leased from Island approximately 16,000 square feet
of space for its principal executive offices. Payment of rent commenced on
July 15, 1995 at a base rental of $22.00 per square foot for the first year of
the lease term, increasing to $39.00 per square foot for the seventh and final
year of the lease term. The base rental rate does
43
<PAGE> 44
not include certain operating expenses to be borne by The Box for the entire
term of the lease and capped for the first three years of the lease term. The
Box has the right to renew the lease subject to the negotiation of a new rental
rate, based upon the then-current market rate.
On August 13, 1997, The Box paid Communications Equity Associates,
Inc. ("CEA"), a company controlled by Mr. Michaels, a fee of $250,000 for
investment banking services provided to The Box. Upon the closing of the Box
Merger, CEA was paid an additional fee of $250,000. CEA agreed to accept these
payments as satisfaction of The Box's obligation to pay CEA a fee of
approximately $1.9 million in connection with the Box Merger pursuant to the
Domestic Financing Agreement between The Box and CEA dated as of October 8,
1996.
The Box is a party to a program affiliation agreement with Satellite
Services, Inc., an wholly-owned subsidiary of TCI ("SSI"), pursuant to which
The Box pays SSI affiliate fees.
The Box is a party to a program affiliation agreements with Lenfest
Communications, Inc., and Suburban Cable TV Co., Inc., companies controlled by
H.F. Lenfest.
TCI Music and TCI have entered into a number of intercompany
agreements more fully described below covering matters such as the provision of
services and allocation of tax liabilities. TCI also provides certain
administrative, financial, legal, treasury, accounting, tax and other services
to TCI Music and makes available certain of its employee benefit plans to TCI
Music's employees. The terms of these arrangements were established by TCI in
consultation with TCI Music and are not the result of arm's-length
negotiations. Accordingly, although TCI Music believes that the terms of these
arrangements are reasonable, there is no assurance that the terms and
conditions of these agreements, or the terms of any future arrangements between
TCI and TCI Music, are as favorable to TCI Music as could be obtained from
unaffiliated third parties. In addition, TCI Music and TCI and their respective
subsidiaries and affiliates may from time to time do business with one another
in areas not governed by any of the following agreements.
Amended Contribution Agreement. In connection with the DMX Merger, TCI Music
and TCI entered into a Contribution Agreement dated July 11, 1997, pursuant to
which TCI agreed to cause certain of its affiliates to assign and contribute to
TCI Music the right to receive the revenue from sales of the DMX Service net of
an amount equal to 10% of the revenue from such sales to residential
subscribers and net of license fees otherwise payable to DMX for a 10-year
period beginning July 1, 1997, and to transfer certain equipment to DMX useful
in DMX's business. In consideration of such agreement, in connection with the
consummation of the DMX Merger, TCI Music delivered to TCI, as designee for
certain TCI affiliates, 62,500,000 shares of TCI Music Series B Common Stock
and a note in the principal amount of $40,000,000. Pursuant to the Agreement
and Plan of Merger dated as of August 12, 1997 (the "Box Merger Agreement"),
TCI Music and TCI entered into the Amended Contribution Agreement, as amended,
effective as of July 1, 1997 (the "Contribution Agreement"), which provides,
among other things, for TCI to deliver, or cause certain of its subsidiaries to
deliver, in lieu of TCI's obligation to cause its affiliates to make
contributions to TCI Music under the Contribution Agreement, to TCI Music
payments aggregating $18 million, increased annually by the percentage
increase, if any, in CPI for the prior year, for a term of 20 years.
Affiliation Agreement. In connection with the Box Merger Agreement, effective
as of July 1, 1997, DMX and SSI entered into an Affiliation Agreement (the
"Affiliation Agreement") pursuant to which DMX granted to SSI and certain of
its affiliates 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.
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<PAGE> 45
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 or decrease in the 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. During the six
months ended December 31, 1997, TCI Music recognized $4.2 million pursuant to
the Affiliation Agreement.
The Affiliation Agreement between DMX and SSI dated July 6, 1989 (the
"Old Affiliation Agreement"), provides for distribution by SSI-affiliated cable
systems of the DMX Service and the Superaudio service (a basic analog music
service provided through a joint venture between DMX and an affiliate of Jones
Intercable, Inc.). Although the Affiliation Agreement supersedes the Old
Affiliation Agreement with respect to the DMX Service, the Old Affiliation
Agreement remains in effect through June 30, 1999, with respect to the
Superaudio service.
TCI Music Note. On July 11, 1997, in connection with the DMX Merger, the Company
entered into a $2 million revolving credit note with TCI Communications, Inc., a
subsidiary of TCI, and pursuant to the Amended Contribution Agreement entered
into a $40 million promissory note with TCI. The interest rate on the notes was
10% per annum. On December 30, 1997, the Company paid in full $900,000 drawn
under the $2 million revolving credit note and related accrued interest of
$24,000 and the $40 million note. The accrued interest on the $0 million note of
$1.9 million was forgiven pursuant to the terms of the note agreement.
TCI Rights. In connection with the DMX Merger, pursuant to a Rights Agreement
dated July 11, 1997, by and among TCI Music, TCI and The Bank of New York, as
rights agent, TCI issued one TCI Right with each share of TCI Music Series A
Common Stock issued to DMX stockholders in connection with the DMX Merger. Each
TCI Right entitles the holder to require TCI to purchase from such holder the
related share of TCI Music Series A Common Stock for $8.00 per share (subject to
reduction by the aggregate amount per share of any dividend and certain other
distributions, if any, made by TCI Music to its stockholders) payable at the
election of TCI in cash, a number of shares of TCI Group Series A Stock having
an equivalent value or a combination thereof, if, during the one year period
beginning July 11, 1997, the price of TCI Music Series A Common Stock (trading
together with associated TCI Rights) does not equal or exceed $8.00 per share
for a period of at least 20 consecutive trading days. If the TCI Rights have
not terminated prior to July 11, 1998, they will become exercisable for a 30-day
period following such date and will expire on the last day of such 30-day
period, unless extended by their terms.
TCI Loan. On February 6, 1997, the Company entered into a loan and security
agreement with TCI which provided $3.5 million. The loan proceeds were used to
purchase equipment and pay certain costs related to obtaining commercial
customers. The outstanding balance at December 31, 1997 was $3.1 million which
was payable in 34 equal monthly installments, which commenced September 1, 1997
at an interest rate of 12.5% per annum. Interest expense for the six months
ended December 31, 1997, was $207,000. The loan was paid in full on March 2,
1998.
Liberty Loans. On September 19, 1997, the Company entered into a $2.18
million note payable with Liberty. The proceeds were issued to Paradigm as a
note receivable pursuant to the letter of intent in contemplation of
45
<PAGE> 46
the Paradigm Merger. Interest on the note was 10% per annum. The Company paid
in full principal and related accrued interest of $62,000 on December 30, 1997.
On December 16, 1997, the Company entered into a $3.75 million note
payable with Liberty. The proceeds were used to purchase the outstanding
preferred stock of The Box in connection with the Box Merger. The Company paid
in full the principal and related accrued interest of $15,000 on December 30,
1997.
Services Agreement. Pursuant to a Services Agreement between TCI and TCI Music
(the "Services Agreement"), TCI shall provide services to TCI Music for
administration and operation of the businesses of TCI Music and its subsidiaries
as requested by TCI Music from time to time. These services can include: (i)
tax reporting, financial reporting, payroll, employee benefit administration,
workers' compensation administration, telephone, package delivery, management
information systems, billing, lock box, remittance processing and risk
management services, (ii) other services typically performed by TCI's
accounting, finance, treasury, corporate, legal, tax, benefits, insurance,
facilities, purchasing, and advanced information technology department
personnel, (iii) use of telecommunications and data facilities and of systems
and software developed, acquired or licensed by TCI from time to time for
financial forecasting, budgeting and similar purposes, including without
limitation any such software for use on personal computers, in any case to the
extent available under copyright law or any applicable third-party contract,
(iv) technology support and consulting services and (v) such other management,
supervisory, strategic planning and other services as TCI Music may from time
to time request. Pursuant to the Services Agreement, TCI also provides TCI
Music access to any volume discounts that may be available to TCI for the
purchase of certain equipment. The Services Agreement also provides that TCI,
for so long as TCI continues to beneficially own at least a majority of the
voting power of the outstanding shares of the TCI Music Series A Common Stock,
TCI Music Series B Common Stock and the TCI Music Preferred Stock, will
continue to provide, in the same manner and on the same basis as generally
provided from time to time to other participating TCI subsidiaries, benefits
and administrative services to TCI Music's employees. In this regard, TCI Music
will be allocated that portion of TCI's compensation expense attributable to
benefits extended to employees of TCI Music. Pursuant to the Services
Agreement, TCI Music from time to time will reimburse TCI for all direct
expenses incurred by TCI in providing such services and a pro rata share of all
indirect expenses incurred by TCI in connection with the rendering of such
services, including a pro rata share of the salary and other compensation of
TCI employees performing services for TCI Music, general overhead expenses and
rental expense for any physical facilities of TCI utilized by TCI Music. In
this regard, it is anticipated that TCI Music will, for the foreseeable future,
share office space with, or sublease office space from, TCI. The Services
Agreement will continue in effect until terminated by (i) TCI Music upon 60
days' prior written notice to TCI, (ii) TCI at any time after three years upon
not less than six months' prior notice to TCI Music, and (iii) either party if
the other party is the subject of certain bankruptcy or insolvency-related
events.
46
<PAGE> 47
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8K.
(a) Consolidated Financial Statements and Schedules. Reference is made to
the Index to Consolidated Financial Statements of TCI Music, Inc. and
Subsidiaries and Schedules for the six month period ended December 31,
1997, for a list of financial statements and schedules filed as part
of this report at page F-1.
(b) Reports on Form 8-K. During the quarter ended December 31, 1997, the
Company filed one report on Form 8-K. On December 31, 1997, the
Company disclosed the consummation of the December 16, 1997 merger
with The Box Worldwide, Inc.
(c) Exhibits. Following is a list of Exhibits filed with this report.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------ -----------
<S> <C>
2.1 Agreement and Plan of Merger, dated as of February 6, 1997, as amended by Amendment One dated May 29,
1997, by and among Tele-Communications, Inc., TCI Music, Inc., TCI Merger Sub, Inc., and DMX Inc.
(Incorporated by reference to Exhibit 2.1 to the Registration Statement on Form S-4 of TCI Music, Inc. and
Tele-Communications, Inc. filed with the Securities and Exchange Commission on June 6, 1997 (Commission
File Nos. 333-28613 and 333-28613-01))
2.2 Agreement and Plan of Merger dated as of August 12, 1997 among TCI Music, Inc., TCI Music Acquisition Sub,
Inc. and The Box Worldwide, Inc. (Incorporated by reference to Exhibit 2.1 to the Registration Statement on
Form S-4 of TCI Music, Inc. filed with the Securities and Exchange Commission on November 12, 1997
(Commission File No. 333-39943))
2.3 Agreement of Merger dated as of December 8, 1997 among TCI Music, Inc., TCI Para Merger Sub, Inc. and
Paradigm Music Entertainment Company
3.1 Certificate of Incorporation of TCI Music, Inc. (Incorporated by reference to Exhibit 3.1 to the
Registration Statement on Form S-4 of TCI Music, Inc. and Tele-Communications, Inc., filed with the
Securities and Exchange Commission on June 6, 1997 (Commission File Nos. 333-28613 and 333-28613-01))
3.2 Bylaws of TCI Music, Inc. (Incorporated by reference to Exhibit 3.2 to the Registration Statement on Form
S-4 of TCI Music, Inc. and Tele-Communications, Inc., filed with the Securities and Exchange Commission on
June 6, 1997 (Commission File Nos. 333-28613 and 333-28613-01))
4.1 Specimen Stock Certificate for Series A Common Stock, par value $.01 per share, of TCI Music, Inc. (with
TCI Rights) (Incorporated by reference to Exhibit 4.1 to Amendment No. 1 to the Registration Statement on
Form S-4 of TCI Music, Inc. and Tele-Communications, Inc., filed with the Securities and Exchange
Commission on June 12, 1997 (Commission File Nos. 333-28613 and 333-28613-01))
4.2 Specimen Stock Certificate for Series A Common Stock, par value $.01 per share, of TCI Music, Inc. (without
TCI Rights) (Incorporated by reference to Exhibit 4.1 to the Registration Statement on Form S-4 of TCI
Music, Inc. filed with the Securities and Exchange Commission on November 12, 1997 (Commission File No.
333-39943))
4.3 Specimen Stock Certificate for the Series B Common Stock, par value $.01 per share, of TCI Music, Inc.
(Incorporated by reference to Exhibit 4.2 to the Amendment No. 1 to the Registration Statement on Form S-4
of TCI Music, Inc. and Tele-Communications, Inc. filed with the Securities and Exchange Commission on
June 12, 1997 (Commission File Nos. 333-28613 and 33-28613-01))
4.4 Specimen Stock Certificate for the Series A Convertible Preferred Stock, par value $.01 per share, of TCI
Music, Inc. (Incorporated by reference to Exhibit 4.2 to the Registration Statement on Form S-4 of TCI
Music, Inc. filed with the Securities and Exchange Commission on November 12, 1997 (Commission File No.
333-39943))
</TABLE>
47
<PAGE> 48
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------ -----------
<S> <C>
4.5 TCI Music, Inc. Certificate of Designations for Series A Convertible Preferred Stock (Incorporated by
reference to Exhibit 4.3 to the Registration Statement on Form S-4 of TCI Music, Inc. filed with the
Securities and Exchange Commission on November 12, 1997 (Commission File No. 333-39943))
4.6 Rights Agreement among Tele-Communications, Inc., TCI Music, Inc., and the Bank of New York, as Rights
Agent, dated as of July 11, 1997 (Incorporated by reference to Exhibit 4.1 to the Report on Form 8-K of TCI
Music, Inc., filed with the Securities and Exchange Commission on July 24, 1997)
4.7 Amendment to Rights Agreement among Tele-Communications, Inc., TCI Music, Inc. and the Bank of New York, as
Rights Agent, dated March 18, 1998
10.1 Amended and Restated Contribution Agreement between Tele-Communications, Inc. and TCI Music, Inc. dated
July 11, 1997 (Incorporated by reference to Exhibit 10.2 to the Registration Statement on Form S-4 of TCI Music,
Inc. filed with the Securities and Exchange Commission on November 12, 1997 (Commission File No. 333-39943))
10.2 Revolving Loan Agreement between TCI Music, Inc. and Certain Lender Parties Thereto dated December 30, 1997
10.3* Affiliation Agreement between Satellite Services, Inc. and DMX Inc., dated July 1, 1997, and letter amendment
dated January 27, 1998
10.4 Letter Agreement between TCI Music, Inc. and Tele-Communications, Inc., dated November 7, 1997, extending Promissory
Note dated July 11, 1997 (attached as Exhibit A) (Incorporated by reference to Exhibit 10.3 to the Registration
Statement on Form-4 of TCI Music, Inc. filed with the Securities and Exchange Commission on November 12, 1997
(Commission File No. 333-39943))
10.5 Promissory Note dated July 11, 1997 between TCI Music, Inc. and Tele-Communications, Inc.
10.6 Promissory Note, dated September 19, 1997, between TCI Music, Inc. and Liberty Media Corporation
10.7 Services Agreement between Tele-Communications, Inc. and TCI Music, Inc. (Incorporated by reference to
Exhibit 10.2 to the Report on Form 8-K of TCI Music, Inc., filed with the Securities and Exchange
Commission on July 24, 1997)
10.8 Loan and Security Agreement by and between DMX Inc. and Tele-Communications, Inc., dated as of February 6,
1997, as amended (Incorporated by reference to Exhibit 10.7 to the Registration Statement on Form S-4 of
TCI Music, Inc. and Tele-Communications, Inc. filed with the Securities and Exchange Commission on June 6,
1997 (Commission File Nos. 333-28613 and 333-28613-01))
10.9**** TCI Music, Inc. 1997 Stock Incentive Plan (Incorporated by reference to Exhibit 10.83 to the Transition
Report of TCI Music, Inc. on Form 10-K filed with the Securities and Exchange Commission on October 9,
1997)
10.10**** Non-Qualified Stock Option and Stock Appreciation Rights Agreement between TCI Music, Inc. and David Koff,
dated July 11, 1997
10.11**** Non-Qualified Stock Option and Stock Appreciation Rights Agreement between TCI Music, Inc. and Lon Troxel,
dated July 11, 1997
10.12**** Non-Qualified Stock Option and Stock Appreciation Rights Agreement between TCI Music, Inc. and J.C.
Sparkman, dated July 11, 1997
</TABLE>
48
<PAGE> 49
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
10.13**** Non-Qualified Stock Option and Stock Appreciation Rights Agreement between TCI Music, Inc. and Leo J.
Hindery, Jr., dated July 11, 1997
10.14**** Non-Qualified Stock Option and Stock Appreciation Rights Agreement between TCI Music, Inc. and Robert R.
Bennett, dated July 11, 1997
10.15**** Non-Qualified Stock Option and Stock Appreciation Rights Agreement between TCI Music, Inc. and Donne F.
Fisher, dated July 11, 1997
10.16**** Non-Qualified Stock Option and Stock Appreciation Rights Agreement between TCI Music, Inc. and Peter J.
Kern, dated July 11, 1997
10.17**** Form of TCI Music, Inc. Employee Stock Option Agreement (Incorporated by reference to Exhibit 10.16 to the
Registration Statement on Form S-4 of TCI Music, Inc. filed with the Securities and Exchange Commission
on November 12, 1997 (Commission File No. 333-39943))
10.18*** Employment Agreement between DMX Inc. and Lon Troxel, dated October 1, 1991, as amended August 22, 1997
(Incorporated by reference to Exhibit 10.64 to DMX Inc.'s 1994 Report on Form 10-K, filed with the
Securities and Exchange Commission on December 29, 1994, and to Exhibit 10.82 to TCI Music, Inc.'s
Transition Report on Form 10-K for the transition period October 1, 1996 through June 30, 1997, filed with
the Securities and Exchange Commission on October 9, 1997)
10.19*** Employment Agreement dated January 1, 1996 between Paradigm Music Entertainment Company, Inc. and Thomas
McPartland
10.20 Registration Rights Agreement dated December 31, 1997 between TCI Music, Inc. and Thomas McPartland,
Attorney in fact
10.21** Affiliation Agreement between International Cablecasting Technologies Inc. and Satellite Services, Inc.,
dated July 6 1989 (Incorporated by reference to Exhibit 10.2 to DMX Inc.'s Amendment No. 1 to Registration
Statement on Form S-1, filed with the Securities and Exchange Commission on August 31, 1990 (Commission
File No. 33-35690))
10.22** Affiliation Agreement between International Cablecasting Technologies Inc. and Viacom Cable, dated May 4,
1990 (Incorporated by reference to Exhibit 10.3 to DMX Inc.'s Amendment No. 1 to Registration Statement on
Form S-1, filed with the Securities and Exchange Commission on August 31, 1990 (Commission File No.
33-35690))
10.23** Affiliation Agreement between International Cablecasting Technologies Inc. and KBLCOM Incorporated, dated
June 20, 1990 (Incorporated by reference to Exhibit 10.4 to DMX Inc.'s Amendment No. 1 to Registration
Statement on Form S-1, filed with the Securities and Exchange Commission on August 31, 1990 (Commission
File No. 33-35690))
10.24 National Digital Television Center, Inc., formerly known as Western Tele-Communications, Inc., Security
Agreement and Promissory Note, dated March 26, 1991 (Incorporated by reference to Exhibit 10.14 to DMX
Inc.'s Post-Effective Amendment No. 2 to Registration Statement on Form S-1, filed with the Securities and
Exchange Commission on May 24, 1991 (Commission File No 33-35690))
10.25** Uplink Services Agreement between National Digital Television Center, Inc., formerly known as Western
Tele-Communications, Inc., and International Cablecasting Technologies Inc., dated March 16, 1991
(Incorporated by reference to Exhibit 10.15 to DMX Inc.'s Post-Effective Amendment No. 3 to Registration
Statement on Form S-1, filed with the Securities and Exchange Commission on August 15, 1991 (Commission
File No. 33-35690))
10.26** License and Distribution Agreement between International Cablecasting Technologies Inc. and Broadcom
International Holdings, dated March 31, 1992, as amended (Incorporated by reference to Exhibit 10.34 to DMX
Inc.'s 1993 Report on Form 10-K, filed with the Securities and Exchange Commission on December 23, 1993)
</TABLE>
49
<PAGE> 50
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
10.27 Manufacturing and Sales Agreement between International Cablecasting Technologies Inc. and Scientific-
Atlanta, Inc., dated February 28, 1991 (Incorporated by reference to Exhibit 10.12 to DMX Inc.'s Post-
Effective Amendment No. 2 to Registration Statement on Form S-1, filed with the Securities and Exchange
Commission on May 24, 1991 (Commission File No. 33-35690))
10.28 License and Technical Assistance Agreement between International Cablecasting Technologies Inc. and
Scientific-Atlanta, Inc., dated February 28, 1991 (Incorporated by reference to Exhibit 10.14 to DMX Inc.'s
Post-Effective Amendment No. 2 to Registration Statement on Form S-1, filed with the Securities and
Exchange Commission on May 24, 1991 (Commission File No. 33-35690))
10.29 Development and Licensing Agreement between International Cablecasting Technologies Inc. and Frederikson &
Shu Laboratories, Inc., as amended March 29, 1990 (Incorporated by reference to Exhibit 10.8 to DMX Inc.'s
Registration on Form S-1, filed with the Securities and Exchange Commission on July 10, 1990 (Commission
File No. 33-35690))
10.30 Agreement between GE American Communications, Inc. and International Cablecasting Technologies Inc., dated
April 14, 1989 (Incorporated by reference to Exhibit 10.9 to DMX Inc.'s Registration Statement on Form S-1,
filed with the Securities and Exchange Commission on July 10, 1990 (Commission File No. 33-35690))
10.31 Partnership Agreement between TEMPO Sound, Inc. and Galactic Radio Partners, Inc., dated May 7, 1990
(Incorporated by reference to Exhibit 10.7 to DMX Inc.'s Registration Statement on Form S-1, filed with the
Securities and Exchange Commission on July 10, 1990 (Commission File No. 33-35690))
10.32 C-3 Satellite Transponder Sub-Lease Agreement between National Digital Television Center, Inc., formerly
known as Western Tele-Communications, Inc., and International Cablecasting Technologies Inc., dated
December 2, 1992 (Incorporated by reference to Exhibit 10.55 to DMX Inc.'s 1993 Report on From 10-K, filed
with the Securities and Exchange Commission on December 23, 1993)
10.33 Satellite Transponder Management Agreement between National Digital Television Center, Inc., formerly known
as Western Tele-Communications, Inc. and International Cablecasting Technologies Inc., dated December 2,
1992 (Incorporated by reference to Exhibit 10.57 to DMX Inc.'s 1993 Report on Form 10-K, filed with the
Securities and Exchange Commission on December 23, 1993)
10.34 Satellite Transponder Management Agreement between National Digital Television Center, Inc., formerly known
as Western Tele-Communications, Inc. and International Cablecasting Technologies Inc., dated January 27,
1993 (Incorporated by reference to Exhibit 10.57 to DMX Inc.'s 1993 Report on Form 10-K, filed with the
Securities and Exchange Commission on December 23, 1993)
10.35 Assignment and Assumption Agreement between National Digital Television Center, Inc., formerly known as
Western Tele-Communications, Inc. and International Cablecasting Technologies Europe N.V., dated April 22,
1993 (Incorporated by reference to Exhibit 10.58 to DMX Inc.'s 1993 Report on Form 10-K, filed with the
Securities and Exchange Commission on December 23, 1993)
10.36** Assignment Agreement between IDB Communications Group, Inc. and National Digital Television Center, Inc.,
formerly known a Western Tele-Communications, Inc., dated January 21, 1993 (Incorporated by reference to
Exhibit 10.59 to DMX Inc.'s 1993 Report on Form 10-K, filed with the Securities and Exchange Commission on
December 23, 1993)
10.37 Agreement between International Cablecasting Technologies Inc. and the American Society of Composers,
Authors & Publishers, dated December 20, 1991 (Incorporated by reference to Exhibit 10.60 to DMX Inc.'s
1993 Report on Form 10-K, filed with the Securities and Exchange Commission on December 23, 1993)
10.38** Agreement between International Cablecasting Technologies Inc. and Broadcast Music Inc., dated October 11,
1991, as supplemented and amended (Incorporated by reference to Exhibit 10.61 to DMX Inc.'s 1993 Report on
Form 10-K, filed with the Securities and Exchange Commission on December 23, 1993)
</TABLE>
50
<PAGE> 51
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------ -----------
<S> <C>
10.39** Agreement between DMX Inc. and SESAC, dated December 26, 1991 (Incorporated by reference to Exhibit 10.62
to DMX Inc.'s 1993 Report on From 10-K, filed with the Securities and Exchange Commission on December 23,
1993)
10.40 International Cablecasting Technologies Inc. Savings Plan, Amended and Restated Generally Effective as of
May 1, 1992 (Incorporated by reference to Exhibit 10.66 to DMX Inc.'s 1994 Report on Form 10-K, filed with
the Securities and Exchange Commission on December 29, 1994)
10.41 Addendum to Affiliation Agreement between KBLCOM and International Cablecasting Technologies Inc., dated
May 4, 1994 (Incorporated by reference to DMX Inc.'s 1994 Report on Form 10-K, filed with the Securities
and Exchange Commission on December 29, 1994)
10.42** Affiliation Agreement between DMX Inc. and PRIMESTAR Partners, dated January 25, 1995 (Incorporated by
reference to Exhibit 10.71 to DMX Inc.'s 1996 Report on Form 10-K, filed with the Securities and Exchange
Commission on January 14, 1997)
10.43 Subscription and Shareholders Agreement between DMX Inc., Jerold H. Rubinstein and XTRA Music Limited,
dated December 18, 1996 (Incorporated by reference to Exhibit 10.74 to DMX Inc.'s 1996 Report on Form 10-K,
filed with the Securities and Exchange Commission on January 14, 1997)
10.44** Commercial License and Distribution Agreement between DMX Inc. and DMX-Canada Partnership, dated
November 1, 1994 (Incorporated by reference to Exhibit 10.75 to TCI Music, Inc.'s Transition Report on Form
10-K for the transition period October 1, 1996 through June 30, 1997, filed with the Securities and
Exchange Commission on October 9, 1997)
10.45** Residential License and Distribution Agreement between DMX Inc. and DMX-Canada (1995) Ltd., dated March 9,
1992, as amended April 18, 1997 (Incorporated by reference to Exhibit 10.76 to TCI Music, Inc.'s Transition
Report on Form 10-K for the transition period October 1, 1996 through June 30, 1997, filed with the
Securities and Exchange Commission on October 9, 1997)
10.46 Channel Distribution Agreement between DMX Inc. and XTRA Music Limited, dated July 3, 1997 (Incorporated by
reference to Exhibit 10.77 to TCI Music, Inc.'s Transition Report on Form 10-K for the transition period
October 1, 1996 through June 30, 1997, filed with the Securities and Exchange Commission on October 9,
1997)
10.47 Termination Agreement between DMX Inc. and DMX-Europe N.V., a Netherlands corporation (Technology License
and Services Agreement, dated May 19, 1993), dated July 3, 1997 (Incorporated by reference to Exhibit 10.79
to TCI Music, Inc.'s Transition Report on Form 10-K for the transition period October 1, 1996 through
June 30, 1997, filed with the Securities and Exchange Commission on October 9, 1997)
10.48 Termination Agreement between DMX Inc. and DMX-Europe N.V., a Netherlands corporation (Trademark Agreement,
dated May 19, 1993), dated July 3, 1997 (Incorporated by reference to Exhibit 10.80 to TCI Music, Inc.'s
Transition Report on Form 10-K for the transition period October 1, 1996 through June 30, 1997, filed with
the Securities and Exchange Commission on October 9, 1997)
10.49 Assignment Agreement between DMX Inc. and Jerold H. Rubinstein, dated July 8, 1997 (Incorporated by
reference to Exhibit 10.81 to TCI Music, Inc.'s Transition Report on Form 10-K for the transition period
October 1, 1996 through June 30, 1997, filed with the Securities and Exchange Commission on October 9,
1997)
10.50 License Agreement between Broadcast Music, Inc. and DMX Inc., dated August 7, 1995 (Incorporated by
reference to Exhibit 10.55 to the Registration Statement on Form S-1 of TCI Music, Inc., filed with the
Securities and Exchange Commission on November 12, 1997)
</TABLE>
51
<PAGE> 52
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------ -----------
<S> <C>
10.51 Separation and Mutual Release Agreement between DMX Inc. and Jerold Rubinstein, dated July 11, 1997
(Incorporated by reference to Exhibit 10.53 to the Registration Statement on Form S-4 of TCI Music, Inc.,
filed with the Securities and Exchange Commission on November 12, 1997 (Commission File No. 333-39943))
10.52 Background/Foreground Music Service License Agreement between American Society of Composers, Authors and
Publishers and International Cablecasting Technologies Inc., dated April 4, 1995 (Incorporated by reference
to Exhibit 10.54 of the Registration Statement on Form S-4 of TCI Music, Inc., filed with the Securities
and Exchange Commission on November 12, 1997 (Commission File No. 333-39943))
10.53 Service Agreement between The Box Worldwide, Inc., formerly known as Video Jukebox, Inc., and West
Interactive Corporation, dated July 31, 1992 (Incorporated by reference to Exhibit 19.18 to The Box
Worldwide, Inc.'s Report on Form 10-KSB for the fiscal year ended December 31, 1991)
10.54 Lease Agreement between The Box Worldwide, Inc., formerly known as Video Jukebox, Inc., and Island Trading
Company, Inc., dated April 21, 1994 (Incorporated by reference to Exhibit 10.37 to The Box Worldwide,
Inc.'s Report on Form 10-KSB for the fiscal year ended December 31, 1994)
10.55 Equipment and Service Agreement between The Box Worldwide, Inc. formerly known as Video Jukebox, Inc., and
Hughes Network Systems, Inc., dated February 27, 1996 (Incorporated by reference to Exhibit 10.27 to The
Box Worldwide, Inc.'s Report on Form 10-KSB for the fiscal year ended December 31, 1996)
10.56 International Representation Agreement between The Box Worldwide, Inc., formerly known as Video Jukebox,
Inc., and Communications Equity Associates, Inc. dated September 14, 1995 (Incorporated by reference to
Exhibit 10.28 to The Box Worldwide, Inc.'s Report on Form 10-KSB for the fiscal year ended December 31,
1996)
10.57 Service Affiliate Agreement between The Box Worldwide, Inc., formerly known as Video Jukebox, Inc., and
Suburban Cable TV Co., Inc., dated August 4, 1997 (Incorporated by reference to Exhibit 10.1 to The Box
Worldwide, Inc.'s Report on Form 10-QSB for the quarter ended September 30, 1997)
10.58 Affiliation Agreement between The Box Worldwide, Inc. and Satellite Services, Inc., dated February 27, 1997
21 Subsidiaries of TCI Music, Inc.
23 Consent of KPMG Peat Marwick LLP
27 Financial Data Schedule
</TABLE>
_____________
* TCI Music, Inc. has requested confidential treatment for a portion
of the referenced Exhibit.
** TCI Music, Inc. has received confidential treatment for a portion
of the referenced Exhibit.
*** Indicated management contract.
**** Indicates compensatory plan or arrangement.
52
<PAGE> 53
TCI MUSIC, INC.
AND SUBSIDIARIES
(A SUBSIDIARY OF TELE-COMMUNICATIONS, INC.)
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND JUNE 30, 1997
(WITH INDEPENDENT AUDITORS' REPORT THEREON)
<PAGE> 54
TCI MUSIC, INC. AND SUBSIDIARIES
(A SUBSIDIARY OF TELE-COMMUNICATIONS, INC.)
Index to Consolidated Financial Statements
<TABLE>
<CAPTION>
Page
----
<S> <C>
Independent Auditors' Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-2
Consolidated Financial Statements of TCI Music, Inc. and DMX Inc. (Predecessor):
Consolidated Balance Sheets - December 31, 1997 and June 30, 1997 . . . . . . . . . . . . . . . . . . F-3
Consolidated Statements of Operations - Six months ended December 31, 1997 and 1996 (unaudited), nine
months ended June 30, 1997 and 1996 (unaudited) and fiscal years ended September 30, 1996 and 1995 . .F-5
Consolidated Statements of Stockholders' Equity (Deficit) - Six months ended December 31, 1997 and
1996 (unaudited), nine months ended June 30, 1997 and fiscal years ended September 30, 1996 and
1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .F-7
Consolidated Statements of Cash Flows - Six months ended December 31, 1997 and 1996 (unaudited), nine
months ended June 30, 1997 and 1996 (unaudited) and years ended September 30, 1996 and 1995 . . . . .F-8
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .F-10
</TABLE>
Financial Statement Schedules have not been provided as any required
information has been included in the consolidated financial statements
and notes thereto or are not required
F-1
<PAGE> 55
INDEPENDENT AUDITORS' REPORT
We have audited the consolidated financial statements of TCI Music, Inc. and
subsidiaries as listed in the accompanying index. These consolidated financial
statements are the responsibility of TCI Music, Inc.'s management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We have conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of TCI Music, Inc. and
subsidiaries as of December 31, 1997 and of DMX Inc. and subsidiaries
(Predecessor) as of June 30, 1997 and the results of their operations and their
cash flows for the six months ended December 31, 1997, nine months ended June
30, 1997 and the years ended September 30, 1996 and 1995, in conformity with
generally accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements, effective July
11, 1997, TCI Music, Inc. acquired all of the outstanding stock of DMX Inc. in
a business combination accounted for as a purchase. As a result of the
acquisition the consolidated financial information for the periods after the
acquisition is presented on a different cost basis than that for the periods
before the acquisition and, therefore, is not comparable.
KPMG Peat Marwick LLP
Los Angeles, California
February 20, 1998
F-2
<PAGE> 56
TCI MUSIC, INC. AND SUBSIDIARIES
(A SUBSIDIARY OF TELE-COMMUNICATIONS, INC.)
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND JUNE 30, 1997
<TABLE>
<CAPTION>
TCI MUSIC, INC. DMX INC.
(NOTE 1) (NOTE 1)
--------------------------------------------
ASSETS DECEMBER 31, 1997 JUNE 30, 1997
--------------------------------------------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents $ 7,915 664
Cash DMX-Europe N.V. (note 5) -- 168
Trade receivable:
Related party (note 6) 2,530 1,482
Other 6,275 3,004
Allowance for doubtful accounts (note 3) (563) (451)
------------------ ----------------
8,242 4,035
Prepaid expenses and other 2,993 827
Equipment inventory 6,713 492
------------------ ----------------
Total current assets 25,863 6,186
Investment in equity interests 1,201 558
Property and equipment, net (note 7):
Furniture, machinery and equipment 7,024 4,399
Leasehold improvements 543 213
Studio equipment 5,599 3,432
Music library 300 1,047
Computer system 459 571
Software 676 --
------------------ ----------------
14,601 9,662
Less accumulated depreciation and amortization (1,113) (5,694)
------------------ ----------------
13,488 3,968
Property and equipment DMX-Europe N.V., net (note 5) -- 164
Intangible assets, net (note 8) 153,265 --
Other assets 910 110
------------------ ----------------
TOTAL ASSETS $ 194,727 10,986
================== ================
</TABLE>
See accompanying notes to consolidated financial statements
(continued)
F-3
<PAGE> 57
CONSOLIDATED BALANCE SHEETS, CONTINUED
DECEMBER 31, 1997 AND JUNE 30, 1997
<TABLE>
<CAPTION>
TCI MUSIC, INC. DMX INC.
(NOTE 1) (NOTE 1)
----------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) DECEMBER 31, 1997 JUNE 30, 1997
----------------------------------
(AMOUNTS IN THOUSANDS)
<S> <C> <C>
Current liabilities:
Accounts payable $ 4,390 1,815
Accrued liabilities (note 9) 10,561 7,524
Accrued loss on disposal - DMX-Europe N.V. (note 5) 2,827 2,827
Deferred revenue 186 --
Current portion of capital lease obligation (note 10) 27 23
Current portion of debt (note 10) 3,327 --
Income taxes payable, related party (note 13) 1,762 --
--------- ---------
23,080 12,189
Current liabilities DMX-Europe N.V. (note 5):
Accounts payable -- 1,014
Accrued liabilities -- 1,525
Investment in and advances to DMX-Europe N.V 9,058 6,591
--------- ---------
Total current liabilities DMX-Europe N.V 9,058 9,130
--------- ---------
Total current liabilities 32,138 21,319
Other liabilities 2,063 2,082
Related party debt and accrued interest (note 6) 4,359 3,887
Debt (note 10) 53,236 --
Deferred income taxes (note 13) 2,811 --
--------- ---------
Total liabilities 94,607 27,288
TCI Music, Inc. redeemable convertible preferred stock, $.01 par
value; Authorized 5,000,000 shares;
Issued 1,742,484 shares; $39,154 liquidation preference and
redemption value 35,588 --
Stockholders' equity (deficit):
DMX Inc. common stock, $.01 par value;
Authorized 100,000,000 shares;
Issued 59,672,224 shares -- 597
TCI Music, Inc. common stock:
Series A Common Stock, $.01 par value;
Authorized 295,000,000 shares;
Issued 18,098,983 shares 181 --
Series B Common Stock, $.01 par value;
Authorized 200,000,000 shares;
Issued 62,500,000 shares 625 --
Paid-in capital 64,193 136,896
Accumulated deficit (465) (152,787)
Foreign currency translation adjustment (2) (430)
Treasury stock, 85,630 shares at cost -- (578)
--------- ---------
Total stockholders' equity (deficit) 64,532 (16,302)
--------- ---------
Commitments and contingencies (note 12)
$ 194,727 10,986
========= =========
</TABLE>
See accompanying notes to consolidated financial statements
F-4
<PAGE> 58
TCI MUSIC, INC. AND SUBSIDIARIES
(A SUBSIDIARY OF TELE-COMMUNICATIONS, INC.)
CONSOLIDATED STATEMENTS OF OPERATIONS
SIX MONTHS ENDED DECEMBER 31, 1997 AND 1996, NINE MONTHS
ENDED JUNE 30, 1997 AND 1996 AND FISCAL
YEARS ENDED SEPTEMBER 30, 1996 AND 1995
(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
TCI MUSIC, INC.
(NOTE 1) DMX INC. (NOTE 1)
----------------- ---------------------------------------------------------------
DECEMBER 31, JUNE 30, SEPTEMBER 30,
------------------------------------ --------------------------------------------
1997 1996 1997 1996 1996 1995
----------------------------------------------------------------------------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Subscriber fee revenue - related party (note 6)$ 15,502 4,828 6,907 6,648 9,086 7,696
Subscriber fee revenue - other 5,918 3,949 6,902 5,034 6,973 4,920
Viewer revenue, net 460 -- -- -- -- --
Advertising revenue 365 -- -- -- -- --
Other revenue, net 710 221 565 271 431 157
Revenue - DMX-Europe N.V. (note 5) -- 1,291 2,220 238 836 --
----------------------------------------------------------------------------------
22,955 10,289 16,594 12,191 17,326 12,773
Operating expenses:
Operating 6,477 5,072 8,178 7,206 9,796 8,667
Selling, general and administrative 7,523 6,990 10,633 10,618 14,373 12,949
Stock compensation (note 11) 294 275 137 412 550 550
Depreciation and amortization 6,317 1,061 1,789 1,302 1,884 1,342
Operating expenses - DMX-Europe N.V. (note 5)
-- 6,855 8,489 2,110 5,740 --
Loss on disposal of DMX-Europe N.V. (note 5)
-- 7,153 1,738 -- 7,153 --
----------------------------------------------------------------------------------
20,611 27,406 30,964 21,648 39,496 23,508
Net operating income (loss) 2,344 (17,117) (14,370) (9,457) (22,170) (10,735)
</TABLE>
(continued)
F-5
<PAGE> 59
CONSOLIDATED STATEMENTS OF OPERATIONS, CONTINUED
SIX MONTHS ENDED DECEMBER 31, 1997 AND 1996, NINE MONTHS
ENDED JUNE 30, 1997 AND 1996 AND FISCAL
YEARS ENDED SEPTEMBER 30, 1996 AND 1995
(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
TCI MUSIC, INC.
(NOTE 1) DMX INC. (NOTE 1)
----------------- ----------------------------------------------------------------
DECEMBER 31, JUNE 30, SEPTEMBER 30,
------------------------------------ ------------------------------------ ------
1997 1996 1997 1996 1996 1995
-----------------------------------------------------------------------------------
(UNAUDITED) (UNAUDITED)
<S> <C> ` <C> <C> <C> <C> <C>
Other income (expense): $
Interest income (expense):
Related party (385) -- -- -- -- --
DMX-Europe N.V -- (98) (174) (296) (54) --
Other 105 (88) (248) (190) (246) (209)
-----------------------------------------------------------------------------------
(280) (186) (422) (486) (300) (209)
Share of earnings of affiliates 76 185 203 108 197 307
Loss of DMX-Europe N.V. (note 5) -- -- -- (11,854) (11,854) (13,271)
Other, net (223) 74 (119) 547 272 829
-----------------------------------------------------------------------------------
Income (loss) before income taxes 1,917 (17,044) (14,708) (21,142) (33,855) (23,079)
Income tax expense 2,382 -- -- -- -- --
-----------------------------------------------------------------------------------
Net loss $ (465) (17,044) (14,708) (21,142) (33,855) (23,079)
===================================================================================
Basic and diluted loss per common share $ (0.01) (0.32) (0.25) (0.44) (0.68) (0.60)
===================================================================================
Weighted average number of common shares 77,423 53,695 59,587 47,739 49,676 38,585
===================================================================================
</TABLE>
See accompanying notes to consolidated financial statements
F-6
<PAGE> 60
TCI MUSIC, INC. AND SUBSIDIARIES
(A SUBSIDIARY OF TELE-COMMUNICATIONS, INC.)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
SIX MONTHS ENDED DECEMBER 31, 1997, NINE MONTHS ENDED JUNE 30, 1997 AND
YEARS ENDED SEPTEMBER 30, 1996 AND 1995
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
FOREIGN
COMMON STOCK CURRENCY
------------------------- PAID IN ACCUMULATED TREASURY TRANSLATION
SERIES A SERIES B CAPITAL DEFICIT STOCK ADJUSTMENT TOTAL
<S> <C> <C> <C> <C> <C> <C> <C>
--------------------------------------------------------------------------------
DMX INC. (NOTE 1)
BALANCE AT SEPTEMBER 30, 1994 $ 363 -- 81,543 (81,145) (578) -- 183
Issuance of common stock 74 -- 17,188 -- -- -- 17,262
Cost of issuance -- -- (70) -- -- -- (70)
Accrued compensation (note 11) -- -- 550 -- -- -- 550
Foreign currency translation adjustment -- -- -- -- -- 26 26
Net loss -- -- -- (23,079) -- -- (23,079)
--------------------------------------------------------------------------------
BALANCE AT SEPTEMBER 30, 1995 437 -- 99,211 (104,224) (578) 26 (5,128)
Issuance of common stock 160 -- 37,238 -- -- -- 37,398
Cost of issuance -- -- (240) -- -- -- (240)
Accrued compensation (note 11) -- -- 550 -- -- -- 550
Foreign currency translation adjustment -- -- -- -- -- (78) (78)
Net loss -- -- -- (33,855) -- -- (33,855)
--------------------------------------------------------------------------------
BALANCE AT SEPTEMBER 30, 1996 597 -- 136,759 (138,079) (578) (52) (1,353)
Accrued compensation (note 11) -- -- 137 -- -- -- 137
Foreign currency translation adjustment -- -- -- -- -- (378) (378)
Net loss -- -- -- (14,708) -- -- (14,708)
--------------------------------------------------------------------------------
BALANCE AT JUNE 30, 1997 $ 597 -- 136,896 (152,787) (578) (430) (16,302)
====================================================================================================================================
TCI MUSIC, INC. (NOTE 1)
Initial capitalization $ 149 625 39,546 -- -- -- 40,320
Recognition of stock compensation -- -- 294 -- -- -- 294
Accretion of put option (note 8) -- -- 2,425 -- -- -- 2,425
Eliminate investment and advances to subsidiary -- -- (252) -- -- -- (252)
Issuance of common stock 32 -- 22,304 -- -- -- 22,336
Accretion of redeemable convertible preferred
stock -- -- (124) -- -- -- (124)
Foreign currency translation adjustment -- -- -- -- -- (2) (2)
Net loss -- -- -- (465) -- -- (465)
--------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1997 $ 181 625 64,193 (465) -- (2) 64,532
================================================================================
</TABLE>
See accompanying notes to consolidated financial statements
F-7
<PAGE> 61
TCI MUSIC, INC. AND SUBSIDIARIES
(A SUBSIDIARY OF TELE-COMMUNICATIONS, INC.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED DECEMBER 31, 1997 AND 1996, NINE MONTHS ENDED JUNE 30, 1997
AND 1996 AND FISCAL YEARS ENDED SEPTEMBER 30, 1996 AND 1995
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
TCI MUSIC, INC.
(NOTE 1) DMX INC. (NOTE 1)
----------------------------------------------------------------------------
DECEMBER 31, JUNE 30, SEPTEMBER 30,
----------------------------------------------------------------------------
1997 1996 1997 1996 1996 1995
----------------------------------------------------------------------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (465) (17,044) (14,708) (21,142) (33,855) (23,079)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 6,317 1,651 2,462 1,413 2,230 1,342
Share of earnings of affiliates (76) (185) (203) (108) (197) (307)
Share of loss of DMX-Europe N.V -- -- -- 11,854 11,854 13,271
Loss on disposal of DMX-Europe N.V -- 7,153 1,738 -- 7,153 --
Loss on disposal of property and equipment -- -- 46 -- -- --
Compensation expense for stock bonus and
options 294 275 137 412 550 550
Provision for doubtful accounts 264 985 810 -- 643 700
Changes in operating assets and liabilities net of
the effect of acquisitions:
(Increase) decrease in prepaid and other current
assets (2,166) 70 30 (827) (948) 76
Decrease in advances to DMX-Europe N.V -- -- -- -- -- 490
(Increase) decrease in receivables (390) 1,525 (777) (1,996) (1,078) (715)
(Increase) decrease in other assets (619) 13 (42) 65 93 (111)
(Decrease) increase in deferred revenue -- (12) 13 (87) (81) (42)
Increase in royalty payable -- 87 -- 434 521 538
(Decrease) increase in accounts payable and
accrued liabilities (2,298) 4,283 8,823 2,370 4,036 (33)
Increase in taxes payable to related party 1,762 -- -- -- -- --
Increase in deferred taxes 620 -- -- -- -- --
----------------------------------------------------------------------------
Net cash provided by (used in)
operating activities $ 3,243 (1,199) (1,671) (7,612) (9,079) (7,320)
----------------------------------------------------------------------------
</TABLE>
(continued)
F-8
<PAGE> 62
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
SIX MONTHS ENDED DECEMBER 31, 1997 AND 1996, NINE MONTHS ENDED JUNE 30, 1997
AND 1996 AND FISCAL YEARS ENDED SEPTEMBER 30, 1996 AND 1995
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
TCI MUSIC, INC.
(NOTE 1) DMX INC. (NOTE 1)
----------------- ----------------------------------------------------------
DECEMBER 31, JUNE 30, SEPTEMBER 30,
------------------------------------------------------------------------------
1997 1996 1997 1996 1996 1995
------------------------------------------------------------------------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Cash flows from investing activities:
Cash paid for acquisitions $(7,567) -- -- -- -- --
Capital expended for property and equipment (1,513) (770) (1,055) (1051) (1,519) (954)
Investments in affiliates (50) -- -- -- -- --
Return of capital from affiliates 100 -- 150 150 150 300
Advances to DMX-Europe N.V., net -- -- -- (682) (682) (2,044)
Investment in preferred stock of DMX-Europe (UK)
Limited -- -- -- (6,440) (6,440) (3,500)
Purchase of securities held to maturity -- -- -- -- -- (165)
Proceeds of securities held to maturity -- -- -- 165 165 2,279
------------------------------------------------------------------------------
Net cash used in investing activities (9,030) (770) (905) (7,858) (8,326) (4,084)
Cash flows from financing activities:
Issuance of common stock, net -- -- -- 10,346 10,346 17,192
Borrowing (repayment) of note payable due to
related party (39,527) -- 2,517 -- -- --
Borrowing (repayment) of note payable to bank 53,236 -- -- (45) (45) (240)
Repayment of note payable -- -- -- -- -- (182)
Repayment of principal portion of capital lease
obligation (7) (203) (229) (295) (397) (228)
------------------------------------------------------------------------------
Net cash provided by (used in)
financing activities 13,702 (203) 2,288 10,006 9,904 16,542
------------------------------------------------------------------------------
Net (decrease) increase in cash and
cash equivalents 7,915 (2,172) (288) (5,464) (7,501) 5,138
Cash and cash equivalents, beginning of period -- 3,158 1,121 8,622 8,622 3,484
------------------------------------------------------------------------------
Cash and cash equivalents, end of period$ $ 7,915 986 833 3,158 1,121 8,622
==============================================================================
</TABLE>
See accompanying notes to consolidated financial statements
F-9
<PAGE> 63
TCI MUSIC, INC. AND SUBSIDIARIES
(A SUBSIDIARY OF TELE COMMUNICATIONS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
(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 4.
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. See note 4.
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 9, 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 the surviving corporation and a wholly-owned
subsidiary of TCI Music. See note 4.
TCI Music has three classes of stock outstanding at December 31, 1997,
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 (collectively the "TCI Music Stock"). TCI
beneficially owns approximately 5% of the outstanding TCI Music
Preferred Stock, 37.77% 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 81.1% of the
outstanding shares of TCI Music Stock, assuming conversion of the TCI
Music Preferred Stock, representing 97.5% of the voting power of the
outstanding shares of TCI Music Stock.
For the six months ended December 31, 1997, TCI Music's business
consisted principally of the business of DMX, which is primarily
engaged in programming, distributing and marketing a digital music
service; Digital Music Express(R), providing continuous
24-hours-per-day commercial free, compact disc quality music
programming. The merger with The Box was effective December 16, 1997
and was accounted for under the purchase method for accounting
purposes. Therefore, results from operations of The Box for the 15
days ended December 31, 1997 have been included in the accompanying
consolidated financial statements. The Box is primarily engaged in
programming, distributing and marketing an interactive music video
television programming service known as THE BOX (the Box Service)
operating 24 hours-per-day, seven days a week. Additionally, the
Paradigm Merger was accounted for under the purchase method of
accounting effective December 31, 1997. Paradigm is a broad based
music entertainment company utilizing traditional and non-traditional
marketing and distribution channels to exploit music entertainment
products.
PRINCIPLES OF CONSOLIDATION.
In the accompanying financial statements and in the following text,
references are made to DMX, The Box, Paradigm and TCI Music. The
financial statements as of June 30, 1997 and for the six months ended
December 31, 1996, the nine months ended June 30, 1997 and 1996 and
the years ended September 30, 1996 and 1995 reflect the consolidated
results of operations and financial condition of DMX and are referred
to as "DMX" (the predecessors' operations). The financial statements
as of December 31, 1997 and for the six months then ended reflect the
consolidated results of operations
F-10
<PAGE> 64
TCI MUSIC, INC. AND SUBSIDIARIES
(A SUBSIDIARY OF TELE COMMUNICATIONS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
and financial condition of TCI Music.
The accompanying consolidated financial statements include the
accounts of the Company and those of all wholly-owned subsidiaries.
All significant intercompany accounts and transactions have been
eliminated for all periods presented. As a result of the DMX Merger,
the consolidated financial information for the periods after the DMX
Merger is presented on a different cost basis than that for the
periods before the DMX Merger and, therefore, is not comparable.
Effective July 11, 1997, TCI Music as the successor registrant to DMX,
changed its fiscal year end from September 30 to December 31, and
reported the nine month transition period ended June 30, 1997 on Form
10-K.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES.
CASH EQUIVALENTS.
Cash equivalents consist of investments which are readily convertible
into cash and maturities of three months or less at the time of
acquisition.
REVENUE RECOGNITION.
Subscriber revenue is recognized based upon subscriber levels for
affiliate sales and the contract terms for its direct sales. The
calculation of subscriber levels for affiliate sales is based on
billing and sales information provided by its affiliates. Direct
sales revenue is recognized beginning at inception of service ratably
over the contract terms. Viewer revenue is recognized when the
viewer-requested music video has aired net of estimated, probable
denial calls and other billing charges. Advertising revenue is
recognized when the commercials have aired.
For the six months ended December 31, 1997, approximately, 72% of
subscriber fee revenue is derived from services provided to
subscribers of TCI and its affiliates. Total subscriber fee revenue
from TCI for the six months ended December 31, 1996, the nine months
ended June 30, 1997 and 1996 and the fiscal years ended September 30,
1996 and 1995 represented approximately 55%, 50%, 56%, 56% and 61%,
respectively, of total subscriber fee revenue.
CONCENTRATION OF CREDIT RISK.
The Company's accounts receivable balance is comprised primarily of
amounts due from cable system operators, with the majority due from
its largest customer, TCI, advertisers and telephone company partners.
INVENTORY.
Inventory consisted of receivers, amplifiers, compact disc players,
compact discs, packaging material and finished product and is valued
at the lower of cost (determined on a first-in, first-out method) or
estimated net realizable value.
PROPERTY AND EQUIPMENT.
Property and equipment is carried at cost and is depreciated over the
estimated useful lives of three to ten years using the straight-line
method. Leasehold improvements are carried at cost and are amortized
over the shorter of the estimated five-year useful life of the related
asset or the term of the lease.
INVESTMENTS IN EQUITY INTERESTS.
Investments in equity interests consists of investments in companies
in which the Company has an equity interest of at least 20% but not
more than 50% and are accounted for under the equity method.
F-11
<PAGE> 65
TCI MUSIC, INC. AND SUBSIDIARIES
(A SUBSIDIARY OF TELE COMMUNICATIONS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
INTANGIBLE ASSETS.
Intangible assets primarily consists of the excess cost over the fair
value of net assets acquired in the DMX, The Box and Paradigm Mergers
and are being amortized over 10 years. (See note 4.)
INCOME TAXES.
The Company accounts for income taxes under Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS No.
109), whereby deferred tax assets and liabilities are recognized for
the future tax consequences attributable to differences between the
financial statement carrying amount of existing assets and liabilities
and their respective tax bases. Deferred tax assets and liabilities
are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected
to be recovered or settled. Under SFAS No. 109, the effect on
deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date.
STOCK OPTIONS.
As permitted under the Statement of Financial Accounting Standards No.
123, "Accounting for Stock-Based Compensation" (SFAS No. 123), the
Company accounts for its stock option plan in accordance with the
provisions of Accounting Principles Board ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees". As such, compensation
expense is recorded on the date of grant when the current market price
of the underlying stock exceeded the exercise price and the required
pro forma net income (loss) and earnings (loss) per share disclosures
for employee stock option grants made as if the fair-value-based
method defined in SFAS No. 123 had been applied.
FOREIGN CURRENCY TRANSLATION ADJUSTMENT.
Unrealized gains and losses resulting from the translation of
financial statements are reflected as a separate component of
stockholders' equity.
EARNINGS (LOSS) PER COMMON AND POTENTIAL COMMON SHARE.
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 128, Earnings Per Share, ("SFAS 128") in
February of 1997. SFAS 128 establishes new computation, presentation
and disclosure requirements for earnings per share ("EPS"). SFAS 128
requires companies with complex capital structures to present basic
and diluted EPS. Basic EPS is measured as the income or loss
available to common shareholders divided by the weighted average
outstanding common shares for the period. Diluted EPS is similar to
basic EPS but presents the dilutive effect on a per share basis of
potential common shares (e.g., convertible securities, options, etc.)
as if they had been converted at the beginning of the periods
presented. Potential common shares that have an anti-dilutive effect
(i.e., those that increase income per share or decrease loss per
share) are excluded from diluted EPS. The Company adopted SFAS 128 as
of December 31, 1997 and has restated all prior period EPS data, as
required. SFAS 128 did not have a material impact on EPS for any
periods presented. See note 11.
USE OF ESTIMATES.
In preparing financial statements in conformity with generally
accepted accounting principles, management is required to make
estimates and assumptions that affect the reported amounts of assets
and liabilities, including the accrual of music rights and royalties,
and the disclosures of contingent assets and liabilities at the date
of the financial statements and revenues and expenses during the
reporting period. Actual results could differ from those estimates.
F-12
<PAGE> 66
TCI MUSIC, INC. AND SUBSIDIARIES
(A SUBSIDIARY OF TELE-COMMUNICATIONS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
IMPAIRMENT OF LONG-LIVED ASSETS.
The Company periodically assesses the recoverability of the carrying
amount of long-lived assets, including intangible assets. A loss is
recognized when expected future cash flows (undiscounted and without
interest) are less than the carrying amount of the asset. The
impairment loss is determined as the difference by which the carrying
amount of the asset exceeds its fair value. Assets to be disposed of
are carried at the lower of their financial statement carrying amounts
or fair value less costs to sell.
FAIR VALUES OF FINANCIAL INSTRUMENTS.
Statement of Financial Accounting Standards No. 107, "Disclosures
about Fair Value of Financial Instruments", requires the Company to
disclose estimated fair values for its financial instruments. The
carrying amounts of cash, other current assets, trade accounts
payable, and accrued expenses and debt approximate fair value because
of the short maturity of those instruments and the short term
repricing structure of the debt.
RECLASSIFICATIONS.
Certain reclassifications of prior period amounts have been made to
conform to the current year's reporting format.
SUPPLEMENTAL DISCLOSURES TO CONSOLIDATED STATEMENTS OF CASH FLOWS
Cash paid for interest was $411,000, $114,000, $247,000 $191,000,
$246,000 and $209,000 for the six months ended December 31, 1997 and
1996, nine months ended June 30, 1997 and 1996 and fiscal years ended
September 30, 1996 and 1995, respectively. Cash paid for taxes for
all periods presented was not material.
Significant noncash investing and financing activities are as follows
for the period ended December 31, 1997 (in thousands):
<TABLE>
<S> <C>
Cash paid for acquisitions:
Fair value of assets acquired $ 34,168
Net liabilities assumed (38,495)
Debt issued to related party (40,000)
Deferred liability recorded (3,583)
Value assigned to affiliation agreements and commercial
contracts 8,740
Excess of cost paid over fair value of net assets acquired 144,604
Equity interest of acquired entities (97,867)
----------------
Cash paid for acquisitions $ 7,567
================
Noncash accretion of put option to purchase shares from a
subsidiary (note 4) $ 2,425
================
</TABLE>
F-13
<PAGE> 67
TCI MUSIC, INC. AND SUBSIDIARIES
(A SUBSIDIARY OF TELE-COMMUNICATIONS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
(3) ALLOWANCE FOR DOUBTFUL ACCOUNTS.
A summary of the activity of the allowance for doubtful accounts for
the six months ended December 31, 1997, nine months ended June 30,
1997 and fiscal years ended September 30, 1996 and 1995 follows
(amounts in thousands):
<TABLE>
<CAPTION>
TCI MUSIC, INC. DMX INC.
------------------ -----------------------------------------------
SIX MONTHS NINE MONTHS
ENDED ENDED FOR THE YEARS ENDED
DECEMBER 31, JUNE 30, SEPTEMBER 30,
1997 1997 1996 1995
--------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, beginning of period $ 451 251 857 157
Provision for doubtful accounts 264 810 643 700
Accounts charged-off (152) (610) (1,249) --
--------------------------------------------------------------------
Balance, end of period $ 563 451 251 857
====================================================================
</TABLE>
(4) 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 TCI (as designee of certain of its indirect
subsidiaries), 62,500,000 shares of TCI Music Series B Common Stock,
and a promissory note in the amount of $40 million, (ii) 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 to require TCI to purchase from such holder one share of TCI Music
Series A Common Stock at a purchase price of $8.00 per share payable at
the election of TCI, in cash, a number of shares of
Tele-Communications, Inc. 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.
Upon consummation of the DMX Merger, each outstanding share of DMX
Common Stock was converted into the right to receive (i) one-quarter
of a share of TCI Music Series A Common Stock, (ii) one TCI Right with
respect to each whole share of TCI Music Series A Common Stock and
(iii) cash in lieu of fractional shares of TCI Music Series A Common
Stock and TCI Rights. Until the TCI Rights expire or are exercised,
the TCI Rights are evidenced by a legend on the certificates for
shares of TCI Music Series A Common Stock issued in the DMX Merger.
Accordingly, the TCI Rights associated with the shares of TCI Music
Series A Common Stock are represented solely by, and are not separable
from, such shares of TCI Music Series A Common Stock, and the
surrender or transfer of any such certificate for shares of TCI Music
Series A Common Stock will also constitute the surrender or transfer
of the TCI Rights
F-14
<PAGE> 68
TCI MUSIC, INC. AND SUBSIDIARIES
(A SUBSIDIARY OF TELE COMMUNICATIONS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
associated with the TCI Music Series A Common Stock represented by
such certificate.
The DMX Merger was effective July 1, 1997 and was accounted for under
the purchase method of accounting. The estimated aggregate fair value
of the TCI Music Series A Common Stock and associated TCI Rights (the
"DMX Merger Consideration") issued to entities not controlled by TCI
("Unaffiliated Stockholders") and the carryover basis of the DMX
Merger Consideration issued to entities controlled by TCI aggregated
approximately $73.9 million. The Company performed an allocation of
the purchase price to excess cost over the fair value of net assets
acquired as the net book values of DMX assets and liabilities were
estimated to approximate their respective fair values and affiliate
agreements of commercial contracts. 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
DMX Merger Consideration issued to Unaffiliated Stockholders is being
accreted to the value of $8.00 per share (the equivalent of $2.00 per
share of DMX Common Stock), subject to reduction by the aggregate
amount per share of any dividend and certain other distributions, if
any, made by TCI Music to its stockholders during the one-year period
beginning on the effective date of the DMX Merger. Such accretion is
reflected as an increase in excess cost with a corresponding increase
to additional paid-in capital. Additional information concerning the
valuation of the TCI Music Series A Common Stock is set forth below
(dollar amounts in thousands):
<TABLE>
<S> <C> <C>
Shares issued to TCI, valued at carryover basis at June 30, 1997
(6,812,393 shares) $ 14,087
Shares issued to others, valued at estimated fair value of $7.40
per share (8,084,255 shares) 59,824
---------------
Total value assigned to TCI Music Series A
Common Stock 73,911
DMX Merger costs incurred by TCI Music 1,397
Elimination of DMX historical stockholders' deficit at June 30,
1997 16,302
Increase in deferred income tax liability resulting from purchase
price allocation 3,583
Affiliation agreements and commercial contracts (8,740)
----------------
Excess of cost over fair value of net assets
acquired $ 86,453
===============
</TABLE>
F-15
<PAGE> 69
TCI MUSIC, INC. AND SUBSIDIARIES
(A SUBSIDIARY OF TELE-COMMUNICATIONS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
The following table represents the summary balance sheet of DMX at
June 30, 1997 prior to the consummation of the DMX Merger and the
opening summary balance sheet of TCI Music subsequent to the
consummation of the DMX Merger (amounts in thousands):
<TABLE>
<CAPTION>
TCI MUSIC DMX
-------------------- --------------------
Assets
------
<S> <C> <C>
Current assets $ 5,694 6,186
Property and equipment, net 4,132 4,132
Other assets 101,953 668
------------------- -------------------
$ 111,779 10,986
=================== ===================
Liabilities and Equity
----------------------
Current liabilities $ 24,422 21,296
Capital lease obligation 23 23
Other liabilities 3,127 2,082
Due to related party 43,887 3,887
------------------- -------------------
Total liabilities 71,459 27,288
Equity (deficit) 40,320 (16,302)
------------------- -------------------
$ 111,779 10,986
=================== ===================
</TABLE>
THE BOX MERGER.
In connection with the Box Merger, TCI Music, TCI Music Acquisition
Sub, Inc., a Florida corporation and a wholly-owned subsidiary of TCI
Music ("Acquisition Sub"), and The Box, entered into the "Box Merger
Agreement". Pursuant to the Box Merger Agreement, 24,892,623
outstanding shares of common stock of The Box were converted into the
right to receive a fraction of a share of TCI Music Preferred Stock,
equal to the quotient of $1.50 divided by three times the average of
the average daily closing bid and asked prices of one share of TCI
Music Series A Common Stock trading with an associated TCI Right for a
period of 20 consecutive trading days ending on the third trading day
prior to the closing of the Box Merger as reported on the Nasdaq
SmallCap Market and cash in lieu of fractional shares of TCI Music
Series A 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 $2,652,466. Each
share of TCI Music Series A Common Stock currently outstanding trades
together with an associated TCI Right issued in connection with the
DMX Merger. The TCI Rights will terminate or expire on or before
August 10, 1998 unless extended by their terms. The shares of TCI
Music Series A Common Stock into which the TCI Music Preferred Stock
is convertible do not have any such associated TCI Rights, and if a
holder of TCI Music Preferred Stock converts shares into TCI Music
Series A Common Stock prior to the termination or expiration of the
TCI Rights, the TCI Music Series A Common Stock without the TCI Rights
received upon conversion will not be tradable on the Nasdaq SmallCap
Market under the Symbol "TUNE" with the TCI Music Series A Common
Stock that includes the TCI Rights until such TCI Rights terminate or
expire.
F-16
<PAGE> 70
TCI MUSIC, INC. AND SUBSIDIARIES
(A SUBSIDIARY OF TELE-COMMUNICATIONS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
The Box Merger was effective December 16, 1997 and was accounted for
under the purchase method of accounting. Accordingly, the results of
operations for The Box have been included in the accompanying
consolidated financial statements for the fifteen day period ended
December 31, 1997. The estimated aggregate fair value of the TCI
Music Preferred Stock (the Box Merger Consideration) issued to
Unaffiliated Stockholders and the carryover basis of the Box Merger
Consideration issued to entities controlled by TCI aggregated
approximately $35.5 million. 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. The number of shares issued was based
upon Box Common Stock ownership as of December 15, 1997. Excess cost
is being amortized over ten years. Additional information concerning
the valuation of the TCI Music Preferred Stock is set forth below
(dollar amounts in thousands):
<TABLE>
<S> <C> <C>
Shares issued to TCI, valued at carryover basis at December 16, 1997
(84,242 shares) $ 790
Shares issued to others, valued at estimated fair value (without the
TCI Right upon conversion) of $20.91 per share (1,658,242 shares) 34,674
---------------
Total value assigned to TCI Music Preferred Stock 35,464
Merger costs incurred by TCI Music 345
Elimination of The Box historical stockholders' equity at
December 16, 1997 (6,897)
---------------
Excess of cost over fair value of net assets acquired $ 28,912
===============
</TABLE>
PARADIGM MERGER.
In connection with the Paradigm Merger, TCI Music, TCI Para Merger
Sub, a wholly-owned subsidiary of TCI Music ("Merger Corp. "), and
Paradigm, entered into the Paradigm Merger Agreement. Pursuant to the
Paradigm Merger Agreement, all the outstanding shares of common stock
of Paradigm ("Paradigm Common Stock") were converted into a number of
shares of TCI Music Series A Common Stock determined by dividing
$24,000,000 by the average of the average daily closing bid and asked
prices of one share of TCI Music Series A Common Stock trading with an
associated TCI Right, for a period of 20 consecutive trading days
ending on the third day prior to the closing of the Paradigm Merger,
as reported on the Nasdaq SmallCap Market 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 are not tradable on the Nasdaq SmallCap Market under the
symbol "TUNE" until such TCI Rights expire or terminate.
Additionally, under the terms of the Paradigm Merger Agreement TCI
Music made a cash payment of approximately $5,332,000 to Paradigm for
working capital needs and payment of Paradigm debt.
The Paradigm Merger was effective December 31, 1997 and was accounted
for under the purchase method of accounting. Accordingly, the results
of operations for Paradigm have been included in the accompanying
consolidated financial statements for the one day period ended
December 31, 1997. 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. Additional
information concerning the assumed valuation of the TCI Music Series A
Common Stock is set forth below (dollar amounts in thousands):
F-17
<PAGE> 71
TCI MUSIC, INC. AND SUBSIDIARIES
(A SUBSIDIARY OF TELE-COMMUNICATIONS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
<TABLE>
<CAPTION>
<S> <C> <C>
TCI Music Series A Common Stock issued at estimated fair value (without
the TCI Right) of $6.97 per share (3,204,532 shares) $ 22,336
Cash payment at closing 5,332
Merger costs incurred by TCI Music 137
Paradigm's historical stockholders' deficit at December 31, 1997 1,434
---------------
Excess of cost over fair value of net assets acquired $ 29,239
===============
</TABLE>
The following unaudited pro forma summarized operating results of the
Company assuming the DMX Merger, the Box Merger and Paradigm Merger
had been consummated on October 1, 1996, and after giving effect to
certain adjustments, including amortization of intangibles, increased
interest expense on debt related to the acquisition are as follows
(amounts in thousands):
<TABLE>
<CAPTION>
SIX MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, 1997 JUNE 30, 1997
----------------- -----------------
<S> <C> <C>
Revenue $ 44,516 44,190
================= =================
Net loss $ (13,960) (18,328)
================= ==================
Pro forma net loss per common share $ (0.18) (0.24)
================= =================
</TABLE>
The foregoing unaudited pro forma information is based upon historical
results of operations and is not necessarily indicative of the results
that would have been obtained had the DMX, The Box and Paradigm
mergers actually occurred on October 1, 1996.
(5) INVESTMENT IN AND DISPOSITION OF DMX-EUROPE N.V. AND SUBSIDIARY.
On May 17, 1996, DMX consummated the merger of TCI-Euromusic, Inc.
("TCI-E"), an indirect affiliate of TCI ("the TCI-E Merger") pursuant
to the terms of the Agreement and Plan of Merger, dated August 28,
1995, as amended 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. As DMX-E UK was placed into
receivership on July 1, 1997 and into liquidation on July 18, 1997,
the Company no longer has control over operations and activities.
Accordingly the accompanying balance sheets give effect to the
deconsolidation of DMX-E UK as of December 31, 1997 and June 30, 1997.
DMX-E NV, although inactive since July 1, 1997, was placed into
receivership on December 23, 1997. Accordingly, the accompanying
balance sheet as of December 31, 1997 gives effect to the
deconsolidation of DMX-E.
As a result of the DMX-E cessation of operations, the Subscription and
Shareholder Agreement dated December 18, 1996 (the "Definitive
Agreement") between DMX; Mr. Jerold H. Rubinstein, an individual; and
XTRA Music Limited, a corporation under laws of England ("XTRA") was
put into place pursuant to which a termination certificate was executed
in July 1997, terminating the Stock Purchase Agreement dated December
18, 1996 that provided for the disposition of DMX-E to Mr. Jerold H.
Rubinstein. Pursuant to the Definitive Agreement, DMX obtained a 10%
interest in XTRA and a channel distribution agreement was executed
between XTRA and DMX (the "Channel Distribution Agreement"). The
Channel Distribution Agreement provides XTRA an exclusive, five-year,
royalty-free license to distribute the DMX
F-18
<PAGE> 72
TCI MUSIC, INC. AND SUBSIDIARIES
(A SUBSIDIARY OF TELE-COMMUNICATIONS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
music service in Europe, the former Soviet Union and in the Middle
East and the right to use DMX's trademarks for two years. The music
service is currently not being distributed by XTRA as Mr. Jerold H.
Rubinstein is seeking financial partners.
The Company has accounted for the effects of the loss on disposal of
DMX-E and has estimated the loss on the disposal of DMX-E in the
consolidated statements of operations. The loss on disposal of
DMX-Europe N.V. reflected a write down of the assets to their
estimated net realizable value at June 30, 1997. The loss on disposal
for 1996 was estimated as the net investment of $5,720,000 and the
incurrence of certain potential liabilities of $1,469,000 in
conjunction with such disposal activities.
(6) RELATED PARTY TRANSACTIONS.
Pursuant to an Amended and Restated Contribution Agreement between TCI
and TCI Music to be effective as of July 1, 1997 (the "Amended
Contribution Agreement") TCI is required to deliver, or cause certain
of its subsidiaries to deliver to TCI Music monthly payments
aggregating $18 million annually, adjusted annually through 2017 (the
"Annual TCI Payments"). Pursuant to the Amended Contribution
Agreement, the Annual TCI payments will represent (i) revenue of
certain subsidiaries of TCI that is attributable to the distribution
and sale of the DMX service to 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 December 31, 1997, TCI
Music recognized $9.9 million 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, 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.
See note 13 for the intercompany tax allocation policy.
On February 6, 1997 the Company entered into a loan and security
agreement with TCI which provided $3.5 million. The loan proceeds
were used to purchase equipment and pay certain costs related to
obtaining commercial customers. The outstanding balance at December
31, 1997 was $3.1 million which was payable in 34 equal monthly
installments which commenced September 1, 1997 at an interest rate of
12.5% per annum. Interest expense for the six months ended December
31, 1997 was $207,000. The loan was paid in full on March 2, 1998.
On July 11, 1997 in connection with the DMX Merger, the Company entered
into a $2 million revolving credit note with TCI Communications, Inc.,
a subsidiary of TCI, and pursuant to the Amended Contribution
Agreement entered into a $40 million promissory note with TCI. The
interest rate on the notes was 10% per annum. On December 30, 1997,
the Company paid in full $900,000 drawn under the $2 million revolving
credit note and related accrued interest of $42,000 and the $40 million
note. The accrued interest on the $40 million note of $1.9 million was
forgiven pursuant to the terms of the note agreement.
F-19
<PAGE> 73
TCI MUSIC, INC. AND SUBSIDIARIES
(A SUBSIDIARY OF TELE-COMMUNICATIONS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
On September 19, 1997, the Company entered into a $2.18 million note
payable with Liberty Media Corporation, a wholly owned subsidiary of
TCI ("Liberty"). The proceeds were issued to Paradigm as a note
receivable pursuant to the letter of intent in contemplation of the
Paradigm Merger. See note 4. Interest on the note was 10% per annum.
The Company paid in full the principal and related accrued interest of
$62,000 on December 30, 1997.
On December 16, 1997 the Company entered into a $3.75 million note
payable with Liberty Media Corporation. The proceeds were used to
purchase the outstanding preferred stock of The Box in connection with
the Box Merger. The Company paid in full the principal and related
accrued interest of $15,000 on December 30, 1997.
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 balance of the capital lease obligation at December
31, 1997 was approximately $1.2 million with terms that extend through
the year 2000, at an interest rate of 9.5%. Total interest expense
for the six months ended December 31, 1997 was $59,000. The related
studio equipment had a net book value of approximately $728,000 at
December 31, 1997 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
the NDTC. (see note 12)
The components of related party debt at December 31, 1997 and June 30,
1997 were as follows (amounts in thousands):
<TABLE>
<CAPTION>
PRINCIPAL INTEREST TOTAL
--------- --------- -----
<S> <C> <C> <C>
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
============== ============ ===============
June 30, 1997
-------------
$3.5 million equipment loan $ 2,420 97 2,517
Capital lease obligation 1,370 -- 1,370
-------------- ------------ ---------------
$ 3,790 97 3,887
============== ============ ===============
</TABLE>
(7) PROPERTY AND EQUIPMENT.
At December 31, 1997, studio equipment with a net book value of
$728,000 was held under a capital lease and was included in the
balance of furniture, machinery and equipment.
Studio equipment with a net book value of $137,000, net of accumulated
depreciation of $583,000 was leased to DMX-E for a monthly fee of
approximately $23,000, and was written off at June 30, 1997. Lease
income related to leased equipment to DMX-E for the period from
October 1, 1995 through May 17, 1996, and the fiscal year ended
September 30, 1995 was approximately $172,000 and $245,000,
respectively, and was included in other income. For the nine months
ended June 30, 1997 and the period from May 18, 1996 through September
30, 1996, the lease income of approximately $160,000 and $103,000,
respectively, was eliminated in consolidation.
F-20
<PAGE> 74
TCI MUSIC, INC. AND SUBSIDIARIES
(A SUBSIDIARY OF TELE COMMUNICATIONS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
(8) INTANGIBLE ASSETS.
The balance of intangible assets as of December 31, 1997 principally
consists of the excess of cost over the fair value of the net assets
acquired in the DMX, The Box and Paradigm acquisitions (see note 4).
Such intangibles are being amortized over a 10 year period. The
balance at December 31, 1997 is comprised of the following items
(amounts in thousands):
<TABLE>
<S> <C>
DMX Merger:
Affiliation agreements and Commercial contracts $ 8,740
Excess of cost over fair value of net assets acquired 86,453
Utilization of net operating loss (see note 13) (1,393)
Accretion of put option for the six months ended December 31, 1997 (see
note 4) 2,425
Box Merger:
Excess cost over fair value of net assets acquired 28,912
Launch incentive fee, net 1,225
Purchase of Box preferred shares 210
Other 575
Paradigm Merger:
Excess cost over fair value of net assets acquired 29,239
Other 1,822
Accumulated amortization as of December 31, 1997 (4,943)
---------------
Intangible assets, net $ 153,265
===============
</TABLE>
(9) ACCRUED LIABILITIES.
Accrued liabilities as of December 31, 1997 and June 30, 1997 were
comprised of the following (amounts in thousands):
<TABLE>
<CAPTION>
TCI MUSIC, INC. DMX INC.
DECEMBER 31, JUNE 30,
1997 1997
---------------------------------------
<S> <C> <C>
Accrued music right royalties $ 3,827 2,920
Accrued marketing credits -- 2,305
Other accrued expenses 6,734 2,299
------------------ -----
$ 10,561 7,524
================== =====
</TABLE>
F-21
<PAGE> 75
TCI MUSIC, INC. AND SUBSIDIARIES
(A SUBSIDIARY OF TELE-COMMUNICATIONS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
(10) DEBT AND OTHER PAYABLES.
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, for the preceding quarter or at the banks
base rate. The first advance of $53.2 million was used to payoff
related party debt and amounts paid in connection with the close of
the Paradigm Merger (see notes 4 and 6). 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 ranging from .25%
to .375% based upon the leverage ratio for the preceding quarter. The
balance of outstanding draws at March 2, 1998 was $72 million bearing
interest at 30 day LIBOR plus .7% or average rate of 6.4%.
In connection with the Paradigm Merger, the Company assumed debt
consisting of two bridge loans and a note payable to an individual.
As of December 31, 1997 the balance outstanding on the bridge loans
was $2,944,900 and accrued interest of $256,600. The notes bear
interest at 10% per annum and were paid in full, including accrued
interest, in January 1998. The note payable to an individual bears
interest at prime with $25,000 due April 1, 1998 and the remaining
balance is being paid monthly through August 15, 1998.
The following debt payment schedules includes related party debt and
capital lease (see note 6) and the third party debt described above as
of December 31, 1997 (amounts in thousands):
<TABLE>
<CAPTION>
THIRD
RELATED PARTY PARTY TOTAL
------------------------------------------------------
<S> <C> <C> <C> <C>
1998 $ 1,626 3,354 4,980
1999 1,750 -- 1,750
2000 912 1,597 2,509
2001 -- 5,324 5,324
2002 -- 9,425 9,425
Thereafter -- 36,890 36,890
---------------- ------ ------
$ 4,288 56,590 60,878
================ ====== ======
</TABLE>
The fair market value of TCI Music's debt approximated its carrying
value at December 31, 1997.
F-22
<PAGE> 76
TCI MUSIC, INC. AND SUBSIDIARIES
(A SUBSIDIARY OF TELE-COMMUNICATIONS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
(11) STOCKHOLDERS' EQUITY (DEFICIT).
STOCK OPTIONS.
Upon consummation of the DMX Merger, the Company granted options to
the board of directors to purchase 3,000,002 shares of TCI Music
Series A Common Stock at a price of $6.25 per share. The options vest
in 20% cumulative increments, with the first increment vested on the
effective day of the DMX Merger, and each additional increment vesting
on the anniversary date. The options will be exercisable for up to
ten years with no TCI Rights being issued in connection with TCI Music
Series A Common Stock issued upon exercise of any such options.
Additionally, the Company granted options to employees to purchase
496,800 shares of TCI Music Series A Common Stock at a price of $6.25
per share under the TCI Music, Inc. 1997 Stock Incentive Plan which is
authorized to issue up to 4,000,000 shares. The options will vest
annually in 20% cumulative increments beginning on the first
anniversary date of the DMX Merger. The options will be exercisable
for up to ten years with no TCI Rights being issued in connection with
TCI Music Series A Common Stock issued upon exercise of any such
options.
Upon consummation of the Box Merger, the Company granted options to
employees under the TCI Music, Inc. 1997 Stock Incentive Plan to
purchase 92,060 shares of TCI Music Series A Common Stock at $6.25 per
share. The vesting schedules vary with expirations ranging between
April 1, 1998 and March 31, 2002 with no TCI Rights being issued in
connection with TCI Music Series A Common Stock issued upon exercise
of any such options. Two former employees were granted options under
no plan, to purchase 9,630 shares of TCI Music Series A Common Stock
each at $6.25 per share. These options vested on the effective day of
the Box Merger and expire on December 31, 1998 with no TCI Rights
being issued in connection with TCI Music Series A Common Stock issued
upon exercise of any such options. A former employee was granted
options to purchase 1,400 shares of TCI Music Preferred Stock at an
exercise price of $18.75 per share. The options vested on the
effective day of the Box Merger and expire on March 16, 1998.
The Company issued awards of stock options to directors and employees
and recorded compensation of $294,000 pursuant to APB Opinion No. 25
for the six months ended December 31, 1997.
Had the Company determined compensation expense under SFAS No. 123 by
calculating the fair value at the grant date using the Black-Scholes
option-pricing model, the Company's net loss and loss per share would
have been increased to the pro forma amount for the six months ended
December 31, 1997:
<TABLE>
<S> <C> <C>
Net loss (dollar amounts in thousands)
As reported $ (465)
Pro forma $ (2,884)
Net loss per share
As reported $ (0.01)
Pro forma $ (0.04)
Weighted average common stock outstanding 77,423,352
</TABLE>
The following assumptions were used in arriving at the estimated pro
forma net loss: 6.10% weighted average risk-free interest rate; 60
month weighted average expected life; 50% weighted average expected
volatility and the weighted average expected individual yield was
zero. The weighted average fair value of the options granted during
the period was $3.31. At December 31, 1997 the number of exercisable
options were 705,588. The weighted average remaining contractual life
for outstanding options at December 31, 1997 was 9.3 years.
F-23
<PAGE> 77
TCI MUSIC, INC. AND SUBSIDIARIES
(A SUBSIDIARY OF TELE-COMMUNICATIONS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
At June 30, 1997, options to purchase 3,584,583 shares were
exercisable at prices ranging from $2.063 to $6.25 per share and
include accelerated options to purchase 400,000 shares that were
exercisable prior to the DMX Merger, July 11, 1997. By terms of the
DMX Inc. 1993 Stock Option Plan, options issued, outstanding and
unexercised were terminated upon consummation of the DMX Merger.
Exercisable options held by officers and directors of DMX at June 30,
1997 totaled 3,373,333.
DMX had issued options to purchase DMX Common Stock to certain
directors, officers and employees under various stock option plans.
The option prices represent fair market values at the date of grant.
Transactions in stock options under these plans are summarized as
follows:
<TABLE>
<CAPTION>
SHARES OPTION PRICE
---------- -------------------------------------------------
<S> <C> <C>
Outstanding options at
September 30, 1995 4,395,833 $1.95 - $6.25 per share, expiring on various
dates, December 31, 1996 to July 1, 2006
Options issued 100,000 $2.563 per share
Options expired and canceled $2.563 - $4.180 per share
(230,000)
Options exercised $1.95 per share
(150,000)
----------
Outstanding options at
September 30, 1996 4,115,833 $1.95 - $6.25 per share, expiring on various
dates, December 31, 1996 to July 1, 2006
Options expired $1.95 - $5.75 per share
(531,250)
----------
Outstanding options at
June 30, 1997 3,584,583 $2.063 - $6.25 per share, expiring on various
========== dates, June 30, 1998 to July 1, 2006
</TABLE>
The per share fair value of stock options granted during the years
ended September 30, 1996 and 1995 ranged from $1.69 to $2.69 on the
date of grant using the Black-Scholes option-pricing model. There
were no options granted during the nine months ended June 30, 1997.
DMX applies APB Opinion No. 25 in accounting for its Plans and
accordingly, no compensation cost was recognized to the extent the
exercise price of the stock options equaled the fair value. Had DMX
determined compensation cost based on the fair value at the grant date
for its stock options under SFAS No. 123, DMX's net loss and loss per
share would have been increased to the pro forma amounts indicated
below (dollar amounts in thousands, except per share data):
<TABLE>
<CAPTION>
NINE MONTHS
ENDED YEAR ENDED
JUNE 30, SEPTEMBER 30,
1997 1996 1995
------------------------------------------------------
<S> <C> <C> <C>
Net loss:
As reported $ (14,708) (33,855) (23,079)
Pro forma (15,216) (34,363) (23,575)
Net loss per share:
As reported (0.25) (0.68) (0.60)
Pro forma (0.26) (0.69) (0.61)
Weighted average common stock and potential common
stock outstanding 59,586,594 49,675,569 38,505,107
</TABLE>
F-24
<PAGE> 78
TCI MUSIC, INC. AND SUBSIDIARIES
(A SUBSIDIARY OF TELE-COMMUNICATIONS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
Pro forma net income reflects only options granted during the years
ended September 30, 1996 and 1995. Therefore, the full impact of
calculating compensation cost for stock options under SFAS No. 123 is
not reflected in the pro forma net income amounts presented above
because compensation cost is reflected over the options vesting period
and compensation cost for options granted prior to January 1, 1995 is
not considered.
Stock bonus expense included in stock compensation in the accompanying
financial statements of $137,427 for the nine months ended June 30,
1997 and $549,708 of compensation for each of the years ended
September 30, 1996 and 1995, related to the 1992 extension of the
exercise date of an option issued in October 1990. The exercise date
was extended from 1993 to December 31, 1996 and represented an option
to purchase 350,000 shares of common stock granted to Jerold H.
Rubinstein, the former Chairman and Chief Executive Officer of DMX.
During the fiscal year ended September 30, 1996, options to purchase
150,000 shares were exercised and at December 31, 1996 the remaining
options to purchase 200,000 shares expired.
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. 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.
REDEEMABLE PREFERRED STOCK.
The TCI Music preferred stock may be divided and issued in one or more
series from time to time as determined by the board of directors of
TCI Music, without further shareholder approval. As of December 31,
1997, the board of directors of TCI Music has authorized the issuance
of 2,250,000 shares of TCI Music Preferred Stock in connection with
the Box Merger. The TCI Music Preferred Stock may be converted by the
holder at any time in whole or in part into shares of TCI Music Series
A Common Stock at the conversion rate of three shares of TCI Music
Series A Common Stock for one share of TCI Music Preferred Stock,
subject to certain adjustments for antidilution, dividends and
distributions, as defined. Subject to the rights of holders of senior
securities and to any restrictions set forth in any security or debt
instrument, the holders of TCI Music Preferred Stock will be entitled
to receive cash dividends on each share of TCI Music Preferred Stock
in amount equal to the product of (i) the amount of the cash dividend
declared on one share of TCI Music Series A Common Stock or any other
security into which the shares of TCI Music Preferred Stock are then
convertible and (ii) the number of shares of TCI Music Series A Common
Stock or other security into which one share of TCI Music Preferred
Stock may be converted as of the date such dividend is declared. Such
dividends shall be payable to holders of TCI Music Preferred Stock
only if, and when the board of directors of TCI Music declares cash
dividends on TCI Music Series A Common Stock. If TCI Music is
prohibited from paying the full dividends which have been declared to
holders of TCI Music Preferred Stock, the amount that is available
will be distributed among the holders of TCI Music Preferred Stock
ratably in proportion to the full amounts to which they would
otherwise be entitled.
Each share of TCI Music Preferred Stock is entitled to vote on all
matters submitted to a vote of the holders of TCI Music Series A
Common Stock and the number of votes equal to the number of shares of
TCI Music Series A Common Stock into which such shares are convertible
as of the record date in the matters to be voted upon.
F-25
<PAGE> 79
TCI MUSIC, INC. AND SUBSIDIARIES
(A SUBSIDIARY OF TELE-COMMUNICATIONS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
Upon any liquidation, dissolution or winding up (or deemed liquidation
by virtue of a change in control or a sale of all or substantially all
of the assets of TCI Music) of TCI Music subject to the prior payment
in full of amounts to which any senior securities are entitled,
holders of TCI Music Preferred Stock are entitled only to the
liquidation value of their shares to be paid pari passu with payments
to holders of parity securities. The liquidation value of TCI Music
Preferred Stock at December 31, 1997 is equal to $39.2 million, to be
increased each year by the greater of (i) the percentage increase in
the CPI over the prior year (but not to exceed 5%) or (ii) 3%.
The Company may, at its option, redeem, at the liquidation value, all
or part of the shares of TCI Music Preferred Stock ratably among the
holders of such shares by giving written notice to such holders (i)
during the 30 day periods immediately following the fourth, sixth and
eighth anniversaries of the issue date of the TCI Music Series A
Preferred Stock, (ii) at any time after the closing price of the TCI
Music Series A Common Stock exceeds 125% of the purchase price
benchmark for a period of at least 30 consecutive business days and
(iii) at any time after the tenth anniversary of the issue date.
Holders of TCI Music Preferred Stock may require TCI Music to redeem,
at the liquidation value, all or part of their shares any time after
the tenth anniversary of the issue date by giving written notice to
TCI Music stating the number of shares such holder elects to redeem.
If there are insufficient funds available for redemption purposes, all
available funds will be used to redeem the maximum possible number of
shares ratably among those holders requiring shares to be redeemed,
including shares of parity securities required to be redeemed.
As of December 31, 1997, the Company has recorded approximately
$124,000 for the accretion to the liquidation value of the TCI Music
Preferred Stock using the effective interest method over a ten year
period at a 3% effective rate.
BASIC AND DILUTED EARNINGS (LOSS) PER SHARE.
Basic and diluted loss per share was calculated by dividing net loss
attributable to common stockholders by the weighted average number of
common shares outstanding during the periods presented. Potential
common shares, consisting of TCI Music Preferred Stock convertible
into TCI Music Series A Common Stock, and employee stock options were
not included in the computation of weighted average shares outstanding
for diluted loss per share because their inclusion would be
anti-dilutive.
Dilutive securities and stock options at December 31, 1997 and 1996
were 3,602,592 and 3,659,583, respectively; at June 30, 1997 were
3,584,583; and at September 30, 1996 and 1995 were 4,115,833 and
4,395,833, respectively.
(12) COMMITMENTS AND CONTINGENCIES.
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 breakeven", as defined in the agreement.
ACCRUED MUSIC RIGHT ROYALTIES.
DMX licenses rights to re-record and distribute music from a variety
of sources and pays royalties to songwriters and publishers through
contracts negotiated with performing rights societies such as the
American Society of Composers, Authors and Publishers ("ASCAP"),
Broadcast Music, Inc. ("BMI") and the Society of European Stage
Authors and Composers
F-26
<PAGE> 80
TCI MUSIC, INC. AND SUBSIDIARIES
(A SUBSIDIARY OF TELE-COMMUNICATIONS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
("SESAC"). DMX has separate agreements with ASCAP, BMI and SESAC for
residential and commercial distribution. Certain of the agreements
are being negotiated on an industrywide basis mainly over new rate
structures that may require retroactive rate increases. DMX has
continued to accrue royalties that are under negotiations based on its
best estimate, after consultation with counsel and consideration of
the terms and rates of the expired contracts.
The Digital Performance Right in Sound Recordings Act of 1995 ("1995
Act") was signed into law on November 1, 1995. The 1995 Act
establishes the right of owners of the performance rights, such as the
performers and record companies, to control digital transmission of
sound recordings by means of subscription service digital
transmissions. The 1995 Act provides a compulsory license for
noninteractive subscription services. An arbitration panel rendered a
decision before the United States Copyright Office in late November
1997 that determined the statutory license royalty rate of 5% to be
paid under the 1995 Act by DMX and other digital music residential
subscription services on services transmitted on non-business
subscribers, and required back payments be made on a forward basis
amortized over approximately thirty months, without interest. As of
December 31, 1997, the Company's accrued music royalties include the
license royalty at the assessed rate of 5% pursuant to this decision.
On January 28, 1998, the United States Copyright office issued a brief
order noting that it would not adopt the arbitrators' decision in its
entirety and has not specified what provisions would be adopted or
not.
OPERATING LEASE COMMITMENTS.
The Company is obligated under various operating leases for office
space, uplinking and satellite services. Certain leases are
cancelable subject to penalties. Total expenses under these leases
were approximately $2,741,000 and $2,538,000 for the six months ended
December 31, 1997 and 1996, respectively, $4,023,000 for the nine
months ended June 30, 1997, and $5,324,000 and $5,097,000 for the
fiscal years ended September 30, 1996 and 1995, respectively.
Minimum lease payments under non cancelable operating leases for each
of the next five years are summarized as follows (amounts in
thousands):
<TABLE>
<CAPTION>
OPERATING LEASES
WITH OPERATING LEASES
RELATED PARTIES WITH OTHERS TOTAL
--------------------------------------------------------------------
<S> <C> <C> <C>
1998 $ 4,543 3,580 8,123
1999 4,557 3,280 7,837
2000 2,737 2,487 5,224
2001 2,258 1,697 3,955
2002 2,228 222 2,450
Thereafter 3,571 75 3,646
</TABLE>
The operating leases with related parties include the lease of studio
facilities in Colorado and uplinking and satellite services from NDTC.
Total expenses under leases with related party were $2,599,000 and
$2,268,000 for the six months ended December 31, 1997 and 1996,
respectively, $3,392,000 for the nine months ended June 30, 1997 and
$4,831,000 and $4,489,000 for the fiscal years ended September 30,
1996 and 1995, respectively.
PARENT GUARANTEES.
As described in note 5, "Investment in and Disposition of DMX-Europe
N.V. and Subsidiary", DMX-E ceased operations and DMX-E U.K. was put
into receivership on July 1, 1997 and into liquidation proceedings on
July 18, 1997. DMX-Europe NV, 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.
F-27
<PAGE> 81
TCI MUSIC, INC. AND SUBSIDIARIES
(A SUBSIDIARY OF TELE-COMMUNICATIONS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
The Company has guaranteed certain contracts of DMX-E related to their
uplink services agreement and subscriber management services
agreement. To the extent DMX-E is unable to perform under the
agreements, certain creditors of DMX-E may pursue claims against the
Company under the guarantees. A claim under the guaranty of DMX-E's
obligation to indemnify British Sky Broadcasting under the uplink
services agreement could potentially approximate $1.3 million which is
included in the loss on disposal of DMX-E in the accompanying
consolidated statement of operations. The Company has also guaranteed
certain other obligations of DMX-E under the Subscriber Management
Services Agreement between DMX-E and Selco Servicegesellschaft fur
elektronische Kommunikation mbH ("Selco"), and the related side letter
agreement. The Company cannot estimate the amount of any potential
claims at this time under such guarantee. (See "Legal Action" below.)
DMX has received a letter from counsel for Selco Servicegesellschaft
fur elektronische Kommunikation mbH ("Selco") requesting that DMX make
a proposal to settle claims alleged by Selco for damages in the amount
of approximately $3.5 million with respect to a guaranty by DMX of
obligations of DMX-E N.V. under a Subscriber Management Services
Agreement between DMX-E N.V. and Selco. TCI Music does not believe
that DMX has any liability to Selco under that guaranty.
Nevertheless, TCI Music cannot estimate, based on the facts available
as of the date of this Form 10-K, 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.
On September 8, 1996, a purported class action lawsuit entitled
Brickell Partners v. Jerold H. Rubinstein, Donne F. Fisher, Leo J.
Hindery, Jr., James R. Shaw, Sr., Kent Burkhart, J.C. Sparkman,
Bhaskar Menon, DMX Inc., and Tele-Communications, Inc. (Civil Action
No. 15206) was filed in the Delaware Chancery Court alleging, among
other things, that the proposed acquisition of DMX by TCI is wrongful,
unfair and harmful to DMX's public stockholders and seeking to enjoin
the consummation of the Merger. DMX believes that this action is
without merit and intends to defend it vigorously.
On July 23, 1997, Jeri L. Amstutz, a former employee of DMX, filed a
complaint in Superior Court of California, County of Los Angeles
seeking compensatory damages for lost wages and benefits, foreseeable
consequential and incidental damages in an unspecified amount, as well
as attorneys' fees, costs and prejudgment interest in connection with
alleged wrongful employment practices. The plaintiff also seeks
punitive damages and damages for emotional distress (and similar harm)
in unspecified amounts which the plaintiff claims to believe will
exceed $2,000,000.
On July 23, 1997, Marnie Tenden a former employee of DMX, filed a
complaint in Superior Court of California, County of Los Angeles,
which alleges sex discrimination and retaliatory harassment. The
plaintiff seeks compensatory damages for lost wages and benefits,
foreseeable consequential and incidental damages, as well as
attorneys' fees, costs and prejudgment interest. The plaintiff also
seeks punitive damages and damages for emotional distress (and similar
harm) in unspecified amounts which the plaintiff claims to believe
will exceed $500,000.
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.
F-28
<PAGE> 82
TCI MUSIC, INC. AND SUBSIDIARIES
(A SUBSIDIARY OF TELE-COMMUNICATIONS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
(13) INCOME TAXES.
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.
The payable or receivable arising from the intercompany tax allocation
is recorded as an increase or decrease in amounts due to related
parties.
Income tax (benefit) expense consists of (amounts in thousands):
<TABLE>
<CAPTION>
CURRENT DEFERRED TOTAL
<S> <C> <C> <C>
--------------------------------------------------------
Six months ended December 31, 1997:
Intercompany allocation $ 1,379 -- 1,379
State and local tax 383 29 412
--------------------------------------------------------
Federal tax -- 591 591
$ 1,762 620 2,382
========================================================
</TABLE>
Income tax (benefit) expense differs from the amounts computed by the
federal income tax rate of 35% as a result of the following (amounts
in thousands):
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
DECEMBER 31,
1997
---------------
<S> <C>
Computed expected tax expense $ 671
State and local income taxes, net of federal income tax
benefit 268
Amortization not deductible for income tax purposes
1,555
Change in allocated state tax rate (112)
---------------
$ 2,382
===============
</TABLE>
The lack of tax expense (benefit) for the period prior to June 30,
1997 resulted from the generated losses during the periods which were
not benefited due to the evaluation of the likelihood of future
taxable income.
F-29
<PAGE> 83
TCI MUSIC, INC. AND SUBSIDIARIES
(A SUBSIDIARY OF TELE-COMMUNICATIONS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax (liabilities) at
December 31, 1997 are presented below (amounts in thousands):
<TABLE>
<S> <C>
Deferred tax assets:
Net operating loss carryforwards $ 39,650
Investments in affiliates, due principally to undistributed earnings in
affiliates 21,273
Intangible assets due to an increase in tax basis upon completion of the DMX
Merger 15,820
Other future deductible amounts due principally to non-deductible accruals
323
---------------
Total deferred tax assets 77,066
Less - valuation allowance (76,743)
---------------
Net deferred assets 323
---------------
Deferred tax liabilities:
Property and equipment, due principally to differences in depreciation (1,132)
Intangible assets, due principally to differences in amortization (2,002)
---------------
Deferred tax liabilities
(3,134)
---------------
Net deferred tax liabilities $ (2,811)
===============
</TABLE>
At December 31, 1997, the Company has net operating loss carryforwards
from the DMX Merger, the Box Merger and Paradigm Merger of
approximately $100,254,000 which expire between 2001 and 2011. These
net operating losses are subject to certain rules limiting their
usage.
The components of deferred tax assets and liabilities as of June 30,
1997 consisted primarily of net operating loss carryforward and
undistributed earnings from affiliates. Such net assets were fully
reserved with a valuation allowance.
As the DMX, The Box and Paradigm Mergers were considered to be tax
free acquisitions for tax purposes, any utilization of the net
operating loss would reduce the value of the excess purchase price and
not be taken into income. As of December 31, 1997, the excess
purchase price of the DMX Merger was reduced by approximately $1.3
million resulting from utilization of such net operating losses.
F-30
<PAGE> 84
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, TCI Music, Inc. has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
TCI MUSIC, INC.
(Registrant)
By: /s/ THOMAS MCPARTLAND
--------------------------------- Date: March 30, 1997
Thomas McPartland
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of TCI
Music, Inc. and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE DATE TITLE
--------- ---- -----
<S> <C> <C>
/s/ LEO J. HINDERY March 30, 1998 Chairman of the Board
-------------------------------
LEO J. HINDERY
/s/ ROBERT R. BENNETT March 30, 1998 Director
-------------------------------
ROBERT R. BENNETT
/s/ DONNE F. FISHER March 30, 1998 Director
-------------------------------
DONNE F. FISHER
/s/ PETER M. KERN March 30, 1998 Director
-------------------------------
PETER M. KERN
/s/ DAVID B. KOFF March 30, 1998 Director
-------------------------------
DAVID B. KOFF
/s/ THOMAS MCPARTLAND March 30, 1998 Director, President and
------------------------------- Chief Executive Officer
THOMAS MCPARTLAND
/s/ J.C. SPARKMAN March 30, 1998 Director
-------------------------------
J.C. SPARKMAN
/s/ LON A. TROXEL March 30, 1998 Director
-------------------------------
LON A. TROXEL
/s/ STEPHEN M. BRETT March 30, 1998 Secretary, Vice President and
------------------------------- General Counsel
STEPHEN M. BRETT
/s/ JOANNE WENDY KIM March 30, 1998 Vice President-Finance
------------------------------- Principal Financial Officer and
JOANNE WENDY KIM Principal Accounting Officer
</TABLE>
<PAGE> 85
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------ -----------
<S> <C>
2.1 Agreement and Plan of Merger, dated as of February 6, 1997, as amended by Amendment One dated May 29,
1997, by and among Tele-Communications, Inc., TCI Music, Inc., TCI Merger Sub, Inc., and DMX Inc.
(Incorporated by reference to Exhibit 2.1 to the Registration Statement on Form S-4 of TCI Music, Inc. and
Tele-Communications, Inc. filed with the Securities and Exchange Commission on June 6, 1997 (Commission
File Nos. 333-28613 and 333-28613-01))
2.2 Agreement and Plan of Merger dated as of August 12, 1997 among TCI Music, Inc., TCI Music Acquisition Sub,
Inc. and The Box Worldwide, Inc. (Incorporated by reference to Exhibit 2.1 to the Registration Statement on
Form S-4 of TCI Music, Inc. filed with the Securities and Exchange Commission on November 12, 1997
(Commission File No. 333-39943))
2.3 Agreement of Merger dated as of December 8, 1997 among TCI Music, Inc., TCI Para Merger Sub, Inc. and
Paradigm Music Entertainment Company
3.1 Certificate of Incorporation of TCI Music, Inc. (Incorporated by reference to Exhibit 3.1 to the
Registration Statement on Form S-4 of TCI Music, Inc. and Tele-Communications, Inc., filed with the
Securities and Exchange Commission on June 6, 1997 (Commission File Nos. 333-28613 and 333-28613-01))
3.2 Bylaws of TCI Music, Inc. (Incorporated by reference to Exhibit 3.2 to the Registration Statement on Form
S-4 of TCI Music, Inc. and Tele-Communications, Inc., filed with the Securities and Exchange Commission on
June 6, 1997 (Commission File Nos. 333-28613 and 333-28613-01))
4.1 Specimen Stock Certificate for Series A Common Stock, par value $.01 per share, of TCI Music, Inc. (with
TCI Rights) (Incorporated by reference to Exhibit 4.1 to Amendment No. 1 to the Registration Statement on
Form S-4 of TCI Music, Inc. and Tele-Communications, Inc., filed with the Securities and Exchange
Commission on June 12, 1997 (Commission File Nos. 333-28613 and 333-28613-01))
4.2 Specimen Stock Certificate for Series A Common Stock, par value $.01 per share, of TCI Music, Inc. (without
TCI Rights) (Incorporated by reference to Exhibit 4.1 to the Registration Statement on Form S-4 of TCI
Music, Inc. filed with the Securities and Exchange Commission on November 12, 1997 (Commission File No.
333-39943))
4.3 Specimen Stock Certificate for the Series B Common Stock, par value $.01 per share, of TCI Music, Inc.
(Incorporated by reference to Exhibit 4.2 to the Amendment No. 1 to the Registration Statement on Form S-4
of TCI Music, Inc. and Tele-Communications, Inc. filed with the Securities and Exchange Commission on
June 12, 1997 (Commission File Nos. 333-28613 and 33-28613-01))
4.4 Specimen Stock Certificate for the Series A Convertible Preferred Stock, par value $.01 per share, of TCI
Music, Inc. (Incorporated by reference to Exhibit 4.2 to the Registration Statement on Form S-4 of TCI
Music, Inc. filed with the Securities and Exchange Commission on November 12, 1997 (Commission File No.
333-39943))
</TABLE>
<PAGE> 86
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------ -----------
<S> <C>
4.5 TCI Music, Inc. Certificate of Designations for Series A Convertible Preferred Stock (Incorporated by
reference to Exhibit 4.3 to the Registration Statement on Form S-4 of TCI Music, Inc. filed with the
Securities and Exchange Commission on November 12, 1997 (Commission File No. 333-39943))
4.6 Rights Agreement among Tele-Communications, Inc., TCI Music, Inc., and the Bank of New York, as Rights
Agent, dated as of July 11, 1997 (Incorporated by reference to Exhibit 4.1 to the Report on Form 8-K of TCI
Music, Inc., filed with the Securities and Exchange Commission on July 24, 1997)
4.7 Amendment to Rights Agreement among Tele-Communications, Inc., TCI Music, Inc. and the Bank of New York, as
Rights Agent, dated March 18, 1998
10.1 Amended and Restated Contribution Agreement between Tele-Communications, Inc. and TCI Music, Inc. dated
July 11, 1997 (Incorporated by reference to Exhibit 10.2 to the Registration Statement on Form S-4 of TCI Music,
Inc. filed with the Securities and Exchange Commission on November 12, 1997 (Commission File No. 333-39943))
10.2 Revolving Loan Agreement between TCI Music, Inc. and Certain Lender Parties Thereto dated December 30, 1997
10.3* Affiliation Agreement between Satellite Services, Inc. and DMX Inc., dated July 1, 1997, and letter amendment
dated January 27, 1998
10.4 Letter Agreement between TCI Music, Inc. and Tele-Communications, Inc., dated November 7, 1997, extending
Promissory Note dated July 11, 1997 (attached as Exhibit A) (Incorporated by reference to Exhibit 10.3 to the
Registration Statement on Form-4 of TCI Music, Inc. filed with the Securities and Exchange Commission on
November 12, 1997 (Commission File No. 333-39943))
10.5 Promissory Note dated July 11, 1997 between TCI Music, Inc. and Tele-Communications, Inc.
10.6 Promissory Note, dated September 19, 1997, between TCI Music, Inc. and Liberty Media Corporation
10.7 Services Agreement between Tele-Communications, Inc. and TCI Music, Inc. (Incorporated by reference to
Exhibit 10.2 to the Report on Form 8-K of TCI Music, Inc., filed with the Securities and Exchange
Commission on July 24, 1997)
10.8 Loan and Security Agreement by and between DMX Inc. and Tele-Communications, Inc., dated as of February 6,
1997, as amended (Incorporated by reference to Exhibit 10.7 to the Registration Statement on Form S-4 of
TCI Music, Inc. and Tele-Communications, Inc. filed with the Securities and Exchange Commission on June 6,
1997 (Commission File Nos. 333-28613 and 333-28613-01))
10.9**** TCI Music, Inc. 1997 Stock Incentive Plan (Incorporated by reference to Exhibit 10.83 to the Transition
Report of TCI Music, Inc. on Form 10-K filed with the Securities and Exchange Commission on October 9,
1997)
10.10**** Non-Qualified Stock Option and Stock Appreciation Rights Agreement between TCI Music, Inc. and David Koff,
dated July 11, 1997
10.11**** Non-Qualified Stock Option and Stock Appreciation Rights Agreement between TCI Music, Inc. and Lon Troxel,
dated July 11, 1997
10.12**** Non-Qualified Stock Option and Stock Appreciation Rights Agreement between TCI Music, Inc. and J.C.
Sparkman, dated July 11, 1997
</TABLE>
<PAGE> 87
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
10.13**** Non-Qualified Stock Option and Stock Appreciation Rights Agreement between TCI Music, Inc. and Leo J.
Hindery, Jr., dated July 11, 1997
10.14**** Non-Qualified Stock Option and Stock Appreciation Rights Agreement between TCI Music, Inc. and Robert R.
Bennett, dated July 11, 1997
10.15**** Non-Qualified Stock Option and Stock Appreciation Rights Agreement between TCI Music, Inc. and Donne F.
Fisher, dated July 11, 1997
10.16**** Non-Qualified Stock Option and Stock Appreciation Rights Agreement between TCI Music, Inc. and Peter J.
Kern, dated July 11, 1997
10.17**** Form of TCI Music, Inc. Employee Stock Option Agreement (Incorporated by reference to Exhibit 10.16 to the
Registration Statement on Form S-4 of TCI Music, Inc. filed with the Securities and Exchange Commission
on November 12, 1997 (Commission File No. 333-39943))
10.18*** Employment Agreement between DMX Inc. and Lon Troxel, dated October 1, 1991, as amended August 22, 1997
(Incorporated by reference to Exhibit 10.64 to DMX Inc.'s 1994 Report on Form 10-K, filed with the
Securities and Exchange Commission on December 29, 1994, and to Exhibit 10.82 to TCI Music, Inc.'s
Transition Report on Form 10-K for the transition period October 1, 1996 through June 30, 1997, filed with
the Securities and Exchange Commission on October 9, 1997)
10.19*** Employment Agreement dated January 1, 1996 between Paradigm Music Entertainment Company, Inc. and Thomas
McPartland
10.20 Registration Rights Agreement dated December 31, 1997 between TCI Music, Inc. and Thomas McPartland,
Attorney in fact
10.21** Affiliation Agreement between International Cablecasting Technologies Inc. and Satellite Services, Inc.,
dated July 6 1989 (Incorporated by reference to Exhibit 10.2 to DMX Inc.'s Amendment No. 1 to Registration
Statement on Form S-1, filed with the Securities and Exchange Commission on August 31, 1990 (Commission
File No. 33-35690))
10.22** Affiliation Agreement between International Cablecasting Technologies Inc. and Viacom Cable, dated May 4,
1990 (Incorporated by reference to Exhibit 10.3 to DMX Inc.'s Amendment No. 1 to Registration Statement on
Form S-1, filed with the Securities and Exchange Commission on August 31, 1990 (Commission File No.
33-35690))
10.23** Affiliation Agreement between International Cablecasting Technologies Inc. and KBLCOM Incorporated, dated
June 20, 1990 (Incorporated by reference to Exhibit 10.4 to DMX Inc.'s Amendment No. 1 to Registration
Statement on Form S-1, filed with the Securities and Exchange Commission on August 31, 1990 (Commission
File No. 33-35690))
10.24 National Digital Television Center, Inc., formerly known as Western Tele-Communications, Inc., Security
Agreement and Promissory Note, dated March 26, 1991 (Incorporated by reference to Exhibit 10.14 to DMX
Inc.'s Post-Effective Amendment No. 2 to Registration Statement on Form S-1, filed with the Securities and
Exchange Commission on May 24, 1991 (Commission File No 33-35690))
10.25** Uplink Services Agreement between National Digital Television Center, Inc., formerly known as Western
Tele-Communications, Inc., and International Cablecasting Technologies Inc., dated March 16, 1991
(Incorporated by reference to Exhibit 10.15 to DMX Inc.'s Post-Effective Amendment No. 3 to Registration
Statement on Form S-1, filed with the Securities and Exchange Commission on August 15, 1991 (Commission
File No. 33-35690))
10.26** License and Distribution Agreement between International Cablecasting Technologies Inc. and Broadcom
International Holdings, dated March 31, 1992, as amended (Incorporated by reference to Exhibit 10.34 to DMX
Inc.'s 1993 Report on Form 10-K, filed with the Securities and Exchange Commission on December 23, 1993)
</TABLE>
<PAGE> 88
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
10.27 Manufacturing and Sales Agreement between International Cablecasting Technologies Inc. and Scientific-
Atlanta, Inc., dated February 28, 1991 (Incorporated by reference to Exhibit 10.12 to DMX Inc.'s Post-
Effective Amendment No. 2 to Registration Statement on Form S-1, filed with the Securities and Exchange
Commission on May 24, 1991 (Commission File No. 33-35690))
10.28 License and Technical Assistance Agreement between International Cablecasting Technologies Inc. and
Scientific-Atlanta, Inc., dated February 28, 1991 (Incorporated by reference to Exhibit 10.14 to DMX Inc.'s
Post-Effective Amendment No. 2 to Registration Statement on Form S-1, filed with the Securities and
Exchange Commission on May 24, 1991 (Commission File No. 33-35690))
10.29 Development and Licensing Agreement between International Cablecasting Technologies Inc. and Frederikson &
Shu Laboratories, Inc., as amended March 29, 1990 (Incorporated by reference to Exhibit 10.8 to DMX Inc.'s
Registration on Form S-1, filed with the Securities and Exchange Commission on July 10, 1990 (Commission
File No. 33-35690))
10.30 Agreement between GE American Communications, Inc. and International Cablecasting Technologies Inc., dated
April 14, 1989 (Incorporated by reference to Exhibit 10.9 to DMX Inc.'s Registration Statement on Form S-1,
filed with the Securities and Exchange Commission on July 10, 1990 (Commission File No. 33-35690))
10.31 Partnership Agreement between TEMPO Sound, Inc. and Galactic Radio Partners, Inc., dated May 7, 1990
(Incorporated by reference to Exhibit 10.7 to DMX Inc.'s Registration Statement on Form S-1, filed with the
Securities and Exchange Commission on July 10, 1990 (Commission File No. 33-35690))
10.32 C-3 Satellite Transponder Sub-Lease Agreement between National Digital Television Center, Inc., formerly
known as Western Tele-Communications, Inc., and International Cablecasting Technologies Inc., dated
December 2, 1992 (Incorporated by reference to Exhibit 10.55 to DMX Inc.'s 1993 Report on From 10-K, filed
with the Securities and Exchange Commission on December 23, 1993)
10.33 Satellite Transponder Management Agreement between National Digital Television Center, Inc., formerly known
as Western Tele-Communications, Inc. and International Cablecasting Technologies Inc., dated December 2,
1992 (Incorporated by reference to Exhibit 10.57 to DMX Inc.'s 1993 Report on Form 10-K, filed with the
Securities and Exchange Commission on December 23, 1993)
10.34 Satellite Transponder Management Agreement between National Digital Television Center, Inc., formerly known
as Western Tele-Communications, Inc. and International Cablecasting Technologies Inc., dated January 27,
1993 (Incorporated by reference to Exhibit 10.57 to DMX Inc.'s 1993 Report on Form 10-K, filed with the
Securities and Exchange Commission on December 23, 1993)
10.35 Assignment and Assumption Agreement between National Digital Television Center, Inc., formerly known as
Western Tele-Communications, Inc. and International Cablecasting Technologies Europe N.V., dated April 22,
1993 (Incorporated by reference to Exhibit 10.58 to DMX Inc.'s 1993 Report on Form 10-K, filed with the
Securities and Exchange Commission on December 23, 1993)
10.36** Assignment Agreement between IDB Communications Group, Inc. and National Digital Television Center, Inc.,
formerly known a Western Tele-Communications, Inc., dated January 21, 1993 (Incorporated by reference to
Exhibit 10.59 to DMX Inc.'s 1993 Report on Form 10-K, filed with the Securities and Exchange Commission on
December 23, 1993)
10.37 Agreement between International Cablecasting Technologies Inc. and the American Society of Composers,
Authors & Publishers, dated December 20, 1991 (Incorporated by reference to Exhibit 10.60 to DMX Inc.'s
1993 Report on Form 10-K, filed with the Securities and Exchange Commission on December 23, 1993)
10.38** Agreement between International Cablecasting Technologies Inc. and Broadcast Music Inc., dated October 11,
1991, as supplemented and amended (Incorporated by reference to Exhibit 10.61 to DMX Inc.'s 1993 Report on
Form 10-K, filed with the Securities and Exchange Commission on December 23, 1993)
</TABLE>
<PAGE> 89
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------ -----------
<S> <C>
10.39** Agreement between DMX Inc. and SESAC, dated December 26, 1991 (Incorporated by reference to Exhibit 10.62
to DMX Inc.'s 1993 Report on From 10-K, filed with the Securities and Exchange Commission on December 23,
1993)
10.40 International Cablecasting Technologies Inc. Savings Plan, Amended and Restated Generally Effective as of
May 1, 1992 (Incorporated by reference to Exhibit 10.66 to DMX Inc.'s 1994 Report on Form 10-K, filed with
the Securities and Exchange Commission on December 29, 1994)
10.41 Addendum to Affiliation Agreement between KBLCOM and International Cablecasting Technologies Inc., dated
May 4, 1994 (Incorporated by reference to DMX Inc.'s 1994 Report on Form 10-K, filed with the Securities
and Exchange Commission on December 29, 1994)
10.42** Affiliation Agreement between DMX Inc. and PRIMESTAR Partners, dated January 25, 1995 (Incorporated by
reference to Exhibit 10.71 to DMX Inc.'s 1996 Report on Form 10-K, filed with the Securities and Exchange
Commission on January 14, 1997)
10.43 Subscription and Shareholders Agreement between DMX Inc., Jerold H. Rubinstein and XTRA Music Limited,
dated December 18, 1996 (Incorporated by reference to Exhibit 10.74 to DMX Inc.'s 1996 Report on Form 10-K,
filed with the Securities and Exchange Commission on January 14, 1997)
10.44** Commercial License and Distribution Agreement between DMX Inc. and DMX-Canada Partnership, dated
November 1, 1994 (Incorporated by reference to Exhibit 10.75 to TCI Music, Inc.'s Transition Report on Form
10-K for the transition period October 1, 1996 through June 30, 1997, filed with the Securities and
Exchange Commission on October 9, 1997)
10.45** Residential License and Distribution Agreement between DMX Inc. and DMX-Canada (1995) Ltd., dated March 9,
1992, as amended April 18, 1997 (Incorporated by reference to Exhibit 10.76 to TCI Music, Inc.'s Transition
Report on Form 10-K for the transition period October 1, 1996 through June 30, 1997, filed with the
Securities and Exchange Commission on October 9, 1997)
10.46 Channel Distribution Agreement between DMX Inc. and XTRA Music Limited, dated July 3, 1997 (Incorporated by
reference to Exhibit 10.77 to TCI Music, Inc.'s Transition Report on Form 10-K for the transition period
October 1, 1996 through June 30, 1997, filed with the Securities and Exchange Commission on October 9,
1997)
10.47 Termination Agreement between DMX Inc. and DMX-Europe N.V., a Netherlands corporation (Technology License
and Services Agreement, dated May 19, 1993), dated July 3, 1997 (Incorporated by reference to Exhibit 10.79
to TCI Music, Inc.'s Transition Report on Form 10-K for the transition period October 1, 1996 through
June 30, 1997, filed with the Securities and Exchange Commission on October 9, 1997)
10.48 Termination Agreement between DMX Inc. and DMX-Europe N.V., a Netherlands corporation (Trademark Agreement,
dated May 19, 1993), dated July 3, 1997 (Incorporated by reference to Exhibit 10.80 to TCI Music, Inc.'s
Transition Report on Form 10-K for the transition period October 1, 1996 through June 30, 1997, filed with
the Securities and Exchange Commission on October 9, 1997)
10.49 Assignment Agreement between DMX Inc. and Jerold H. Rubinstein, dated July 8, 1997 (Incorporated by
reference to Exhibit 10.81 to TCI Music, Inc.'s Transition Report on Form 10-K for the transition period
October 1, 1996 through June 30, 1997, filed with the Securities and Exchange Commission on October 9,
1997)
10.50 License Agreement between Broadcast Music, Inc. and DMX Inc., dated August 7, 1995 (Incorporated by
reference to Exhibit 10.55 to the Registration Statement on Form S-1 of TCI Music, Inc., filed with the
Securities and Exchange Commission on November 12, 1997)
</TABLE>
<PAGE> 90
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------ -----------
<S> <C>
10.51 Separation and Mutual Release Agreement between DMX Inc. and Jerold Rubinstein, dated July 11, 1997
(Incorporated by reference to Exhibit 10.53 to the Registration Statement on Form S-4 of TCI Music, Inc.,
filed with the Securities and Exchange Commission on November 12, 1997 (Commission File No. 333-39943))
10.52 Background/Foreground Music Service License Agreement between American Society of Composers, Authors and
Publishers and International Cablecasting Technologies Inc., dated April 4, 1995 (Incorporated by reference
to Exhibit 10.54 of the Registration Statement on Form S-4 of TCI Music, Inc., filed with the Securities
and Exchange Commission on November 12, 1997 (Commission File No. 333-39943))
10.53 Service Agreement between The Box Worldwide, Inc., formerly known as Video Jukebox, Inc., and West
Interactive Corporation, dated July 31, 1992 (Incorporated by reference to Exhibit 19.18 to The Box
Worldwide, Inc.'s Report on Form 10-KSB for the fiscal year ended December 31, 1991)
10.54 Lease Agreement between The Box Worldwide, Inc., formerly known as Video Jukebox, Inc., and Island Trading
Company, Inc., dated April 21, 1994 (Incorporated by reference to Exhibit 10.37 to The Box Worldwide,
Inc.'s Report on Form 10-KSB for the fiscal year ended December 31, 1994)
10.55 Equipment and Service Agreement between The Box Worldwide, Inc. formerly known as Video Jukebox, Inc., and
Hughes Network Systems, Inc., dated February 27, 1996 (Incorporated by reference to Exhibit 10.27 to The
Box Worldwide, Inc.'s Report on Form 10-KSB for the fiscal year ended December 31, 1996)
10.56 International Representation Agreement between The Box Worldwide, Inc., formerly known as Video Jukebox,
Inc., and Communications Equity Associates, Inc. dated September 14, 1995 (Incorporated by reference to
Exhibit 10.28 to The Box Worldwide, Inc.'s Report on Form 10-KSB for the fiscal year ended December 31,
1996)
10.57 Service Affiliate Agreement between The Box Worldwide, Inc., formerly known as Video Jukebox, Inc., and
Suburban Cable TV Co., Inc., dated August 4, 1997 (Incorporated by reference to Exhibit 10.1 to The Box
Worldwide, Inc.'s Report on Form 10-QSB for the quarter ended September 30, 1997)
10.58 Affiliation Agreement between The Box Worldwide, Inc. and Satellite Services, Inc. dated February 27, 1997
21 Subsidiaries of TCI Music, Inc.
23 Consent of KPMG Peat Marwick LLP
27 Financial Data Schedule
</TABLE>
_____________
* TCI Music, Inc. has requested confidential treatment for a portion
of the referenced Exhibit.
** TCI Music, Inc. has received confidential treatment for a portion
of the referenced Exhibit.
*** Indicated management contract.
**** Indicates compensatory plan or arrangement.
<PAGE> 1
EXHIBIT 2.3
AGREEMENT OF MERGER
THIS AGREEMENT OF MERGER (this "Agreement") dated as of December 8,
1997, is entered into by and among TCI Music, Inc., a Delaware corporation ("TCI
Music"), TCI Para Merger Sub, Inc., a Delaware corporation and wholly owned
subsidiary of TCI Music ("Merger Sub"), and Paradigm Music Entertainment
Company, a Delaware corporation (the "Company").
RECITALS
TCI Music has proposed that it will acquire the Company in a transaction
in which Merger Sub will merge with and into the Company, as a result of which
TCI Music will become the holder of all the outstanding shares of common stock
of the Company and the holders of shares of common stock of the Company
outstanding immediately prior to such merger will become holders of shares of
Series A Common Stock of TCI Music (the "Merger").
NOW, THEREFORE, in consideration of the foregoing premises and the
representations, warranties and agreements contained in this Agreement, the
parties to this Agreement agree as follows:
ARTICLE I
DEFINITIONS
Section 1.1 Definitions. As used in this Agreement, the following terms
with initial capital letters will have the meanings set forth below:
"Affiliate" means, as to any Person, any other Person which, directly or
indirectly, controls, is under common control with, or is controlled by, such
Person. As used in this definition, "control" (including, with correlative
meaning, "controlling," "controlled by" and "under common control with") means
possession, directly or indirectly, of the power to direct or cause the
direction of the management and policies of a Person (whether through the
ownership of voting securities, by contract or otherwise).
"Box Prospectus" means the registration statement of TCI Music on Form
S-4 declared effective by the SEC on November 12, 1997.
"Code" means the Internal Revenue Code of 1986, as amended.
"Company Common Stock" means the shares of Class A Common Stock, Class B
Common Stock and Class E Common Stock, each par value $0.01 per share, of the
Company.
<PAGE> 2
"Environmental Law" means any applicable Legal Requirement relating to
the protection, preservation or restoration of the environment (including, air,
water vapor, surface water, ground water, drinking water supply, surface land,
subsurface land, plant and animal life or any other natural resource).
"Equity Affiliate" means, as to any Person, any other Person in which
such Person or any of its Subsidiaries holds a five percent or greater equity
interest.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"ERISA Affiliate" means, as to any Person, any trade or business
(whether or not incorporated) that is treated as a single employer with such
Person under Section 414(b), (c), (m) or (o) of the Code.
"GAAP" means generally accepted accounting principles as in effect from
time to time in the United States of America.
"Governmental Entity" means any court, administrative agency or
commission or other governmental authority, department, agency or
instrumentality, whether domestic or foreign.
"HSR Act" means the Hart-Scott-Rodino Antitrust Improvements Act of
1976, as amended.
"Knowledge" means the actual present knowledge of a Person that is a
human being and, in the case of a Person that is not a human being, the present
actual knowledge of the directors and officers (or the human beings having
duties comparable to those of directors and officers) of such Person.
"Legal Requirement" means any statute, ordinance, code, law, rule,
regulation, order or other requirement, standard or procedure enacted, adopted
or applied by any Governmental Entity, including judicial decisions applying
common law or interpreting any other Legal Requirement or any agreement entered
into with a Governmental Entity in resolution of a dispute or otherwise.
"Lien" means any lien, security interest, pledge, charge, claim, option,
right to acquire, restriction on transfer, voting restriction or encumbrance of
any nature.
"Material Adverse Effect" means a material adverse effect on the
business, properties, assets, condition (financial or otherwise), liabilities or
operations of a Person and its Subsidiaries, taken as a whole, or on the ability
of such Person to perform its obligations under this Agreement.
-2-
<PAGE> 3
"PBGC" means the Pension Benefit Guaranty Corporation.
"Person" means any human being or any partnership, limited liability
company, corporation, business trust, joint stock company, trust, unincorporated
association, joint venture, Governmental Entity or other entity.
"Registration Rights Agreement" means the Registration Rights Agreement
in the form of Exhibit C among the Company and the Persons who receive TCI Music
Common Stock in the Merger, to be executed and delivered at the Closing.
"SEC" means the United States Securities and Exchange Commission.
"Subsidiary" means, as to any Person, any other Person more than 20% of
whose outstanding voting securities or partnership or other equity interests, as
the case may be, are directly or indirectly owned by such Person.
"Tax" means all federal, state, local and foreign income, profits,
estimated, franchise, gross receipts, payroll, sales, employment, use, property,
withholding, excise and other taxes, duties and assessments of any nature,
together with all interest, penalties and additions imposed with respect to such
amounts.
"TCI Music Common Stock" means the Series A Common Stock of TCI Music,
par value $.01 per share.
"TCI Music Common Stock Unit" means one share of TCI Music Common Stock
and the corresponding, non-detachable TCI Right.
"TCI Music Loan" means the loan made by TCI Music to the Company
pursuant to the Loan and Security Agreement dated September 18, 1997 between TCI
Music and the Company.
"TCI Music Series A Common Stock Value" means the average of the mean
daily closing bid and asked prices of one TCI Music Common Stock Unit for a
period of 20 consecutive trading days ending on the third trading day prior to
the Closing, as reported on the SmallCap Market of the National Association of
Securities Dealers, Inc.
"TCI Right" means the right of the holder of a share of TCI Music Common
Stock issued on July 11, 1997 to require Tele-Communications, Inc., to purchase
such share under certain conditions on or before August 10, 1998, unless such
right is extended by its terms.
-3-
<PAGE> 4
"Voting Agreement" means the Voting Agreement dated as of September 18,
1997 among TCI Music, the Company and the Company Stockholders (as defined
therein).
"Warrants" means securities or other obligations of the Company that are
convertible into or exercisable or exchangeable for shares of Company Common
Stock, whether or not such securities or obligations are vested, exercisable,
conditional or contingent upon one or more events.
Section 1.2 Other Definitions. The following terms are defined in the
Sections indicated:
Term Section
---- -------
Act 2.1
Acquisition Proposal 7.9
Agreement Preamble
Blair 2.1(e)
Blair Contract 2.1(e)
Box Merger Agreement 4.7(c)
Bylaws 2.1(b)
Certificates 3.3
Certificate of Incorporation 2.1(a)
Closing 3.13
Closing Date 3.13
Common Conversion Number 3.1(b)
Company Preamble
Company Benefit Plans 5.11(a)
Company Bylaws 3.10
Company Charter 2.3
Company Permits 5.8(a)
Company Stock Certificates 3.3(a)
Dissenting Shares 3.8
DMX Prospectus 4.7(b)
Effective Time 2.2
Escrow Agreement 8.3(d)
Exchange Act 4.6
Exchange Agent 3.3(a)
Executive 7.10(a)
Filings 7.2(a)
Meeting 7.3
Merger 2.1
Merger Shares 3.1(a)
Merger Stock Value 3.1(a)
Merger Sub Preamble
-4-
<PAGE> 5
Most Recent Company Balance Sheet 5.7(c)
Most Recent TCI Music Balance Sheet 4.7(c)
Per-Share Merger Value 3.1(b)
Proxy Statement/Private Placement Memorandum 7.3
Representation Letter 7.13
Securities Act 4.6
Surviving Corporation 2.1
TCI 8.2(b)
TCI Music Preamble
TCI Music Certificates 3.3(a)
TCI Music Permits 4.8(a)
TCI Music SEC Reports 4.7(a)
Warrant Cancellation 3.1(b)
Warrant Certificates 3.3
Warrant Conversion Number 3.1(b)
Section 1.3 Use of Terms. Terms used with initial capital letters will
have the meanings specified, applicable to both singular and plural forms, for
all purposes of this Agreement. All pronouns (and any variations) will be deemed
to refer to the masculine, feminine or neuter, as the identity of the Person may
require. The singular or plural includes the other, as the context requires or
permits. The word "include" (and any variation) is used in an illustrative sense
rather than a limiting sense. The word "day" means a calendar day. All
accounting terms not otherwise defined in this Agreement will have the meanings
ascribed to them under GAAP.
ARTICLE II
THE MERGER AND RELATED MATTERS
Section 2.1 The Merger. Subject to the terms and conditions of this
Agreement and the Delaware General Corporation Law (the "Act"), at the Effective
Time: (i) Merger Sub will be merged with and into the Company (the "Merger");
(ii) the separate existence of Merger Sub will cease and the Company will
continue as the surviving corporation in the Merger (the "Surviving
Corporation"); and (iii) the name of the Surviving Corporation will be Paradigm
Music Entertainment Company. From and after the Effective Time, and without any
further action on the part of any Person, the Merger will have all the effects
provided by applicable Legal Requirements, including the Act, the effects
described in Section 3.1 with respect to the capital stock of Merger Sub and the
Company and, subject to applicable Legal Requirements, the following additional
effects:
(a) Certificate of Incorporation. At the Effective Time, the
Certificate of Incorporation of Merger Sub, as in effect immediately prior to
the Effective Time, will become the Certificate of Incorporation of the
Surviving Corporation (the "Certificate of Incorporation"), and the Certificate
of Incorporation may thereafter be amended or restated as provided therein and
by the Act.
-5-
<PAGE> 6
(b) Bylaws. At the Effective Time, the bylaws of Merger Sub, as in
effect immediately prior to the Effective Time, will become the bylaws of the
Surviving Corporation (the "Bylaws"), and the Bylaws may thereafter be amended
or repealed in accordance with their terms and the Certificate of Incorporation
and as provided by the Act.
(c) Directors. At the Effective Time, the directors of Merger Sub
immediately prior to the Effective Time will become the directors of the
Surviving Corporation, each to hold office in accordance with the Certificate of
Incorporation, the Bylaws and the Act and until the earlier of such director's
resignation or removal or such director's successor is duly elected and
qualified, as the case may be. At the Effective Time Mr. Thomas McPartland will
become a director of TCI Music and TCI Music's Board of Directors will consider
nominating Mr. Robert Meyrowitz as a director of TCI Music.
(d) Officers. At the Effective Time, the officers of Merger Sub
immediately prior to the Effective Time will become the officers of the
Surviving Corporation, each to hold office in accordance with the Certificate of
Incorporation, the Bylaws and the Act and until the earlier of such officer's
resignation or removal or such officer's successor is duly appointed and
qualified, as the case may be. At the Effective Time if Mr. Thomas McPartland
has accepted TCI Music's offer described in Section 7.12, Mr. David Koff will
resign as President and Chief Executive Officer of TCI Music and Mr. Thomas
McPartland will be appointed to replace Mr. Koff as President and Chief
Executive Officer of TCI Music.
(e) Properties and Liabilities. At the Effective Time, all the
properties, rights, privileges, powers and franchises of the Company and Merger
Sub will vest in the Surviving Corporation. At the Effective Time, except for
the amounts, if any, payable by the Company to D.H. Blair & Co., Inc. ("Blair")
pursuant to the letter agreement dated November 4, 1996 (the "Blair
Contract")($200,000 of which will be paid by the Company's stockholders by
granting options to Blair, exercisable at $.05 per share, to purchase shares of
TCI Music Common Stock valued at the Per-Share Merger Value and $125,000 of
which will be paid by TCI Music in cash immediately prior to the Effective
Time), all debts, liabilities and duties of the Company and Merger Sub will
become the debts, liabilities and duties of the Surviving Corporation.
Section 2.2 Effective Time of the Merger. Subject to the terms and
conditions in this Agreement, on the Closing Date the parties will deliver a
certificate of merger complying with Section 251(c) of the Act to the Secretary
of State of the State of Delaware for filing pursuant to the Act. The Merger
will become effective upon the filing of such certificate with the Secretary of
State of the State of Delaware. As used in this Agreement, the "Effective Time"
means the time at which the certificate of merger is filed with the Secretary of
State of the State of Delaware.
Section 2.3 Actions Prior to Merger. Immediately prior to the Effective
Time the issued and outstanding shares of the Company's Class E Common Stock
will be converted into an equal number of shares of the Company's Class A Common
Stock by the filing of a restatement to the Company's Second Restated
Certificate of Incorporation (the "Company Charter") in the form
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attached as Exhibit E with the Secretary of State of Delaware effecting such
conversion and eliminating therefrom all provisions relating to Class E Common
Stock.
ARTICLE III
CONVERSION OF CAPITAL STOCK
Section 3.1 Consideration and Conversion of Stock.
(a) Consideration. The aggregate consideration deliverable by TCI
Music in the Merger will be $24,000,000 (less the product of the Per-Share
Merger Value (as defined below) and the number of Dissenting Shares) (the
"Merger Stock Value") payable in a number of shares of TCI Music Common Stock
(collectively, the "Merger Shares") determined by dividing the Merger Stock
Value by the TCI Music Series A Common Stock Value. The Merger Shares will be
allocated among holders of Company Common Stock and Warrants as provided in
Section 3.1. In addition, TCI Music will, if the Merger occurs, provide to the
Company $4,970,831 cash, payable, at the election of TCI Music, either by TCI
Music purchasing debt owed by the Company at the Effective Time (other than the
TCI Music Loan) as follows: cash to the Company at the Effective Time. Such
amount will be used for working capital and other purposes (as pre-approved by
TCIM) and to repay an aggregate principal amount of indebtedness of Paradigm
equal to approximately $4,300,000, together with accrued and unpaid interest as
follows: (i) approximately $3,600,000 in aggregate principal amount pursuant to
certain bridge loan promissory notes payable to the holders of Warrants, (ii)
$450,000 for aggregate principal amount under certain promissory notes issued to
a partnership, the limited partners of which are the grandchildren of the sole
stockholder of Blair, (iii) the balance of the $312,500 in aggregate principal
amount under a loan from an officer of the Company and (iv) $125,000 to pay
additional accrued 1997 consulting fees under the consulting agreements of the
Company.
(b) Conversion of Company Common Stock and Warrants. The Merger
Shares will be deliverable to holders of Company Common Stock at the Effective
Time, by virtue of the Merger and without any action on the part of the holders
of any shares of Company Common Stock. Each share of Company Common Stock issued
and outstanding immediately prior to the Effective Time (except shares subject
to Section 3.1(c) and Dissenting Shares) will be converted into and will
thereafter evidence and become that number of shares of TCI Music Common Stock
equal to the Common Conversion Number. For purposes of this Agreement, "Common
Conversion Number" means the quotient (rounded to the nearest one hundredth)
resulting from dividing (x) the Per-Share Merger Value by (y) the TCI Series A
Common Stock Value. At the Effective Time, the Company will allocate a portion
of the Merger Shares and such Merger Shares will be deliverable to each holder
of Warrants who has agreed to cancel the Warrants (the "Warrant Cancellation")
held by such holder and receive in exchange therefor with respect to each share
of Company Common Stock issuable upon conversion, exercise or exchange of
Warrants that number of shares of TCI Music Common Stock equal to the Warrant
Conversion Number. For purposes of this Agreement, the "Warrant Conversion
Number" means the quotient (rounded to the nearest one hundredth) resulting
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from dividing (x) the difference between the Per-Share Merger Value and the
exercise price of such Warrant by (y) the TCI Series A Common Stock Value. As
used in this Section 3.1, "Per-Share Merger Value" means the quotient resulting
from dividing (x) the sum of $24,000,000 and the aggregate exercise price of all
Warrants subject to the Warrant Cancellation by (y) the total number of shares
of Company Common Stock outstanding at the Effective Date, including as shares
of Company Common Stock deemed to be outstanding for purposes of calculating the
Per-Share Merger Value, without duplication, all shares of Company Common Stock
issuable upon the conversion, exercise or exchange of Warrants. If the total
number of shares of Company Common Stock held by any stockholder or underlying
any Warrant is not convertible into a whole number of shares of TCI Music Common
Stock, such stockholder or holder of Warrants will have the right to receive
cash in lieu of any fractional share of TCI Music Common Stock as provided in
Section 3.5.
(c) Cancellation. Any shares of Company Common Stock held by the
Company or any subsidiary of the Company (not including shares held by the
Company under escrow arrangements) will be canceled at the Effective Time and no
TCI Music Common Stock or other consideration will be delivered in exchange
therefor.
(d) Merger Sub Shares. (i) Each share of capital stock of Merger Sub
issued and outstanding immediately prior to the Effective Time (except shares
subject to clause (ii)) will be converted into, and will thereafter evidence and
become one validly issued, fully paid and nonassessable share of common stock
$.01 par value per share of the Surviving Corporation; and (ii) any shares of
the issued and outstanding capital stock of Merger Sub that are owned directly
or indirectly by Merger Sub immediately prior to the Effective Time will be
canceled and retired, and no common stock of the Surviving Corporation or other
consideration will be delivered in exchange therefor.
Section 3.2 [Intentionally Deleted.]
Section 3.3 Exchange of Certificates.
(a) Exchange Agent. The Bank of New York (or, if The Bank of New
York is unable or unwilling to serve in such capacity, another bank or trust
company selected by TCI Music and reasonably acceptable to the Company) will act
as exchange agent (the "Exchange Agent") in connection with the surrender of
certificates that, prior to the Effective Time, evidenced outstanding shares of
Company Common Stock ("Company Stock Certificates") and Warrants ("Warrant
Certificates") (collectively, the "Certificates"). Prior to the Closing Date,
TCI Music will deposit with the Exchange Agent for exchange in accordance with
this Section 3.3 certificates evidencing the shares of TCI Music Common Stock to
be issued in the Merger ("TCI Music Certificates"), which shares of TCI Music
Common Stock issuable to holders of Company Common Stock and Warrants will be
deemed to be issued at the Effective Time. At and following the Effective Time,
TCI Music will deliver to the Exchange Agent such cash as may be required from
time to time to make payments of cash in lieu of fractional shares of TCI Music
Common Stock in accordance with Section 3.5.
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(b) Exchange. As soon as practicable after the Effective Time, but
subject to the provisions of Section 3.8 regarding Dissenting Shares, TCI Music
will cause the Exchange Agent to mail to each Person who was a holder of record
of Company Common Stock or Warrants at the Effective Time: (i) a letter of
transmittal (which will specify that delivery will be effective, and risk of
loss and title to any Certificates will pass, only upon delivery of the
Certificates to the Exchange Agent and will be in such form and will have such
other provisions that are specified by TCI Music and reasonably acceptable to
the Company); and (ii) instructions for effecting the surrender of Certificates
in exchange for TCI Music Certificates (together with any cash to be paid in
lieu of fractional shares of TCI Music Common Stock pursuant to Section 3.5).
Upon surrender of a Certificate for cancellation to the Exchange Agent or to
such other agent or agents as may be appointed by TCI Music, together with such
letter of transmittal, duly executed, and such other documents as may be
required by the Exchange Agent or such other agent, the holder of such
Certificate will be entitled to receive in exchange therefor TCI Music
Certificates representing the number of whole shares of TCI Music Common Stock
that such holder has the right to receive pursuant to this Agreement (together
with any cash to be paid in lieu of fractional shares of TCI Music Common Stock
pursuant to Section 3.5) and the Certificates so surrendered will be canceled.
In the event of a transfer of ownership of Company Common Stock that is not
registered in the transfer records of the Company, TCI Music Certificates
representing the proper number of shares of TCI Music Common Stock may be issued
to a Person other than the Person in whose name the surrendered Company Stock
Certificate is registered if the Company Stock Certificate representing such
Company Common Stock is presented to the Exchange Agent accompanied by all
documents required to evidence and effect such transfer and by evidence
reasonably satisfactory to TCI Music that any applicable stock transfer tax has
been paid. TCI Music will not directly or indirectly pay or reimburse any Person
for any transfer taxes of the type referred to in the preceding sentence. If any
TCI Music Certificates are to be delivered to a Person other than the Person in
whose name the Certificates surrendered in exchange therefor are registered, it
will be a condition to the delivery of such TCI Music Certificates that the
Certificates so surrendered are properly endorsed or accompanied by appropriate
stock powers and otherwise in proper form for transfer, that such transfer
otherwise is proper and that the Person requesting such transfer pay to the
Exchange Agent any transfer or other taxes payable by reason of the foregoing or
establishes to the satisfaction of the Exchange Agent that such taxes have been
paid or are not required to be paid.
(c) Certificates Not Exchanged. After the Effective Time, each
outstanding Company Stock Certificate and Warrant Certificate subject to the
Warrant Cancellation will, until surrendered for exchange in accordance with
this Section 3.3, be deemed for all purposes to evidence ownership of the number
of whole shares of TCI Music Common Stock into which the shares of Company
Common Stock and Warrants (which, prior to the Effective Time, were represented
thereby) are converted in accordance with Section 3.1, together with the right,
if any, to receive dividends or distributions with respect thereto made after
the Effective Time pursuant to Section 3.4 and any cash to be paid in lieu of
fractional shares of TCI Music Common Stock pursuant to Section 3.5.
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(d) Delivery of Representation Letter. No TCI Music Certificate will
be issued pursuant to this Section 3.3 to any Person who was a holder of Company
Common Stock or Warrants until TCI Music receives a duly executed Representation
Letter from such holder.
(e) Stock Certificate Legend. All certificates representing Merger
Shares will bear a legend substantially in the following form:
"The shares represented by this certificate have not been
registered under the Securities Act of 1933, as amended, or any
state securities laws, and may not be sold, pledged or otherwise
transferred or encumbered unless they are so registered or
unless an exemption from registration is available. As of the
date of their issuance the shares represented hereby are not
listed for trading on Nasdaq or any other securities exchange.
Certain shares of TCI Music Series A Common Stock trade together
with associated rights issued by Tele-Communications, Inc.
('Rights') on the Nasdaq SmallCap Market, under the symbol
'TUNE.' Such Rights will terminate prior to, or expire on,
August 10, 1998 unless extended pursuant to their terms. The
shares of TCI Music Series A Common Stock represented by this
certificate do not include associated Rights and are not
tradeable on the Nasdaq SmallCap Market under the symbol 'TUNE'
until the Rights terminate or expire. Prior to the termination
or expiration of the Rights, no public trading market is
available for the shares of TCI Music Series A Common Stock
represented by this certificate unless an application for
listing the TCI Music Series A Common Stock without the
associated Rights has been approved by Nasdaq."
(f) Expenses. Except as otherwise expressly provided in this
Agreement, TCI Music will pay all charges and expenses, including those of the
Exchange Agent, in connection with the exchange of shares of TCI Music Common
Stock for shares of Company Common Stock and Warrants, except any charges or
expenses that are otherwise solely the liability of one or more holders of
Company Common Stock or Warrants. Any TCI Music Certificates deposited with the
Exchange Agent that remain unclaimed by the former holders of Company Common
Stock and Warrants after six months following the Effective Time will be
delivered to TCI Music upon its demand, and any former holders of Company Common
Stock and Warrants who have not then complied with the instructions for
exchanging their Certificates will thereafter look only to TCI Music for
exchange of Certificates and for any dividend or distribution with respect
thereto made after the Effective Time pursuant to Section 3.4 and any cash to be
paid in lieu of fractional shares of TCI Music Common Stock pursuant to Section
3.5.
Section 3.4 Dividends and Other Distributions. No dividends or other
distributions declared or made after the Effective Time with respect to shares
of TCI Music Common Stock with a record date after the Effective Time will be
paid to the holder of any unsurrendered
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Certificate with respect to the shares of TCI Music Common Stock issuable upon
surrender thereof until the holder of such Certificate surrenders such
Certificate in accordance with Section 3.3. Subject to the effect of applicable
Legal Requirements, following surrender of any such Certificate, TCI Music will
pay or cause to be paid, without interest, to the record holder of TCI Music
Certificates issued in exchange therefor, (a) the amount, if any, of TCI Music
dividends and other distributions declared or authorized to be made by TCI Music
with a record date after the Effective Time payable with respect to the shares
of TCI Music Common Stock represented thereby and (b) at the appropriate payment
date, the amount of dividends and other distributions (if any) declared or
authorized to be made by TCI Music with a record date after the Effective Time
and a payment date subsequent to surrender of such Certificates that are payable
with respect to such holder's shares of TCI Music Common Stock.
Section 3.5 No Fractional Shares.
(a) Cash Payment in Lieu of Fractional Shares. No certificates or
scrip representing fractional shares of TCI Music Common Stock will be issued
upon the surrender of Certificates pursuant to Section 3.3. No such fractional
interest will entitle the owner thereof to any rights as a security holder of
TCI Music. In lieu of any such fractional shares of TCI Music Common Stock, each
holder of Company Common Stock and Warrants entitled to receive shares of TCI
Music Common Stock in the Merger, upon surrender of such Person's Certificates
for exchange pursuant to Section 3.3, will be entitled to receive an amount in
cash (without interest), rounded to the nearest cent, determined by multiplying
the TCI Music Series A Common Stock Value by the fractional share interest in
TCI Music Common Stock to which such holder otherwise would be entitled.
(b) Deposit with Exchange Agent. As soon as practicable after the
determination of the amount of cash, if any, to be paid to holders of shares of
TCI Music Common Stock in lieu of any fractional shares, TCI Music will promptly
deposit with the Exchange Agent cash in the required amounts and the Exchange
Agent will mail such amounts without interest to such holders; provided,
however, that no such amount will be paid to any holder with respect to any
Certificate prior to the surrender by such holder of such Certificate.
Section 3.6 No Liability. None of TCI Music, Merger Sub, the Company,
the Surviving Corporation or the Exchange Agent will be liable to any holder of
shares of Company Common Stock or Warrants for any shares of TCI Music Common
Stock, dividends or distributions with respect thereto or cash payable in lieu
of fractional shares of TCI Music Common Stock delivered to a state abandoned
property administrator or other public official pursuant to any applicable
abandoned property, escheat or similar law.
Section 3.7 Lost Certificates. If any Certificate is lost, stolen or
destroyed, the Exchange Agent will issue in exchange for such lost, stolen or
destroyed Certificate the shares of TCI Music Common Stock (and any dividend or
distribution with respect thereto payable pursuant to Section 3.4 and any cash
payable in lieu of fractional shares of TCI Music Common Stock
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pursuant to Section 3.5) deliverable in respect thereof as determined in
accordance with the terms of this Agreement, subject to the condition that the
Person to whom the TCI Music Common Stock (and any dividend or distribution with
respect thereto payable pursuant to Section 3.4 and any cash payable in lieu of
fractional shares pursuant to Section 3.5) are to be issued, shall have (a)
delivered to TCI Music an affidavit claiming such Certificate to be lost,
stolen, or destroyed and (b) if required by TCI Music, given TCI Music an
indemnity satisfactory to TCI Music against any claim that may be made against
TCI Music with respect to the Certificate alleged to have been lost, stolen or
destroyed.
Section 3.8 Dissenting Shares. Notwithstanding anything in this
Agreement to the contrary, holders of shares of Company Common Stock outstanding
immediately prior to the Effective Time who have not voted in favor of the
Merger or consented thereto in writing and who have demanded appraisal rights
with respect thereto in accordance with the Act (the "Dissenting Shares") will
not have their shares of Company Common Stock converted into or be exchangeable
for the right to receive shares of TCI Music Common Stock or any dividend or
distribution with respect thereto made after the Effective Time or any cash
payable in lieu of fractional shares of TCI Music Common Stock pursuant to
Section 3.5, but instead will be entitled to receive payment of the fair value
of their Dissenting Shares in accordance with the provisions of the Act and this
Section 3.8. Any shares of Company Common Stock held by a stockholder who, prior
to the Effective Time, withdraws a demand for appraisal of such shares or loses
the right to appraisal as provided in the Act will not be considered Dissenting
Shares. The Company will give TCI Music prompt notice of any written demands for
appraisal of any shares of Company Common Stock, attempted withdrawals of such
demand and any other notices or other documents received by the Company pursuant
to the Act relating to stockholders' rights of appraisal. The Company will make
all payments required by the Act to be made in respect of Dissenting Shares,
including any costs assessed against the Company pursuant to the Act, and TCI
Music or any of its Affiliates will directly or indirectly reimburse or
otherwise provide funds to the Company with respect to such payments.
Section 3.9 [Intentionally Deleted.]
Section 3.10 Stockholders' Approval. Subject to fiduciary duty
obligations of the Board of Directors of the Company under applicable Legal
Requirements, the Company will use its best efforts, in accordance with
applicable Legal Requirements and the Company Charter and bylaws of the Company
(the "Company Bylaws"), to have this Agreement, the Merger and the transactions
contemplated by this Agreement approved by the holders of capital stock of the
Company entitled to vote thereon. The Company will notify TCI Music of the date
set for any stockholder action to be taken in connection with approval of the
Merger not later than 20 days prior to such date. The Board of Directors of the
Company will, subject to fiduciary duty obligations under applicable Legal
Requirements, recommend that holders of Company Common Stock vote to adopt this
Agreement and approve the Merger and the transactions contemplated by this
Agreement, and will use best efforts to solicit from such holders proxies in
favor of such approval and adoption and take all other action necessary or
helpful to secure such favorable vote.
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Section 3.11 Closing of the Company's Transfer Books. At the Effective
Time, the stock transfer books of the Company will be closed and no transfer of
shares of Company Common Stock will be made thereafter. In the event that, after
the Effective Time, Company Stock Certificates are presented to the Surviving
Corporation, they will be canceled and exchanged for the TCI Music Certificates
(and, if required, cash) as provided in Section 3.3(b) and Section 3.5.
Section 3.12 Assistance in Consummation of the Merger. Each of TCI
Music, Merger Sub and the Company will provide all reasonable assistance to, and
will cooperate with, each other to bring about the consummation of the Merger as
soon as possible in accordance with the terms and conditions of this Agreement.
Section 3.13 Closing. The closing of the transactions contemplated by
this Agreement (the "Closing") will take place (i) at the offices of Reid &
Priest LLP, 40 West 57th Street, New York, New York, at 9:00 a.m. local time on
the date that is the first business day after the day on which the last of the
conditions set forth in Article VIII (excluding delivery of opinions and
certificates) is fulfilled or waived or (ii) at such other place and time as TCI
Music and the Company agree in writing. The date on which the Closing occurs is
referred to in this Agreement as the "Closing Date."
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF TCI MUSIC AND MERGER SUB
TCI Music and Merger Sub jointly and severally represent and warrant to
the Company as follows:
Section 4.1 Organization and Qualification. Each of TCI Music and Merger
Sub is a corporation duly organized, validly existing and in good standing under
the laws of the State of Delaware and each has all requisite corporate power and
authority to carry on its business as it is now being conducted. Each of TCI
Music and Merger Sub is duly qualified as a foreign corporation to do business,
and is in good standing, in each jurisdiction where the character of its
properties owned or held under lease or the nature of its activities make such
qualification necessary, except where the failure to be so qualified will not,
individually or in the aggregate, have a Material Adverse Effect on it.
Section 4.2 Capitalization.
(a) TCI Music. As of the date of this Agreement, the authorized
capital stock of TCI Music consists of: (i) 495,000,000 shares of common stock,
par value $.01 per share, divided into the following classes: 295,000,000 shares
of common stock designated as Series A Common Stock, of which 14,896,649 shares
are issued and outstanding as of the date of this Agreement, and 200,000,000
shares of common stock, designated as Series B Common Stock, of which 62,500,000
shares are issued and outstanding as of the date of this Agreement and (ii)
5,000,000 shares of
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preferred stock, par value $.01 per share, none of which is issued and
outstanding as of the date of this Agreement. All shares of TCI Music Common
Stock to be issued in connection with the Merger, when issued in accordance with
this Agreement, will be duly authorized, validly issued, fully paid and
nonassessable.
(b) Merger Sub. As of the Effective Time, the authorized capital
stock of Merger Sub will consist of 1,000 shares of common stock, par value $.01
per share, of which 1,000 shares will be issued and outstanding, all of which
will be owned beneficially and of record by TCI Music immediately prior to the
Effective Time.
Section 4.3 Subsidiaries. Schedule 4.3 to this Agreement reflects the
percentage and nature of TCI Music's ownership of each Subsidiary and Equity
Affiliate of TCI Music as of the date of this Agreement. Each of TCI Music's
Subsidiaries is duly organized, validly existing and in good standing under the
laws of its jurisdiction of incorporation or formation and has the corporate or
partnership power to carry on its business as it is now being conducted or
currently proposed to be conducted. Each of TCI Music's Subsidiaries is duly
qualified to do business, and is in good standing, in each jurisdiction where
the character of its properties owned or held under lease or the nature of its
activities makes such qualification necessary, except where the failure to be so
qualified will not have a Material Adverse Effect on TCI Music. All the
outstanding shares of capital stock of each of TCI Music's Subsidiaries that is
a corporation are validly issued, fully paid and nonassessable. Except as set
forth on Schedule 4.3, the shares of capital stock or partnership or other
ownership interests in each of TCI Music's Subsidiaries or Equity Affiliates
that are owned by TCI Music or by a Subsidiary of TCI Music are owned free and
clear of any Liens except Liens securing indebtedness for borrowed money or the
deferred purchase price of property, are not subject to and have not been issued
in violation of any preemptive rights and have not been issued in violation of
any federal or state securities laws or any other Legal Requirement. Except as
disclosed in the TCI Music SEC Reports, the Box Prospectus or on Schedule 4.3,
there are not, as of the date hereof, and at the Effective Time there will not
be, any outstanding options, warrants, calls or other rights, agreements or
commitments of any character, to which TCI Music or any of its Subsidiaries is a
party, relating to the issued or unissued capital stock, other securities or
partnership or other ownership interests in any of the Subsidiaries or Equity
Affiliates of TCI Music.
Section 4.4 Authority Relative to this Agreement. Each of TCI Music and
Merger Sub has all requisite corporate power and authority to execute and
deliver this Agreement and to consummate the transactions contemplated by this
Agreement. The execution and delivery of this Agreement and the consummation of
the transactions contemplated by this Agreement by TCI Music and Merger Sub have
been duly authorized by the Boards of Directors of TCI Music and Merger Sub and
by TCI Music as the sole stockholder of Merger Sub, and no other corporate
proceedings on the part of TCI Music or Merger Sub are necessary to authorize
this Agreement and the transactions contemplated by this Agreement. This
Agreement constitutes a valid and binding obligation of each of TCI Music and
Merger Sub enforceable against each of them in accordance with its terms, except
(i) as enforcement may be limited by bankruptcy, insolvency or other similar
Legal Requirements affecting the enforcement of creditors' rights generally,
(ii) as the availability
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of indemnification and other remedies may be limited by federal and state
securities laws and (iii) for limitations imposed by general principles of
equity.
Section 4.5 No Breach; Required Consents. The execution and delivery of
this Agreement by TCI Music and Merger Sub do not, and the consummation of the
transactions contemplated by this Agreement by TCI Music and Merger Sub will
not: (a) violate or conflict with the certificate of incorporation or bylaws of
TCI Music or Merger Sub; (b) constitute a breach or default (or an event that
with notice or lapse of time or both would become a breach or default) or give
rise to any Lien, third-party right of termination, cancellation, modification
or acceleration under any agreement or undertaking to which TCI Music or Merger
Sub is a party or by which either of them is bound, except where such breach,
default, Lien, third-party right of termination, cancellation, modification or
acceleration would not have a Material Adverse Effect on TCI Music or Merger
Sub; or (c) subject to obtaining the approvals and making the filings described
in Section 4.6, constitute a violation of any applicable Legal Requirement,
except where such violation would not have a Material Adverse Effect on TCI
Music or Merger Sub.
Section 4.6 Consents and Approvals. Neither the execution and delivery
of this Agreement by TCI Music and Merger Sub nor the consummation of the
transactions contemplated by this Agreement by TCI Music and Merger Sub will
require TCI Music or Merger Sub to make any filing or registration with, or
obtain any authorization, consent or approval of, any Governmental Entity,
except those required in connection, or in compliance, with the provisions of
(i) the Communications Act of 1934, as amended, (ii) the Securities Act of 1933,
as amended (the "Securities Act"), (iii) the Securities Exchange Act of 1934, as
amended (the "Exchange Act") and (iv) the corporation, securities or blue sky
laws or regulations, or similar Legal Requirements, of various states of the
United States, and other than such filings, registrations, authorizations,
consents or approvals the failure of which to make or obtain would not have a
Material Adverse Effect on TCI Music or Merger Sub or prevent the consummation
of the transactions contemplated by this Agreement. With respect to the lack of
any filing being required under the HSR Act, such representation and warranty is
made solely in reliance on the representation and warranty of the Company set
forth in the last sentence of Section 5.6.
Section 4.7 Reports and Financial Statements.
(a) SEC Reports. TCI Music has filed all required forms, reports and
documents required to be filed with the SEC since TCI Music was incorporated
(collectively, the "TCI Music SEC Reports"). As of their respective dates or
effective dates and except as the same may have been corrected, updated or
superseded by means of a subsequent filing with the SEC prior to the date of
this Agreement, none of the TCI Music SEC Reports, including any financial
statements or schedules included or incorporated by reference therein, contained
any untrue statement of a material fact or omitted to state a material fact
required to be stated or incorporated by reference therein or necessary in order
to make the statements therein, in light of the circumstances under which they
were made, not misleading. TCI Music has delivered to the Company, in the forms
filed with the SEC, all the TCI Music SEC Reports.
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(b) Financial Statements. The audited consolidated financial
statements of TCI Music and DMX Inc. contained in the Box Prospectus were
prepared in accordance with GAAP applied on a consistent basis during the
periods involved (except as may be indicated in the notes thereto) and present
fairly the financial condition and results of operations of each company,
respectively, as of the relevant dates thereof and for the periods covered
thereby. The unaudited condensed pro forma combined interim financial statements
of TCI Music contained in the Box Prospectus present the financial condition and
results of operations of TCI Music as of the dates and for the periods indicated
therein on a pro forma basis and such financial statements, as of the date of
the Box Prospectus, conformed in all material respects with the requirements for
pro forma financial statements set forth in Article 11 of Regulation S-X under
the Exchange Act.
(c) Absence of Certain Changes. Except as disclosed in the TCI Music
SEC Reports and the Box Prospectus, except for TCI Music's intention to purchase
the preferred stock of The Box Worldwide, Inc. owned by EMAP plc prior to the
Effective Time and except for the transactions contemplated by the Merger
Agreement dated August 12, 1997 among TCI Music, TCI Music Acquisition Sub, Inc.
and The Box Worldwide, Inc. (the "Box Merger Agreement"), since the date of the
most recent balance sheet of TCI Music included in the Box Prospectus (the "Most
Recent TCI Music Balance Sheet"), there has not been any: (i) transaction,
commitment, dispute or other event or condition (financial or otherwise) of any
character (whether or not in the ordinary course of business) that, individually
or in the aggregate, has had, or would have, a Material Adverse Effect on TCI
Music (other than as a result of changes in laws or regulations of general
applicability or any changes resulting from general economic, financial, market
or industry-wide conditions); (ii) declaration, setting aside or payment of any
dividend or other distribution (whether in cash, stock or property) with respect
to the capital stock of TCI Music; or (iii) entry into any commitment or
transaction material to TCI Music and its Subsidiaries taken as a whole
(including any borrowing or sale of assets) except in the ordinary course of
business consistent with past practice.
(d) Absence of Undisclosed Liabilities. Except as disclosed in the
TCI Music SEC Reports or the Box Prospectus, TCI Music does not have any
indebtedness, liability or obligation required by GAAP to be reflected on a
balance sheet that is not reflected or reserved against in the Most Recent TCI
Music Balance Sheet other than liabilities, obligations and contingencies that
(i) were incurred after the date of the Most Recent TCI Music Balance Sheet in
the ordinary course of business, (ii) were incurred pursuant to the Box Merger
Agreement or (iii) would not, in the aggregate, have a Material Adverse Effect
on TCI Music.
(e) Proxy Statement Disclosure. The Proxy Statement/Private
Placement Memorandum delivered to Company stockholders in connection with the
Merger, to the extent it relates to TCI Music, its Subsidiaries and their
respective businesses, will not contain any untrue statement of a material fact
or omit to state a material fact required to be stated therein or necessary in
order to make such statements, in light of the circumstances in which they were
made, not misleading.
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Section 4.8 Compliance with Law; Litigation.
(a) Permits. Except as disclosed in the TCI Music SEC Reports, TCI
Music and its Subsidiaries hold all permits, licenses, franchises, variances,
exemptions, concessions, leases, instruments, orders and approvals (the "TCI
Music Permits") of all Governmental Entities required to be held under
applicable Legal Requirements, except for such TCI Music Permits the failure of
which to hold, individually or in the aggregate, does not have and, in the
future is not likely to have, a Material Adverse Effect on TCI Music. To TCI
Music's Knowledge, TCI Music and its Subsidiaries are in compliance with the
terms of the TCI Music Permits, except for such failures to comply that,
individually or in the aggregate, would not have a Material Adverse Effect on
TCI Music. To TCI Music's Knowledge, the businesses of TCI Music and its
Subsidiaries are not being conducted in violation of any Legal Requirement,
except for such violations which, individually or in the aggregate, would not
have a Material Adverse Effect on TCI Music. No investigation or review by any
Governmental Entity with respect to TCI Music or any of its Subsidiaries is
ongoing, pending, or, to the Knowledge of TCI Music, threatened, nor has any
Governmental Entity indicated to TCI Music in writing an intention to conduct
the same, other than those the outcome of which would not have a Material
Adverse Effect on TCI Music.
(b) Litigation. Except as disclosed in the TCI Music SEC Reports,
the Box Prospectus or on Schedule 4.8(b), there is no suit, action or proceeding
pending or, to the Knowledge of TCI Music, threatened, against or affecting TCI
Music or any of its Subsidiaries that has had or is likely to have a Material
Adverse Effect on TCI Music, nor is there any judgment, decree, injunction, rule
or order of any Governmental Entity or arbitrator outstanding against TCI Music
or any of its Subsidiaries that has had or is likely to have a Material Adverse
Effect on TCI Music.
Section 4.9 Title to Assets. Except as disclosed in the TCI Music SEC
Reports or the Box Prospectus, TCI Music and its Subsidiaries have good and
merchantable title to all material assets reflected on the unaudited pro forma
combined balance sheet as of March 31, 1997 included in TCI Music's Amendment
No. 1 to Registration Statement on Form S-4 filed with the SEC on June 12, 1997,
free and clear of any Lien except: (a) landlord's Liens and Liens for property
taxes not delinquent; (b) statutory Liens that were created in the ordinary
course of business and do not materially detract from the value of such assets
or materially impair the use thereof in the operation of TCI Music's business;
(c) the Liens listed on Schedule 4.3; (d) Liens securing indebtedness for
borrowed money or securing the deferred purchase price of any property; (e)
leased interests in property owned by others and leased interests in property
leased to others; and (f) zoning, building or similar restrictions, easements,
rights-of-way, reservations of rights, conditions, or other restrictions or
encumbrances relating to or affecting real property that do not, individually or
in the aggregate, materially interfere with the use of such real property in the
operation of TCI Music's business.
Section 4.10 Labor and Employee Matters. TCI Music is not a party to any
contract with any labor organization and has not agreed to recognize any union
or other collective bargaining unit. No union or other collective bargaining
unit has been certified as representing any of
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TCI Music's employees. To TCI Music's Knowledge, there is no representation or
organizing effort pending or threatened against or affecting or involving TCI
Music. TCI Music and its Subsidiaries are in compliance with all applicable
Legal Requirements relating to the employment of employees, including any
obligations relating to employment standards legislation, pay equity,
occupational health and safety, labor relations and human rights legislation
except for such failures to comply as do not have, and are not likely to have, a
Material Adverse Effect on TCI Music.
Section 4.11 ERISA.
(a) Benefit Plans. Schedule 4.11(a) sets forth all "employee benefit
plans," as defined in ERISA, and all other material employee benefit
arrangements, programs or payroll practices, including severance pay, sick
leave, vacation pay, salary continuation for disability, deferred compensation,
bonus, stock purchase, hospitalization, medical insurance, life insurance,
tuition reimbursement, employee assistance and employee discounts, that TCI
Music or any of its ERISA Affiliates maintains or has an obligation to make
contributions (the "TCI Music Benefit Plans").
(b) Multi-Employer Plans. Neither TCI Music nor any of its ERISA
Affiliates has incurred any unsatisfied withdrawal liability, as defined in
Section 4201 of ERISA, with respect to any multiemployer plan, nor has any of
them incurred any liability due to the termination or reorganization of any
multiemployer plan, except any such liability that would not have a Material
Adverse Effect on TCI Music. To the Knowledge of TCI Music, neither TCI Music
nor any of its ERISA Affiliates reasonably expects to incur any liability due to
a withdrawal from or termination or reorganization of a multiemployer plan,
except any such liability that would not have a Material Adverse Effect on TCI
Music.
(c) Plan Qualification. Each TCI Music Benefit Plan that is intended
to qualify under Section 401 of the Code and the trust maintained pursuant
thereto has been determined to be exempt from federal income taxation under
Section 501 of the Code by the Internal Revenue Service, and to the Knowledge of
TCI Music, nothing has occurred with respect to any such plan since such
determination that is likely to result in the loss of such exemption or the
imposition of any material liability, penalty or tax under ERISA or the Code.
Each TCI Music Benefit Plan has at all times been maintained in all material
respects, by its terms and in operation, in accordance with all applicable Legal
Requirements.
(d) Contributions. All contributions (including all employer
contributions and employee salary reduction contributions) required to have been
made under the TCI Music Benefit Plans or pursuant to applicable Legal
Requirements (without regard to any waivers granted under Section 412 of the
Code) to any funds or trusts established thereunder or in connection therewith
have been made by the due date thereof (including any valid extension or grace
period) and no accumulated funding deficiency exists with respect to any of the
TCI Music Benefit Plans subject to Section 412 of the Code.
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(e) No Violations. To the Knowledge of TCI Music, there have been no
violations of ERISA or the Code with respect to the filing of applicable
reports, documents and notices regarding the TCI Music Benefit Plans with the
Secretary of Labor and the Secretary of the Treasury or the furnishing of such
reports, documents and notices to the participants or beneficiaries of the TCI
Music Benefit Plans, except such violations that, individually or in the
aggregate, would not have a Material Adverse Effect on TCI Music.
(f) Litigation. There are no pending actions, claims or lawsuits
that have been asserted or instituted against the TCI Music Benefit Plans, the
assets of any of the trusts under such plans or the plan sponsor or the plan
administrator, or against any fiduciary of the TCI Music Benefit Plans, with
respect to the operation of such plans (other than routine benefit claims), nor
does TCI Music have Knowledge of facts that reasonably could be expected to form
the basis for any such action, claim or lawsuit, except any such actions, claims
or lawsuits that, individually or in the aggregate, would not have a Material
Adverse Effect on TCI Music.
Section 4.12 Operations of Merger Sub. As of the date of this Agreement,
Merger Sub has engaged in no business activities other than in connection with
this Agreement and the transactions contemplated by this Agreement and has no
material assets or liabilities other than its rights and obligations under this
Agreement.
Section 4.13 No Broker. No broker, finder or investment banker is
entitled to any brokerage, finder's or other fee or commission in connection
with the Merger or the transactions contemplated by this Agreement based upon
arrangements made by or on behalf of TCI Music or Merger Sub.
Section 4.14 Taxes. TCI Music and each of its Subsidiaries have timely
filed all Tax returns required to be filed by any of them and have timely paid
or have established an adequate reserve for the payment of, all Taxes owed in
respect of the periods covered by such returns, except where the failure to file
such Tax returns or timely pay or establish an adequate reserve for the payment
of such Taxes will not have a Material Adverse Effect on TCI Music. The
information contained in such Tax returns is complete and accurate in all
material respects. Neither TCI Music nor any Subsidiary of TCI Music is
delinquent in the payment of any Tax or other amount owed to any Governmental
Entity, except where the amount owed, when paid, or the delinquency in paying
the amount owed will not have a Material Adverse Effect on TCI Music. There are
no claims or investigations pending or, to TCI Music's Knowledge, threatened
against TCI Music or any of its Subsidiaries for past Taxes, except claims and
investigations that would not have a Material Adverse Effect on TCI Music and
adequate provision for which has been made on the Most Recent TCI Music Balance
Sheet. None of TCI Music or its Subsidiaries has waived or extended any
applicable statute of limitations relating to the assessment of any Taxes that
would be payable by TCI Music or such Subsidiary.
Section 4.15 Environmental Laws. Each of TCI Music and its Subsidiaries
is in compliance in all respects with all Environmental Laws, except where the
failure to so comply would
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not have a Material Adverse Effect on TCI Music. No orders, directions or
notices have been issued pursuant to any Environmental Law and no Governmental
Entity has submitted to any of TCI Music and its Subsidiaries any request for
information pursuant to any Environmental Law.
Section 4.16 Transactions with Affiliates. Except as disclosed in the
TCI Music SEC Reports, the Box Prospectus or as contemplated by this Agreement,
there is no lease, sublease, indebtedness, contract, agreement, commitment,
understanding or other arrangement of any kind entered into by TCI Music or
Merger Sub with any officer, director or shareholder of TCI Music or Merger Sub
or any "affiliate" or "associate" (as those terms are defined in the Exchange
Act) of either of them, except, in each case, for compensation paid to directors
and officers consistent with previously established policies (including normal
merit increases in such compensation in the ordinary course of business),
reimbursements of ordinary and necessary expenses incurred in connection with
their employment and amounts paid or benefits granted pursuant to TCI Music
Benefit Plans.
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company represents and warrants to TCI Music and Merger Sub as
follows:
Section 5.1 Organization and Qualification. The Company is a corporation
duly organized, validly existing and in good standing under the laws of the
State of Delaware and has all requisite corporate power and authority to carry
on its business as it is now being conducted. The Company is duly qualified as a
foreign corporation to do business, and is in good standing, in each
jurisdiction where the character of its properties owned or held under lease or
the nature of its activities makes such qualification necessary, except where
the failure to be so qualified would not, individually or in the aggregate, have
a Material Adverse Effect on the Company.
Section 5.2 Capitalization.
(a) Capital Stock. The authorized capital stock of the Company
consists of 31,999,900 shares of Series A Common Stock, $.01 par value per
share, of which 2,084,204 shares are issued and outstanding (6,000 of which
currently are held in escrow), 1,000,100 shares of Series B Common Stock, $.01
par value per share, of which 1,000,005 shares are issued and outstanding
(566,670 of which currently are held in escrow), 2,000,000 shares of Series E
Common Stock, $.01 par value per share, of which 1,187,965 shares are issued and
outstanding (none of which currently is held in escrow), and 5,000,000 shares of
preferred stock, par value $.01 per share, of which no shares are issued and
outstanding.
(b) Options and Other Rights. Except as set forth on Schedule
5.2(b), there are no options, warrants, calls, subscriptions or other rights,
agreements or commitments of any kind (including preemptive rights), to which
the Company or any of its Subsidiaries is a party, relating
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to the issued or unissued capital stock or other securities of the Company or
any Subsidiary. Schedule 5.2(b) sets forth, for all such options, warrants,
calls, subscriptions or other rights, agreements or commitments that are
outstanding (i) the number of shares and the class or series of capital stock of
the Company issuable pursuant thereto, (ii) the exercise or conversion price,
(iii) the exercise or conversion period and (iv) if not immediately exercisable
or convertible, the date on which they can be exercised or converted.
(c) Due Authorization. All issued and outstanding shares of Company
Common Stock have been duly authorized and validly issued and are fully paid and
nonassessable, are not subject to, and have not been issued in violation of, any
preemptive rights, and have not been issued in violation of any federal or state
securities laws or any other Legal Requirement.
Section 5.3 Subsidiaries. Schedule 5.3 reflects the percentage and
nature of the Company's ownership of each Subsidiary and Equity Affiliate of the
Company as of the date of this Agreement. Each of the Company's Subsidiaries is
a corporation or partnership duly organized, validly existing and in good
standing under the laws of its jurisdiction of incorporation or formation and
has the corporate or partnership power to carry on its business as it is now
being conducted or currently proposed to be conducted. Each of the Company's
Subsidiaries is duly qualified to do business as a foreign corporation or
partnership, and is in good standing, in each jurisdiction where the character
of its properties owned or held under lease or the nature of its activities
makes such qualification necessary, except where the failure to be so qualified
will not have a Material Adverse Effect on the Company. All the outstanding
shares of capital stock of each of the Company's Subsidiaries that is a
corporation are validly issued, fully paid and nonassessable. Except as set
forth on Schedule 5.3, the shares of capital stock or partnership or other
ownership interests in each of the Company's Subsidiaries or Equity Affiliates
that are owned by the Company or by a Subsidiary of the Company are owned free
and clear of any Liens, are not subject to and have not been issued in violation
of any preemptive rights and have not been issued in violation of any federal or
state securities laws or any other Legal Requirement. Except as set forth on
Schedule 5.3, there are not as of the date hereof, and at the Effective Time
there will not be, any outstanding options, warrants, calls or other rights,
agreements or commitments of any character, to which the Company or any of its
Subsidiaries is a party, relating to the issued or unissued capital stock, other
securities or partnership or other ownership interests in any of the
Subsidiaries or Equity Affiliates of the Company.
Section 5.4 Authority Relative to this Agreement. The Company has all
requisite corporate power and authority to execute and deliver this Agreement
and, subject to approval of this Agreement by the holders of a majority of the
outstanding shares of Company Common Stock, to consummate the transactions
contemplated by this Agreement. The execution and delivery of this Agreement and
the consummation of the transactions contemplated by this Agreement have been
duly authorized by the Company's Board of Directors. Except for the approval by
a vote of the holders of a majority of the voting power represented by all of
the outstanding shares of Company Common Stock and the filing of a restatement
of the Company Charter deleting the provisions relating to Class E Common Stock,
no other corporate proceedings on the part of the Company are
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necessary to authorize this Agreement and the transactions contemplated by this
Agreement. Subject to approval by the holders of a majority of the outstanding
shares of Company Common Stock in accordance with the Act, this Agreement
constitutes a valid and binding obligation of the Company enforceable in
accordance with its terms except (i) as enforcement may be limited by
bankruptcy, insolvency or other similar Legal Requirements affecting the
enforcement of creditors' rights generally, (ii) as the availability of
indemnification and other remedies may be limited by federal and state
securities laws and (iii) for limitations imposed by general principles of
equity.
Section 5.5 No Breach; Required Consents. The execution and delivery of
this Agreement by the Company does not, and the consummation of the transactions
contemplated by this Agreement by the Company will not: (a) subject to the
approval of the holders of a majority of the outstanding shares of Company
Common Stock, violate or conflict with the Company Charter or Company Bylaws;
(b) constitute a breach or default (or an event that with notice or lapse of
time or both would become a breach or default) or give rise to any Lien,
third-party right of termination, cancellation, modification or acceleration
under any agreement or undertaking to which the Company is a party or by which
it is bound, except where such breach, default, Lien, third-party right of
termination, cancellation, modification, or acceleration would not have a
Material Adverse Effect on the Company; or (c) subject to obtaining the
consents, approvals or authorizations and making the filings or registrations
described in Section 5.6, constitute a violation of any Legal Requirement,
except where such violation would not have a Material Adverse Effect on the
Company.
Section 5.6 Consents and Approvals. Except as set forth on Schedule 5.6,
neither the execution and delivery of this Agreement by the Company nor the
consummation of the transactions contemplated by this Agreement will require the
Company to make any filing or registration with, or obtain any authorization,
consent or approval of, any Governmental Entity or any other Person, except
those required in connection, or in compliance, with the provisions of (i) the
Communications Act of 1934, as amended, (ii) the Securities Act, (iii) the
Exchange Act and (iv) the corporation, securities or blue sky laws or
regulations, or similar Legal Requirements, of the various states of the United
States, and other than such other filings, registrations, authorizations,
consents or approvals the failure of which to make or obtain would not have a
Material Adverse Effect on the Company or prevent the consummation of the
transactions contemplated by this Agreement. The Company is an ultimate parent
entity, as such term is defined in 16 C.F.R. Section 801.1(a)(3). Neither the
Company nor any entity controlled by the Company is engaged in manufacturing,
and the Company's total assets are (and, immediately prior to the Effective
Time, will be) less than $10,000,000, all as determined in accordance with 16
C.F.R. Sections 801.1(a)-(c), 801.1(j) and 801.11.
Section 5.7 Reports and Financial Statements.
(a) SEC Reports. The Company has not been required by any applicable
Legal Requirement to file any form, report or document with the SEC. The Company
filed a registration statement on Form SB-2/A and a Form 8-A12G with the SEC on
August 19, 1997, file no. 333-23781 (collectively, the "Company SEC Reports").
As of their respective dates or effective dates
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and except as the same may have been corrected, updated or superseded by means
of a subsequent filing with the SEC prior to the date of this Agreement which
has been delivered by the Company to TCI Music and except for information about
Blair that was provided by Blair, none of the Company SEC Reports, including the
financial statements and schedules included or incorporated by reference
therein, contained any untrue statement of a material fact or omitted to state a
material fact required to be stated or incorporated by reference therein or
necessary in order to make the statements therein, in light of the circumstances
under which they were made, not misleading. The Company has delivered to TCI
Music, in the forms filed with the SEC, all the Company SEC Reports.
(b) Financial Statements. The audited consolidated financial
statements of the Company, Purple Demon, Inc. and SonicNet, Inc. contained in
the Company SEC Reports comply in all material respects with applicable
accounting re quirements and with the published rules and regulations of the SEC
with respect thereto, were prepared in accordance with GAAP applied on a
consistent basis during the periods involved (except as may be indicated in the
notes thereto) and present fairly the Company's, Purple Demon, Inc.'s and
SonicNet, Inc.'s consolidated financial condition and the results of their
operations as of the relevant dates thereof and for the periods covered thereby.
The unaudited consolidated interim financial statements of the Company, Purple
Demon, Inc. and SonicNet, Inc. contained in the Company SEC Reports comply in
all material respects with applicable accounting requirements and with the
published rules and regulations of the SEC with respect thereto, were prepared
on a basis consistent with prior interim periods (except as required by
applicable changes in GAAP or in SEC accounting policies) and include all
adjustments (consisting only of normal recurring accruals) necessary for a fair
presentation of the Company's consolidated financial condition and results of
operations for such periods.
(c) Absence of Certain Changes. Except as provided on Schedule
5.7(c), since the date of the most recent consolidated balance sheet of the
Company included in the Company SEC Reports (the "Most Recent Company Balance
Sheet") there has not been any: (i) transaction, commitment, dispute or other
event or condition (financial or otherwise) of any character (whether or not in
the ordinary course of business) that, individually or in the aggregate, has
had, or would have, a Material Adverse Effect on the Company (other than as a
result of changes in laws or regulations of general applicability or any changes
resulting from general economic, financial, market or industry-wide conditions);
(ii) declaration, setting aside or payment of any dividend or other distribution
(whether in cash, stock or property) with respect to the capital stock of the
Company; or (iii) entry into any commitment or transaction material to the
Company and its Subsidiaries taken as a whole (including any borrowing or sale
of assets) except in the ordinary course of business consistent with past
practice.
(d) Absence of Undisclosed Liabilities. The Company does not have
any indebtedness, liability or obligation required by GAAP to be reflected on a
balance sheet that is not reflected or reserved against in the Most Recent
Company Balance Sheet other than liabilities, obligations and contingencies that
(i) were incurred after the date of the Most Recent Company
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Balance Sheet in the ordinary course of busi ness or (ii) would not, in the
aggregate, have a Material Adverse Effect on the Company.
(d) Proxy Statement Disclosure. The Proxy Statement/Private
Placement Memorandum delivered to Company stockholders in connection with the
Merger, to the extent it relates to the Company, its Subsidiaries and their
respective businesses, will not contain any untrue statement of a material fact
or omit to state a material fact required to be stated therein or necessary in
order to make such statements, in light of the circumstances in which they were
made, not misleading.
Section 5.8 Compliance with Law; Litigation.
(a) Permits. The Company and its Subsidiaries hold all permits,
licenses, franchises, variances, exemptions, concessions, leases, instruments,
orders and approvals (the "Company Permits") of all Governmental Entities
required to be held under applicable Legal Requirements, except such Company
Permits the failure of which to hold, individually or in the aggregate, does not
have and, in the future is not likely to have, a Material Adverse Effect on the
Company. To the Company's Knowledge, the Company and its Subsidiaries are in
compliance with the terms of the Company Permits, except for such failures to
comply that, individually or in the aggregate, would not have a Material Adverse
Effect on the Company. To the Company's Knowledge, the businesses of the Company
and its Subsidiaries are not being conducted in violation of any Legal
Requirement, except for such violations which, individually or in the aggregate,
would not have a Material Adverse Effect on the Company. No investigation or
review by any Governmental Entity with respect to the Company or any of its
Subsidiaries is ongoing, pending, or, to the Knowledge of the Company,
threatened, nor has any Governmental Entity indicated to the Company in writing
an intention to conduct the same, other than those the outcome of which would
not have a Material Adverse Effect on the Company.
(b) Litigation. Except as provided on Schedule 5.8(b), there is no
suit, action or proceeding pending or, to the Knowledge of the Company,
threatened against or affecting the Company or any of its Subsidiaries that has
had or is likely to have a Material Adverse Effect on the Company nor is there
any judgment, decree, injunction, rule or order of any Governmental Entity or
arbitrator outstanding against the Company or any of its Subsidiaries that has
had or is likely to have a Material Adverse Effect on the Company.
Section 5.9 Title to Assets. Except as set forth on Schedule 5.9, the
Company and its Subsidiaries have good and merchantable title to all material
assets reflected on the Most Recent Company Balance Sheet, free and clear of any
Lien except: (a) landlord's Liens and Liens for property taxes not delinquent;
(b) statutory Liens that were created in the ordinary course of business and do
not materially detract from the value of such assets or materially impair the
use thereof in the operation of the Company's business; (c) the Lien that
secures the TCI Music Loan; (d) leased interests in property owned by others;
and leased interests in property leased to others; and (e) zoning, building or
similar restrictions, easements, rights-of-way, reservations of rights,
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conditions, or other restrictions or encumbrances relating to or affecting real
property that do not, individually or in the aggregate, materially interfere
with the use of such real property in the operation of the Company's business.
The Company has purchased all of the assets of the Addicted to Noise business
for consideration that did not exceed $220,000 in cash and promissory notes and
75,000 shares of Class A Common Stock of the Company.
Section 5.10 Labor and Employee Matters. The Company is not a party to
any contract with any labor organization and has not agreed to recognize any
union or other collective bargaining unit. No union or other collective
bargaining unit has been certified as representing any of the Company's
employees. To the Company's Knowledge, there is no representation or organizing
effort pending or threatened against or affecting or involving the Company. The
Company and its Subsidiaries are in compliance with all applicable Legal
Requirements relating to the employment of employees, including any obligations
relating to employment standards legislation, pay equity, occupational health
and safety, labor relations and human rights legislation except for such
failures to comply as do not have, and are not likely to have, a Material
Adverse Effect on the Company. Schedule 5.10 sets forth all agreements or
arrangements with any employee of the Company, whether oral or in writing, with
respect to such employee's employment with the Company other than agreements or
arrangements otherwise disclosed on Schedule 5.11(a).
Section 5.11 ERISA.
(a) Benefit Plans. Schedule 5.11(a) sets forth all "employee benefit
plans," as defined in ERISA, and all other material employee benefit
arrangements, programs or payroll practices, including severance pay, sick
leave, vacation pay, salary continuation for disability, deferred compensation,
bonus, stock purchase, hospitalization, medical insurance, life insurance,
tuition reimbursement, employee assistance and employee discounts, that the
Company or any of its ERISA Affiliates maintains or has an obligation to make
contributions (the "Company Benefit Plans").
(b) Multiemployer Plan. Neither the Company nor any of its ERISA
Affiliates has incurred any unsatisfied withdrawal liability, as defined in
Section 4201 of ERISA, with respect to any multiemployer plan, nor has any of
them incurred any liability due to the termination or reorganization of any
multiemployer plan, except any such liability that would not have a Material
Adverse Effect on the Company. To the Knowledge of the Company, neither the
Company nor any of its ERISA Affiliates reasonably expects to incur any
liability due to a withdrawal from or termination or reorganization of a
multiemployer plan, except any such liability that would not have a Material
Adverse Effect on the Company.
(c) Plan Qualification. Each Company Benefit Plan that is intended
to qualify under Section 401 of the Code, and a form of trust that is similar in
all material respects to the trust maintained pursuant thereto, have been
determined to be exempt from federal income taxation under Section 501 of the
Code by the Internal Revenue Service, and to the Knowledge of the Company,
nothing has occurred with respect to any such plan since such determination that
is likely to result
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in the loss of such exemption or the imposition of any material liability,
penalty or tax under ERISA or the Code. Each Company Benefit Plan has at all
times been maintained in all material respects, by its terms and in operation,
in accordance with all applicable Legal Requirements.
(d) Contributions. All contributions (including all employer
contributions and employee salary reduction contributions) required to have been
made under the Company Benefit Plans or pursuant to applicable Legal
Requirements (without regard to any waivers granted under Section 412 of the
Code) to any funds or trusts established thereunder or in connection therewith
have been made by the due date thereof (including any valid extension or grace
period) and no accumulated funding deficiency exists with respect to any of the
Company Benefit Plans subject to Section 412 of the Code.
(e) No Violations. To the Knowledge of the Company, there have been
no violations of ERISA or the Code with respect to the filing of applicable
reports, documents and notices regarding the Company Benefit Plans with the
Secretary of Labor and the Secretary of the Treasury or the furnishing of such
reports, documents and notices to the participants or beneficiaries of the
Company Benefit Plans, except such violations that, individually or in the
aggregate, would not have a Material Adverse Effect on the Company.
(f) Litigation. There are no pending actions, claims or lawsuits
that have been asserted or instituted against the Company Benefit Plans, the
assets of any of the trusts under such plans or the plan sponsor or the plan
administrator, or against any fiduciary of the Company Benefit Plans, with
respect to the operation of such plans (other than routine benefit claims), nor
does the Company have Knowledge of facts that reasonably could be expected to
form the basis for any such action, claim or lawsuit, except any such actions,
claims or lawsuits that, individually or in the aggregate, would not have a
Material Adverse Effect on the Company.
(g) Medical/Welfare Plans. Except as provided in Schedule 5.11(g)
and as may be required under Section 4980B of the Code, neither the Company nor
any of its ERISA Affiliates maintains any Company Benefit Plan that provides
medical or welfare benefits to former employees.
Section 5.12 Approval.
(a) Board of Directors. The Board of Directors of the Company at
meetings duly called and held: (i) determined that the Merger is advisable and
fair and in the best interests of the Company and its stockholders; (ii)
approved the Merger, this Agreement and the transactions contemplated by this
Agreement in accordance with the provisions of the Act; and (iii) recommended
the approval of this Agreement and the Merger by the holders of the Company
Common Stock and directed that the Merger be submitted for consideration by the
Company's stockholders at the Meeting in accordance with the provisions of the
Act.
(b) Stockholders. The vote of a majority of the outstanding shares
of the Company Common Stock entitled to vote, voting as a single class, is the
only vote required for the
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adoption and approval of this Agreement, the Merger and the other transactions
contemplated by this Agreement. The Persons who are beneficial owners of the
shares of the Company's Class B Common Stock that are held in escrow will not
vote with respect to amending the escrow provisions to which such shares are
subject to release them from escrow due to conflicts of interest with respect to
such amendment and release. No class or series of shares of capital stock of the
Company is entitled to vote on the adoption and approval of this Agreement, the
Merger or the other transactions contemplated by this Agreement as a separate
class or series.
Section 5.13 Financial Advisor/Investment Banker. Except for amounts, if
any, payable to Blair pursuant to the Blair Contract, $200,000 of which will be
paid by the Company's stockholders by granting options to Blair, exercisable at
$.05 per share, to purchase shares of TCI Music Common Stock valued at the
Per-Share Merger Value and $125,000 of which will be paid by TCI Music in cash
immediately prior to the Effective Time, the Company or the Surviving
Corporation, no broker, finder or investment banker is entitled to any
brokerage, finder's or other fee or commission in connection with the Merger or
the transactions contemplated by this Agreement based upon arrangements made by
or on behalf of the Company. The Company has delivered to TCI Music a true and
complete copy of the Blair Contract.
Section 5.14 Taxes. The Company and each of its Subsidiaries have timely
filed all Tax returns required to be filed by any of them and have timely paid
or have established an adequate reserve for the payment of, all Taxes owed in
respect of the periods covered by such returns, except where the failure to file
such Tax returns or timely pay or establish an adequate reserve for the payment
of such Taxes, will not have a Material Adverse Effect on the Company. The
information contained in such Tax returns is complete and accurate in all
material respects. Neither the Company nor any Subsidiary of the Company is
delinquent in the payment of any Tax or other amount owed to any Governmental
Entity, except where the amount owed, when paid, or the delinquency in paying
the amount owed will not have a Material Adverse Effect on the Company. There
are no claims or investigations pending or, to the Company's Knowledge,
threatened against the Company or any of its Subsidiaries for past Taxes, except
claims and investigations that would not have a Material Adverse Effect on the
Company and adequate provision for which has been made on the Most Recent
Balance Sheet. Except as set forth on Schedule 5.14, none of the Company or its
Subsidiaries has waived or extended any applicable statute of limitations
relating to the assessment of any Taxes that would be payable by the Company or
such Subsidiary.
Section 5.15 Environmental Laws. Each of the Company and its
Subsidiaries is in compliance in all respects with all Environmental Laws,
except where the failure to so comply would not have a Material Adverse Effect
on the Company. No orders, directions or notices have been issued pursuant to
any Environmental Law and no Governmental Entity has submitted to any of the
Company and its Subsidiaries any request for information pursuant to any
Environmental Law.
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Section 5.16 Transactions with Affiliates. Except as disclosed in the
Company SEC Reports, there is no lease, sublease, indebtedness, contract,
agreement, commitment, understanding or other arrangement of any kind entered
into by the Company with any officer, director or stockholder of the Company or
any "affiliate" or "associate" of any of them (as those terms are defined in the
Exchange Act) or of the Company, except, in each case, for compensation paid to
directors and officers consistent with previously established policies
(including normal merit increases in such compensation in the ordinary course of
business), reimbursements of ordinary and necessary expenses incurred in
connection with their employment and amounts paid or benefits granted pursuant
to Company Benefit Plans.
ARTICLE VI
CONDUCT OF BUSINESS PENDING THE MERGER
Section 6.1 Conduct of Business of the Company. Prior to the Effective
Time, without the prior written consent of TCI Music:
(a) Ordinary Course. The Company will conduct, and will cause each
of its Subsidiaries to conduct, its business in the ordinary course
substantially in accordance with past practice, and will use, and will cause
each of its Subsidiaries to use, its reasonable best efforts to preserve intact
its current business organization and to preserve relationships with customers,
suppliers and others having business dealings with them.
(b) Absence of Changes. Except as required by this Agreement the
Company will not, and will not permit or cause any of its Subsidiaries to,
directly or indirectly: (i) pledge or otherwise encumber any capital stock or
other interest in the Company or any of its Subsidiaries; (ii) amend or propose
to amend the Company Charter or Company Bylaws or similar constituent or
governing documents of any of its Subsidiaries; (iii) split, combine or
reclassify the outstanding capital stock of, or issue or authorize or propose
the issuance of any other securities in respect of, in lieu of or in
substitution for shares of capital stock of, or other ownership interests in,
the Company or any of its Subsidiaries; (iv) declare, set aside or pay any
dividend, distribution or other payment to any stockholder, director or officer
of the Company or any of it Subsidiaries other than regularly scheduled payroll;
(v) redeem, purchase or otherwise acquire any shares of capital stock of, or
other ownership interests in, the Company or any of its Subsidiaries; (vi)
issue, deliver or sell any shares of capital stock of, or other ownership
interests (including any option, warrant or other right to acquire, or any
security convertible into, shares of capital stock of, or other ownership
interests) in the Company or any of its Subsidiaries; (vii) acquire, lease or
dispose of any assets, other than in the ordinary course of business consistent
with past practice; (viii) create, assume or incur any indebtedness, other than
the TCI Music Loan and other indebtedness incurred to refinance outstanding
indebtedness of the Company for borrowed money in an amount not exceeding
$10,000; (ix) mortgage, pledge or subject to any Lien any of its assets except
Liens described in clauses (b) or (c) of Section 5.9; (x) enter into any other
material transaction except in the ordinary course of business consistent with
past practice; (xi) make any payment or transfer any property with respect
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to any indebtedness of the Company or any Subsidiary except such payments with
respect to the indebtedness of the Company as are scheduled to come due prior to
the Effective Time; (xii) acquire by merging or consolidating with, by acquiring
assets of, by purchasing an ownership interest in, or by any other method, any
business or any other Person; or (xiii) agree to do, or to cause or permit any
Subsidiary to do, any of the foregoing.
(c) Compensation. Except as required to comply with applicable Legal
Requirements or with employment agreements of the Company, SonicNet, Inc. or
Addicted to Noise, or with Company Benefit Plans that were entered into or
established on or before August 1, 1997, or as required by this Agreement, the
Company will not, and will not permit any of its Subsidiaries to: (i) adopt,
terminate or amend any bonus, profit sharing, compensation, severance,
termination, stock option, pension, retirement, deferred compensation,
employment or other benefit plan, agreement, trust, fund or other arrangement
for the benefit or welfare of any director, officer or current or former
employee; (ii) increase in any manner the compensation or benefits of any
director, officer, consultant or employee; (iii) grant any award or option under
any bonus, benefit, incentive, performance or other compensation plan or
arrangement; (iv) take any action to fund or in any other way secure the payment
of compensation or benefits under any employee plan, agreement, contract,
benefit plan or arrangement; or (v) agree to do, or to cause or permit any
Subsidiary to do, any of the foregoing.
(d) Affiliate Transactions. The Company will not, and will not
permit any of its Subsidiaries to, enter into any transaction, contract or
arrangement with any officer, stockholder, director, consultant, employee of the
Company or any Subsidiary or any Person that is an "affiliate" or "associate" of
any of the foregoing, as those terms are defined in Rule 12b-2 under the
Exchange Act, whether or not such transaction would be in the ordinary course of
business.
(e) Cooperation. The Company will not take or agree to take, and
will cause its Subsidiaries not to take or agree to take, any action that would:
(i) make any representation or warranty of the Company set forth in this
Agreement untrue or incorrect or result in any breach of this Agreement or (ii)
result in any of the conditions of this Agreement set forth in Sections 8.1 or
8.3 of this Agreement not being satisfied as of the Effective Time.
(f) Use of Loan Proceeds. The Company will use the proceeds of the
TCI Music Loan only for the purposes permitted by the Loan Agreement.
(g) Financial Statements. Upon the request of TCI Music at any time
prior to the Effective Time, the Company will prepare and deliver to TCI Music,
within 20 days after such request, such financial statements (including audited
financial statements) as may be required by TCI Music to meet its financial
reporting obligations, including requirements under applicable securities laws.
To the extent the Company would not otherwise be required to prepare such
financial statements, all costs and expenses of preparing such financial
statements will be borne by TCI Music.
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Section 6.2 Conduct of Business of TCI Music. Prior to the Effective
Time, except as contemplated or permitted by this Agreement TCI Music will not
take or agree to take, and will cause its Subsidiaries not to take or agree to
take, any action that would (i) make any representation or warranty of TCI Music
or Merger Sub set forth in this Agreement untrue or incorrect so as to cause the
condition set forth in Section 8.2(a) of this Agreement not to be fulfilled as
of the Effective Time or (ii) result in any of the other conditions set forth in
Sections 8.1 or 8.2 of this Agreement not to be satisfied as of the Effective
Time.
Section 6.3 Remedies for Breach. The sole remedies (i) of TCI Music and
Merger Sub for any breach by the Company of Section 6.1(a), and (ii) of the
Company for any breach by TCI Music of Section 6.2, will be injunctive relief or
termination of this Agreement pursuant to Article IX, unless such breach is
willful or intentional, in which event any and all available legal or equitable
remedies may be obtained.
ARTICLE
ADDITIONAL AGREEMENTS
Section 7.1 Access and Information. Each of the Company and TCI Music
and their respective Subsidiaries will afford to the other and to the other's
accountants, counsel and other representatives full access during normal
business hours (and at such other times as the parties may mutually agree)
throughout the period prior to the Effective Time to all of its properties,
books, contracts, commitments, records and personnel.
Section 7.2 Proxy Statement/Private Placement Memorandum/Filings.
(a) Proxy Statement/Private Placement Memorandum. The Company and
TCI Music will prepare jointly a proxy statement/private placement memorandum
(the "Proxy Statement/Private Placement Memorandum") comprising proxy materials
of the Company and the private placement memorandum of TCI Music with respect to
the TCI Music Common Stock to be issued in the Merger and the Company will cause
the Proxy Statement/Private Placement Memorandum to be mailed to holders of
record of Company Common Stock and Warrants as promptly as practicable after the
Proxy Statement/Private Placement Memorandum is prepared.
(b) Filings. As soon as reasonably practicable after the date
hereof, the Company and TCI Music will prepare and file any other filings
relating to the Merger and the other transactions contemplated hereby that are
required to be filed by each under the Exchange Act and other applicable Legal
Requirements (collectively "Filings"), and will use their reasonable best
efforts to respond to any comments of any appropriate Governmental Entity with
respect thereto. The Company, on the one hand, and TCI Music and Merger Sub, on
the other, will cooperate with each other and provide all information necessary
to prepare the Filings and will provide promptly to the other party any
information that such party may obtain that could necessitate amending any such
document.
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(c) Cooperation. Each of the Company and TCI Music will notify the
other promptly of the receipt of any comments from any Governmental Entity and
of any requests by the SEC or its staff or any other government official for
amendments or supplements to any of the Filings or for additional information
and will supply the other with copies of all correspondence between the Company
or any of its representatives, or TCI Music or any of its representatives, as
the case may be, on the one hand, and any Governmental Entity, on the other
hand, with respect thereto. If at any time prior to the Effective Time, any
event occurs that should be set forth in an amendment of, or a supplement to,
any of the Filings, the Company and TCI Music promptly will prepare and file
such amendment or supplement and will distribute such amendment or supplement as
required by applicable Legal Requirements.
Section 7.3 Meeting of Stockholders of the Company. The Company will
take all action necessary, in accordance with the Act and the Company Charter
and Company Bylaws, to duly call, give notice of, convene and hold a meeting of
its stockholders as promptly as practicable to consider and vote upon the
adoption and approval of this Agreement, the Merger and the other transactions
contemplated by this Agreement (the "Meeting"), to the extent such approval is
required by the Act and the Company Charter and Company Bylaws.
Section 7.4 Reasonable Best Efforts. Subject to the fiduciary duty
obligations of the Board of Directors of the Company, each of the parties to
this Agreement will use its reasonable best efforts to take, or cause to be
taken, all appropriate action, and to do, or cause to be done, all things
necessary, proper or advisable under applicable Legal Requirements to consummate
and make effective the transactions contemplated by this Agreement in the most
expeditious manner practicable, including the satisfaction of all conditions to
the Merger.
Section 7.5 Public Announcements. No party to this Agreement will make
any public announcements or otherwise communicate with any news media with
respect to this Agreement or any of the transactions contemplated by this
Agreement without prior consultation with the other parties as to the timing and
contents of any such announcement as may be reasonable under the circumstances;
provided however, that nothing contained herein will prevent any party from
promptly making all Filings that may, in its reasonable judgment, be required or
advisable in connection with the execution and delivery of this Agreement or the
consummation of the transactions contemplated by this Agreement so long as such
party gives timely notice to the other parties of the anticipated disclosure and
cooperates with the other parties in designing reasonable procedural and other
safeguards to preserve, to the maximum extent possible, the confidentiality of
all information furnished by the other parties pursuant to this Agreement.
Section 7.6 Notification. In the event of, or after obtaining Knowledge
of the occurrence or threatened occurrence of, any fact or circumstance that
would cause or constitute a breach of any of its representations and warranties,
obligations or covenants set forth herein, each party to this Agreement promptly
will give notice thereof to the other parties and will use its reasonable best
efforts to prevent or remedy such breach.
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Section 7.7 Further Assurances. Each of the parties to this Agreement
will execute such documents and other instruments and take such further actions
as may be reasonably necessary or desirable to carry out the provisions of this
Agreement and to consummate the transactions contemplated by this Agreement or,
at and after the Closing Date, to evidence the consummation of the transactions
contemplated by this Agreement. Upon the terms and subject to the conditions of
this Agreement, each of the parties to this Agreement will take or cause to be
taken all actions and to do or cause to be done all other things necessary,
proper or advisable to consummate and make effective as promptly as practicable
the transactions contemplated by this Agreement and to obtain in a timely manner
all necessary waivers, consents and approvals and to effect all necessary
Filings.
Section 7.8 Employee Matters.
(a) Employment. Immediately prior to the Effective Time, if so
requested by TCI Music the Company will give notice of termination of employment
to all of its employees other than Thomas McPartland, David Friedensohn, Michael
Goldberg, Nicholas Butterworth, Dean Brownrout and David Wolin, which
termination will be conditional upon the consummation of the Merger. The Company
will provide TCI Music with executed agreements between the Company and each of
Robert B. Meyrowitz and Lou Falcigno terminating their consulting agreements
with the Company on terms satisfactory to TCI Music prior to the Effective Time.
TCI Music may, but will have no obligation to, employ or offer employment to any
employees of the Company other than Thomas McPartland. The Company has provided
to TCI Music a list of all employees of the Company and its Subsidiaries as of
September 1, 1997, showing their current positions, rates of compensation and
dates of hire. Within 30 days after the date of execution of this Agreement (or
such earlier date as TCI Music and the Company may mutually agree) but in any
event prior to the Effective Time, TCI Music will provide to the Company in
writing a list of employees TCI Music desires to employ following the Closing,
subject to satisfaction of TCI Music's conditions for employment (the "Desired
Employees"). The Company will coordinate in all reasonable respects with TCI
Music to allow TCI Music to evaluate personnel files and interview employees of
the Company and its Subsidiaries to make hiring decisions.
(b) Compensation. The Company will pay or cause to be paid to all
employees of the Company and its Subsidiaries all compensation, including
salaries, commissions, bonuses, deferred compensation, reasonable severance,
insurance, pensions, profit sharing, vacation (other than vacation that is
allowed to be carried over pursuant to this Section), sick pay and other
compensation or benefits to which they are entitled for periods prior to the
Closing, including all amounts, if any, payable on account of the termination of
their employment. As to any employees who are entitled to severance payments but
are offered employment with TCI Music, the Company will use its reasonable best
efforts to obtain waivers of such employees' rights to severance payments upon
acceptance of such offers of employment.
(c) Benefits. The Company will be responsible for maintenance and
distribution of benefits accrued under any employee benefit plan (as defined in
ERISA) maintained by the Company or any of its Subsidiaries pursuant to the
provisions of such plans. TCI Music will not
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assume any obligation or liability for any such accrued benefits nor any
fiduciary or administrative responsibility to account for or dispose of any such
accrued benefits under any employee benefit plans maintained by the Company or
any of its Subsidiaries.
(d) Claims and Obligations. All claims and obligations under,
pursuant to or in connection with any welfare, medical, insurance, disability or
other employee benefit plans of the Company or any of its Subsidiaries or
arising under any Legal Requirement affecting employees of the Company or any of
its Subsidiaries incurred on or before the Closing Date or resulting or arising
from events or occurrences occurring or commencing on or before the Closing Date
will be satisfied or accrued by the Company prior to the Closing, and TCI Music
will not have or assume any obligation or liability in connection with any such
plan.
(e) Coverage. The Company will retain full responsibility and
liability for offering and providing "continuation coverage" of any "qualified
beneficiary" who is covered by a "group health plan" sponsored or contributed to
by such party and who has experienced a "qualifying event" or is providing
"continuation coverage" on or prior to the Closing Date. "Continuation
coverage," "qualified beneficiary," "group health plan," and "qualified event"
all will have the meanings given such terms under Code Section 4980B.
(f) No Third Party Liability. Nothing in this Agreement will (i)
require TCI Music to assume any collective bargaining agreement between the
Company or any of its Subsidiaries and any labor organization or (ii) be deemed
to make any employee of any of the parties a third-party beneficiary of this
Agreement.
(g) Surviving Company Benefits. To the extent permitted under the
TCI Music Benefits Plans, each person who was an employee of the Company or any
of its Subsidiaries immediately prior to the Effective Time and who is hired by
the Surviving Corporation or TCI Music at or after the Effective Time (i) will
receive credit for past service with the Company or any of its Subsidiaries for
purposes of eligibility and vesting under the Surviving Corporation's employee
benefit plans, as defined in Section 3(3) of ERISA, to the extent such service
was credited under the Company Benefit Plans on the Closing Date, (ii) will not
be subject to any waiting periods or limitations on benefits for pre-existing
conditions under the Surviving Corporation's employee benefit plans, including
any group health and disability plans, except to the extent such employees were
subject to such limitations under the Company Benefit Plans, and (iii) will
receive credit for past service with the Company or any of its Subsidiaries for
purposes of eligibility and vesting under the Surviving Corporation's plans and
policies with respect to seniority benefits, including vacation and sick leave.
Section 7.9 No Solicitation. Neither the Company nor any of its
Subsidiaries or any of their respective officers, directors, representatives or
agents will take any action to (i) initiate the submission of any Acquisition
Proposal, (ii) enter into any agreement with respect to any Acquisition Proposal
or (iii) participate in negotiations with, or provide information concerning the
Company, its assets, liabilities or business to, any Person in connection with
any Acquisition
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Proposal. The Company will promptly communicate to TCI Music any solicitation or
inquiry received by the Company and the terms of any proposal or inquiry that it
may receive in respect of any Acquisition Proposal, or of any such information
requested from it or of any such negotiations or discussions being sought to be
initiated with it. Nothing in this Section 7.9 will be construed as prohibiting
the Board of Directors of the Company from (i) making any disclosure to the
Company's stockholders or (ii) responding to any unsolicited proposal or inquiry
by advising the Person making such proposal or inquiry of the terms of this
Section 7.9. "Acquisition Proposal" means any proposed (i) merger, consolidation
or similar transaction involving the Company or any Subsidiary, (ii) sale, lease
or other disposition, directly or indirectly, by merger, consolidation, share
exchange or otherwise of all or any substantial part of the assets of the
Company or any Subsidiary, (iii) issue, sale or other disposition of securities
representing 10% or more of the voting power of the Company Common Stock or (iv)
transaction in which any Person proposes to acquire beneficial ownership (within
the meaning of Rule 13d-3 under the Exchange Act) of, or the right to acquire
beneficial ownership of, or any "group" (as such term is defined under the
Exchange Act) has been formed which beneficially owns or has the right to
acquire beneficial ownership of, 10% or more of the outstanding Company Common
Stock.
Section 7.10 Indemnification of Executives.
(a) Indemnification. TCI Music will cause the Surviving Corporation
to, and, if the Surviving Corporation fails or is unable to do so, TCI Music
will, indemnify, defend and hold harmless each person who is now, or has been at
any time prior to the date of this Agreement or who becomes prior to the
Effective Time, an officer or director of the Company (each, an "Executive"),
against all losses, expenses, damages, liabilities, costs, judgments and amounts
paid in settlement in connection with any claim, action, suit, proceeding, or
investigation based on or arising out of, in whole or in part, any actions or
omissions of such Executive as an officer or director of the Company on or prior
to the Effective Time, including actions or omissions relating to any of the
transactions contemplated by this Agreement, to the fullest extent permitted
under the Act, the Company Charter and Company Bylaws and the Indemnification
Agreements listed on Schedule 7.10(a). TCI Music will cause the Surviving
Corporation to pay expenses in advance of the final disposition of any such
claim, action, suit, proceeding, or investigation to each Executive to the
fullest extent permitted by applicable Legal Requirements upon receipt of any
undertaking required or contemplated by applicable Legal Requirements. Without
limiting the foregoing, in any case in which approval of or a determination by
the Surviving Corporation is required to effectuate any indemnification, (i) the
Executives will conclusively be deemed to have met the applicable standards for
indemnification with respect to any actions or omissions of such Executives as
officers or directors of the Company on or prior to the Effective Time relating
to any of the transactions contemplated by this Agreement and (ii) TCI Music
will cause the Surviving Corporation to direct, at the election of any
Executive, that the determination of any such approval shall be made by
independent counsel selected by the Executive and reasonably acceptable to TCI
Music. If any such claim, action, suit, proceeding, or investigation is brought
against any Executive (whether arising before or after the Effective Time), (i)
the Executive may retain counsel satisfactory to him or her that is reasonably
acceptable to TCI Music, and (ii) TCI Music will pay or will cause the Surviving
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Corporation to pay all reasonable fees and expenses of such counsel for the
Executive, as such fees and expenses are incurred, upon receipt of a written
undertaking by the Executive that the Executive will repay the amounts so paid
if it ultimately is determined that he or she is not entitled to be indemnified
by the Surviving Corporation as authorized by the Act. Neither TCI Music nor the
Surviving Corporation will have any obligation hereunder to any Executive when
and if a court of competent jurisdiction ultimately determines, after exhaustion
of all avenues of appeal, that such Executive is not entitled to indemnification
hereunder.
(b) Successors. If TCI Music or the Surviving Corporation or any of
its successors or assigns (i) consolidates with or merges into any other Person
and is not the continuing or surviving Person of such consolidation or merger or
(ii) transfers all or substantially all of its properties and assets to any
Person, proper provisions will be made so that the successors and assigns of TCI
Music or the Surviving Corporation assume the obligations set forth in this
Section 7.10.
Section 7.11 Cancellation of Warrants, Options, Etc. The Company will
use its best efforts to cause no Warrants to be exercised and all Warrants to be
canceled at the Effective Time without the payment of cash or any other
consideration by the Company or any Subsidiary (other than the allocation of
Merger Shares to the holders thereof pursuant to Section 3.1).
Section 7.12 McPartland Employment. Prior to the Effective Time TCI
Music will offer to employ Thomas McPartland as the President and Chief
Executive Officer of TCI Music after the Effective Time on terms set forth in
the employment agreement dated January 1, 1996 between the Company and Mr.
McPartland and such offer will include as a provision that he be entitled to
participate in bonus, incentive, stock option and other benefit programs on a
basis consistent with the practice of TCI Music in compensating senior
executives.
Section 7.13 Representation Letter. The Company will mail to each holder
of record of Company Common Stock and Warrants at the same time the Proxy
Statement/Private Placement Memorandum is mailed to such Persons, a letter in
the Form attached as Exhibit D (the "Representation Letter"). The Company will
use its best efforts to obtain and deliver to TCI Music a duly executed original
Representation Letter from each holder of record of Company Common Stock and
Warrants prior to the Effective Time.
ARTICLE VIII
CONDITIONS PRECEDENT
Section 8.1 Conditions to Each Party's Obligation to Effect the Merger.
The respective obligations of each party to effect the Merger will be subject to
the fulfillment at or prior to the Effective Time of the following conditions:
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(a) Stockholders' Action. This Agreement, the Merger and the
transactions contemplated by this Agreement shall have been duly approved by a
vote of the holders of the number of the outstanding shares of Company Common
Stock required to approve the Merger and such transactions pursuant to the Act
and the Company Charter and the Company Bylaws.
(b) Third Party Action. No Governmental Entity shall have enacted,
issued, promulgated, enforced or entered any Legal Requirement that remains in
effect and has the effect of making the transactions contemplated by this
Agreement illegal or otherwise prohibiting the transactions contemplated by this
Agreement, or that questions the validity or the legality of the transactions
contemplated by this Agreement and that could reasonably be expected to
materially and adversely affect the value of the Company or its business, it
being agreed that each party will use its reasonable best efforts to have any
such injunction lifted.
Section 8.2 Conditions to Obligation of the Company to Effect the
Merger. The obligation of the Company to effect the Merger will be subject to
the fulfillment at or prior to the Effective Time of the additional following
conditions:
(a) Performance/Representations and Warranties. TCI Music and Merger
Sub shall have performed in all material respects their agreements contained in
this Agreement required to be performed by them at or prior to the Effective
Time and the representations and warranties of TCI Music and Merger Sub set
forth in this Agreement, if qualified by materiality, are true in all respects
and if not so qualified, are true in all material respects, when made and at and
as of the Effective Time as if made at and as of such time, and the Company
shall have received a certificate of TCI Music and Merger Sub executed on behalf
of each such corporation by the President or a Vice President of such
corporation to that effect.
(b) Legal Opinion. The Company shall have received the opinion of
counsel to TCI Music and Merger Sub (which counsel may be an employee of TCI)
substantially to the effect set forth in Exhibit A.
(c) Absence of Changes. There shall have been no material adverse
change in the financial condition, results of operations, assets, liabilities,
business or prospects of TCI Music since the date of this Agreement.
(d) Registration Rights Agreement. TCI Music shall have executed and
delivered the Registration Rights Agreement in substantially the form set forth
on Exhibit C.
(e) TCI Agreement. The Company shall have received a letter from
Tele-Communications, Inc. ("TCI") or one or more Affiliates controlled by TCI
pursuant to which TCI or such Affiliates agree to continue to be beneficial
owners (as determined pursuant to Rule 13d-3 under the Exchange Act) of shares
of TCI Music capital stock representing at least one-third of the total voting
power of all voting stock of TCI Music through the earlier of the date the
Merger Shares
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are registered, or such registration obligations expire, pursuant to the terms
of the Registration Rights Agreement.
Section 8.3 Conditions to Obligations of TCI Music and Merger Sub to
Effect the Merger. The obligations of TCI Music and Merger Sub to effect the
Merger will be subject to the fulfillment at or prior to the Effective Time of
the additional following conditions:
(a) Performance/Representations and Warranties. The Company shall
have performed in all material respects its agreements contained in this
Agreement required to be performed by it at or prior to the Effective Time and,
except as contemplated or permitted by this Agreement, the representations and
warranties of the Company set forth in this Agreement, if qualified by
materiality, are true in all respects and if not so qualified, are true in all
material respects, when made and at and as of the Effective Time as if made at
and as of such time, and TCI Music and Merger Sub shall have received a
certificate of the Company executed on behalf of the Company by the President or
an Executive Vice President of the Company to that effect.
(b) Consents. All consents of third parties required to be obtained
with respect to the Merger and the other transactions contemplated by this
Agreement shall have been obtained.
(c) Cancellation of Warrants and Registration Rights; No Exercise of
Warrants. TCI Music shall have received evidence satisfactory to it of (i) the
unanimous consent of the holders of all Warrants that are outstanding or
effective as of the date of this Agreement to be subject to the Warrant
Cancellation and that such consent is still in effect at the Effective Time;
(ii) the consent of any Person that has registration rights with respect to the
Company's Warrants or capital stock of the cancellation or termination thereof
and that such consent is still in effect at the Effective Time; and (iii) no
notice of exercise of Warrants was received by the Company and no Warrants were
exercised after the date of this Agreement and prior to the Effective Time.
(d) Stockholders; Escrow Shares. TCI Music shall have received
evidence satisfactory to it that (i) the number of Dissenting Shares do not
exceed 10% of the issued and outstanding shares of Company Common Stock and (ii)
all shares of Series A, Series B and Series E Common Stock of the Company
currently held in escrow pursuant to the Stock Escrow Agreement dated as of
November 21, 1995 among the Company, certain of its stockholders and American
Stock Transfer & Trust Company (the "Escrow Agreement"), the Company Charter or
otherwise, have been released. To the extent permitted by law and the Escrow
Agreement, if the Company's stockholders and Blair do not consent to the release
of the Class B Shares held in escrow prior to the Effective Time and the
beneficial owners of such shares do not otherwise receive Merger Shares in
replacement therefor in connection with the Merger, TCI Music will vote for or
consent to the release from escrow of the TCI Music Series A Common Stock into
which such shares will be converted at the Effective Time. Such release of TCI
Music Series A Common Stock will be accomplished in a manner that does not
require the recipients of those shares to recognize income or gain if that
method of releasing the shares is not likely to have any adverse effect on TCI
Music.
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<PAGE> 38
(e) Absence of Changes. There shall have been no material adverse
change (other than a decrease in the Company's working capital consistent with
decreases experienced in recent periods) in the financial condition, results of
operations, assets, liabilities, business or prospects of the Company since the
date of the Most Recent Company Balance Sheet included in the Company SEC
Reports.
(f) Legal Opinion. TCI Music shall have received the opinion of Reid
& Priest LLP, counsel to the Company, substantially to the effect set forth in
Exhibit B.
(g) Representation Letter. TCI Music shall have received from each
holder of Company Common Stock or Warrants a duly executed Representation Letter
in the form of Exhibit D.
(h) Termination of Consulting Agreements. TCI Music shall have
received executed agreements between the Company and each of Robert B. Meyrowitz
and Lou Falcigno terminating their consulting agreements with the Company as of
the Effective Time on terms satisfactory to TCI Music.
(i) Blair Release and Waiver. TCI Music and the Company shall have
received from Blair, in forms acceptable to TCI Music, a receipt with respect to
payment of all amounts payable under the Blair Contract and release and waiver
with respect to any other amounts claimed by Blair to be payable in connection
with the Company's proposed initial public offering.
(j) Filing of Restatement to Company Charter Stock. TCI Music shall
have received evidence satisfactory to it that the restatement to the Company
Charter in the form of Exhibit E has been duly filed with the Secretary of State
of the State of Delaware.
ARTICLE
TERMINATION, AMENDMENT AND WAIVER
Section 9.1 Termination. This Agreement may be terminated at any time
prior to the Effective Time, whether before or after approval of the Merger by
the stockholders of the Company:
(a) By Mutual Consent. By mutual consent of the Board of Directors
of TCI Music and the Board of Directors of the Company.
(b) By TCI Music or the Company. By either TCI Music or the Company
(i) if at the Meeting (including any postponement or adjournment thereof), this
Agreement, the Merger and the transactions contemplated by this Agreement are
not approved and adopted by the affirmative vote specified herein or (ii) at any
time after January 15, 1998, if the Merger has not been consummated on or before
such date, and in either case so long as the terminating party is not in
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<PAGE> 39
breach of any of its obligations hereunder in any material respect as of the
time such party gives notice of its election to terminate this Agreement and, if
the Company is the terminating party, so long as the TCI Music Loan has been
repaid in full, together with accrued interest, and none of the Company
Stockholders (as defined in the Voting Agreement) is in breach of any
obligations under the Voting Agreement as of the time that the Company gives
notice of its election to terminate this Agreement.
(c) By the Company. By the Company (provided the Company is not in
breach of any of its obligations under this Agreement in any material respect
and none of the Company Stockholders is in breach of any obligations under the
Voting Agreement, in each case as of the time that the Company gives notice of
its election to terminate this Agreement) if any of the conditions specified in
Section 8.1 or Section 8.2 have not been waived by the Company (or, in the case
of Section 8.1, waived by the Company, TCI Music and Merger Sub) or satisfied,
at such time as such condition is no longer capable of satisfaction.
(d) By TCI Music. By TCI Music (provided that neither TCI Music nor
Merger Sub is in breach of any of its obligations hereunder in any material
respect as of the time TCI Music gives notice of its election to terminate this
Agreement) if any of the conditions specified in Section 8.1 or Section 8.3 have
not been waived by TCI Music (or, in the case of Section 8.1, waived by TCI
Music, Merger Sub and the Company) or satisfied, at such time as such condition
is no longer capable of satisfaction.
Section 9.2 Effect of Termination. In the event of termination of this
Agreement by either TCI Music or the Company, as provided above, this Agreement
will forthwith become void and (except for the willful breach of this Agreement
by any party to this Agreement occurring prior to such termination) there will
be no liability on the part of any of the Company, TCI Music or Merger Sub,
except that the Company will remain liable under the TCI Music Loan.
Section 9.3 Amendment. This Agreement may be amended by the parties to
this Agreement, by or pursuant to action taken by all of their Boards of
Directors, at any time before or after approval of this Agreement by the
stockholders of the Company and prior to the Effective Time, but, after such
approval, no amendment will be made that alters the indemnification provisions
of Section 7.2 or changes the ratio at which Company Common Stock is to be
converted into TCI Music Common Stock as provided in Section 3.2 without
stockholder approval. This Agreement may not be amended except by an instrument
in writing signed on behalf of each of the parties to this Agreement.
Section 9.4 Waiver. At any time prior to the Effective Time, the parties
to this Agreement, by or pursuant to action taken by their respective Boards of
Directors, may (i) extend the time for performance of any of the obligations or
other acts of the other parties to this Agreement, (ii) waive any inaccuracies
in the representations and warranties set forth in this Agreement or in any
documents delivered pursuant to this Agreement and (iii) waive compliance with
any of the agreements or conditions set forth in this Agreement. Any agreement
on the part of
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<PAGE> 40
a party to this Agreement to any such extension or waiver will be valid if set
forth in an instrument in writing signed on behalf of such party.
ARTICLE X
GENERAL PROVISIONS; DEFINITIONS
Section 10.1 Non-Survival of Representations, Warranties and Agreements.
No representations and warranties contained in this Agreement will survive
beyond the Closing Date. This Section 10.1 will not limit any covenant or
agreement of the parties to this Agreement that by its terms requires
performance after the Closing Date.
Section 10.2 Notices. All notices or other communications under this
Agreement will be in writing and will be given (and will be deemed to have been
duly given upon receipt) by delivery in person, by cable, telegram, telex or
other standard form of telecommunications, or by registered or certified mail,
postage prepaid, return receipt requested, addressed as follows:
If to the Company: Paradigm Music Entertainment Company
67 Irving Place North
4th Floor
New York, New York 10003
Attention: President
Telecopy: (212) 387-8171
With a copy to: Reid & Priest LLP
40 West 57th Street
New York, New York 10019
Attention: Michael S. Elkin, Esq.
Telecopy No.: (212) 603-2298
If to TCI Music or
Merger Sub: TCI Music, Inc.
8101 East Prentice Avenue
Suite 500
Englewood, Colorado 80111
Telecopy No.: (303) 488-3217
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<PAGE> 41
With a copy to: Legal Department
Terrace Tower II
5619 DTC Parkway
Englewood, Colorado 80111-3000
Attention: David B. Koff, President
Telecopy No.: (303) 721-5443
With a copy to: Sherman & Howard L.L.C.
633 Seventeenth Street
Suite 3000
Denver, Colorado 80202
Attention: Charles Y. Tanabe, Esq.
Telecopy No.: (303) 298-0940
or to such other addresses as any party may have furnished to the other parties
in writing in accordance with this Section.
Section 10.3 Fees and Expenses. Whether or not the Merger is
consummated, all costs and expenses incurred in connection with this Agreement
and the transactions contemplated by this Agreement (other than any fees payable
to Blair, which will be paid as provided in Section 5.13) will be paid by the
party incurring such expenses. The Company's expenses relating to the
transactions contemplated by this Agreement, including fees of Reid & Priest
LLP, counsel to the Company, will be paid or accrued by the Company prior to the
Effective Time.
Section 10.4 Specific Performance. The parties to this Agreement agree
that irreparable damage would occur in the event that any of the provisions of
this Agreement were not performed in accordance with their specific terms or
were otherwise breached. It is accordingly agreed that the parties will be
entitled to enforce specifically the terms and provisions of this Agreement in
any court of the United States or any state having jurisdiction, in addition to
any other remedy to which they are entitled at law or in equity.
Section 10.5 Entire Agreement. This Agreement will be of no force or
effect until executed and delivered by all of the parties to this Agreement.
This Agreement (including the documents and instruments referred to in this
Agreement), when executed and delivered, constitutes the entire agreement and
supersedes all other prior agreements and understandings, both written and oral,
among the parties, or any of them, with respect to the subject matter of this
Agreement, except that the letter agreement dated September 18, 1997 between the
Company and TCI Music will remain in effect to the extent necessary to preserve
the rights and obligations of the parties accruing prior to the date hereof.
Section 10.6 Miscellaneous. This Agreement may be executed in two or
more counterparts which together will constitute a single agreement. Any
certificate delivered pursuant
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<PAGE> 42
to this Agreement will be made without personal liability on the part of the
officer or employee of the Person giving such certificate.
Section 10.7 GOVERNING LAW AND VENUE; WAIVER OF JURY TRIAL.
(a) THIS AGREEMENT WILL BE DEEMED TO BE MADE UNDER, AND IN ALL
RESPECTS WILL BE INTERPRETED, CONSTRUED AND GOVERNED BY AND IN ACCORDANCE WITH,
THE LAW OF THE STATE OF DELAWARE. The parties hereby irrevocably submit to the
jurisdiction of the court of the State of Delaware and the federal courts of the
United States of America located in the State of Delaware solely in respect of
the interpretation and enforcement of the provisions of this Agreement and of
the documents referred to in this Agreement, and in respect of the transactions
contemplated hereby, and hereby waive, and agree not to assert, as a defense in
any action, suit or proceeding for the interpretation or enforcement hereof or
of any such document, that it is not subject thereto or that such action, suit
or proceeding may not be brought or is not maintainable in said courts or that
the venue thereof may not be appropriate or that this Agreement or any such
document may not be enforced in or by such courts, and the parties hereto
irrevocably agree that all claims with respect to such action or proceeding will
be heard and determined in such a Delaware state or federal court. The parties
hereby consent to and grant any such court jurisdiction over the person of such
parties and over the subject matter of such dispute and agree that mailing of
process or other papers in connection with any such action or proceeding in the
manner provided in Section 10.2 or in such other manner as may be permitted by
law will be valid and sufficient service thereof.
(b) EACH PARTY ACKNOWLEDGES AND AGREES THAT ANY CONTROVERSY THAT MAY
ARISE UNDER THIS AGREEMENT IS LIKELY TO INVOLVE COMPLICATED AND DIFFICULT
ISSUES, AND THEREFORE EACH SUCH PARTY HEREBY IRREVOCABLY AND UNCONDITIONALLY
WAIVES ANY RIGHT SUCH PARTY MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY
LITIGATION DIRECTLY OR INDIRECTLY ARISING OUT OF OR RELATING TO THIS AGREEMENT
OR THE TRANSACTIONS CONTEMPLATED BY THIS AGREEMENT. EACH PARTY CERTIFIES AND
ACKNOWLEDGES THAT (i) NO REPRESENTATIVE, AGENT OR ATTORNEY OF ANY OTHER PARTY
HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT SUCH OTHER PARTY WOULD NOT, IN THE
EVENT OF LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVER, (ii) EACH PARTY
UNDERSTANDS AND HAS CONSIDERED THE IMPLICATIONS OF THIS WAIVER, (iii) EACH PARTY
MAKES THIS WAIVER VOLUNTARILY, AND (iv) EACH PARTY HAS BEEN INDUCED TO ENTER
INTO THIS AGREEMENT BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS AND
CERTIFICATIONS IN THIS SECTION 10.7.
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<PAGE> 43
IN WITNESS WHEREOF, the parties have caused this Agreement to be signed
by their respective duly authorized officers all as of the date first written
above.
TCI MUSIC, INC.
By: /s/ David B. Koff
--------------------------------------
Name: David B. Koff
Title: President
TCI PARA MERGER SUB, INC.
By: /s/ David B. Koff
--------------------------------------
Name: David B. Koff
Title: President
PARADIGM MUSIC ENTERTAINMENT
COMPANY
By: /s/ Thomas McPartland
--------------------------------------
Name: Thomas McPartland
Title: President
<PAGE> 1
EXHIBIT 4.7
AMENDMENT TO RIGHTS AGREEMENT
This Amendment to Rights Agreement, dated as of March 18, 1998 (the
"Amendment"), is by and among TELE-COMMUNICATIONS, INC., a Delaware corporation
("TCI" or the "Company"), TCI MUSIC, INC., a Delaware corporation ("MusicCo"),
and THE BANK OF NEW YORK, a New York banking corporation, as Rights Agent for
the Company's rights issued pursuant to the Rights Agreement dated as of July
11, 1997 (the "Rights Agreement").
RECITALS
Section 8.03 of the Rights Agreement provides that the Company and the
Rights Agent may from time-to-time supplement or amend the Rights Agreement
without the approval of any Holder in order to cure any ambiguity or to correct
or supplement any provision contained therein that may be defective or
inconsistent with any other provision therein or to make any other provisions in
regard or manner or questions arising thereunder that the Company and the Rights
Agent may deem necessary or desirable and that shall not be inconsistent with
the provisions of the Rights and shall not adversely affect the interest of the
Holders. Accordingly, the parties wish to amend the initial Rights Agreement as
provided herein.
AGREEMENT
In consideration of the foregoing, and of the provisions of the Rights
Agreement permitting amendments of the kind contemplated hereby, the parties
agree as follows:
1. Definitions. As used in this Amendment, the terms with initial
capital letters will have the meanings assigned to them in the Rights Agreement.
2. Definition of Fair Market Value. There shall be added as the
last sentence of the definition of Fair Market Value the following:
Notwithstanding the foregoing, the Fair Market Value of one share of
stock of an Applicable Entity (including, in the case of MusicCo Series
A Common Stock, one share of MusicCo Series A Common Stock and each
Right, if any, relating thereto) means, as of any date, (i) the closing
sale price of such stock as quoted on the principal securities exchange
(including, if applicable, the NASDAQ National Market) on which such
stock is traded or (ii) if such stock is not traded on any securities
exchange, the average of the low bid price and high bid price of such
stock, as reported by NASDAQ or, if no such price is reported by NASDAQ,
as reported by any reputable successor entity, or, if there is no such
successor entity, by such New York Stock Exchange member firm as may be
selected by MusicCo.
<PAGE> 2
3. Current Market Price of a TCI Series A Share. The first sentence
of the last paragraph of Section 4.05 of the Rights Agreement shall be deleted
in its entirety and the following substituted therefor:
As used herein, the "Current Market Price" of a TCI Series A Share shall
be the average of the daily closing prices for a share of TCI Series A
Common Stock for 30 consecutive trading days commencing 45 trading days
before the date that the Notice to Rights Holders described in Section
4.07 is first published as provided in Section 4.07.
4. Certification by the Company. The Company has delivered to the
Rights Agent a certificate from an officer of the Company which states that this
Amendment is in compliance of the terms of Section 8.03 of the Rights Agreement,
and the Rights Agent is relying on such certificate in executing this Amendment.
5. No Other Amendment. Except as amended hereby, the Rights
Agreement will continue in full force and effect without any amendment or
modification thereof.
6. Counterparts. This Amendment may be executed in any number of
counterparts and each of such counterpart shall for all purposes be deemed to be
an original, and all such counterparts shall together constitute but one and the
same instrument.
TELE-COMMUNICATIONS, INC.
By: /s/ STEPHEN M. BRETT
----------------------------------------
Name: Stephen M. Brett
--------------------------------------
Title: Executive Vice President
-------------------------------------
TCI MUSIC, INC.
By: /s/ STEPHEN M. BRETT
----------------------------------------
Name: Stephen M. Brett
--------------------------------------
Title: Vice President
-------------------------------------
THE BANK OF NEW YORK, as Rights Agent
By: /s/ JOSEPH VARCA
----------------------------------------
Name: Joseph Varca
--------------------------------------
Title: Vice President
-------------------------------------
<PAGE> 1
EXHIBIT 10.2
$100,000,000 REVOLVING LOAN AGREEMENT
AMONG
TCI MUSIC, INC.
and
THE BANKS WHOSE NAMES APPEAR AS "BANKS"
ON THE SIGNATURE PAGES HEREOF,
with
BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION,
AS ADMINISTRATIVE AGENT,
and
CREDIT LYONNAIS NEW YORK BRANCH
and
ROYAL BANK OF CANADA,
AS SYNDICATION AGENTS
December 30, 1997
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
ARTICLE 1 - DEFINITIONS......................................................................1
ARTICLE 2 - LOANS...........................................................................17
Section 2.1 The Loans.........................................................17
Section 2.2 Manner of Borrowing and Disbursement..............................17
Section 2.3 Interest..........................................................20
Section 2.4 Fees..............................................................22
Section 2.5 Reduction of Commitment...........................................22
Section 2.6 Prepayment........................................................23
Section 2.7 Repayment.........................................................23
Section 2.8 Notes; Loan Accounts..............................................24
Section 2.9 Manner of Payment.................................................24
Section 2.10 Reimbursement.....................................................25
Section 2.11 Application of Proceeds...........................................26
Section 2.12 Capital Adequacy..................................................27
Section 2.13 Bank Tax Forms....................................................27
ARTICLE 3 - CONDITIONS PRECEDENT............................................................28
Section 3.1 Conditions Precedent to Effectiveness of Agreement and Initial
Advance...........................................................28
Section 3.2 Conditions Precedent to Each Advance..............................29
ARTICLE 4 - REPRESENTATIONS AND WARRANTIES..................................................30
Section 4.1 Representations and Warranties....................................30
Section 4.2 Survival of Representations and Warranties, etc...................36
ARTICLE 5 - GENERAL COVENANTS...............................................................36
Section 5.1 Preservation of Existence and Similar Matters.....................36
Section 5.2 Business; Compliance with Applicable Law..........................37
Section 5.3 Maintenance of Properties.........................................37
Section 5.4 Accounting Methods and Financial Records..........................37
Section 5.5 Insurance.........................................................37
Section 5.6 Payment of Taxes and Claims.......................................37
Section 5.7 Visits and Inspections............................................38
Section 5.8 Payment of Indebtedness...........................................38
Section 5.9 Use of Proceeds...................................................38
Section 5.10 ERISA.............................................................38
Section 5.11 Indemnity.........................................................38
Section 5.12 Further Assurances................................................39
Section 5.13 Broker's Claims...................................................40
</TABLE>
<PAGE> 3
<TABLE>
<S> <C> <C>
Section 5.14 Covenants Regarding Formation of Subsidiaries and Acquisitions....40
ARTICLE 6 - INFORMATION COVENANTS...........................................................40
Section 6.1 Quarterly Financial Statements and Information....................40
Section 6.2 Annual Financial Statements and Information; Certificate of
No Default........................................................41
Section 6.3 Performance Certificates..........................................41
Section 6.4 Copies of Other Reports...........................................42
Section 6.5 Notice of Litigation and Other Matters............................42
Section 6.6 Loss of Agreements................................................43
ARTICLE 7 - NEGATIVE COVENANTS..............................................................43
Section 7.1 Indebtedness for Borrowed Money...................................43
Section 7.2 Investments.......................................................44
Section 7.3 Limitation on Liens...............................................45
Section 7.4 Amendment and Waiver..............................................45
Section 7.5 Liquidation; Disposition or Acquisition of Assets.................46
Section 7.6 Limitation on Guaranties..........................................46
Section 7.7 Restricted Payments and Purchases.................................46
Section 7.8 Leverage Ratio....................................................46
Section 7.9 Pro Forma Debt Service Coverage Ratio.............................47
Section 7.10 Interest Coverage Ratio...........................................47
Section 7.11 Affiliate Transactions............................................47
Section 7.12 ERISA Liabilities.................................................48
Section 7.13 Limitation on Upstream Dividends by Subsidiaries..................48
Section 7.14 TCI Revenue Agreement.............................................48
Section 7.15 Designation of Restricted and Unrestricted Subsidiary.............48
ARTICLE 8 - DEFAULT.........................................................................49
Section 8.1 Events of Default.................................................49
Section 8.2 Remedies..........................................................51
ARTICLE 9 - THE ADMINISTRATIVE AGENT........................................................52
Section 9.1 Appointment and Authorization.....................................52
Section 9.2 Delegation of Duties..............................................52
Section 9.3 Interest Holders..................................................53
Section 9.4 Consultation with Counsel.........................................53
Section 9.5 Documents.........................................................53
Section 9.6 Agents and Affiliates.............................................53
Section 9.7 Responsibility of the Agents......................................53
Section 9.8 Action by Administrative Agent....................................54
Section 9.9 Notice of Default.................................................54
</TABLE>
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<PAGE> 4
<TABLE>
<S> <C> <C>
Section 9.10 Responsibility Disclaimed.........................................55
Section 9.11 Indemnification...................................................55
Section 9.12 Credit Decision...................................................55
Section 9.13 Successor Administrative Agent....................................56
Section 9.14 Syndication Agents and Co-Agents..................................56
ARTICLE 10 - CHANGE IN CIRCUMSTANCES AFFECTING LIBOR ADVANCES...............................56
Section 10.1 LIBOR Basis Determination Inadequate..............................57
Section 10.2 Illegality........................................................57
Section 10.3 Increased Costs...................................................57
Section 10.4 Effect On Other Advances..........................................59
ARTICLE 11 - MISCELLANEOUS..................................................................59
Section 11.1 Notices...........................................................59
Section 11.2 Expenses..........................................................61
Section 11.3 Waivers...........................................................61
Section 11.4 Set-Off...........................................................62
Section 11.5 Assignment........................................................62
Section 11.6 Counterparts......................................................64
Section 11.7 Governing Law.....................................................65
Section 11.8 Severability......................................................65
Section 11.9 Headings..........................................................65
Section 11.10 Interest..........................................................65
Section 11.11 Entire Agreement..................................................66
Section 11.12 Amendment and Waiver..............................................66
Section 11.13 Other Relationships...............................................66
Section 11.14 Confidentiality...................................................66
Section 11.15 Survival of Various Provisions....................................67
ARTICLE 12 - WAIVER OF JURY TRIAL...........................................................67
Section 12.1 Waiver of Jury Trial..............................................67
</TABLE>
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<PAGE> 5
LOAN AGREEMENT
FOR
$100,000,000 REVOLVING CREDIT FACILITY
among
TCI MUSIC, INC.
and
THE BANKS WHOSE NAMES APPEAR AS "BANKS"
ON THE SIGNATURE PAGES HEREOF,
with
BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION,
AS ADMINISTRATIVE AGENT,
and
CREDIT LYONNAIS NEW YORK BRANCH
and
ROYAL BANK OF CANADA,
AS SYNDICATION AGENTS
Dated as of the 30th day of December, 1997
THIS AGREEMENT is made as of the 30th day of December, 1997, by and
among TCI MUSIC, INC., the Administrative Agent (as defined herein) and the
Banks (as defined herein).
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged by each of the parties hereto, the
parties hereby agree as follows:
ARTICLE 1 - Definitions.
For the purposes of this Agreement:
"Acquisition" shall mean (whether by purchase, exchange, issuance of
stock or other equity or debt securities, merger, reorganization or any other
method) (i) any acquisition by the Borrower or any of its Restricted
Subsidiaries of any other Person, which Person shall then become consolidated
with the Borrower or any such Restricted Subsidiary in accordance
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<PAGE> 6
with GAAP, or (ii) any acquisition by the Borrower or any of its Restricted
Subsidiaries of all or any substantial part of the assets of any other Person.
"Administrative Agent" shall mean Bank of America National Trust and
Savings Association, in its capacity as Administrative Agent for the Banks or
any successor Administrative Agent appointed pursuant to Section 9.13 hereof.
"Administrative Agent's Office" shall mean the office of the
Administrative Agent located at the address set forth in Section 11.1 hereof, or
such other office as may be designated pursuant to the provisions of Section
11.1 hereof.
"Advance" shall mean amounts advanced by the Banks to the Borrower
pursuant to Article 2 hereof on the occasion of any borrowing; and Advances
shall mean more than one Advance.
"Affiliate" shall mean, with respect to any Person, any other Person
directly or indirectly controlling, controlled by, or under common control with
the Borrower other than a Restricted Subsidiary . For purposes of this
definition, "control" when used with respect to any Person means the power to
direct or cause the direction of the management and policies of such Person,
whether by contract or otherwise.
"Affiliation Agreement" shall mean that certain Affiliation Agreement
dated as of July 1, 1997, between DMX Inc. and Satellite Services, Inc..
"Affiliate Debt Subordination Agreement" shall mean any Affiliate Debt
Subordination Agreement from any Affiliate in favor of the Administrative Agent
and in substantially the form of Exhibit A attached hereto.
"Agreement" shall mean this Loan Agreement, as amended, supplemented,
restated or otherwise modified from time to time.
"Agreement Date" shall mean December 30, 1997.
"Annualized Operating Cash Flow" shall mean, as of any calculation date,
(a) Operating Cash Flow (for the quarter end being tested or the most recently
completed fiscal quarter, as the case may be) times (b) four (4).
"Applicable Law" shall mean, in respect of any Person, all provisions of
constitutions, statutes, rules, regulations, and orders of governmental bodies
or regulatory agencies applicable to such Person, including, without limitation,
all orders and decrees of all courts and arbitrators in proceedings or actions
to which the Person in question is a party or by which it is bound.
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<PAGE> 7
"Applicable Margin" shall mean the interest rate margin applicable to
Base Rate Advances and LIBOR Advances, as the case may be, in each case
determined in accordance with Section 2.3(f) hereof.
"Assignment and Assumption Agreement" shall mean that certain form of
Assignment and Assumption Agreement in substantially the form of Exhibit B
attached hereto, pursuant to which each Bank may, as further provided in Section
11.5 hereof, sell a portion of its Loans or Commitment.
"Authorized Signatory" shall mean, with respect to any Person, such
senior personnel of such Person as may be duly authorized and designated in
writing by such Person to execute documents, agreements, and instruments on
behalf of such Person.
"Banks" shall mean those banks whose names are set forth on the
signature pages hereof under the heading "Banks" and any assignees of the Banks
which hereafter become parties hereto pursuant to and in accordance with Section
11.5 hereof; and "Bank" shall mean any one of the foregoing Banks.
"Base Rate" shall mean, as of any date, a fluctuating interest rate per
annum equal to the sum of (a) the higher of (i) the Prime Rate, or (ii) the sum
of (1) the Federal Funds Rate, plus (2) one-half of one percent (1/2%), plus (b)
the Applicable Margin. The Base Rate shall be adjusted automatically as of the
opening of business on the effective date of each change in the Prime Rate or
the Federal Funds Rate, as the case may be, to account for such change, and
shall also be changed as and when provided in Section 2.3(f) hereof to reflect
changes in the Applicable Margin.
"Base Rate Advance" shall mean an Advance which bears interest at the
Base Rate which the Borrower requests to be made as a Base Rate Advance or is
reborrowed as a Base Rate Advance, in accordance with the provisions of Section
2.2 hereof, and which shall be in a principal amount of at least $500,000 and in
an integral multiple of $250,000, except for a Base Rate Advance which is in an
amount equal to the unused amount of the Commitment, which Advance may be in
such amount.
"Borrower" shall mean TCI Music, Inc., a Delaware corporation.
"Business Day" shall mean a day on which banks and foreign exchange
markets are open for the transaction of business required for this Agreement in
London, England, Los Angeles, California and New York, New York, as relevant to
the determination to be made or the action to be taken.
"Capital Expenditures" shall mean with respect to any Person,
expenditures for the purchase of tangible assets of long-term use which would be
required to be capitalized on the balance sheet of such Person in accordance
with GAAP.
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<PAGE> 8
"Capital Stock" shall mean, as applied to any Person, any capital stock
or ownership interests of such Person, regardless of class or designation, and
all warrants, options, purchase rights, conversion or exchange rights, voting
rights, calls or claims of any character with respect thereto.
"Capitalized Lease Obligation" shall mean that portion of any obligation
of a Person as lessee under a lease which at the time would be required to be
capitalized on the balance sheet of such lessee in accordance with GAAP.
"Cash Management Suspension Notice" shall mean a notice delivered to the
Borrower executed by the Majority Banks following the occurrence of a Default
stating that it is a "Cash Management Suspension Notice." Such Cash Management
Suspension Notice shall be in effect from the time such notice is sent until the
earlier of (a) such time as it is revoked by notice delivered to the Borrower
executed by the Administrative Agent at the request of the Majority Banks, or
(b) such time as the event to which it relates is cured or waived in accordance
with the terms of this Agreement and the Borrower has given the Administrative
Agent and the Banks written notice of the Borrower's intent to resume its
ordinary cash management practices.
"Change of Control" shall mean any change in the ownership of the
Borrower to which the Majority Banks have not consented in writing that results
in less than fifty and one-tenth of one percent (50.1%) of all voting rights
(after giving effect to any member's agreement or voting trust agreements) with
respect to the Capital Stock of the Borrower (including, without limitation,
warrants, options, conversion rights, voting rights and calls or claims of any
character with respect thereto, to the extent exercisable prior to repayment in
full of the Obligations) being owned directly or indirectly by one or more of
(a) TCI, (b) Liberty, (c) John C. Malone, (d) the estate of Bob Magness
(including the legal heirs of Bob Magness), or (e) the legal heirs of John C.
Malone; provided, however, that in the case of clause (d) and (e) above, TCI or
Liberty continues to appoint the management of the Borrower.
"Co-Agents" shall mean Fleet National Bank and Banque Paribas; and
"Co-Agent" shall mean any one of the foregoing Co-Agents.
"Code" shall mean the Internal Revenue Code of 1986, as amended from
time to time.
"Commitment" shall mean the several obligations of the Banks to advance
the aggregate sum of up to $100,000,000 to the Borrower pursuant to the terms
hereof, as such obligations may be reduced from time to time.
"Commitment Ratios" shall mean the percentages as of the date of
determination in which the Banks are severally bound to satisfy the Commitment
to make Advances to the
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<PAGE> 9
Borrower pursuant to the terms hereof, which as of the Agreement Date are as set
forth below:
<TABLE>
<CAPTION>
Percentage
(Rounded to the
Banks nearest 1/10%) Dollar Commitment
----- --------------- -----------------
<S> <C> <C>
Bank of America National Trust and Savings Association 30.0% $ 30,000,000
Royal Bank of Canada 20.0% $ 20,000,000
Credit Lyonnais New York Branch 20.0% $ 20,000,000
Fleet National Bank 15.0% $ 15,000,000
Banque Paribas 15.0% $ 15,000,000
TOTAL: 100% $ 100,000,000
</TABLE>
"Control Shareholders" shall mean any one or more of the following: (i)
TCI or any wholly-owned direct or indirect Subsidiary of TCI; (ii) Liberty or
any wholly-owned direct or indirect Subsidiary of Liberty; and (iii) any other
shareholder holding greater than 20% of the Capital Stock of the Borrower having
ordinary voting power to elect a majority of the board of directors or other
governing body.
"DBS Agreement" shall mean any agreement between the Borrower (or any of
its Restricted Subsidiaries) and a provider of direct broadcast satellite
services pursuant to which such provider agrees, among other things, to
distribute and exhibit to its subscribers programming of the Borrower and/or its
Restricted Subsidiaries.
"Default" shall mean any Event of Default, and any other event specified
in Section 8.1 hereof which with any passage of time or giving of notice (or
both) would constitute such event an Event of Default.
"Default Rate" shall mean a simple per annum interest rate equal to the
sum of (a) the Base Rate or the LIBOR Basis otherwise applicable plus (b) two
percent (2%).
"ERISA" shall mean the Employee Retirement Income Security Act of 1974,
as in effect on the Agreement Date and as such Act may be amended thereafter
from time to time.
"ERISA Affiliate" shall mean (a) any corporation which is a member of
the same controlled group of corporations (within the meaning of Code Section
414(b)) as is the Borrower, (b) any other trade or business (whether or not
incorporated) under common control (within the meaning of Code Section 414(c))
with the Borrower, (c) any other corporation, partnership or other organization
which is a member of an affiliated service
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<PAGE> 10
group (within the meaning of Code Section 414(m)) with the Borrower, or (d) any
other entity required to be aggregated with the Borrower pursuant to regulations
under Code Section 414(o).
"Event of Default" shall mean any of the events specified in Section 8.1
hereof, provided that any requirement for notice or lapse of time, or both, has
been satisfied.
"FCC" shall mean the Federal Communications Commission, or any successor
thereto.
"Federal Funds Rate" shall mean, as of any date, the weighted average of
the rates on overnight federal funds transactions with the members of the
Federal Reserve System arranged by federal funds brokers, as published for such
day (or, if such day is not a Business Day, for the next preceding Business Day)
by the Federal Reserve Bank of New York, or, if such rate is not so published
for any day which is a Business Day, the average of the quotations for such day
on such transactions received by the Administrative Agent from three federal
funds brokers of recognized standing selected by the Administrative Agent.
"Fee Agreements" shall mean all agreements by and between the Borrower
on the one hand, and the Administrative Agent or the Banks (or any of them) on
the other hand, setting forth the applicable fees relating to this Agreement.
"GAAP" shall mean, as in effect from time to time, generally accepted
accounting principles consistently applied.
"Guaranty" or "Guaranteed," as applied to an obligation (each a "primary
obligation"), shall mean and include (a) any guaranty, direct or indirect, in
any manner, of any part or all of such primary obligation, and (b) any
agreement, direct or indirect, contingent or otherwise, the practical effect of
which is to assure in any way the payment or performance (or payment of damages
in the event of non-performance) of any part or all of such primary obligation,
including, without limiting the foregoing, any reimbursement obligations as to
amounts drawn down by beneficiaries of outstanding letters of credit or capital
call requirements, without limitation, and any obligation of such Person (the
"primary obligor"), whether or not contingent, (i) to purchase any such primary
obligation or any property or asset constituting direct or indirect security
therefor, (ii) to advance or supply funds (1) for the purchase or payment of
such primary obligation or (2) to maintain working capital, equity capital or
the net worth, cash flow, solvency or other balance sheet or income statement
condition of any other Person, (iii) to purchase property, assets, securities or
services primarily for the purpose of assuring the owner or holder of any
primary obligation of the ability of the primary obligor with respect to such
primary obligation to make payment thereof or (iv) otherwise to assure or hold
harmless the owner or holder of such primary obligation against loss in respect
thereof excluding, however, general indemnifications for breach of contract
entered into in the ordinary course of business. For purposes hereof, the amount
of any Guaranty of (i) a
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<PAGE> 11
contract of another Person for the purchase or acquisition of programming by
such other Person in the ordinary course of business shall be the maximum amount
payable under such guaranty in the twelve (12) month period immediately
succeeding the calculation date and (ii) in connection with a permitted sale
hereunder shall be an amount reasonably determined by the Borrower.
"Indebtedness" shall mean, with respect to any Person, (a) all items,
except items of owners', shareholders' and partners' equity or capital stock or
surplus or general contingency or deferred tax reserves, which in accordance
with GAAP would be included in determining total liabilities as shown on the
liability side of a balance sheet of such Person, (b) all direct or indirect
obligations secured by any Lien to which any property or asset owned by such
Person is subject, whether or not the obligation secured thereby shall have been
assumed, (c) to the extent not otherwise included, all Capitalized Lease
Obligations of such Person, (d) all reimbursement obligations with respect to
outstanding letters of credit, and (e) all obligations of such Person to pay the
deferred purchase or acquisition price of property or services.
"Indebtedness for Money Borrowed" shall mean, with respect to any
Person, all money borrowed by such Person and Indebtedness represented by notes
payable by such Person, all obligations of such Person evidenced by bonds,
debentures, notes, or other similar instruments, and all Indebtedness of such
Person upon which interest charges are customarily paid, all Capitalized Lease
Obligations, all reimbursement obligations with respect to outstanding letters
of credit, all Indebtedness issued or assumed as full or partial payment for
property or services (other than trade payables arising in the ordinary course
of business), whether or not any such notes, drafts, obligations or Indebtedness
represent Indebtedness for money borrowed, and, without duplication, Guaranties
of any of the foregoing. For purposes of this definition, interest which is
accrued but not paid on the original due date or within any applicable cure or
grace period as provided by the underlying contract for such interest shall be
deemed Indebtedness for Money Borrowed. For purposes of this Agreement,
Indebtedness for Money Borrowed shall not include (i) any bond obligation of, or
any Guaranty of or letter of credit securing performance by, either Borrower or
any Restricted Subsidiary undertaken or incurred in the ordinary course of its
or their business (other than in connection with the borrowing of money or
obtaining of credit) as presently conducted for or on behalf of either Borrower
or a Restricted Subsidiary and (ii) a guaranty or other obligation consisting of
a pledge of such Person's interest in any Unrestricted Subsidiary equity,
provided that recourse under any such guaranty or obligation secured by such
pledge shall be limited solely to such Person's interest in such Unrestricted
Subsidiary equity so pledged.
"Interest Hedge Agreement" shall mean the obligations of any Person
pursuant to (a) any arrangement with any other Person whereby, directly or
indirectly, such Person is entitled to receive from time to time periodic
payments calculated by applying either a floating or a fixed rate of interest on
a stated notional amount in exchange for periodic payments made by such Person
calculated by applying a fixed or a floating rate of interest on
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<PAGE> 12
the same notional amount or (b) interest rate swaps, caps, floors, collars and
similar agreements.
"Interest Period" shall mean, (a) in connection with any Base Rate
Advance, each calendar quarter; provided, however, that for any Base Rate
Advance made after the first day of any calendar quarter the first Interest
Period with respect thereto shall be the period beginning on the date such
Advance is made and ending on the last day of the calendar quarter in which such
Advance is made; provided, further, however, that if a Base Rate Advance is made
on the last day of any calendar quarter, it shall have an initial Interest
Period ending on, and its initial Payment Date shall be, the last day of the
following calendar quarter; and, (b) in connection with any LIBOR Advance, the
term of such Advance selected by the Borrower or otherwise determined in
accordance with this Agreement. Notwithstanding the foregoing, however, (i) any
applicable Interest Period which would otherwise end on a day which is not a
Business Day shall be extended to the next succeeding Business Day unless, with
respect to LIBOR Advances only, such Business Day falls in another calendar
month, in which case such Interest Period shall end on the next preceding
Business Day; (ii) with respect to LIBOR Advances only, any applicable Interest
Period which begins on a day for which there is no numerically corresponding day
in the calendar month during which such Interest Period is to end shall (subject
to clause (i) above) end on the last day of such calendar month; and (iii) no
Interest Period shall extend beyond the Maturity Date or such earlier date as
would interfere with the repayment obligations of the Borrower under Section 2.7
hereof. Interest shall be due and payable with respect to any Advance as
provided in Section 2.3 hereof.
"Interest Rate Basis" shall mean the Base Rate or the LIBOR Basis, as
appropriate.
"Investment" shall mean, with respect to the Borrower or any of its
Subsidiaries, (a) any loan, advance or extension of credit (other than to
customers in the ordinary course of business) by such Person to, or any Guaranty
or other contingent liability with respect to the capital stock, indebtedness or
other obligations of, or any contributions to the capital of, any other Person,
or any ownership, purchase or other acquisition by such Person of any interest
in any capital stock, limited partnership interests, general partnership
interest, or other securities of such other Person, other than an Acquisition,
and (b) all expenditures by the Borrower or any of its Subsidiaries relating to
the foregoing.
"Leverage Ratio" shall mean, as of any date of determination, the ratio
of (a) Total Debt as of such date to (b) Annualized Operating Cash Flow.
"Liberty" shall mean Liberty Media Corporation, a Delaware corporation.
"LIBOR" shall mean, for any Interest Period, the interest rate per annum
equal to the offered rate for deposits in United States Dollars for an amount
approximately equal to the principal amount of, and for a length of time
approximately equal to the Interest Period for,
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<PAGE> 13
the LIBOR Advance sought by the Borrower, which rate appears on the Reuter's
Screen LIBO Rate Page (or such other page as may replace that page in that
service) at approximately 11:00 a.m. (London time) two (2) Business Days before
the first day of such Interest Period; provided, that (i) if more than one such
offered rate appears on the Reuter's Screen, LIBOR shall be the arithmetic
average (rounded upward to the nearest one-sixteenth (1/16) of one percent (1%))
of such offered rates, or (ii) if the Reuter's Screen is not available, LIBOR
shall be the average offered to the Administrative Agent (or an affiliate
thereof) by two (2) leading banks (rounded upward to the nearest one-sixteenth
(1/16) of one percent (1%)) of the interest rates per annum at which deposits in
United States Dollars for such Interest Period are offered to the Administrative
Agent in the London eurodollar interbank borrowing market at approximately 11:00
a.m. (London time) two (2) Business Days before the first day of such Interest
Period, in an amount approximately equal to the principal amount of, and for a
length of time approximately equal to the Interest Period for, the LIBOR Advance
sought by the Borrower.
"LIBOR Advance" shall mean an Advance which bears interest at the LIBOR
Basis which the Borrower requests to be made as a LIBOR Advance or which is
reborrowed as a LIBOR Advance, in accordance with the provisions of Section 2.2
hereof, and which shall be in a principal amount of at least $500,000 and in an
integral multiple of $250,000, except for a LIBOR Advance which is in an amount
equal to the unused amount of the Commitment, which Advance may be in such
amount.
"LIBOR Basis" shall mean a simple per annum interest rate equal to the
sum of (a) LIBOR plus (b) the Applicable Margin. The LIBOR Basis shall be
rounded upward to the nearest one-hundredth of one percent (1/100%) and shall
apply to Interest Periods of one (1), two (2), three (3), and six (6) months,
and, once determined, shall be subject to Article 10 hereof and shall remain
unchanged during the applicable Interest Period. The Borrower may not select an
Interest Period for a LIBOR Advance in excess of six (6) months unless the
Administrative Agent has notified the Borrower (i) that each of the Banks has
available to it funds for such Bank's share of the proposed Advance which are
not required for other purposes and (ii) that such funds are available to each
Bank at a rate (exclusive of reserves and other adjustments) at or below LIBOR
for such proposed Advance and Interest Period. Interest on LIBOR Advances shall
also be subject to adjustment to reflect changes in the Applicable Margin as
provided in Section 2.3(f) hereof.
"LIBOR Reserve Percentage" shall mean the percentage which is in effect
from time to time under Regulation D of the Board of Governors of the Federal
Reserve System, as such regulation may be amended from time to time, as the
actual reserve requirement applicable with respect to Eurocurrency Liabilities
(as that term is defined in Regulation D), to the extent any Bank has any
Eurocurrency Liabilities subject to such reserve requirement at that time.
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<PAGE> 14
"Licenses" shall mean any rights, whether based upon any agreement,
statute, order, ordinance, or otherwise, granted by any governmental authority
to the Borrower or its Restricted Subsidiaries to operate its business, together
with any amendment, modification or replacement with respect thereto.
"Lien" shall mean, with respect to any property, any mortgage, lien,
pledge, assignment, charge, security interest, title retention agreement, levy,
execution, seizure, attachment, garnishment, or other encumbrance of any kind in
respect of such property, whether or not choate, vested, or perfected.
"Loan Documents" shall mean this Agreement, the Notes, any Subsidiary
Guaranty, the Fee Agreements, all Requests for Advance, all Affiliate Debt
Subordination Agreements and all Interest Hedge Agreements between the Borrower
and the Administrative Agent, the Banks, or any of them and all other documents
and agreements executed or delivered in connection with or contemplated by this
Agreement.
"Loans" shall mean, collectively, amounts advanced by the Banks to the
Borrower under the Commitment.
"Majority Banks" shall mean, at any time, Banks the total of whose
Commitment Ratios equals or exceeds fifty-one percent (51%).
"Materially Adverse Effect" shall mean any materially adverse effect
upon the business, assets, financial condition or results of operations of the
Borrower and its Restricted Subsidiaries, on a consolidated basis in accordance
with GAAP, taken as a whole, or upon the ability of the Borrower and its
Restricted Subsidiaries, taken as a whole, to perform their obligations under
this Agreement or any other Loan Document.
"Maturity Date" shall mean June 30, 2005, or such earlier date as
payment of the Loans shall be due (whether by acceleration or otherwise).
"Maximum Permitted Indebtedness" shall mean, as of any date, the maximum
amount of Indebtedness that the Borrower could incur on such date and remain in
compliance with Section 7.8 hereof.
"MSO Agreement" shall mean any agreement between the Borrower or any of
its Restricted Subsidiaries and a cable television operator pursuant to which
such operator agrees, among other things, to distribute and exhibit to its
subscribers programming of the Borrower or such Restricted Subsidiary and shall
include, without limitation, the Affiliation Agreement.
"Multiemployer Plan" shall have the meaning set forth in Section
4001(a)(3) of ERISA.
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<PAGE> 15
"Necessary Authorizations" shall mean all authorizations, consents,
permits, approvals, licenses, and exemptions from, and all filings and
registrations with, and all reports to, any governmental or other regulatory
authority whether federal, state, or local, and all agencies thereof necessary
for the conduct of the businesses and the ownership (or lease) of the properties
and assets of the Borrower or its Restricted Subsidiaries, including, without
limitation, the Licenses.
"Notes" shall mean, collectively, those certain promissory notes in the
aggregate principal amount of up to $100,000,000, one such note issued to each
of the Banks by the Borrower, each one substantially in the form of Exhibit C
attached hereto, and any extensions, renewals or amendments to any of the
foregoing.
"Obligations" shall mean (a) all payment and performance obligations of
every kind, nature and description of the Borrower and all other obligors to the
Banks and the Administrative Agent under this Agreement and the other Loan
Documents (including any interest, fees and other charges on the Loans or
otherwise under the Loan Documents that would accrue but for the filing of a
bankruptcy action with respect to the Borrower, whether or not a claim for such
amounts is allowed in such bankruptcy action and including Obligations to the
Banks pursuant to Section 5.11 hereof), as they may be amended from time to
time, or as a result of making the Loans, whether such Obligations are direct or
indirect, absolute or contingent, due or not due, contractual or tortious,
liquidated or unliquidated, arising by operation of law or otherwise, now
existing or hereafter arising, and (b) the obligation to pay an amount equal to
the amount of any and all damages which the Banks and the Administrative Agent,
or any of them, may suffer by reason of a breach by the Borrower or any other
obligor of any obligation, covenant, or undertaking with respect to this
Agreement or any other Loan Document.
"Operating Cash Flow" shall mean, with respect to the Borrower and its
Restricted Subsidiaries on a consolidated basis in respect of any period, the
sum of (a) operating income for such period, plus (b) to the extent deducted in
determining operating income, the sum of the following for such period (i)
depreciation, (ii) amortization, and (iii) all other non-cash items and all
extraordinary and non-recurring items; provided, the calculation is made after
giving effect to acquisitions and dispositions of assets of the Borrower or any
Restricted Subsidiary (including designations of Subsidiaries as Restricted or
Unrestricted) during such period as if such transactions had occurred on the
first day of such period.
"Payment Date" shall mean the last day of each Interest Period.
"Permitted Asset Sales" shall mean sales, transfers, exchanges or other
dispositions of assets by the Borrower or any of its Restricted Subsidiaries in
bona fide arms' length transactions in which the Operating Cash Flow for the
most recently completed fiscal quarter of such assets sold, transferred,
exchanged, or disposed of do not exceed in the aggregate
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<PAGE> 16
(when added to amounts for prior sites, transfers, exchanges or other
dispositions) (i) during any period of one year (or shorter period commencing on
the Agreement Date), 30% of the Operating Cash Flow of the Borrower and
Restricted Subsidiaries ending as of the most recently completed fiscal quarter,
and (ii) during any period of five years (or shorter period commencing on the
Agreement Date), 50% of the Operating Cash Flow of the Borrower and Restricted
Subsidiaries ending as of the most recently completed fiscal quarter; provided
that, in the case of exchanges, Operating Cash Flow shall be the net effect of
such exchanges and the following conditions shall have been satisfied: (v) the
assets received by the Borrower or the Restricted Subsidiary are free of any
Liens except for Permitted Liens; (w) the Borrower or such Restricted Subsidiary
receives assets which have comparable value; (x) no Event of Default shall have
occurred and be continuing either before or after the consummation of such
transaction; (y) such trade or exchange shall not have a Materially Adverse
Effect; and (z) the Borrower promptly notifies the Administrative Agent (and the
Administrative Agent shall promptly notify the Banks) of such trade or exchange
(such notice to include information comparing the assets being traded or
exchanged and the methodology used to establish fair and comparable value).
"Permitted Liens" shall mean, as applied to any Person:
(a) any Lien in favor of the Administrative Agent or the
Banks given to secure the Obligations or the obligations under the Loan
Agreement;
(b) (i) Liens on real estate for real estate taxes not yet
delinquent and (ii) Liens for taxes, assessments, judgments, governmental
charges or levies, or claims the non-payment of which is being contested in good
faith by appropriate proceedings and for which adequate reserves as required by
GAAP have been set aside on such Person's books, but only so long as no
foreclosure, distraint, sale, or similar proceedings have been commenced with
respect thereto and which remain unstayed for a period of thirty (30) days after
their commencement;
(c) Liens of carriers, warehousemen, mechanics, laborers,
and materialmen incurred in the ordinary course of business for sums not yet due
or being contested in good faith, if such reserve or appropriate provision, if
any, as shall be required by GAAP shall have been made therefor;
(d) Liens incurred in the ordinary course of business in
connection with worker's compensation and unemployment insurance;
(e) restrictions on the transfer of assets imposed by any
agreement, or by any federal, state or local statute, regulation or ordinance
applicable to such person;
(f) easements, rights-of-way, restrictions, and other
similar encumbrances on the use of real property which do not interfere with the
ordinary conduct of the business of
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<PAGE> 17
such Person, or Liens incidental to the conduct of the business of such Person
or to the ownership of its properties which were not incurred in connection with
Indebtedness or other extensions of credit and which do not in the aggregate
materially detract from the value of such properties or materially impair their
use in the operation of the business of such Person;
(g) purchase money mortgages or security interests,
conditional sale arrangements and other similar security interests, on any
property or assets hereinafter acquired by the Borrower (hereafter referred to
individually as a "Purchase Money Security Interest"); provided, however, that:
(i) the transaction in which any Purchase Money
Security Interest is proposed to be created is not otherwise prohibited by this
Agreement;
(ii) any Purchase Money Security Interest shall
attach only to the property or asset acquired in such transaction and shall not
extend to or cover any other assets or properties of the Borrower;
(iii) the Indebtedness secured or covered by any
Purchase Money Security Interest shall not exceed the cost of the property or
asset acquired and shall not be renewed or extended by the Borrower;
(iv) the aggregate outstanding amount of all
Indebtedness secured by Purchase Money Security Interests and Capitalized Lease
Obligations shall not at any time exceed the amounts permitted pursuant to
Section 7.1 hereof; and
(h) other Liens; provided that (i) no Default or Event of
Default exists prior to or after giving effect to the incurrence thereof; and
(ii) the aggregate amount of all Indebtedness secured by such other Liens does
not exceed the amounts permitted pursuant to Section 7.1 hereof.
"Person" shall mean an individual, corporation, partnership, limited
liability company, trust, or unincorporated organization, or a government or any
agency or political subdivision thereof.
"Plan" shall mean an employee benefit plan within the meaning of Section
3(3) of ERISA maintained by or contributed to by the Borrower or any ERISA
Affiliate.
"Prime Rate" shall mean, at any time, the rate of interest adopted by
Bank of America National Trust and Savings Association, as its reference rate
for the determination of interest rates for loans of varying maturities in
United States dollars to United States residents of varying degrees of
creditworthiness and being quoted at such time by such bank as its "prime rate."
The Prime Rate is not necessarily the lowest rate of interest charged to
borrowers of The Bank of America National Trust and Savings Association.
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<PAGE> 18
"Pro Forma Debt Service" shall mean for any period the sum of (a) Total
Pro Forma Interest Expense during such period (b) Pro Forma Scheduled Principal
Payments with respect to the Loans during such period; and (c) all payments of
principal on Indebtedness for Money Borrowed of the Borrower and the Restricted
Subsidiaries (other than the Loans) scheduled to be paid during such period.
"Pro Forma Scheduled Principal Payments" shall mean for any period (a)
Loans as of the date of determination minus (b) the Commitment scheduled to be
available on the last day of such period after giving effect to the Commitment
reductions set forth in Section 2.5 hereof.
"Regulatory Change" shall mean, with respect to any Bank, any change on
or after the date of this Agreement in United States Federal, state or foreign
laws or regulations (including the LIBOR Reserve Percentage under Regulation D)
or the adoption or making on or after such date of any interpretations,
directives or requests applying to a class of banks including such Bank of or
under any United States Federal or state, or any foreign, laws or regulations
(whether or not having the force of law) by any court or governmental or
monetary authority charged with the interpretation or administration thereof.
"Reportable Event" shall have the meaning set forth in Section 4043(c)
of ERISA.
"Request for Advance" shall mean any certificate signed by an Authorized
Signatory requesting an Advance hereunder which will increase the aggregate
amount of the Loans outstanding, which certificate shall be denominated a
"Revolver Status Advice," and shall be in substantially the form of Exhibit D
attached hereto. Each Request for Advance shall, among other things, (a) specify
the date of the Advance, which shall be a Business Day, the amount of the
Advance, the type of Advance, and, with respect to LIBOR Advances, the Interest
Period selected by the Borrower and (b) state that the requirements of Section
3.2 hereof have been satisfied.
"Restricted Payment" shall mean, (a) any direct or indirect
distribution, dividend, or other payment to any Person (other than to the
Borrower or any wholly-owned Subsidiary of the Borrower) on account of any
general or limited partnership interest in, or other securities of, the
Borrower, or any of its Subsidiaries (other than dividends payable solely in
stock of the Borrower or such Subsidiary, as applicable, and stock splits),
including, without limitation, any direct or indirect distribution, dividend or
other payment to any Person (other than to the Borrower or any Subsidiary of the
Borrower) on account of any warrants or other rights or options to acquire
shares of capital stock of the Borrower or any of its Subsidiaries; and (b) any
consulting, management or other similar fees, or any interest thereon, payable
by the Borrower or its Subsidiaries, to any Affiliate, other than reimbursement
of overhead and employee costs in the ordinary course of business which are
directly attributable to the Borrower and its Subsidiaries.
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<PAGE> 19
"Restricted Purchase" shall mean any payment (including, without
limitation, any sinking fund payment, prepayment or installment payment) on
account of the purchase, redemption, or other acquisition or retirement of any
general or limited partnership interest in, or shares of capital stock or other
securities of, the Borrower or any of the Subsidiaries, including, without
limitation, any warrants or other rights or options to acquire shares of capital
stock of the Borrower or any of the Subsidiaries or any loan, advance, release
or forgiveness of Indebtedness by the Borrower or its Subsidiaries to any
partner, shareholder or Affiliate of any such Person.
"Restricted Subsidiaries" shall mean DMX Inc. and shall include any
other Subsidiary of the Borrower which the Borrower designates (and the Majority
Banks accept) as a "Restricted Subsidiary," and "Restricted Subsidiary" shall
mean any one of the foregoing.
"Significant Default" shall mean a Default described in Sections 8.1(b),
(f) or (g) hereof.
"Subordinated Affiliate Debt" shall mean Indebtedness (a) owed by
Borrower to any Affiliate; (b) which is unsecured; and (c) which has been
subordinated in right of payment to the prior payment of the Obligations,
pursuant to an Affiliate Debt Subordination Agreement.
"Subsidiary" shall mean, as applied to any Person, (a) any corporation
of which greater than fifty percent (50%) of the outstanding stock (other than
directors' qualifying shares) having ordinary voting power to elect a majority
of its board of directors, regardless of the existence at the time of a right of
the holders of any class or classes of securities of such corporation to
exercise such voting power by reason of the happening of any contingency, or any
partnership of which greater than fifty percent (50%) of the outstanding
partnership interests is at the time owned by such Person, or by one or more
Subsidiaries of such Person, or by such Person and one or more Subsidiaries of
such Person, and (b) any other entity the majority of whose equity interests
having ordinary voting power is at the time owned by such Person.
"Subsidiary Guaranty" shall mean each Subsidiary Guaranty in favor of
the Administrative Agent on behalf of itself and the Banks, given by a
Restricted Subsidiary of the Borrower, each substantially in the form of Exhibit
E attached hereto, including that certain Master Subsidiary Guaranty dated as of
the Agreement Date.
"Syndication Agents" shall mean Credit Lyonnais New York Branch and
Royal Bank of Canada; and "Syndication Agent" shall mean any one of the
foregoing Syndication Agents.
"TCI" shall mean Tele-Communications, Inc., a Delaware corporation.
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<PAGE> 20
"TCI Revenue Agreement" shall mean, collectively, (a) that certain
Amended and Restated Contribution Agreement, dated as of November 10, 1997,
between the Borrower and TCI, and (b) the Affiliation Agreement.
"Total Debt" shall mean on a consolidated basis, as of any date, without
duplication (a) all outstanding Indebtedness for Money Borrowed of the Borrower
and its Restricted Subsidiaries (other than Subordinated Affiliate Debt) and (b)
the aggregate of all Guarantees by the Borrower and its Restricted Subsidiaries
(provided, however, that the amount of any Guaranty by the Borrower or any of
its Restricted Subsidiaries of (i) a contract of another Person for the purchase
or acquisition of programming by such other Person in the ordinary course of
business shall be the maximum amount payable under such guaranty in the twelve
(12) month period immediately succeeding the calculation date and (ii) in
connection with a permitted sale shall be an amount reasonably determined by the
Borrower).
"Total Interest Expense" shall mean, for any period, an amount equal to
the sum of (a) the interest paid during such period with respect to Indebtedness
for Money Borrowed of the Borrower and its Restricted Subsidiaries and (b)
commitment fees paid with respect to the Loans during such period.
"Total Pro Forma Interest Expense" shall mean, for any period, an amount
equal to the sum of (a) the interest to be paid during such period with respect
to Indebtedness for Money Borrowed of the Borrower and its Restricted
Subsidiaries and (b) commitment fees to be paid with respect to the Loans during
such period. For purposes of clause (a) of this definition only, interest
payable in respect of the Loans, to the extent that interest payments on the
Loans are not fixed by way of a LIBOR Advance or an Interest Hedge Agreement,
shall be calculated using the weighted average of the Interest Rate Bases in
effect on the calculation date.
"Trademarks" shall mean all registered trademarks and pending
applications for trademarks of the Borrower and its Restricted Subsidiaries
which are more fully described on Schedule 1 attached hereto.
"Transponder Lease Agreement" shall mean any agreement by and between
the Borrower (or any of its Restricted Subsidiaries) and any other Person for
the license, lease or other agreement to use the telecommunications satellites
for purposes of broadcasting the programming of the Borrower and its Restricted
Subsidiaries and any other agreement related to the transmission, origination
and production of such programming and the related technical services.
"Unrestricted Subsidiary" shall mean any Subsidiary of the Borrower
which is not a Restricted Subsidiary and shall include, as of the Agreement
Date, The Box Worldwide, Inc. and Paradigm Entertainment Group.
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<PAGE> 21
Each definition of an agreement in this Article 1 shall include such
agreement as modified, amended, or supplemented from time to time with the prior
written consent of the Majority Banks, except as provided in Section 11.12
hereof, and except where the context otherwise requires, definitions imparting
the singular shall include the plural and vice versa. Except where otherwise
specifically restricted, reference to a party to a Loan Document includes that
party and its successors and assigns. All terms used herein which are defined in
Article 9 of the Uniform Commercial Code in effect in the State of New York on
the date hereof and which are not otherwise defined herein shall have the same
meanings herein as set forth therein.
All accounting terms used herein without definition shall be used as
defined under GAAP. All references to financial information and results of the
Borrower shall be determined on a consolidated basis with the Borrower's
Restricted Subsidiaries as appropriate.
ARTICLE 2 - Loans
Section 2.1 The Loans. The Banks agree, severally in accordance with
their respective Commitment Ratios and not jointly, upon the terms and subject
to the conditions of this Agreement, to lend and relend to the Borrower, on or
prior to the Maturity Date, amounts which in the aggregate at any one time
outstanding do not exceed the Commitment (as it may be reduced from time to time
pursuant to the terms hereof).
Section 2.2 Manner of Borrowing and Disbursement.
(a) Choice of Interest Rate, etc. Any Advance shall, at the
option of the Borrower, be made as a Base Rate Advance or a LIBOR Advance;
provided, however, that (i) if the Borrower fails to give the Administrative
Agent written notice specifying whether an Advance is to be repaid or reborrowed
on a Payment Date, such Advance shall be repaid and then reborrowed as a Base
Rate Advance on the Payment Date and (ii) the Borrower may not select a LIBOR
Advance if, at the time of such selection, a Default has occurred and is
continuing. LIBOR Advances shall in all cases be subject to Section 2.3(e) and
Article 10 hereof.
(b) Base Rate Advances.
(i) Advances. The Borrower shall give the
Administrative Agent in the case of Base Rate Advances irrevocable
written notice in the form of a Request for Advance, or notice by
telephone or telecopy followed immediately by a Request for Advance not
later than 12:00 noon (Eastern time) on the date the Advance is
requested; provided, however, that the failure by the Borrower to
confirm any notice by telephone or telecopy with a Request for Advance
shall not invalidate any
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<PAGE> 22
notice so given. Upon receipt of such notice from the Borrower, the
Administrative Agent shall promptly notify each Bank by telephone or
telecopy of the contents thereof.
(ii) Repayments and Reborrowings. Subject to the
provisions of Section 2.3(e) hereof, the Borrower may repay or prepay a
Base Rate Advance without regard to its Payment Date and (a) upon
irrevocable written notice in accordance with Section 2.2(b)(i) hereof,
reborrow all or a portion of the principal amount thereof as one or more
Base Rate Advances, (b) upon at least three (3) Business Days'
irrevocable prior written notice, reborrow all or a portion of the
principal thereof as one or more LIBOR Advances, or (c) upon at least
one (1) Business Day's irrevocable prior written notice and subject to
Section 2.6 hereof, not reborrow all or any portion of such Base Rate
Advance. On the date indicated by the Borrower, such Base Rate Advance
shall be so repaid and, as applicable, reborrowed.
(c) LIBOR Advances.
(i) Advances. The Borrower shall give the
Administrative Agent in the case of LIBOR Advances at least three (3)
Business Days' irrevocable written notice in the form of a Request for
Advance, or notice by telephone or telecopy followed immediately by a
Request for Advance; provided, however, that the failure of the Borrower
to confirm any notice by telephone or telecopy with a Request for
Advance shall not invalidate any notice so given. The Administrative
Agent, whose determination shall be conclusive absent manifest error,
shall determine the available LIBOR Bases and shall notify the Borrower
of such LIBOR Bases. The Borrower shall promptly notify the
Administrative Agent by telecopy or by telephone, and shall immediately
confirm any such telephonic notice in writing, of its selection of a
LIBOR Basis and Interest Period for such Advance. Upon receipt of such
notice from the Borrower, the Administrative Agent shall promptly notify
each Bank by telephone or telecopy of the contents thereof.
(ii) Repayments and Reborrowings. At least three (3)
Business Days prior to each Payment Date for a LIBOR Advance, subject to
Sections 2.3(e) and 2.2(a) hereof, the Borrower shall give the
Administrative Agent written notice specifying whether all or a portion
of any LIBOR Advance outstanding on the Payment Date (a) is to be repaid
and then reborrowed in whole or in part as a LIBOR Advance, (b) is to be
repaid and then reborrowed in whole or in part as one or more Base Rate
Advances or (c) subject to Section 2.6 hereof, is to be repaid and not
reborrowed. Upon such Payment Date such LIBOR Advance will, subject to
the provisions hereof, be so repaid and, as applicable, reborrowed.
(d) Notification of Banks. Upon receipt of a Request for
Advance or a written notice under this Section 2.2 from the Borrower with
respect to a reborrowing of any
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<PAGE> 23
then outstanding Advance on the Payment Date for such Advance, the
Administrative Agent shall promptly notify each Bank by telephone or telecopy of
the contents thereof and the amount of such Bank's portion of the applicable
Advance. Each Bank shall, not later than 2:00 p.m. (Eastern time) on the date
specified in such notice, make available to the Administrative Agent at the
Administrative Agent's Office, or at such account as the Administrative Agent
shall designate, the amount of its portion of the applicable Advance in
immediately available funds.
(e) Disbursement.
(i) Prior to 2:00 p.m. (Eastern time) on the date of
an Advance hereunder, the Administrative Agent shall, subject to the
satisfaction of the conditions set forth in this Section 2.2 and in
Article 3, disburse the amounts made available to the Administrative
Agent by the Banks in immediately available funds by (A) transferring
the amounts so made available by wire transfer pursuant to the
instructions of the Borrower, or (B) in the absence of such
instructions, crediting the amounts so made available to the account of
the Borrower maintained with the Administrative Agent or an affiliate of
the Administrative Agent.
(ii) Unless the Administrative Agent shall have
received notice from a Bank prior to the date of any Advance that such
Bank will not make available to the Administrative Agent such Bank's
ratable portion of such Advance, and so long as notice has been given as
provided in Section 2.2(d) hereof, the Administrative Agent may assume
that such Bank has made such portion available to the Administrative
Agent on the date of such Advance and the Administrative Agent may, in
its sole discretion and in reliance upon such assumption, make available
to the Borrower on such date a corresponding amount. If and to the
extent such Bank shall not have so made such ratable portion available
to the Administrative Agent, such Bank agrees to repay to the
Administrative Agent forthwith on demand such corresponding amount
together with interest thereon, for each day from the date such amount
is made available to the Borrower until the date such amount is repaid
to the Administrative Agent, at the Federal Funds Rate.
(iii) If such Bank shall repay to the Administrative
Agent such corresponding amount, such amount so repaid shall constitute
such Bank's portion of the applicable Advance for purposes of this
Agreement. The failure of any Bank to fund its portion of any Advance
shall not relieve any other Bank of its obligation, if any, hereunder to
fund its respective portion of the Advance on the date of such
borrowing, but no Bank shall be responsible for any such failure of any
other Bank.
(iv) In the event that, at any time when the Borrower
is not in Default, a Bank for any reason fails or refuses to fund its
portion of an Advance, then,
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<PAGE> 24
until such time as such Bank has funded its portion of such Advance, or
all other Banks have received payment in full (whether by repayment or
prepayment) of the principal and interest due in respect of such
Advance, such non-funding Bank shall (A) have no right to vote regarding
any issue on which voting is required or advisable under this Agreement
or any other Loan Document, and (B) not be entitled to receive payments
of principal, interest or fees from the Borrower in respect of such
Loans which such Bank failed to make.
Section 2.3 Interest
(a) On Base Rate Advances. Interest on each Base Rate
Advance shall be computed on the basis of a year of 365/366 days for the actual
number of days elapsed and shall be payable at the Base Rate for such Advance in
arrears on the applicable Payment Date. Interest on Base Rate Advances then
outstanding shall also be due and payable on the Maturity Date.
(b) On LIBOR Advances. Interest on each LIBOR Advance shall
be computed on the basis of a 360-day year for the actual number of days elapsed
and shall be payable at the LIBOR Basis for such Advance in arrears on the
applicable Payment Date, and, in addition, if the Interest Period for a LIBOR
Advance exceeds three (3) months, interest on such LIBOR Advance shall also be
due and payable in arrears on each three (3) month anniversary of the making of
such Advance. Interest on LIBOR Advances then outstanding shall also be due and
payable on the Maturity Date.
(c) If No Notice of Selection of Interest Rate Basis. If the
Borrower fails to give the Administrative Agent timely notice of (i) its
selection of a LIBOR Basis or (ii) an election to reborrow a Base Rate Advance
as a Base Rate Advance or if for any reason a determination of a LIBOR Basis for
any Advance is not timely concluded, the Base Rate shall apply to such Advance,
and if the Borrower shall fail to elect to reborrow any LIBOR Advance then
outstanding prior to the last Payment Date applicable thereto in accordance with
the provisions of Section 2.2(c)(ii) hereof, as applicable, the Base Rate shall
apply to such Advance commencing on and after such Payment Date.
(d) Upon Default. Upon the occurrence and during the
continuance of an Event of Default, the Majority Banks shall have the option
(but shall not be required) to give prior notice thereof to the Borrower, to
accelerate the maturity of the Loans, or exercise any other rights or remedies
hereunder in connection with the exercise of this right, to charge interest on
the outstanding principal balance of the Loans at the Default Rate from the date
of such Event of Default. Such interest shall be payable on the earlier of
DEMAND or the Maturity Date and shall accrue until the earlier of (i) waiver or
cure (to the satisfaction of the Majority Banks) of the applicable Event of
Default, (ii) agreement by the Majority Banks to rescind the charging of
interest at the Default Rate, or (iii) payment in full of the Obligations.
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<PAGE> 25
(e) LIBOR Advances; Conversions. At no time may the number
of outstanding LIBOR Advances under the Commitment exceed six (6).
(f) Applicable Margin. The Applicable Margin shall be
subject to reduction or increase, as applicable, and as set forth in the table
below, based upon the Leverage Ratio of the Borrower as reflected in the
financial statements required to be delivered for the fiscal quarter most
recently ended pursuant to Section 6.1 or Section 6.2 hereof. The adjustment
provided for in this Section 2.3(f) shall be effective (a) with respect to an
increase of the Applicable Margin, as of the second (2nd) Business Day after the
day on which financial statements are required to be delivered to the
Administrative Agent pursuant to Sections 6.1 and 6.2 hereof, as the case may
be, and (b) with respect to a decrease in the Applicable Margin, as of the
second (2nd) Business Day after except with respect to Interest Periods ending
(or other payments of interest occurring) before the date that such financial
statements are actually delivered to the Administrative Agent, the day on which
such financial statements are required to be delivered to the Administrative
Agent pursuant to Section 6.1 or 6.2 hereof, as the case may be. If the Borrower
shall fail to deliver financial statements within seventy-five (75) days after
the end of any of the first three fiscal quarters of the Borrower's fiscal year
(or within one hundred twenty (120) days after the end of the last fiscal
quarter of the Borrower's fiscal year), as required by Sections 6.1 or 6.2
hereof, it shall be conclusively presumed that the Applicable Margin is based
upon a Leverage Ratio of 4.00:1 for the period from and including the
seventy-sixth (76th) day (or one hundred twenty-first (121st) day, in the case
of the last quarter) after the end of such fiscal quarter, as the case may be,
to the fifth day following the delivery by the Borrower to the Administrative
Agent of such financial statements. The Applicable Margin in effect on the
Agreement Date shall be based upon a certificate, dated the Agreement Date, by
the Borrower's Authorized Signatory showing the Leverage Ratio on a pro forma
basis (after giving effect to initial Advances hereunder) and delivered to the
Administrative Agent on the Agreement Date.
<TABLE>
<CAPTION>
Base Rate Advance LIBOR Advance
Leverage Ratio Applicable Margin Applicable Margin
-------------- ----------------- -----------------
<S> <C> <C>
Greater than or equal to 4.00:1 0.000% 1.250%
3.50:1 or greater, but less than 4.00:1 0.000% 1.125%
3.00:1 or greater, but less than 3.50:1 0.000% 0.875%
less than 3.00:1 0.000% 0.700%
</TABLE>
Section 2.4 Fees. The Borrower agrees to pay to the Administrative Agent
for the benefit of the Banks, in accordance with their respective Commitment
Ratios, a commitment fee on the average daily amount of the unborrowed
Commitment for each day from the Agreement Date through the Maturity Date, (A)
at all times during which the Leverage Ratio
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<PAGE> 26
is greater than or equal to 3.5:1, at the rate of three-eighths of one percent
(0.375%) per annum, and (B) at all times during which the Leverage Ratio is less
than 3.5:1, at the rate of one-quarter of one percent (0.250%) per annum. The
commitment fee shall be subject to reduction or increase, as applicable, based
upon the Leverage Ratio of the Borrower for the fiscal quarter most recently
ended as reflected in the financial statements required to be delivered for such
quarter pursuant to Section 6.1 or Section 6.2 hereof. Any adjustment provided
for in this Section 2.4(a)(i) shall be effective (1) with respect to an increase
of the commitment fee, as of the second (2nd) Business Day after the day on
which financial statements are required to be delivered to the Administrative
Agent pursuant to Sections 6.1 and 6.2 hereof, as the case may be, and (2) with
respect to a decrease in the commitment fee, as of the second (2nd) Business Day
after which such financial statements are required to be delivered to the
Administrative Agent pursuant to Section 6.1 or 6.2 hereof, as the case may be,
except with respect to any payment of the commitment fee hereunder occurring
prior to the date such financial statements are actually delivered to the
Administrative Agent. The commitment fee in effect on the Agreement Date shall
be based upon a certificate, dated the Agreement Date, by a senior financial
officer of the Borrower showing the Leverage Ratio on a pro forma basis (after
giving effect to initial Advances hereunder) and delivered to the Administrative
Agent on the Agreement Date. Such commitment fee shall be computed on the basis
of a year of 365/366 days for the actual number of days elapsed, shall be
payable quarterly in arrears on the last day of each calendar quarter,
commencing on March 31, 1998 (for the period from the Agreement Date through
March 31, 1998), and continuing on the last day of each successive calendar
quarter and on the Maturity Date, and shall be fully earned when due and
non-refundable when paid.
Section 2.5 Reduction of Commitment.
(a) Optional. The Borrower shall have the right, at any time
and from time to time after the Agreement Date and prior to the Maturity Date,
upon at least three (3) Business Days' prior written notice to the
Administrative Agent, without premium or penalty, to cancel or reduce
permanently all or a portion of the Commitment on a pro rata basis among the
Banks, provided that any such partial reduction shall be made in an amount not
less than $5,000,000 and in integral multiples of not less than $1,000,000. As
of the date of cancellation or reduction set forth in such notice, the
Commitment shall be permanently reduced to the amount stated in the Borrower's
notice for all purposes herein, and the Borrower shall, subject to Section 2.10
hereof, pay to the Administrative Agent for the account of the Banks the amount
necessary to reduce the principal amount of the Loans then outstanding under the
Commitment to not more than the amount of the Commitment as so reduced, together
with accrued interest on the amount so prepaid. Reductions hereunder shall be
applied to the reductions under Section 2.5(b) hereof on a pro rata basis with
respect to the remaining reductions.
(b) Scheduled Reductions. The Commitment (based upon the
Commitment as of June 29, 2000) shall be reduced automatically and permanently
on a semi-annual
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<PAGE> 27
basis (i.e., each June 30 and December 31) commencing on June 30, 2000 and
ending on the Maturity Date (which percentage reduction shall be in addition to
reductions under Section 2.5(a) hereof during such quarter) in the amounts set
forth below:
<TABLE>
<CAPTION>
Semi-Annual Percentage of
Reduction of
Dates of Commitment as of
Commitment Reduction June 29, 2000
-------------------- -------------------------
<S> <C>
June 30, 2000 and December 31, 2000 1.50%
June 30, 2001 and December 31, 2001 5.00%
June 30, 2002 and December 31, 2002 9.00%
June 30, 2003 and December 31, 2003 10.00%
June 30, 2004 and December 31, 2004 12.00%
June 30, 2005 25.00%
</TABLE>
Section 2.6 Prepayment. LIBOR Advances may be prepaid prior to the
applicable Payment Date, upon two (2) Business Days' prior written notice to the
Administrative Agent, provided that the Borrower shall reimburse the Banks and
the Administrative Agent, on the earlier of demand or the Maturity Date, for any
loss or out-of-pocket expense incurred by the Banks or the Administrative Agent
in connection with such prepayment, as set forth in Section 2.10 hereof. Base
Rate Loans may be prepaid in full or in part at any time without penalty upon
written notice to the Administrative Agent on the date of such prepayment. Each
notice of prepayment shall be irrevocable, and all amounts prepaid on the Loans
shall be applied first to interest and fees and other amounts due and payable
hereunder as of such date, and then to principal. Partial prepayments shall be
in a principal amount of not less than $1,000,000 and in an integral multiple of
$1,000,000. Upon receipt of any notice of prepayment, the Administrative Agent
shall promptly notify each Bank.
Section 2.7 Repayment.
(a) Loans Exceeding Commitment. If, at any time, the amount
of the Loans then outstanding shall exceed the Commitment, the Borrower shall on
such date make a repayment of the principal amount of the Loans in an amount
equal to such excess.
(b) Maturity. In addition to the foregoing, a final payment
of all Obligations then outstanding shall be due and payable on the Maturity
Date.
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Section 2.8 Notes; Loan Accounts.
(a) The Loans shall be repayable in accordance with the
terms and provisions set forth herein, and shall be evidenced by the Notes. One
of the Notes shall be payable to the order of each Bank in accordance with the
respective Commitment Ratio of the Bank. The Notes shall be issued by the
Borrower to the Banks and shall be duly executed and delivered by an Authorized
Signatory.
(b) Each Bank may open and maintain on its books in the name
of the Borrower a loan account with respect to the Loans and interest thereon.
Each Bank which opens such loan account or accounts shall debit the applicable
loan account for the principal amount of each Advance made by it and accrued
interest thereon, and shall credit such loan account for each payment on account
of principal of or interest on the Loans. The records of each Bank with respect
to the loan accounts maintained by it shall be, absent manifest error, prima
facie evidence of the Loans and accrued interest thereon, but the failure to
maintain such records shall not impair the obligation of the Borrower to repay
Indebtedness hereunder.
(c) Each Advance from the Banks under this Agreement shall
be made pro rata on the basis of their respective Commitment Ratios.
Section 2.9 Manner of Payment.
(a) Each payment (including any prepayment) by the Borrower
on account of the principal of or interest on the Loans, fees, and any other
amount owed to the Banks or the Administrative Agent under this Agreement, the
Notes, or the other Loan Documents shall be made not later than 1:00 p.m.
(Eastern time) on the date specified for payment under this Agreement or such
other Loan Document to the Administrative Agent to an account designated by the
Administrative Agent for the account of the Banks or the Administrative Agent,
as the case may be, in lawful money of the United States of America in
immediately available funds. The failure of the Borrower to make any such
payment by such time shall not constitute a Default hereunder, provided that
such payment is received by the Administrative Agent in immediately available
funds by 4:00 p.m. (Eastern time) on such due date, but any such payment made
after 1:00 p.m. (Eastern time) on such due date shall be deemed to have been
made on the next Business Day for the purpose of calculating interest on amounts
outstanding on the Loans, unless the Administrative Agent, in fact, was able to
remit to such Bank its pro rata share of such payment by 4:00 p.m. (Eastern
time) on such due date. In the case of a payment for the account of a Bank, the
Administrative Agent will promptly thereafter distribute the amount so received
in like funds to such Bank. If the Administrative Agent shall not have received
any payment from the Borrower as and when due, the Administrative Agent will
promptly notify the Banks accordingly.
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<PAGE> 29
(b) If any payment under this Agreement or any of the Notes
shall be specified to be made upon a day which is not a Business Day, it shall
be made on the next day which is a Business Day, and such extension of time
shall in such case be included in computing interest and fees, if any, in
connection with such payment.
(c) So long as the applicable Bank has complied with Section
2.13 hereof, the Borrower agrees to pay principal, interest, fees and all other
amounts due hereunder, under the Notes or under any other Loan Document without
set-off or counterclaim or any deduction whatsoever and free and clear of all
taxes, levies and withholding. So long as the applicable Bank has complied with
Section 2.13 hereof, if the Borrower is required by Applicable Law to deduct any
taxes from or in respect of any sum payable to the such Bank hereunder, under
any Note or under any other Loan Document: (i) the sum payable hereunder or
thereunder, as applicable, shall be increased to the extent necessary to provide
that, after making all required deductions (including deductions applicable to
additional sums payable under this Section 2.9(c)), the Administrative Agent or
such Bank, as applicable, receives an amount equal to the sum it would have
received had no such deductions been made; (ii) the Borrower shall make such
deductions from such sums payable hereunder or thereunder, as applicable, and
pay the amount so deducted to the relevant taxing authority as required by
Applicable Law; and (iii) the Borrower shall provide the Administrative Agent or
such Bank, as applicable, with evidence satisfactory to the Administrative Agent
or such Bank, as applicable, that such deducted amounts have been paid to the
relevant taxing authority. Before making any such deductions, such Bank shall
designate a different lending office and may take such alternative courses of
action if such designation or alternative courses of action will avoid the need
for such deductions and will not in the good faith judgment of such Bank be
otherwise disadvantageous to such Bank.
Section 2.10 Reimbursement.
(a) Whenever any Bank shall actually incur any losses or
reasonable out-of-pocket expenses (other than losses associated with a reduction
in the interest rate margin) in connection with (i) failure by the Borrower to
borrow any LIBOR Advance after having given notice of its intention to borrow in
accordance with Section 2.2 hereof (whether by reason of the election of the
Borrower not to proceed or the non-fulfillment of any of the conditions set
forth in Article 3) other than a failure to borrow resulting from an
unavailability which occurs after notice from the Administrative Agent to the
Borrower pursuant to Section 10.1 or 10.2 hereof, or (ii) prepayment of any
LIBOR Advance in whole or in part (including a prepayment pursuant to Sections
10.2 and 10.3(b) hereof), the Borrower agrees to pay to such Bank, upon the
earlier of such Bank's demand or the Maturity Date, an amount sufficient to
compensate such Bank for all such losses and reasonable out-of-pocket expenses.
Such Bank's good faith determination of the amount of such losses and reasonable
out-of-pocket expenses, absent manifest error, shall be binding and conclusive.
Upon request of the Borrower, any Bank seeking reimbursement under this
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Section 2.10 shall provide a certificate setting forth the amount to be paid to
it by the Borrower hereunder and calculations therefor.
(b) Losses subject to reimbursement hereunder shall include,
without limiting the generality of the foregoing, but without duplication,
expenses incurred by any Bank or any participant of such Bank permitted
hereunder in connection with the re-employment of funds prepaid, paid, repaid,
not borrowed, not converted or not paid, as the case may be, and will be payable
whether the Maturity Date is changed by virtue of an amendment hereto (unless
such amendment expressly waives such payment) or as a result of acceleration of
the Obligations and whether such Bank has a "matched funding" of such Advance.
2.11 Application of Proceeds. Payments made to the Administrative Agent
or the Banks, or any of them, or otherwise received by the Administrative Agent
or the Banks, or any of them (from realization on collateral for the Obligations
or otherwise), shall be distributed as follows: First, to the reasonable costs
and expenses, if any, incurred by the Administrative Agent or the Banks, or any
of them, to the extent permitted by Section 11.2 hereof in the collection of
such amounts under this Agreement or any of the other Loan Documents, including,
without limitation, any reasonable costs incurred in connection with the sale or
disposition of any collateral for the Obligations; Second, pro rata among the
Administrative Agent and the Banks based on the total amount of fees then due
and payable hereunder or under any other Loan Document to any Administrative
Agent's fees then due and payable hereunder or under any other Loan Document and
to such fees then due and payable to the Banks; Third, pro rata among the Banks
based on the outstanding principal amount of the Loans outstanding immediately
prior to such payment, to any unpaid interest which may have accrued on the
Loans; Fourth, pro rata among the Banks based on the outstanding principal
amount of the Loans outstanding immediately prior to such payment, to any unpaid
principal of the Loans; Fifth, to any other Obligations not otherwise referred
to in this Section 2.11 until all such Obligations are paid in full; Sixth, to
damages incurred by the Administrative Agent or the Banks, or any of them, by
reason of any breach hereof or of any other Loan Documents; and Seventh, upon
satisfaction in full of all Obligations, to the Borrower or as otherwise
required by law. If any Bank shall obtain any payment (whether involuntary or
otherwise) on account of the Loans made by it in excess of its ratable share of
the Loans then outstanding and such Bank's share of any expenses, fees and other
items due and payable to it hereunder, such Bank shall forthwith purchase a
participation in the Loans from the other Banks as shall be necessary to cause
such purchasing Bank to share the excess payment ratably with each of them;
provided, however, that if all or any portion of such excess payment is
thereafter recovered from such purchasing Bank, such purchase from each Bank
shall be rescinded and such Bank shall repay to the purchasing Bank the purchase
price to the extent of such recovery. The Borrower agrees that any Bank so
purchasing a participation from another Bank pursuant to this Section may, to
the fullest extent permitted by law, exercise all its rights of payment with
respect to such participation as fully as if such Bank were the direct creditor
of the Borrower in the amount of such participation so long as the Borrower's
Obligations are not increased.
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2.12 Capital Adequacy. In the event that a Regulatory Change does or
shall have the effect of reducing the rate of return on such Bank's capital as a
consequence of its obligations hereunder to a level below that which such Bank
could have achieved but for such adoption, change or compliance (taking into
consideration such Bank's policies with respect to capital adequacy) by an
amount deemed by such Bank to be material, then from time to time, ten (10) days
after submission by such Bank to the Borrower (with a copy to the Agent) of a
written request therefor, together with a certificate (which shall be conclusive
absent manifest error), setting forth the calculations evidencing such requested
additional amount, and the law or regulation with respect thereto and certifying
that such request is consistent with such Bank's treatment of other similar
customers having similar provisions generally in their agreements with such
Bank, and that such request is being made on the basis of a reasonable
allocation of the costs resulting from such law or regulation, the Borrower
shall pay to such Bank such additional amount or amounts as will compensate such
Bank for such reduction. Allocations shall not be deemed reasonable unless made
ratably, to the extent practicable, to all affected assets, commitments,
activities or other relevant aspects of such Bank's business, whether or not the
Bank is entitled to compensation with respect thereto. Notwithstanding the
foregoing, the Borrower shall only be obligated to compensate such Bank for any
amount under this subsection arising or occurring during (i) in the case of each
such request for compensation, any time or period commencing not more than sixty
(60) days prior to the date on which such Bank submits such request and (ii) any
other time or period during which, because of the unannounced retroactive
application of such law, regulation, interpretation, request or directive, such
Bank could not have known that the resulting reduction in return might arise.
Each Bank will notify the Borrower that it is entitled to compensation pursuant
to this subsection as promptly as practicable after it determines to request
such compensation; provided, however, that the failure to provide such notice
shall not restrict the ability of such Bank to be reimbursed under this Section
2.12 except as provided in clause (i) above.
2.13 Bank Tax Forms. On or prior to the Agreement Date, each Bank which
is organized in a jurisdiction other than the United States shall provide each
of the Administrative Agent and the Borrower with properly executed originals of
Forms 4224 or 1001 (or any successor form) prescribed by the Internal Revenue
Service or other documents satisfactory to the Borrower and the Administrative
Agent, and each such Bank shall provide properly executed Internal Revenue
Service Forms W-8 or W-9, as the case may be, certifying (i) as to such Bank's
status for purposes of determining exemption from United States withholding
taxes with respect to all payments to be made to such Bank hereunder and under
the Notes or (ii) that all payments to be made to such Bank hereunder and under
the Notes are subject to such taxes at a rate reduced to zero by an applicable
tax treaty. Each such Bank agrees to provide the Administrative Agent and the
Borrower with new forms prescribed by the Internal Revenue Service upon the
expiration or obsolescence of any previously delivered form, or after the
occurrence of any event requiring a change in the most recent forms delivered by
it to the Administrative Agent and the Borrower.
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ARTICLE 3 - Conditions Precedent.
Section 3.1 Conditions Precedent to Effectiveness of Agreement and
Initial Advance. The obligation of the Banks to undertake the Commitment and to
make the initial Advance hereunder is subject to the prior fulfillment of each
of the following conditions:
(a) The Administrative Agent shall have received each of the
following, in form and substance satisfactory to the Administrative Agent:
(i) duly executed Notes;
(ii) duly executed Subsidiary Guaranty;
(iii) evidence satisfactory to the Administrative Agent that
the Borrower and its Subsidiaries have a Transponder Lease Agreement
providing for unqualified access to a non-preemptable transponder;
(iv) the loan certificate of the Borrower dated as of the
Agreement Date, including a certificate of incumbency with respect to
the signature of each Authorized Signatory, which loan certificate shall
be in substantially the form of Exhibit F attached hereto, together with
appropriate attachments thereto;
(v) a loan certificate from each of the Restricted
Subsidiaries dated as of the Agreement Date, in substantially the form
attached hereto as Exhibit G, including a certificate of incumbency with
respect to each Authorized Signatory of such Person;
(vi) legal opinion of (i) Sherman & Howard L.L.C., special
counsel to the Borrower and its Subsidiaries, and (ii) Stephen M. Brett,
Esq., in-house counsel to the Borrower and its Subsidiaries, each dated
as of the Agreement Date addressed to each Bank and the Administrative
Agent and dated as of the Agreement Date substantially in the form of
Exhibits H-1 and H-2, respectively, attached hereto;
(vii) receipt by the Administrative Agent and the Banks of all
appropriate fees to be paid to them by the Borrower on or prior to the
Agreement Date;
(viii) any required consents to the closing of this Agreement
or to the execution, delivery and performance of this Agreement and the
other Loan Documents, each of which shall be in form and substance
satisfactory to the Administrative Agent and the Banks;
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(ix) duly executed Fee Agreements;
(x) duly executed Leverage Ratio Certificate in
substantially the form of Exhibit I attached hereto; and
(xi) all such other documents as the Administrative Agent may
reasonably request, certified by an appropriate governmental official or
Authorized Signatory if so requested.
(b) The Administrative Agent shall have received evidence
satisfactory to it that all material Necessary Authorizations, including all
necessary consents to the closing of this Agreement, have been obtained or made,
are in full force and effect and are not subject to any pending or, to the
knowledge of the Borrower, threatened reversal or cancellation, and the
Administrative Agent shall have received a certificate of an Authorized
Signatory so stating.
(c) The Borrower shall certify to the Administrative Agent and the
Banks that each of the representations and warranties in Article 4 hereof are
true and correct in all material respects as of the Agreement Date, that no
Default then exists or is continuing.
(d) No material adverse change from the financial condition and
operations as reflected in the pro forma financial statements as of June 30,
1997 and the unaudited financial statements as of September 30, 1997 of the
Borrower.
Section 3.2 Conditions Precedent to Each Advance. The obligation of the
Banks to make each Advance, including the initial Advance hereunder, other than
an Advance which does not increase the principal amount outstanding hereunder,
is subject to the fulfillment of each of the following conditions immediately
prior to or contemporaneously with such Advance:
(a) All of the representations and warranties of the Borrower under
this Agreement and the other Loan Documents, which, in accordance with Section
4.2 hereof, are made at and as of the time of such Advance, shall be true and
correct at such time, both before and after giving effect to the application of
the proceeds of the Advance;
(b) There shall not exist, on the date of the making of the Advance
and after giving effect thereto, a Default hereunder and the Administrative
Agent and each of the Banks shall have received a Request for Advance so
certifying;
(c) The Administrative Agent and each of the Banks shall have
received all such other certificates, reports, statements, opinions of counsel
or other documents as any of them may reasonably request; and
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(d) With respect to any Advance relating to any Acquisition or the
formation of any Subsidiary which is permitted hereunder, the Administrative
Agent and the Banks shall have received such documents and instruments relating
to such Acquisition or formation of a new Subsidiary as are described in Section
5.14 hereof or otherwise required herein.
The acceptance of the proceeds of any Loans which would increase the aggregate
Dollar amount of the Loans outstanding shall be deemed to be a representation
and warranty by the Borrower as to compliance with this Section 3.2 on the date
any such Loan is made.
ARTICLE 4 - Representations and Warranties.
Section 4.1 Representations and Warranties. The Borrower hereby agrees,
represents, and warrants that:
(a) Organization; Power; Qualification.
(i) The Borrower is a corporation duly organized and validly
existing under the laws of the State of Delaware. The Borrower has the power and
authority to own or lease and operate its properties and to carry on its
business as now being and hereafter proposed to be conducted, and is duly
qualified and authorized to do business, in each jurisdiction in which such
qualification is necessary in view of the character of its properties or the
nature of its business requires such qualification or authorization, except for
qualifications and authorizations, the lack of which, singly or in the
aggregate, has not had and is not likely to have a Materially Adverse Effect.
(ii) Each Restricted Subsidiary of the Borrower is a
corporation, partnership or a limited liability company duly organized and
validly existing under the laws of its state of formation. Each Restricted
Subsidiary of the Borrower has the power and the authority to own or lease and
operate its properties and to carry on its business as now being and hereafter
proposed to be conducted, and is duly qualified and authorized to do business in
each jurisdiction in which such qualification is necessary in view of the
character of its properties or the nature of its business requires such
qualification or authorization, except for qualifications and authorizations,
the lack of which, singly or in the aggregate, has not had and is not likely to
have a Materially Adverse Effect.
(b) Authorization; Enforceability. The Borrower has the necessary
power and has taken all necessary action to authorize it to execute, deliver,
and perform this Agreement and each of the other Loan Documents to which it is a
party in accordance with the terms thereof and to consummate the transactions
contemplated hereby and thereby. This Agreement has been duly executed and
delivered by the Borrower, and is, and each of the other Loan Documents to which
the Borrower is a party is, a legal, valid and binding obligation of the
Borrower, enforceable in accordance with its terms, subject to limitations on
enforceability
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under bankruptcy, reorganization, insolvency and similar laws affecting
creditors' rights generally and limitations on the availability of the remedy of
specific performance imposed by the application of general equity principles.
(c) Subsidiaries Authorization; Enforceability. The Subsidiaries and
the Borrower's direct and indirect ownership thereof as of the Agreement Date
are as set forth on Schedule 3 attached hereto, and to the extent such
Subsidiaries are Restricted Subsidiaries and are corporations, the Borrower has
the unrestricted right to vote the issued and outstanding shares of the
Subsidiaries shown thereon and such shares of such Subsidiaries have been duly
authorized and issued and are fully paid and nonassessable. Each Restricted
Subsidiary has the necessary power and has taken all necessary action to
authorize it to execute, deliver and perform each of the Loan Documents to which
it is a party in accordance with their respective terms and to consummate the
transactions contemplated by this Agreement and by such Loan Documents. Each of
the Loan Documents to which any Restricted Subsidiary is party is a legal, valid
and binding obligation of such Restricted Subsidiary enforceable against such
Restricted Subsidiary in accordance with its terms, subject, to limitations on
enforceability under bankruptcy, reorganization, insolvency and similar laws
affecting creditors' rights generally and limitations on the availability of the
remedy of specific performance imposed by the application of general equity
principles. The Borrower's ownership interest in each of the Restricted
Subsidiaries represents a direct or indirect controlling interest of such
Restricted Subsidiary for purposes of directing or causing the direction of the
management and policies of each Restricted Subsidiary.
(d) Compliance with Laws, Other Loan Documents, and Contemplated
Transactions. The execution, delivery, and performance by the Borrower and its
Restricted Subsidiaries of this Agreement and each of the other Loan Documents
in accordance with the terms thereof and the consummation of the transactions
contemplated hereby and thereby do not and will not (i) violate any Applicable
Law, (ii) result in a breach of, or constitute a default under, the certificate
or articles of incorporation or by-laws or partnership agreements, as the case
may be, as amended, of the Borrower or of any Restricted Subsidiary of the
Borrower or under any indenture, agreement, or other instrument to which the
Borrower or any of its Restricted Subsidiaries is a party or by any of them or
any of their respective properties may be bound, or (iii) result in or require
the creation or imposition of any Lien upon or with respect to any property now
owned or hereafter acquired by the Borrower or any of its Restricted
Subsidiaries except Permitted Liens; except where such violations, breaches,
defaults or Liens, if any, singly or in the aggregate, has not had and is not
likely to have a Materially Adverse Effect.
(e) Necessary Authorizations. No approval or consent of, or filing
or registration with, any federal, state or local commission or other regulatory
authority is required in connection with the execution, delivery and performance
by the Borrower or any of its Restricted Subsidiaries of such of this Agreement,
the Notes, and the other Loan Documents to which any of them is a party.
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(f) Title to Properties. The Borrower has good, marketable, and
legal title to, or a valid leasehold interest in, all of its respective material
tangible properties and assets free and clear of all Liens, except Permitted
Liens. Except for financing statements evidencing Permitted Liens, no financing
statement under the Uniform Commercial Code as in effect in any jurisdiction and
no other filing which names the Borrower or any of the Restricted Subsidiaries
as debtor or which covers or purports to cover any of the assets of the Borrower
or any of its Restricted Subsidiaries is currently effective and on file in any
state or other jurisdiction, and neither the Borrower nor any of its Restricted
Subsidiaries has signed any such financing statement or filing or any security
agreement authorizing any secured party thereunder to file any such financing
statement or filing.
(g) Collective Bargaining. There are no collective bargaining
agreements between the Borrower or any of its Restricted Subsidiaries and any
trade or labor union or other employee collective bargaining agent.
(h) Taxes. All federal, state, and other tax returns of the Borrower
and each Subsidiary of the Borrower required by law to be filed have been duly
filed, and all federal, state, and other taxes, assessments, and other
governmental charges or levies upon the Borrower or any of the Subsidiaries of
the Borrower or any of their respective properties, income, profits, and assets,
which are due and payable, have been paid, except any such tax payment (i) of
which the Borrower or any Subsidiary of the Borrower is diligently contesting in
good faith by appropriate proceedings, (ii) for which adequate reserves as
required by GAAP have been provided on the books of the Borrower or any
Subsidiary of the Borrower and (iii) as to which neither any Lien other than a
Permitted Lien has attached nor any foreclosure, distraint, sale, or similar
proceedings have been commenced. The charges, accruals, and reserves on the
books of the Borrower or any of its Subsidiaries in respect of taxes are, in the
reasonable judgment of the Borrower, adequate.
(i) Financial Statements. The Borrower has furnished, or caused to
be furnished, to the Banks unaudited pro forma financial statements for the
Borrower and its Subsidiaries which present fairly in accordance with GAAP the
financial position of the Borrower and its Subsidiaries as at December 1, 1996,
and the results of operations for the periods then ended. Except as disclosed in
the financial statements most recently furnished to the Banks pursuant to
Section 6.2 hereof (or until such financial statements are delivered hereunder,
the audited financial statement referred to in the preceding sentence), none of
the Borrower or any of its Subsidiaries had any material liabilities, contingent
or otherwise, and there are no material unrealized or anticipated losses of the
Borrower which have not heretofore been disclosed in writing to the Banks.
(j) Licenses, etc. The material Licenses have been duly issued and
are in full force and effect. The Borrower and its Restricted Subsidiaries are
in compliance in all material respects with all of the provisions thereof. The
Borrower and its Restricted
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Subsidiaries have secured all material Necessary Authorizations and all such
Necessary Authorizations are in full force and effect. Neither any material
License nor any material Necessary Authorization is the subject of any pending
or, to the best of the Borrower's knowledge, threatened revocation.
(k) No Adverse Change. There has occurred no event since June 30,
1997 which has or could reasonably be expected to have a Materially Adverse
Effect.
(l) Investments and Guaranties. The Borrower has not made material
investments, advances to, or guaranties of, the obligations of any Person,
except as reflected in the financial statements referred to in Section 4.1(i)
above or as otherwise permitted by the terms of this Agreement.
(m) Liabilities, Litigation, etc. Except for liabilities incurred in
the normal course of business, neither the Borrower nor any of its Restricted
Subsidiaries has any material (individually or in the aggregate) liabilities,
direct or contingent, except as disclosed or referred to in the financial
statements referred to in Section 4.1(i) above. Except as set forth on Schedule
4 attached hereto, there is no material litigation, legal or administrative
proceeding, investigation, or other action of any nature pending or, to the
knowledge of the Borrower, threatened against or affecting the Borrower, any of
its Restricted Subsidiaries or any of its properties which involves the
possibility of any material judgment or liability not fully covered by
insurance.
(n) ERISA. The Borrower and each ERISA Affiliate and each of their
respective Plans are in substantial compliance with ERISA and the Code and
neither the Borrower nor any of its ERISA Affiliates has incurred any
accumulated funding deficiency with respect to any such Plan within the meaning
of ERISA or the Code. The Borrower and each of its ERISA Affiliates have
complied with all requirements of ERISA Sections 601 through 608 and Code
Section 4980B in all material respects. The Borrower has incurred no material
liability to the Pension Benefit Guaranty Corporation in connection with any
Plan. The assets of each Plan which is subject to Title IV of ERISA are
sufficient to provide the benefits under such Plan, the payment of which the
Pension Benefit Guaranty Corporation would guarantee if such Plan were
terminated, and such assets are also sufficient to provide all other "benefit
liabilities" (as defined in ERISA Section 4001(a)(16)) due under the plan upon
termination. No Reportable Event has occurred and is continuing with respect to
any Plan which could reasonably be likely to have a Materially Adverse Effect.
No Plan or trust created thereunder, or party in interest (as defined in Section
3(14) of ERISA, or any fiduciary (as defined in Section 3(21) of ERISA), has
engaged in a "prohibited transaction" (as such term is defined in Section 406 of
ERISA or Section 4975 of the Code) which would subject the Borrower or any ERISA
Affiliate to a material penalty or tax on "prohibited transactions" imposed by
Section 502 of ERISA or Section 4975 of the Code. Neither the Borrower nor any
of its ERISA Affiliates is a participant in or is obligated to make any payment
to a Multiemployer Plan which has or is expected to have any withdrawal
liability if such Plan were terminated or
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<PAGE> 38
if such Person were to withdraw from such Plan which could reasonably be likely
to have a Materially Adverse Effect.
(o) Patents, Trademarks, etc. The Borrower and each of its
Restricted Subsidiaries owns, possesses or has the right to use all licenses and
rights to all patents, Trademarks, trademark rights, trade names, trade name
rights, service marks, and copyrights, and rights with respect thereto,
necessary to conduct its business in all material respects as now conducted,
without known conflict with any patent, Trademark, trade name, service mark,
license or copyright of any other Person, and in each case, with respect to
patents, Trademarks, trademark rights, trade names, trade name and copyrights
and licenses with respect thereto owned by Borrower or its Restricted
Subsidiaries, subject to no mortgage, pledge, lien, lease, encumbrance, charge,
security interest, title retention agreement or option. All such licenses and
rights with respect to patents, Trademarks, trademark rights, trade names, trade
name rights, service marks and copyrights are in full force and effect, and to
the extent applicable, the Borrower and its Restricted Subsidiaries are in full
compliance in all material respects with all of the provisions thereof. No such
patent, Trademark, trademark rights, trade names, trade name rights, service
marks, copyrights or licenses is subject to any pending or, to the best of the
Borrower's knowledge, threatened attack or revocation. Neither the Borrower nor
any of its Restricted Subsidiaries owns any registered copyrights or patents
(other than general business licenses and permits).
(p) Compliance with Law; Absence of Default. The Borrower and each
of its Restricted Subsidiaries is in compliance with all Applicable Laws, and no
event has occurred or has failed to occur which has not been remedied or waived,
the occurrence or non-occurrence of which constitutes (i) a Default or (ii) a
default by the Borrower or any of its Restricted Subsidiaries under any other
indenture, agreement, or other instrument, or any judgment, decree, or order to
which the Borrower or any of its Restricted Subsidiaries is a party or by which
the Borrower or any of its Restricted Subsidiaries or any of its or their
properties may be bound, which default could reasonably be considered to have a
Materially Adverse Effect.
(q) Compliance with Regulations G, U, and X. The Borrower is neither
engaged principally in, nor as one of its important activities in the business
of, extending credit for the purpose of purchasing or carrying any "margin
security" or "margin stock" as defined in Regulations G, U, and X (12 C.F.R.
Parts 221 and 224) of the Board of Governors of the Federal Reserve System
(herein called "margin stock"). None of the proceeds of the Loans will be used,
directly or indirectly, for the purpose of purchasing or carrying any margin
stock or for the purpose of reducing or retiring any Indebtedness which was
originally incurred to purchase or carry margin stock or for any other purpose
which might constitute this transaction a "purpose credit" within the meaning of
said Regulations G, U, and X. Neither the Borrower nor any bank acting on its
behalf has taken or will take any action which might cause this Agreement or the
Notes to violate Regulation G, U, or X or any other regulation of the Board of
Governors of the Federal Reserve System or to violate the Securities Exchange
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<PAGE> 39
Act of 1934, in each case as now in effect or as the same may hereafter be in
effect. If so requested by the Bank, the Borrower will furnish the Bank with (i)
a statement or statements in conformity with the requirements of Federal Reserve
Forms G-3 and/or U-1 referred to in Regulations G and U of said Board of
Governors and (ii) other documents evidencing its compliance with the margin
regulations, including without limitation an opinion of counsel in form and
substance satisfactory to the Banks. Neither the making of the Loans nor the use
of proceeds thereof will violate, or be inconsistent with, the provisions of
Regulation G, U, or X of said Board of Governors.
(r) Broker's or Finder's Commissions. No broker's or finder's fee or
commission will be payable with respect to the issuance of the Notes, and no
other similar fees or commissions will be payable by the Borrower for any other
services rendered to the Borrower ancillary to the transactions contemplated
herein.
(s) Governmental Regulation. Neither the Borrower nor any of its
Restricted Subsidiaries is required to obtain any consent, approval,
authorization, permit or license which has not already been obtained from, or
effect any filing or registration which has not already been effected with, any
federal, state or local regulatory authority in connection with the performance,
in accordance with their respective terms, of this Agreement or any other Loan
Document the failure of which to obtain could have a Materially Adverse Effect.
(t) Accuracy and Completeness of Information. All information,
reports, prospectuses and other papers and data relating to the Borrower or any
of its Subsidiaries and furnished by or on behalf of the Borrower or any of its
Subsidiaries to the Administrative Agent or the Banks were, at the time
furnished, true, complete and correct in all material respects to the extent
necessary to give the Administrative Agent and the Banks true and accurate
knowledge of the subject matter.
(u) Payment of Wages. The Borrower and each of its Restricted
Subsidiaries are in compliance with the Fair Labor Standards Act, as amended, in
all material respects, and to the knowledge of the Borrower and each of its
Restricted Subsidiaries, such Persons have paid all minimum and overtime wages
required by law to be paid to their respective employees.
(v) Business. The Borrower's business and the business of its
Restricted Subsidiaries include distributing and acquiring music programming,
distributing and selling such programming to cable and other non-broadcast
delivery systems, and directly related media activities.
(w) Investment Company Act. Neither the Borrower nor any of its
Restricted Subsidiaries is required to register under the provisions of the
Investment Company Act of 1940, as amended, and neither the entering into or
performance by the Borrower and its Restricted Subsidiaries of this Agreement
and the Loan Documents to which they are
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<PAGE> 40
respectively party nor the issuance of the Notes violates any provision of such
Act or requires any consent, approval, or authorization of, or registration
with, the Securities and Exchange Commission, any governmental or public body or
authority pursuant to any of the provisions of such Act.
Section 4.2 Survival of Representations and Warranties, etc. All
representations and warranties made under this Agreement shall be deemed to be
made, and shall be true and correct, at and as of the Agreement Date and the
date of each Advance hereunder, except to the extent previously fulfilled in
accordance with the terms hereof and to the extent subsequently inapplicable.
All representations and warranties made under this Agreement shall survive, and
not be waived by, the execution hereof by the Banks and the Administrative
Agent, any investigation or inquiry by any Bank or the Administrative Agent, or
the making of any Advance under this Agreement.
ARTICLE 5 - General Covenants.
So long as any of the Obligations is outstanding and unpaid or the
Borrower shall have the right to borrow hereunder (whether or not the conditions
to borrowing have been or can be fulfilled), and unless the Majority Banks shall
otherwise consent in writing:
Section 5.1 Preservation of Existence and Similar Matters. The Borrower
will, and, except as permitted by Section 7.5 hereof, will cause each of its
Restricted Subsidiaries to, (a) preserve and maintain its existence, rights,
licenses, and privileges in its jurisdiction of formation and (b) qualify and
remain qualified and authorized to do business in each jurisdiction in which
such qualification is necessary in view of the character of its properties or
the nature of its business requires such qualification or authorization, except
for qualifications and authorizations, the lack of which, singly or in the
aggregate, has not had and is not likely to have a Materially Adverse Effect.
Section 5.2 Business; Compliance with Applicable Law. The Borrower will,
and will cause each of its Restricted Subsidiaries to, (a) engage primarily in
the business described in Section 4.1(w) hereof and related businesses and (b)
comply with the requirements of all Applicable Law, including environmental
laws, the non-compliance with which could have a Materially Adverse Effect.
Section 5.3 Maintenance of Properties. The Borrower will, and will cause
each of its Restricted Subsidiaries to, maintain or cause to be maintained in
the ordinary course of business in good repair, working order, and condition all
properties necessary in its business (whether owned or held under lease).
Section 5.4 Accounting Methods and Financial Records. The Borrower will,
and will cause each of its Restricted Subsidiaries to, maintain a system of
accounting established
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and administered in accordance with GAAP, and keep adequate records and books of
account in which complete entries will be made in accordance with GAAP
reflecting all transactions required to be reflected by GAAP and keep accurate
and complete records of their respective properties and assets. The Borrower and
its Restricted Subsidiaries will maintain a fiscal year ending on December 31.
Section 5.5 Insurance. The Borrower will, and will cause each of its
Restricted Subsidiaries to maintain insurance on its assets and properties and
on its operations including, but not limited to, public liability, business
interruption, property and crime, from responsible insurance companies in such
amounts and against such risks as shall be customary for similar businesses. The
Borrower and each of its Restricted Subsidiaries shall at all times maintain
insurance coverage comparable to that in place on the Agreement Date, taking
into account the growth of the Borrower's and the Restricted Subsidiaries'
business and operations after the Agreement Date.
Section 5.6 Payment of Taxes and Claims. The Borrower will, and will
cause each of its Restricted Subsidiaries to, pay and discharge all taxes,
assessments, and governmental charges or levies imposed upon it or upon its
incomes or profits or upon any properties belonging to it prior to the date on
which penalties attach thereto, and all lawful claims for labor, materials, and
supplies which, if unpaid, might become a Lien other than a Permitted Lien upon
any of its properties; except that, no such tax, assessment, charge, levy, or
claim need be paid which is being contested in good faith by appropriate
proceedings and for which adequate reserves as required by GAAP shall have been
set aside on the appropriate books, but only so long as such tax, assessment,
charge, levy, or claim does not become a Lien or charge other than a Permitted
Lien and no foreclosure, distraint, sale, or similar proceedings shall have been
commenced and remain unstayed for a period of thirty (30) days after such
commencement. The Borrower will, and will cause each of its Restricted
Subsidiaries to, timely file all information returns required by federal, state
or local tax authorities.
Section 5.7 Visits and Inspections. The Borrower will permit, and will
cause each of its Restricted Subsidiaries to permit, representatives of the
Administrative Agent and each Bank to (a) visit and inspect the properties of
the Borrower and each of its Restricted Subsidiaries at reasonable times during
normal business hours, (b) inspect and make extracts from and copies of their
respective books and records, and (c) discuss with their respective principal
officers its businesses, assets, liabilities, financial positions, results of
operations, and business prospects relating to the Borrower and each of its
Restricted Subsidiaries. The Borrower and each of its Restricted Subsidiaries
will also permit representatives of the Administrative Agent to discuss with
their respective accountants the Borrower's and its Restricted Subsidiaries'
businesses, assets, liabilities, financial positions, results of operations and
business prospects.
Section 5.8 Payment of Indebtedness. The Borrower will pay, and will
cause each of its Restricted Subsidiaries to pay, subject to any provisions
therein regarding
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subordination, any and all of their respective Indebtedness when and as the same
becomes due, other than Indebtedness the non-payment of which will not have a
Materially Adverse Effect, and which the Borrower is contesting in good faith
and has established adequate reserves on its books and records.
Section 5.9 Use of Proceeds. The Borrower will use the proceeds of the
Loans solely for (a) Acquisitions permitted hereunder, (b) Capital Expenditures,
(c) refinancing existing Indebtedness owed to Affiliates of the Borrower and (d)
general corporate purposes.
Section 5.10 ERISA. The Borrower shall (a) notify the Banks as soon as
practicable of any Reportable Event for which the Pension Benefit Guaranty
Corporation has not waived the thirty (30) day notice requirement and of any
additional act or condition arising in connection with any such Plan which the
Borrower believes might constitute grounds for the termination thereof by the
Pension Benefit Guaranty Corporation or for the appointment by the appropriate
United States District Court of a trustee to administer such Plan and (b)
furnish to the Banks, promptly upon the Banks' request therefor, such additional
information concerning any such Plan as may be reasonably requested by the
Banks.
Section 5.11 Indemnity. The Borrower agrees to indemnify and hold
harmless each Bank and the Administrative Agent, and each of their respective
affiliates, employees, representatives, shareholders, officers and directors
(any of the foregoing shall be an "Indemnitee") from and against any and all
claims, liabilities, losses, damages, actions, reasonable attorneys' fees and
expenses (as such fees and expenses are incurred) and demands by any party
(other than the Borrower), including the costs of investigating and defending
such claims, whether or not the Borrower, any Subsidiary or the Person seeking
indemnification is the prevailing party (a) resulting from any breach or alleged
breach by the Borrower or any Restricted Subsidiary of the Borrower of any
representation or warranty made hereunder; or (b) otherwise arising out of (i)
the Commitment or otherwise under this Agreement, any Loan Document or any
transaction contemplated hereby or thereby, including, without limitation, the
use of the proceeds of Loans hereunder in any fashion by the Borrower or the
performance of their respective obligations under the Loan Documents by the
Borrower, (ii) allegations of any participation by the Banks or the
Administrative Agent, or any of them, in the affairs of the Borrower or any of
its Subsidiaries, or allegations that any of them has any joint liability with
the Borrower or any of its Subsidiaries for any reason, (iii) any claims against
the Banks or the Administrative Agent, or any of them, by any shareholder or
other investor in or lender to the Borrower or any Subsidiary, by any brokers or
finders or investment advisers or investment bankers retained by the Borrower or
by any other third party, arising out of the Commitment or otherwise under this
Agreement or any other Loan Document; or (c) in connection with taxes (not
including federal or state income taxes or other taxes based solely upon the
revenues of such Persons), fees, and other charges payable in connection with
the Loans, or the execution, delivery, and enforcement of this Agreement, the
other Loan Documents, and any amendments thereto or waivers of any of the
provisions thereof; unless the Person seeking indemnification hereunder is
determined in such
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case to have acted with gross negligence or willful misconduct, in any case, by
a final, non-appealable judicial order. The obligations of the Borrower under
this Section 5.11 are in addition to, and shall not otherwise limit, any
liabilities which the Borrower might otherwise have in connection with any
warranties or similar obligations of the Borrower in any other Loan Document.
Section 5.12 Further Assurances. The Borrower will promptly cure, or
cause to be cured, defects in the creation and issuance of the Notes and the
execution and delivery of the Loan Documents (including this Agreement),
resulting from any act or failure to act by the Borrower or any of its
Restricted Subsidiaries or any employee or officer thereof. The Borrower at its
expense will promptly execute and deliver to the Administrative Agent and the
Banks, or cause to be executed and delivered to the Administrative Agent and the
Banks, all such other and further documents, agreements, and instruments in
compliance with or accomplishment of the covenants and agreements of the
Borrower in the Loan Documents, including this Agreement, or to correct any
omissions in the Loan Documents, or more fully to state the obligations set out
herein or in any of the Loan Documents, or to obtain any consents, all as may be
necessary or appropriate in connection therewith as may be reasonably requested.
Section 5.13 Broker's Claims. The Borrower hereby indemnifies and agrees
to hold the Administrative Agent and each of the Banks harmless from and against
any and all losses, liabilities, damages, costs and expenses which may be
suffered or incurred by the Administrative Agent and each of the Banks in
respect of any claim, suit, action or cause of action now or hereafter asserted
by a broker or any Person acting in a similar capacity arising from or in
connection with the execution and delivery of this Agreement or any other Loan
Document or the consummation of the transactions contemplated herein or therein.
Section 5.14 Covenants Regarding Formation of Subsidiaries and
Acquisitions. At the time of (a) any Acquisition by a Restricted Subsidiary of
the Borrower, (b) any Acquisition of a Person which becomes a Restricted
Subsidiary of the Borrower, or (c) the formation of any new Restricted
Subsidiary of the Borrower which is permitted under this Agreement, the Borrower
will, and will cause its Subsidiaries, as appropriate, to (i) provide to the
Administrative Agent an executed Subsidiary Guaranty for such new Restricted
Subsidiary, in substantially the form of Exhibit E attached hereto, which shall
constitute a Loan Document for purposes of this Agreement, as well as a loan
certificate for such new Restricted Subsidiary, substantially in the form of
Exhibit G attached hereto, together with appropriate attachments; and (ii) all
other documentation, including one or more opinions of counsel, reasonably
satisfactory to the Administrative Agent which in its reasonable opinion is
appropriate with respect to such Acquisition or the formation of such Restricted
Subsidiary. Any document, agreement or instrument executed or issued pursuant to
this Section 5.14 shall be a "Loan Document" for purposes of this Agreement.
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<PAGE> 44
ARTICLE 6 - Information Covenants.
So long as any of the Obligations is outstanding and unpaid or the
Borrower has a right to borrow hereunder (whether or not the conditions to
borrowing have been or can be fulfilled) and unless the Majority Banks shall
otherwise consent in writing, the Borrower will furnish or cause to be furnished
to each Bank and to the Administrative Agent at their respective offices:
Section 6.1 Quarterly Financial Statements and Information. Within
seventy-five (75) days after the last day of each of the first three (3)
quarters in each calendar year, the unaudited balance sheet of the Borrower and
its Restricted Subsidiaries as at the end of such quarter, and the related
unaudited statement of operations and related unaudited statement of cash flows
of the Borrower and its Restricted Subsidiaries for the elapsed portion of the
year ended with the last day of such quarter, certified by an Authorized
Signatory of the Borrower to have been prepared in accordance with GAAP and, in
his or her opinion, present fairly in all material respects the financial
position of the Borrower and its Restricted Subsidiaries, as at the end of such
period and the results of operations for such period, and for the elapsed
portion of the year ended with the last day of such period, subject only to
normal year-end adjustments.
Section 6.2 Annual Financial Statements and Information; Certificate of
No Default. Within one hundred twenty (120) days after the end of each calendar
year the audited consolidated balance sheet of the Borrower and its Restricted
Subsidiaries and the related audited consolidated statements of operations and
related audited consolidated statements of cash flows of the Borrower and its
Restricted Subsidiaries for such calendar year and set forth in comparative form
such figures as at the end of and for the previous calendar year, all in
reasonable detail, and in each case prepared in accordance with GAAP throughout
the periods involved and shall be certified by independent certified public
accountants of recognized national standing which certification shall (a) be
accompanied by the opinion of such accountants without reservation or exception
as to the scope of their audit, (b) state that the examination by such
accountants in connection with the financial statements has been made in
accordance with generally accepted auditing standards, (c) include the opinion
of such accountants that such financial statements have been prepared in
accordance with GAAP, except as otherwise specified in such opinion, (d) include
an expression of their opinion that the computations by the Borrower in
connection with the certificate delivered pursuant to Section 6.3 hereof show
compliance with Sections 7.8, 7.9 and 7.10 hereof; and (e) stating that, in
making the examination necessary for their audit of the financial statements of
the Borrower for such year, nothing came to their attention of a financial or
accounting nature that caused them to believe that the Borrower was not in
compliance with the terms, covenants, provisions or conditions of this
Agreement, or that there shall have occurred any condition or event which would
constitute a Default or, if so, specifying all such instances of non-compliance
and the nature and status thereof.
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<PAGE> 45
Section 6.3 Performance Certificates. At the time the financial
statements are furnished pursuant to Sections 6.1 and 6.2 hereof, a certificate
of an Authorized Signatory of the Borrower in form and substance satisfactory
to the Majority Banks:
(a) Setting forth as at the end of such quarter or calendar year, as
the case may be, the arithmetical calculations required to establish (i)
adjustments to the Applicable Margin, as provided for in Section 2.3(f) hereof,
and (ii) whether or not the Borrower was in compliance with the requirements of
Sections 7.8, 7.9 and 7.10 hereof; and
(b) Stating that the signer has reviewed the terms of this Agreement
and that in the course of the performance of his or her duties, he or she would
normally have knowledge of any condition or event which would constitute a
Default and certifying that, to the best of his or her knowledge, no Default has
occurred as at the end of such quarter or year, as the case may be, or, if a
Default has occurred, disclosing each such Default and its nature, when it
occurred, whether it is continuing, and the steps being taken by the Borrower
with respect to such Default.
Section 6.4 Copies of Other Reports.
(a) Promptly upon receipt thereof, copies of all reports, if any,
submitted to the Borrower by its independent public accountants including,
without limitation, any management report prepared in connection with the annual
financial statements referred to in Section 6.2 hereof.
(b) Within sixty (60) days after the end of each year of the
Borrower, the annual budget for the Borrower for the next succeeding year.
(c) Promptly after the preparation of the same, copies of all
material reports or financial information filed with any governmental agency,
department, bureau, division or other governmental authority or regulatory body
evidencing facts or containing information which could have a Materially Adverse
Effect.
(d) From time to time and promptly upon each request, such data,
certificates, reports, statements, documents, or further information regarding
the business, assets, liabilities, financial position, projections, results of
operations of the Borrower or any of its Subsidiaries as the Administrative
Agent, upon request of the Majority Banks, may reasonably request.
Section 6.5 Notice of Litigation and Other Matters. Prompt notice of
the following events as to which the Borrower has received notice or otherwise
become aware thereof:
(a) The commencement of all proceedings and investigations by or
before any governmental body and all actions and proceedings in any court or
before any arbitrator
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<PAGE> 46
against or in any other way relating adversely and directly to the Borrower or
any of its Restricted Subsidiaries or any of its properties, assets, or
businesses, or which calls into question the validity of this Agreement or any
other Loan Document, which, if determined adversely to the Borrower or such
Subsidiary, could reasonably be expected to have a Materially Adverse Effect.
(b) Any material adverse change with respect to the business,
assets, liabilities, financial position, or results of operations of the
Borrower or any of its Restricted Subsidiaries, other than changes in the
ordinary course of business which have not had and are not likely to have a
Materially Adverse Effect;
(c) Any Default or the occurrence or non-occurrence of any event (i)
which constitutes, or which with the passage of time or giving of notice or both
would constitute a default by the Borrower or any Restricted Subsidiary of the
Borrower under any material agreement other than this Agreement and the other
Loan Documents to which the Borrower or any Restricted Subsidiary of the
Borrower is party or by which any of their respective properties may be bound,
and (ii) which could reasonably be expected to have a Materially Adverse Effect,
giving in each case the details thereof and specifying the action proposed to be
taken with respect thereto;
(d) The occurrence of any Reportable Event for which the PBGC has
not waived the 30-day notice request or a "prohibited transaction" (as such term
is defined in Section 406 of ERISA or Section 4975 of the Code) that is not
subject to an individual, class, or statutory prohibited transaction exemption
with respect to any Plan of the Borrower or any of its ERISA Affiliates or the
institution or threatened institution by the Pension Benefit Guaranty
Corporation of proceedings under ERISA to terminate or to partially terminate
any such Plan or the commencement or threatened commencement of any litigation
regarding any such Plan or naming it or the trustee of any such Plan with
respect to such Plan if such occurrence would reasonably be expected to result
in a Materially Adverse Effect; and
(e) The occurrence of any event subsequent to the Agreement Date
which, if such event had occurred prior to the Agreement Date, would have
constituted an exception to the representation and warranty in Section 4.1(n) of
this Agreement.
Section 6.6 Loss of Agreements. The Borrower shall notify the
Administrative Agent and the Banks within fifteen (15) days of the occurrence of
any termination of any MSO Agreement or DBS Agreement which results in a
reduction of ten percent (10%) or more of the total revenue of the Borrower and
its Restricted Subsidiaries in any calendar quarter when added to all other
terminations and after giving effect to any additions in such quarter. In
addition, the Borrower shall notify the Administrative Agent and the Banks
promptly upon receipt of any notice that a Transponder Lease Agreement is in
default.
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ARTICLE 7 - Negative Covenants.
So long as any of the Obligations is outstanding and unpaid or the
Borrower has a right to borrow hereunder (whether or not the conditions to
borrowing have been or can be fulfilled) and unless the Majority Banks shall
otherwise give their prior consent in writing:
Section 7.1 Indebtedness for Borrowed Money. The Borrower shall not
create, assume, incur or otherwise become or remain obligated in respect of, or
permit to be outstanding, and the Borrower shall not permit any of its
Restricted Subsidiaries to create, assume, incur or otherwise become or remain
obligated in respect of or permit to be outstanding, any Indebtedness for Money
Borrowed except:
(a) the Obligations;
(b) Indebtedness existing as of the Agreement Date as described on
Schedule 6 attached hereto;
(c) obligations under Interest Hedge Agreements in respect of the
Loans;
(d) Capitalized Lease Obligations, Purchase Money Security Interests
and other Indebtedness for Money Borrowed of the Borrower and the Restricted
Subsidiaries (including, without duplication, Guarantees); provided, that (i) no
Default or Event of Default exists prior to or after giving effect to the
occurrence thereof, and (ii) the aggregate amount of all such other Capitalized
Lease Obligations, Purchase Money Security Interests and Indebtedness for Money
Borrowed does not at the time of the incurrence in the aggregate exceed fifteen
percent (15%) of Maximum Permitted Indebtedness;
(e) Indebtedness owed to the Borrower or any Restricted Subsidiary;
and
(f) Subordinated Affiliate Debt.
Section 7.2 Investments. The Borrower shall not, and shall not permit
any of its Restricted Subsidiaries to, make any loan, advance, or otherwise
acquire evidences of Indebtedness, capital stock or other securities of any
Person, except that the Borrower and its Restricted Subsidiaries may:
(a) purchase or otherwise acquire and own:
(i) marketable, direct obligations of the United States of
America maturing within three hundred sixty-five (365) days of the date
of purchase;
(ii) commercial paper issued by any Bank as of the Agreement
Date or by corporations, which conduct a substantial part of their
business in the United States of
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America, maturing within one hundred eighty (180) days from the date of
the original issue thereof, and carrying the highest rating by Moody's
Investor's Service, Inc. or Standard and Poor's Ratings Group, a
division of McGraw-Hill, Inc.;
(iii) repurchase agreements in such amounts and with such
financial institutions having the highest rating from Moody's Investor's
Service, Inc. or the highest rating from Standard and Poor's Ratings
Group, a division of McGraw-Hill, Inc., as the Borrower may select from
time to time;
(iv) certificates of deposit maturing within three hundred
sixty-five (365) days of the date of purchase which are issued by any
Bank or by a United States national or state bank or foreign bank having
capital, surplus and undivided profits totaling more than $100 million,
and having a rating of Baa or better from Moody's Investors Service,
Inc.; and
(v) money market mutual funds substantially invested in
obligations of the United States of America.
(b) so long as no Significant Default then exists or would be caused
thereby and the Borrower has not delivered a Cash Management Suspension Notice,
make investments in and loans to a Subsidiary or make advances to any
Unrestricted Subsidiary in the course of its normal cash management practices;
(c) the Borrower and its Restricted Subsidiaries may make other
advances to and investments in the Borrower's Affiliates, provided that the
aggregate amount of all such advances to and investment in the Borrower's
Affiliates does not exceed (i) during calendar year 1997, $19,000,000, (ii)
during calendar year 1998, $25,000,000, and (iii) during calendar year 1999,
$25,000,000, and (iv) each calendar year thereafter, $15,000,000; provided,
further, that amounts not invested in any calendar year may be carried forward
to the immediately succeeding calendar year, with such amounts being deemed to
be the first dollars spent in such succeeding year;
(d) make investments permitted under Section 7.5 hereof; and
(e) the Borrower and its Restricted Subsidiaries may make
investments in Restricted Subsidiaries.
Section 7.3 Limitation on Liens. The Borrower shall not create, assume,
incur or permit to exist or to be created, assumed, incurred or permitted to
exist, directly or indirectly, and the Borrower shall not permit any Restricted
Subsidiary to create, assume, incur or permit to exist, or to be created,
assumed or incurred or permitted to exist, directly or indirectly, any Lien on
any of its properties or assets, whether now owned or hereafter acquired, except
for Permitted Liens.
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<PAGE> 49
Section 7.4 Amendment and Waiver. The Borrower shall not, without the
prior written consent of the Majority Banks, enter into any material amendment
of, or agree to or accept any material waiver of the certificate or articles of
incorporation and bylaws of the Borrower or its Restricted Subsidiaries, in each
case which would have or could reasonably be expected to have an adverse effect
upon the rights and remedies of the Banks hereunder or under any Loan Document.
Section 7.5 Liquidation; Disposition or Acquisition of Assets. The
Borrower shall not and shall not at any time permit any of its Restricted
Subsidiaries to:
(a) (i) liquidate or dissolve itself (or suffer any liquidation or
dissolution) or otherwise wind up, or (ii) enter into any merger or
consolidation, or (iii) sell, lease, abandon, transfer or otherwise dispose of
any assets (other than contract rights) or business other than Permitted Asset
Sales; provided, however, that (x) the Borrower may merge or consolidate with a
wholly-owned Restricted Subsidiary of the Borrower (so long as the Borrower is
the surviving entity), and (y) wholly-owned Restricted Subsidiaries of the
Borrower may merge or consolidate with other wholly-owned Restricted
Subsidiaries of the Borrower; or
(b) acquire assets, property, stock or business of any other Person,
except so long as no Default exists or would be caused thereby, the Borrower and
its Restricted Subsidiaries may (i) make expenditures or advances (A) in the
ordinary course of the Borrower's and its Restricted Subsidiaries' businesses
and (B) for expansion into related businesses (including Acquisitions by the
Borrower and its Restricted Subsidiaries) and (ii) make Capital Expenditures.
Section 7.6 Limitation on Guaranties. The Borrower shall not, and shall
not permit any of its Restricted Subsidiaries to, at any time Guaranty, or
assume, be obligated with respect to, or permit to be outstanding any Guaranty
of, any obligation of any other Person other than (a) as may be contained in any
Loan Document, (b) obligations under agreements to indemnify Persons who have
issued bid or performance bonds or letters of credit issued in lieu of such
bonds in the ordinary course of business of the Borrower or its Subsidiaries, as
the case may be, securing other performance by the Borrower or any of its
Subsidiaries of activities otherwise permissible hereunder, (c) a guaranty by
endorsement of negotiable instruments for collection in the ordinary course of
business, and (d) Guarantees permitted under Section 7.1(d) hereof.
Section 7.7 Restricted Payments and Purchases. The Borrower shall not,
and shall not permit any of its Restricted Subsidiaries to, directly or
indirectly declare or make any Restricted Payment or Restricted Purchase,
provided, that so long as no Default then exists or would be caused thereby, (a)
and so long as on such date, the Borrower confirms that its Leverage Ratio is
less than 3.50 to 1.0, before and after giving effect to such Restricted
Payment, the Borrower may make Restricted Payments to its shareholders, and (b)
any
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<PAGE> 50
Subsidiary of the Borrower may make distributions to the Borrower or a
Restricted Subsidiary of the Borrower.
Section 7.8 Leverage Ratio. (a) As of the end of any calendar quarter
and (b) at the time of any Advance increasing the principal amount of the Loans
hereunder (after giving effect to such Advance), the Borrower shall not permit
the ratio of (x) Total Debt to (y) Annualized Operating Cash Flow to exceed the
ratios set forth below during the periods indicated:
<TABLE>
<CAPTION>
Period Ratio
------ -----
<S> <C>
Agreement Date through
December 31, 2000 4.50:1
January 1, 2001 through
December 31, 2002 4.00:1
January 1, 2003 and thereafter 3.50:1
</TABLE>
Section 7.9 Pro Forma Debt Service Coverage Ratio. (a) As of the end of
any calendar quarter and (b) at the time of any Advance increasing the
Obligations hereunder (after giving effect to such Advance), the Borrower shall
not permit the ratio of (x) Annualized Operating Cash Flow to (y) Pro Forma Debt
Service as of such date, to be less than 1.20:1.
Section 7.10 Interest Coverage Ratio. (a) As of the end of any calendar
quarter and (b) at the time of any Advance increasing the principal amount of
the Loans hereunder (after giving effect to such Advance), the Borrower shall
not permit the ratio of (x) Annualized Operating Cash Flow to (y) its Total
Interest Expense for the same period, to be less than the amounts set forth for
such date in the table below:
<TABLE>
<CAPTION>
Period Ratio
------ -----
<S> <C>
Agreement Date through
December 31, 2000 1.75:1
January 1, 2001 and thereafter 2.00:1
</TABLE>
Section 7.11 Affiliate Transactions. Except for transactions pursuant to
any Transponder Lease Agreement between the Borrower and an Affiliate,
agreements which are direct cost or direct revenue pass through in nature and
any renewals or extensions of any of the foregoing, the Borrower shall not, and
shall not permit any of its Restricted Subsidiaries to, at any time engage in
any transaction with an Affiliate (other than the Borrower or a
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<PAGE> 51
Restricted Subsidiary of the Borrower), nor make an assignment or other transfer
of any of its assets to any Affiliate (other than the Borrower or a Restricted
Subsidiary of the Borrower), on terms less advantageous than would be the case
if such transaction had been effected with a non-Affiliate.
Section 7.12 ERISA Liabilities. The Borrower shall not, and shall not
permit any of its Restricted Subsidiaries to, fail to meet all of the applicable
minimum funding requirements of ERISA and the Code, without regard to any
waivers thereof, and, to the extent that the assets of any of its Plans would be
less than an amount sufficient to provide all accrued benefits payable under
such Plans, shall make the maximum deductible contributions allowable under the
Code. The Borrower shall not, and shall not permit any of its Subsidiaries to,
become a participant in any Multiemployer Plan.
Section 7.13 Limitation on Upstream Dividends by Subsidiaries. The
Borrower shall not permit any of its Restricted Subsidiaries to enter into or
agree, or otherwise become subject, to any agreement, contract or other
arrangement with any Person pursuant to the terms of which (a) such Restricted
Subsidiary is or would be prohibited from declaring or paying any cash dividends
or distributions on any class of its stock or any partnership interests owned
directly or indirectly by the Borrower or from making any other distribution on
account of any class of any such stock or any such partnership interests owned
directly or indirectly by the Borrower (herein referred to as "Upstream
Dividends") or (b) the declaration or payment of Upstream Dividends by a
Restricted Subsidiary to the Borrower or to another Restricted Subsidiary of the
Borrower, on an annual or cumulative basis, is or would be otherwise limited or
restricted.
Section 7.14 TCI Revenue Agreement. The Borrower shall not, and shall
not permit its Subsidiaries to, terminate or make any material amendment to the
TCI Revenue Agreement without the prior written consent of the Majority Banks,
except that the Borrower may enter into amendments or modifications of the TCI
Revenue Agreement provided that the contracted revenues to be received through
the Maturity Date are not less than ninety percent (90%) of the revenues that
would have been derived under the TCI Revenue Agreement as of the Agreement
Date.
Section 7.15 Designation of Restricted and Unrestricted Subsidiary. The
Borrower shall not, and shall not permit its Restricted Subsidiaries to,
designate a Restricted Subsidiary as an Unrestricted Subsidiary or an
Unrestricted Subsidiary as a Restricted Subsidiary except in accordance
herewith. The Borrower and its Subsidiaries are permitted to designate a
Restricted Subsidiary as an Unrestricted Subsidiary (other than DMX, Inc.) and
an Unrestricted Subsidiary as a Restricted Subsidiary by the delivery to the
Administrative Agent and the Banks of a written notice, not later than twenty
(20) Business Days after such designation, certifying that all conditions set
forth in this Section 7.17 are satisfied as of the effective date of such
designation, which certification shall state the effective date of such
designation and shall be signed by a Authorized Signatory, provided that: (a) no
Event of De-
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fault shall exist immediately before or after the effective date of such
designation; (b) after giving effect to such designation, there shall not be a
Materially Adverse Effect, and such designation shall not render the Borrower
and its Restricted Subsidiaries on a consolidated basis insolvent or generally
unable to pay its or their respective debts as they become due; and (c) in the
case of the designation of an Unrestricted Subsidiary as a Restricted
Subsidiary, such notice shall also serve as the certification of the Borrower
that, with respect to such Restricted Subsidiary, the representations and
warranties made in Article 4 hereto are true and correct on and as of the
effective date of such designation to the extent applicable (provided that,
together with such notice, the Borrower may submit a revised Schedules to be
attached hereto to make revisions to such Schedules attached hereto with respect
to the Subsidiary to be so designated as may be necessary for the
representations in Article 4 to be true and correct with respect to such
Subsidiary).
ARTICLE 8 - Default
Section 8.1 Events of Default. Each of the following shall constitute an
Event of Default, whatever the reason for such event and whether it shall be
voluntary or involuntary or be effected by operation of law or pursuant to any
judgment or order of any court or any order, rule, or regulation of any
governmental or non-governmental body:
(a) Any representation or warranty made under this Agreement
shall prove incorrect or misleading in any material respect when made or deemed
to have been made pursuant to Section 4.2 hereof;
(b) The Borrower shall default in the payment of (i) any
interest, fees and other amounts payable hereunder or under the Notes, or any of
them, or under the other Loan Documents and such default shall continue
unremedied for a period of five (5) days or (ii) any principal when due
hereunder or under the Notes, or any of them;
(c) The Borrower shall default in the performance or
observance of any agreement or covenant contained in Article 7, Sections 6.1,
6.2 or 6.3 hereof;
(d) The Borrower shall default in the performance or
observance of any other agreement or covenant contained in this Agreement not
specifically referred to elsewhere in this Section 8.1, and such default shall
not be cured to the Majority Banks' satisfaction within a period of thirty (30)
days from the date of the occurrence of such default;
(e) There shall occur any default in the performance or
observance of any agreement or covenant or breach of any representation or
warranty contained in any of the Loan Documents (other than this Agreement or as
otherwise provided in this Section 8.1 of
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this Agreement), which shall not be cured to the Majority Banks' satisfaction
within a period of thirty (30) days from the occurrence of such default;
(f) There shall be entered a decree or order for relief in
respect of any of the Borrower or any Subsidiary of the Borrower under Title 11
of the United States Code, as now constituted or hereafter amended, or any other
applicable federal or state bankruptcy law or other similar law, or appointing a
receiver, liquidator, assignee, trustee, custodian, sequestrator, or similar
official of any of the Borrower or any Subsidiary of the Borrower or of any
substantial part of their respective properties, or ordering the winding-up or
liquidation of the affairs of any of the Borrower and its Subsidiaries or an
involuntary petition shall be filed against any of the Borrower and its
Subsidiaries and a temporary stay entered, and (i) such petition and stay shall
not be diligently contested, or (ii) any such petition and stay shall continue
undismissed for a period of sixty (60) consecutive days;
(g) The Borrower or any Subsidiary of the Borrower shall
file a petition, answer, or consent seeking relief under Title 11 of the United
States Code, as now constituted or hereafter amended, or any other applicable
federal or state bankruptcy law or other similar law, or the Borrower or any
Subsidiary of the Borrower shall consent to the institution of proceedings
thereunder or to the filing of any such petition or to the appointment or taking
of possession of a receiver, liquidator, assignee, trustee, custodian,
sequestrator, or other similar official of the Borrower or any Subsidiary of the
Borrower or of any substantial part of their respective properties, or the
Borrower or any Subsidiary of the Borrower shall fail generally to pay its
respective debts as they become due, or the Borrower or any Subsidiary of the
Borrower shall take any action in furtherance of any such action;
(h) A final judgment shall be entered by any court against
any of the Borrower or any Subsidiary of the Borrower for the payment of money
which exceeds $1,000,000, which judgment is not covered by insurance or a
warrant of attachment or execution or similar process shall be issued or levied
against property of any of the Borrower or any Subsidiary of the Borrower which,
together with all other such property of the Borrower and its Subsidiaries
subject to other such process, exceeds in value $1,000,000 in the aggregate, and
if, within thirty (30) days after the entry, issue, or levy thereof, such
judgment, warrant, or process shall not have been paid or discharged or stayed
pending appeal, or if, after the expiration of any such stay, such judgment,
warrant, or process shall not have been paid or discharged;
(i) (i) There shall be at any time any "accumulated funding
deficiency," as defined in ERISA or in Section 412 of the Code, with respect to
any Plan; or (ii) a trustee shall be appointed by a United States District Court
to administer any Plan; or the Pension Benefit Guaranty Corporation shall
institute proceedings to terminate any Plan; or (iii) any of the Borrower and
its ERISA Affiliates shall incur any liability to the Pension Benefit Guaranty
Corporation in connection with the termination of any Plan; or (iv) any Plan or
trust created under any Plan of any of the Borrower and its ERISA Affiliates
shall engage in a
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non-exempt "prohibited transaction" (as such term is defined in Section 406 of
ERISA or Section 4975 of the Code) which would subject the Borrower or any ERISA
Affiliate to the tax or penalty on "prohibited transactions" imposed by Section
502 of ERISA or Section 4975 of the Code; and by reason of any or all of the
events described in clauses (i) through (iv), as applicable, the Borrower shall
have waived (and/or is likely to incur) and/or incurred liability in excess of
$1,000,000 in the aggregate;
(j) There shall occur any default under any material
indenture, agreement, or instrument evidencing or relating to Indebtedness for
Money Borrowed of the Borrower or any of its Subsidiaries having an aggregate
principal amount in excess of $10,000,000, which default is not cured or waived
within any applicable cure period which default shall give the holder thereof
the right to accelerate the obligations thereunder;
(k) All or any portion of any Loan Document shall at any
time and for any reason be declared by a court of competent jurisdiction in a
suit with respect to such Loan Document to be null and void, or a proceeding
shall be commenced by any governmental authority involving a legitimate dispute
or by the Borrower or any of its Subsidiaries having jurisdiction over the
Borrower or any of its Subsidiaries seeking to establish the invalidity or
unenforceability thereof (exclusive of questions of interpretation of any
provision thereof);
(l) There shall occur any default by the Borrower under or a
cancellation of, without replacement, any Transponder Lease Agreement which
results (or is reasonably likely to result in) a termination of the Borrower's
access to a transponder thereunder; or
(m) There shall occur any Change of Control.
Section 8.2 Remedies. If an Event of Default shall have occurred and
shall be continuing:
(a) With the exception of an Event of Default specified in
Sections 8.1(f) or (g), the Administrative Agent, shall at the request, or may
with the consent, of the Majority Banks, (A) terminate the Commitment, and/or
(B) declare the principal of and interest on the Loans and the Notes and all
other Obligations to be forthwith due and payable, without presentment, demand,
protest, or notice of any kind, all of which are hereby expressly waived,
anything in this Agreement or in the Notes to the contrary notwithstanding, or
both.
(b) Upon the occurrence an Event of Default under Sections
8.1(f) or (g) hereof, such principal, interest, and other obligations shall
thereupon and concurrently therewith become due and payable, and the Commitment
shall forthwith terminate, all without any action by the Administrative Agent or
the Banks or the holders of the Notes, all without presentment, demand, protest,
or other notice of any kind, all of which are expressly waived, anything in this
Agreement or in the Notes to the contrary notwithstanding.
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(c) The Administrative Agent, with the concurrence of the
Majority Banks, shall exercise all of the post-default rights granted to it and
to them under the Loan Documents or under Applicable Law.
(d) Upon acceleration of the Notes, as provided in
subsection (a) or (b) of this Section 8.2, the Administrative Agent, upon
request of the Majority Banks shall have the right to the appointment of a
receiver for the properties and assets of the Borrower and its Subsidiaries, and
the Borrower, for itself and on behalf of its Subsidiaries, hereby consents to
such rights and such appointment and hereby waives any objection the Borrower or
any Subsidiary of the Borrower may have thereto or the right to have a bond or
other security posted by the Administrative Agent on behalf of the Banks, in
connection therewith. The rights of the Administrative Agent under this Section
8.2(d) shall be subject to its prior compliance with the Communications Act and
the FCC rules and policies promulgated thereunder to the extent applicable to
the exercise of such rights.
(e) The rights and remedies of the Administrative Agent and
the Banks hereunder shall be cumulative, and not exclusive.
ARTICLE 9 - The Administrative Agent.
Section 9.1 Appointment and Authorization. Each Bank hereby irrevocably
appoints and authorizes, and hereby agrees that it will require any transferee
of any of its interest in its Loans and in its Notes irrevocably to appoint and
authorize, the Administrative Agent to take such actions as its agent on its
behalf and to exercise such powers hereunder as are delegated by the terms
hereof, together with such powers as are reasonably incidental thereto. Neither
the Administrative Agent nor any of its directors, officers, employees, or
agents shall be liable for any action taken or omitted to be taken by it or them
hereunder or in connection herewith, except for its or their own gross
negligence or willful misconduct as determined by a final non-appealable
judicial order of a court of competent jurisdiction.
Section 9.2 Delegation of Duties. The Administrative Agent may execute
any of its duties under the Loan Documents by or through agents or attorneys
selected by it using reasonable care and shall be entitled to advice of counsel
concerning all matters pertaining to such duties. The Administrative Agent shall
not be responsible to any Bank for the negligence or misconduct of any agents or
attorneys selected by it with reasonable care.
Section 9.3 Interest Holders. The Administrative Agent may treat each
Bank, or the Person designated in the last notice filed with the Administrative
Agent under this Section 9.3, as the holder of all of the interests of such Bank
in its Loans and in its Notes until written notice of transfer, signed by such
Bank (or the Person designated in the last notice filed with the Administrative
Agent) and by the Person designated in such written
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notice of transfer, substantially in the form of Exhibit A attached hereto or in
another form and substance satisfactory to the Administrative Agent, shall have
been filed with the Administrative Agent.
Section 9.4 Consultation with Counsel. The Administrative Agent may
consult with legal counsel selected by it and shall not be liable for any action
taken or suffered by it in good faith in reliance thereon.
Section 9.5 Documents. The Administrative Agent shall not be under any
duty to examine, inquire into, or pass upon the validity, effectiveness, or
genuineness of this Agreement, any Note, or any instrument, document, or
communication furnished pursuant hereto or in connection herewith, and the
Administrative Agent shall be entitled to assume that they are valid, effective,
and genuine, have been signed or sent by the proper parties, and are what they
purport to be.
Section 9.6 Agents and Affiliates. With respect to the Commitment and
the Loans, the Bank which is an Affiliate of the Administrative Agent shall have
the same rights and powers hereunder as any other Bank, and the Administrative
Agent and its other affiliates may accept deposits from, lend money to, and
generally engage in any kind of business with the Borrower or any Affiliates of,
or Persons doing business with, the Borrower, as if it were not affiliated with
the Administrative Agent and without any obligation to account therefor.
Section 9.7 Responsibility of the Agent. The duties and obligations of
the Administrative Agent under this Agreement are only those expressly set forth
in this Agreement. The Administrative Agent shall be entitled to assume that no
Default or Event of Default has occurred and is continuing unless it has actual
knowledge, or has been notified by the Borrower, of such fact, or has been
notified by a Bank in writing that such Bank considers that a Default or an
Event of Default has occurred and is continuing, and such Bank shall specify in
detail the nature thereof. The Administrative Agent shall not be liable
hereunder for any action taken or omitted to be taken except for its own gross
negligence or willful misconduct as determined by a final, non-appealable
judicial order of a court of competent jurisdiction. The Administrative Agent
shall provide each Bank with copies of such documents received from the Borrower
as such Bank may reasonably request.
Section 9.8 Action by Administrative Agent.
(a) The Administrative Agent shall be entitled to use its
discretion with respect to exercising or refraining from exercising any rights
which may be vested in it by, and with respect to taking or refraining from
taking any action or actions which it may be able to take under or in respect
of, this Agreement, unless the Administrative Agent shall have been instructed
by the Majority Banks to exercise or refrain from exercising such rights or to
take or refrain from taking such action, provided that the Administrative Agent
shall not exercise any rights under Section 8.2(a) of this Agreement without the
request of the
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Majority Banks unless time is of the essence, in which case, such action can be
taken. The Administrative Agent shall incur no liability under or in respect of
this Agreement with respect to anything which it may do or refrain from doing in
the reasonable exercise of its judgment or which may seem to it to be necessary
or desirable in the circumstances, except for its gross negligence or willful
misconduct as determined by a final, non-appealable judicial order of a court of
competent jurisdiction.
(b) The Administrative Agent shall not be liable to the
Banks or to any Bank in acting or refraining from acting under this Agreement in
accordance with the instructions of the Majority Banks, and any action taken or
failure to act pursuant to such instructions shall be binding on all Banks. The
Administrative Agent shall not be obligated to take any action which is contrary
to law or which would in its reasonable opinion subject it to liability.
Section 9.9 Notice of Default. In the event that the Administrative
Agent or any Bank shall acquire actual knowledge, or shall have been notified in
writing, of any Default, the Administrative Agent or such Bank shall promptly
notify the Banks and the Administrative Agent (provided failure to give such
notice shall not result in any liability on the part of such Bank or
Administrative Agent), and the Administrative Agent shall take such action and
assert such rights under this Agreement as the Majority Banks shall request in
writing, and the Administrative Agent shall not be subject to any liability by
reason of its acting pursuant to any such request. If the Majority Banks shall
fail to request the Administrative Agent to take action or to assert rights
under this Agreement in respect of any Default or Event of Default within ten
(10) days after their receipt of the notice of any Default or Event of Default
from the Administrative Agent, or shall request inconsistent action with respect
to such Default or Event of Default, the Administrative Agent may, but shall not
be required to, take such action and assert such rights (other than rights under
Article 8 hereof) as it deems in its discretion to be advisable for the
protection of the Banks, except that, if the Majority Banks have instructed the
Administrative Agent not to take such action or assert such right, in no event
shall the Administrative Agent act contrary to such instructions unless time is
of the essence, in which case, the Administrative Agent may act in accordance
with its reasonable discretion.
Section 9.10 Responsibility Disclaimed. The Administrative Agent shall
not have any liability or responsibility whatsoever in its capacity as
Administrative Agent:
(a) To the Borrower or any other Person or entity as a
consequence of any failure or delay in performance by or any breach by, any Bank
or Banks of any of its or their obligations under this Agreement;
(b) To any Bank or Banks, as a consequence of any failure or
delay in performance by, or any breach by, (i) the Borrower of any of its
obligations under this
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Agreement or the Notes or any other Loan Document (ii) any Subsidiary or any
other obligor under any other Loan Document;
(c) To any Bank or Banks for any statements,
representations, or warranties in this Agreement, or any other document
contemplated by this Agreement or any information provided pursuant to this
Agreement, any other Loan Document, or any other document contemplated by this
Agreement, or for the validity, effectiveness, enforceability, or sufficiency of
this Agreement, the Notes, any other Loan Document, or any other document
contemplated by this Agreement; or
(d) To any Person for any act or omission other than that
arising from gross negligence or willful misconduct of the Administrative Agent
as determined by a final, non-appealable judicial order of a court of competent
jurisdiction.
Section 9.11 Indemnification. The Banks agree to indemnify the
Administrative Agent (to the extent not reimbursed by the Borrower) from and
against any and all liabilities, obligations, losses, damages, penalties,
actions, judgments, suits, costs, expenses (including fees and expenses of
experts, agents, consultants, and counsel), or disbursements of any kind or
nature whatsoever which may be imposed on, incurred by, or asserted against the
Administrative Agent in any way relating to or arising out of this Agreement,
any other Loan Document, or any other document contemplated by this Agreement or
any action taken or omitted by the Administrative Agent under this Agreement,
any other Loan Document, or any other document contemplated by this Agreement,
except that no Bank shall be liable to the Administrative Agent for any portion
of such liabilities, obligations, losses, damages, penalties, actions,
judgments, suits, costs, expenses, or disbursements resulting from the gross
negligence or willful misconduct of the Administrative Agent as determined by a
final, non-appealable judicial order of a court of competent jurisdiction. The
provisions of this Section 9.11 shall survive the termination of this Agreement.
Section 9.12 Credit Decision. Each Bank represents and warrants to each
other and to the Administrative Agent that:
(a) In making its decision to enter into this Agreement and
to make Advances it has independently taken whatever steps it considers
necessary to evaluate the financial condition and affairs of the Borrower and
that it has made an independent credit judgment, and that it has not relied upon
information provided by the Administrative Agent; and
(b) So long as any portion of the Loans remains outstanding,
it will continue to make its own independent evaluation of the financial
condition and affairs of the Borrower.
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Section 9.13 Successor Administrative Agent. Subject to the appointment
and acceptance of a successor Administrative Agent as provided below, the
Administrative Agent may resign at any time by giving written notice thereof to
the Banks and the Borrower and may be removed at any time for cause by the
Majority Banks. Upon any such resignation or removal, the Majority Banks shall
have the right to appoint a successor Administrative Agent. If no successor
Administrative Agent shall have been so appointed by the Majority Banks, and
shall have accepted such appointment within thirty (30) days after the retiring
Administrative Agent's giving of notice of resignation or the Majority Banks'
removal of the retiring Administrative Agent, then the retiring Administrative
Agent may, on behalf of the Banks, appoint a successor Administrative Agent
which shall be any Bank or a commercial bank organized under the laws of the
United States of America or any political subdivision thereof which has combined
capital and reserves in excess of $250,000,000. Upon the acceptance of any
appointment as Administrative Agent hereunder by a successor Administrative
Agent, such successor Administrative Agent shall thereupon succeed to and become
vested with all the rights, powers, privileges, duties, and obligations of the
retiring Administrative Agent, and the retiring Administrative Agent shall be
discharged from its duties and obligations hereunder. After any retiring
Administrative Agent's resignation or removal hereunder as Administrative Agent,
the provisions of this Section 9.13 shall continue in effect for its benefit in
respect of any actions taken or omitted to be taken by it while it was acting as
the Administrative Agent.
Section 9.14 Syndication Agents and Co-Agents. None of the Syndication
Agents or Co-Agents shall have any duties or obligations under this Agreement or
the other Loan Documents in their capacities as Syndication Agents and
Co-Agents.
ARTICLE 10 - Change in Circumstances Affecting LIBOR Advances.
Section 10.1 LIBOR Basis Determination Inadequate. Notwithstanding
anything contained herein which may be construed to the contrary, if with
respect to any proposed LIBOR Advance for any Interest Period, the
Administrative Agent determines after consultation with the Banks that deposits
in dollars (in the applicable amount) are not being offered to each of the Banks
in the relevant market for such Interest Period, the Administrative Agent shall
forthwith give notice thereof to the Borrower and the Banks, whereupon until the
Administrative Agent notifies the Borrower that the circumstances giving rise to
such situation no longer exist, the obligations of the Banks to make such types
of LIBOR Advances shall be suspended.
Section 10.2 Illegality. If after the date hereof, the adoption of any
Applicable Law, or any change in any Applicable Law, or any change in
interpretation or administration thereof by any governmental authority, central
bank, or
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comparable agency charged with the interpretation or administration thereof, or
compliance by any Bank with any request or directive (whether or not having the
force of law) of any such authority, central bank, or comparable agency, shall
make it unlawful or impossible for any Bank to make, maintain, or fund its LIBOR
Advances, such Bank shall so notify the Administrative Agent, and the
Administrative Agent shall forthwith give notice thereof to the other Banks and
the Borrower. Before giving any notice to the Administrative Agent pursuant to
this Section 10.2, such Bank shall designate a different lending office and
shall take such alternative courses of action if such designation or courses of
action will avoid the need for giving such notice and will not, in the good
faith judgment of such Bank, be otherwise disadvantageous to such Bank. Upon
receipt of such notice, notwithstanding anything contained in Article 2 hereof,
the Borrower shall repay in full the then outstanding principal amount of each
affected LIBOR Advance of such Bank so affected, together with accrued interest
thereon, either (a) on the last day of the then current Interest Period
applicable to such Advance if such Bank may lawfully continue to maintain and
fund such Advance to such day or (b) immediately if such Bank may not lawfully
continue to fund and maintain such Advance to such day. Concurrently with
repaying each affected LIBOR Advance of such Bank, notwithstanding anything
contained in Article 2 hereof, the Borrower shall borrow a Base Rate Advance (or
other LIBOR Advance, if available) from such Bank, and such Bank shall make such
Base Rate Advance in an amount such that the outstanding principal amount of the
Note held by such Bank shall equal the outstanding principal amount of such Note
immediately prior to such repayment.
Section 10.3 Increased Costs.
(a) If any Regulatory Change:
(i) Shall subject any Bank to any tax, duty, or
other charge with respect to its share of the Commitment or its
obligation to make LIBOR Advances, or its LIBOR Advances, or shall
change the basis of taxation of payments to any Bank of the principal of
or interest on its LIBOR Advances or in respect of any other amounts due
under this Agreement in respect of its LIBOR Advances or its share of
the Commitment or its obligation to make LIBOR Advances (except for
changes in the rate of tax on the overall net income of such Bank); or
(ii) Shall impose, modify, or deem applicable any
reserve (including, without limitation, any imposed by the Board of
Governors of the Federal Reserve System and any change in the LIBOR
Reserve Percentage), special deposit, capital adequacy, assessment, or
other requirement or condition against assets of, deposits with or for
the account of, or commitments or credit extended by any Bank, or shall
impose on any Bank or the eurodollar interbank borrowing market any
other condition affecting its obligation to make such LIBOR Advances or
its LIBOR Advances;
and the result of any of the foregoing is to increase the cost to such Bank of
maintaining its share of the Commitment or making or maintaining any such LIBOR
Advances, or to reduce
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the amount of any sum received or receivable by such Bank under this Agreement
or under its Notes with respect thereto, then, on the earlier of demand by such
Bank or the Maturity Date, the Borrower agrees to pay to such Bank such
additional amount or amounts as will compensate such Bank for such increased
costs. Each Bank will promptly notify the Borrower and the Administrative Agent
of any event of which it has knowledge, occurring after the date hereof, which
will entitle such Bank to compensation pursuant to this Section 10.3 and will
designate a different lending office and shall take alternative courses of
action if such designation or courses of action will avoid the need for, or
reduce the amount of, such compensation and will not, in the good faith judgment
of such Bank, be otherwise disadvantageous to such Bank.
(b) A certificate of any Bank claiming compensation under
this Section 10.3 and setting forth the additional amount or amounts to be paid
to it hereunder and calculations therefor shall be conclusive in the absence of
manifest error. In determining such amount, such Bank may use any reasonable
averaging and attribution methods. If any Bank demands compensation under this
Section 10.3, the Borrower may at any time, upon at least five (5) Business
Days' prior notice to such Bank, prepay in full the then outstanding affected
LIBOR Advances of such Bank, together with accrued interest thereon to the date
of prepayment, along with any reimbursement required under Section 2.9 hereof.
Concurrently with prepaying such LIBOR Advances, the Borrower shall borrow a
Base Rate Advance (or other type of LIBOR Advance, if available) from such Bank,
and such Bank shall make such Base Rate Advance in an amount such that the
outstanding principal amount of the Notes held by such Bank shall equal the
outstanding principal amount of such Notes immediately prior to such prepayment.
Section 10.4 Effect On Other Advances. If notice has been given pursuant
to Section 10.1, 10.2 or 10.3 hereof suspending the obligation of any Bank to
make any type of LIBOR Advance, or requiring LIBOR Advances of any Bank to be
repaid or prepaid, then, unless and until such Bank notifies the Borrower that
the circumstances giving rise to such repayment no longer apply, all Advances
which would otherwise be made by such Bank as to the LIBOR Advances shall, at
the option of the Borrower, be made instead as Base Rate Advances or, if
available, the other type of LIBOR Advance, as specified by the Borrower.
ARTICLE 11 - Miscellaneous.
Section 11.1 Notices.
(a) All notices and other communications under this
Agreement shall be in writing and shall be deemed to have been given three (3)
days after deposit in the mail, designated as certified mail, return receipt
requested, post-prepaid, or one (1) day after being entrusted to a reputable
commercial overnight delivery service, or telecopy addressed to the party to
which such notice is directed at its address determined as provided in this
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Section 11.1 All notices and other communications under this Agreement shall be
given to the parties hereto at the following addresses:
(i) If to the Borrower, to it at:
TCI Music, Inc.
c/o Liberty Media Corporation
8101 East Prentice Avenue
Suite 500
Englewood, Colorado 80111
Attn: President
Telecopy No.: (303) 721-5445
with a copy to:
Tele-Communications, Inc.
5619 DTC Parkway
Englewood, Colorado 80111
Attn: Treasury Department
Telecopy No.: (303) 488-3216
(ii) If to the Administrative Agent, to it at:
Bank of America National Trust and Savings
Association
555 South Flower Street
11th Floor
Los Angeles, California 90071
Attn: Janice Hammond
Telecopy No.: (213) 228-2299
with a copy to:
Powell, Goldstein, Frazer & Murphy LLP
191 Peachtree Street, N.E.
Suite 1600
Atlanta, Georgia 30303
Attn: Douglas S. Gosden, Esq.
Telecopy No.: (404) 572-6999
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(iii) If to the Banks, to them at the addresses set
forth below:
Bank of America National Trust and
Savings Association
555 South Flower Street, 11th Floor
Los Angeles, California 90071
Attn: Shannon T. Ward
Telecopy No.: (213) 228-2641
Royal Bank of Canada
USA Headquarters
One Financial Square, 24th Floor
New York, New York 10005-3531
Attn: Barbara Meijer
Telecopy No.: (212) 428-6460
Credit Lyonnais New York Branch
Credit Lyonnais Building
1301 Avenue of the Americas
New York, New York 10019
Attn: John Judge
Telecopy No.: (212) 261-3288
Fleet National Bank
One Federal Street
3rd Floor
Boston, Massachusetts 02110
Attn: Stephen J. Healey
Telecopy No.: (617) 346-4346
Banque Paribas
2029 Century Park East
Suite 3900
Los Angeles, California 90067
Attn: David Pastre
Telecopy No.: (310) 556-3762
Copies shall be provided to persons other than parties hereto only in the case
of notices under Article 8 hereof and failure to provide such copies shall not
affect the validity of the notice given to the primary recipient.
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(b) Any party hereto may change the address to which notices
shall be directed under this Section 11.1 by giving ten (10) days' written
notice of such change to the other parties.
Section 11.2 Expenses. The Borrower agrees to promptly pay:
(a) All reasonable out-of-pocket expenses of the
Administrative Agent in connection with the preparation, negotiation, execution,
and delivery of this Agreement and the other Loan Documents executed on the
Agreement Date, the transactions contemplated hereunder and thereunder, and the
making of the initial Advance hereunder (whether or not such Advance is made)
including, but not limited to, the fees and disbursements of counsel for the
Administrative Agent;
(b) All reasonable out-of-pocket expenses of the
Administrative Agent in connection with the preparation, negotiation, execution
and delivery of any waiver, amendment, or consent by the Administrative Agent
and Banks, or any of them, relating to this Agreement or the other Loan
Documents whether or not executed, including, but not limited to, the fees and
disbursements of counsel for the Administrative Agent; and
(c) All reasonable out-of-pocket costs and expenses of
enforcement of rights and collection if an Event of Default occurs in the
payment of the Notes, which in each case shall include fees and out-of-pocket
expenses of counsel (including the allocated cost of in-house counsel) for the
Administrative Agent and each of the Banks, and the reasonable fees and
out-of-pocket expenses of counsel and of any experts, agents, or consultants of
the Administrative Agent and each of the Banks.
Section 11.3 Waivers. The rights and remedies of the Administrative
Agent and the Banks under this Agreement and the other Loan Documents shall be
cumulative and not exclusive of any rights or remedies which they would
otherwise have. No failure or delay by the Administrative Agent, the Majority
Banks, or the Banks in exercising any right shall operate as a waiver of such
right. The Administrative Agent and the Banks expressly reserve the right to
require strict compliance with the terms of this Agreement in connection with
any funding of a request for an Advance. In the event the Banks decide to fund a
request for an Advance at a time when the Borrower is not in strict compliance
with the terms of this Agreement, such decision by the Banks shall not be deemed
to constitute an undertaking by the Banks to fund any further requests for
Advances or preclude the Banks from exercising any rights available to the Banks
under the Loan Documents or at law or equity. Any waiver or indulgence granted
by the Banks or by the Majority Banks shall not constitute a modification of
this Agreement, except to the extent expressly provided in such waiver or
indulgence, or constitute a course of dealing by the Banks at variance with the
terms of the Agreement such as to require further notice by the Banks of the
Banks' intent to require strict adherence to the terms of the Agreement in the
future.
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<PAGE> 65
Section 11.4 Set-Off. In addition to any rights now or hereafter granted
under Applicable Law and not by way of limitation of any such rights, the
Administrative Agent and the Banks and any subsequent holder or holders of the
Notes are hereby authorized by the Borrower at any time or from time to time
after the Maturity Date (whether by acceleration or otherwise), without notice
to the Borrower or to any other Person, any such notice being hereby expressly
waived, to set-off and to appropriate and apply any and all deposits (general or
special, time or demand, including, but not limited to, Indebtedness evidenced
by certificates of deposit, in each case whether matured or unmatured) and any
other Indebtedness at any time held or owing by the Banks or such holder to or
for the credit or the account of the Borrower, against and on account of the
obligations and liabilities of the Borrower, to the Banks or such holder under
this Agreement, the Notes, and any other Loan Document, including, but not
limited to, all Obligations and any other claims of any nature or description
arising out of or connected with this Agreement, the Notes, or any other Loan
Document, irrespective of whether or not (a) the Administrative Agent and the
Banks or the holder of the Notes shall have made any demand hereunder or (b) the
Administrative Agent and the Banks shall have declared the principal of and
interest on the Loans and Notes and other amounts due hereunder to be due and
payable as permitted by Section 8.2 hereof and although said obligations and
liabilities, or any of them, shall be contingent or unmatured. Any sums obtained
by the Administrative Agent, any Bank or any subsequent holder of the Notes
shall be subject to the application of payments provisions of Article 2 hereof.
Upon direction by the Administrative Agent, with the consent of the Majority
Banks, after the Maturity Date (whether by reason of acceleration or otherwise)
each Bank holding deposits of the Borrower shall exercise its set-off rights as
so directed.
Section 11.5 Assignment.
(a) The Borrower may not assign or transfer any of its
rights or obligations hereunder or under the Notes without the prior written
consent of each Bank.
(b) Each of the Banks may at any time enter into assignment
agreements or participations with respect to its interest hereunder and under
the other Loan Documents with one or more other banks or other Persons,
provided, that (i) all assignments (other than assignments described in clause
(ii) hereof) shall be in minimum principal amounts of $5,000,000, (ii) each Bank
may sell assignments and participations of up to one hundred percent (100%) of
its interest hereunder to (A) one or more affiliates of such Bank, (B) any
Federal Reserve Bank as collateral security pursuant to Regulation A of the
Board of Governors of the Federal Reserve System and any Operating Circular
issued by such Federal Reserve Bank (no such assignment or participation shall
relieve such Bank from its obligations hereunder) or (C) one or more Banks, and
(iii) all assignments and participations (other than assignments and
participations described in clause (ii) hereof) hereunder shall be subject to
the following additional terms and conditions:
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<PAGE> 66
(A) No such assignment shall be sold without the
consent of the Administrative Agent, and prior to the occurrence of a
Default, the Borrower, which consents to assignments comprising in the
aggregate up to fifty percent (50%) of any Bank's Commitment as of the
Agreement Date shall not be unreasonably withheld.
(B) Any Person purchasing a participation or an
assignment of the Loans from any Bank shall be required to represent and
warrant that its purchase shall not constitute a "prohibited
transaction" (as defined in Section 4.1(n) hereof).
(C) The Borrower, the Banks, and the Administrative
Agent agree that assignments permitted hereunder (including the
assignment of any Advance or portion thereof) may be made with all
voting rights and shall be made pursuant to an Assignment and Assumption
Agreement. An administrative fee of $3,000 shall be payable to the
Administrative Agent by the assigning Bank at the time of any assignment
hereunder.
(D) No participation agreement shall confer any
rights under this Agreement or any other Loan Document to any purchaser
thereof, or relieve any issuing Bank from any of its obligations under
this Agreement, and all actions hereunder shall be conducted as if no
such participation had been granted; provided, however, that any
participation agreement may confer on the participant the right to
approve or disapprove decreases in the interest rate, increases or
forgiveness of the principal amount of the Loans participated in by such
participant, decreases in fees, releases of the collateral or
guarantors, except for collateral the sale or disposition of which is
permitted hereunder, and extensions of the Maturity Date or other
principal payment date for the Loans or of the scheduled reduction of
the Commitment.
(E) Each Bank agrees to provide the Administrative
Agent and the Borrower with prompt written notice of any issuance of
participations or assignments of its interests hereunder.
(F) No assignment, participation or other transfer
of any rights hereunder or under the Notes shall be effected that would
result in any interest requiring registration under the Securities Act
of 1933, as amended, or qualification under any state securities law.
(G) No such assignment may be made to any bank or
other financial institution (x) with respect to which a receiver or
conservator (including, without limitation, the Federal Deposit
Insurance Corporation, the Resolution Trust Corporation or the Office of
Thrift Supervision) has been appointed or (y) that has failed to meet
any of the capital requirements of its primary regulator or insurer.
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<PAGE> 67
(H) If applicable, each Bank shall, and shall cause
each of its assignees to provide to the Administrative Agent on or prior
to the Agreement Date or effective date of any assignment, as the case
may be, an appropriate Internal Revenue Service form as required by
Applicable Law supporting such Bank's position that no withholding by
the Borrower or the Administrative Agent for U.S. income tax payable by
the Bank in respect of amounts received by it hereunder is required on
the effective date of such assignment. For purposes of this Agreement,
an appropriate Internal Revenue Service form shall mean Form 1001
(Ownership Exemption or Reduced Rate Certificate of the U.S. Department
of Treasury), or Form 4224 (Exemption from Withholding of Tax on Income
Effectively Connected with the Conduct of a Trade or Business in the
United States), or any successor or related forms adopted by the
relevant U.S. taxing authorities.
(c) Except specifically set forth in Section 11.5(b) hereof,
nothing in this Agreement or the Notes, expressed or implied, is intended to or
shall confer on any Person other than the respective parties hereto and thereto
and their successors and assignees permitted hereunder and thereunder any
benefit or any legal or equitable right, remedy or other claim under this
Agreement or the Notes.
(d) In the case of any participation, all amounts payable by
the Borrower under the Loan Documents shall be calculated and made in the manner
and to the parties hereto as if no such participation had been sold.
Section 11.6 Counterparts. This Agreement may be executed in any number
of counterparts, each of which shall be deemed to be an original, but all such
separate counterparts shall together constitute but one and the same instrument.
Section 11.7 Governing Law. This Agreement and the Notes shall be
construed in accordance with and governed by the internal laws of the State of
New York applicable to agreements made and to be performed in New York. If any
action or proceeding shall be brought by the Administrative Agent or any Bank
hereunder or under any other Loan Document in order to enforce any right or
remedy under this Agreement or under any Note or any other Loan Document, the
Borrower hereby consents and will, and the Borrower will cause each Subsidiary
to, submit to the jurisdiction of any state or federal court of competent
jurisdiction sitting within the area comprising the Southern District of New
York on the date of this Agreement. The Borrower, for itself and on behalf of
its Subsidiaries, hereby agrees that service of the summons and complaint and
all other process which may be served in any such suit, action or proceeding may
be effected by mailing by registered mail a copy of such process to the offices
of the Borrower at the address given in Section 11.1 hereof and that personal
service of process shall not be required. Nothing herein shall be construed to
prohibit service of process by any other method permitted by law, or the
bringing of any suit, action or proceeding in any other jurisdiction. The
Borrower agrees that final judgment in
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<PAGE> 68
such suit, action or proceeding shall be conclusive and may be enforced in any
other jurisdiction by suit on the judgment or in any other manner provided by
Applicable Law.
Section 11.8 Severability. Any provision of this Agreement which is
prohibited or unenforceable shall be ineffective to the extent of such
prohibition or unenforceability without invalidating the remaining provisions
hereof in that jurisdiction or affecting the validity or enforceability of such
provision in any other jurisdiction.
Section 11.9 Headings. Headings used in this Agreement are for
convenience only and shall not be used in connection with the interpretation of
any provision hereof.
Section 11.10 Interest.
(a) In no event shall the amount of interest due or payable
hereunder or under the Notes exceed the maximum rate of interest allowed by
Applicable Law, and in the event any such payment is inadvertently made by the
Borrower or is inadvertently received by any Bank, then such excess sum shall be
credited as a payment of principal, unless the Borrower shall notify such Bank
in writing that it elects to have such excess sum returned forthwith. It is the
express intent hereof that the Borrower not pay and the Banks not receive,
directly or indirectly in any manner whatsoever, interest in excess of that
which may legally be paid by the Borrower under Applicable Law.
(b) Notwithstanding the use by the Banks of the Prime Rate,
the LIBOR Rate and the Federal Funds Rate as reference rates for the
determination of interest on the Loans, the Banks shall be under no obligation
to obtain funds from any particular source in order to charge interest to the
Borrower at interest rates tied to such reference rates.
Section 11.11 Entire Agreement. Except as otherwise expressly provided
herein, this Agreement, the Notes, and the Loan Documents to which the Borrower
is a party embody the entire Agreement and understanding among the parties
hereto and thereto and supersede all prior agreements, understandings, and
conversations relating to the subject matter hereof and thereof.
Section 11.12 Amendment and Waiver. Neither this Agreement nor any term
hereof nor any Loan Document may be amended orally, nor may any provision hereof
be waived orally, but only by an instrument in writing signed by the Majority
Banks or the Borrower, as the case may be, and, in the case of an amendment, by
the Borrower and the Majority Banks, except that in the event of (a) any
increase or decrease (other than pro rata) in the amount of the Commitment, (b)
any change in the timing of, or reduction of the amount of, payments of
principal, interest, and fees due hereunder, (c) any release or impairment of
collateral or any guaranty issued in favor of the Administrative Agent and the
Banks, (d) any waiver of any Event of Default due to the failure by the Borrower
to pay any sum due hereunder, (e) any amendment of this Section 11.12, Section
11.5(a) or of the definition of Majority Banks, or
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<PAGE> 69
(f) any waiver of any condition precedent specified in Section 3.1 to the
initial Advance hereunder, any amendment or waiver may be made only by an
instrument in writing signed by each of the Banks and, in the case of an
amendment, also by the Borrower. Any amendment to any provision hereunder
governing the rights, obligations, or liabilities of the Administrative Agent in
its capacity as such, may be made only by an instrument in writing signed by
such affected Person and by each of the Banks.
Section 11.13 Other Relationships. No relationship created hereunder or
under any other Loan Document shall in any way affect the ability of the
Administrative Agent and each Bank to enter into or maintain business
relationships with the Borrower, or any of its Affiliates, beyond the
relationships specifically contemplated by this Agreement and the other Loan
Documents.
Section 11.14 Confidentiality. Each Bank and the Administrative Agent
agrees (on behalf of itself and each of its affiliates, directors, officers,
employees and representatives) to use reasonable precautions to keep
confidential, in accordance with their customary procedures for handling
confidential information of the same nature and in accordance with safe and
sound banking practices, any non-public information supplied to it by the
Borrower pursuant to this Agreement, provided that (a) nothing herein shall
limit the disclosure of any such information (i) to the extent required by
statute, rule, regulation or judicial process, (ii) to counsel for any of the
Banks or the Administrative Agent, (iii) to bank examiners, auditors or
accountants, (iv) to the Administrative Agent or any other Bank, (v) in
connection with any litigation to which any one or more of the Banks or the
Administrative Agent is a party, or (vi) to any assignee or participant (or
prospective assignee or participant) so long as such assignee or participant (or
prospective assignee or participant) shall have agreed to keep such information
confidential as set forth herein, and (b) in no event shall any Bank or the
Administrative Agent be obligated or required to return any materials furnished
by the Borrower.
Section 11.15 Survival of Various Provisions. Notwithstanding anything
herein which may be construed to the contrary, rights pursuant to Sections
2.9(c), 2.10, 2.14(f), 5.11, 9.11 and 10.3 hereof shall survive the termination
of this Agreement and the payment and performance of all other Obligations.
ARTICLE 12 - Waiver of Jury Trial.
Section 12.1 Waiver of Jury Trial. THE BORROWER, FOR ITSELF AND ON
BEHALF OF THE SUBSIDIARIES, THE ADMINISTRATIVE AGENT AND THE BANKS HEREBY AGREE
TO WAIVE AND HEREBY WAIVE THE RIGHT TO A TRIAL BY JURY IN ANY COURT AND IN ANY
ACTION OR PROCEEDING OF ANY TYPE IN WHICH THE BORROWER, ANY OF THE SUBSIDIARIES,
ANY OF THE BANKS, THE ADMINISTRATIVE AGENT OR ANY OF THEIR RESPECTIVE
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<PAGE> 70
SUCCESSORS OR ASSIGNS IS A PARTY, AS TO ALL MATTERS AND THINGS ARISING DIRECTLY
OR INDIRECTLY OUT OF THIS AGREEMENT, ANY OF THE NOTES OR THE OTHER LOAN
DOCUMENTS AND THE RELATIONS AMONG THE PARTIES LISTED IN THIS SECTION 12.1.
EXCEPT AS PROHIBITED BY LAW, EACH PARTY TO THIS AGREEMENT WAIVES ANY RIGHTS IT
MAY HAVE TO CLAIM OR RECOVER IN ANY LITIGATION REFERRED TO IN THIS SECTION, ANY
SPECIAL, EXEMPLARY, PUNITIVE OR CONSEQUENTIAL DAMAGES OR ANY DAMAGES OTHER THAN,
OR IN ADDITION TO, ACTUAL DAMAGES. EACH PARTY TO THIS AGREEMENT (i) CERTIFIES
THAT NEITHER ANY REPRESENTATIVE, AGENT OR ATTORNEY OF THE ADMINISTRATIVE AGENT
OR ANY BANK HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT THE ADMINISTRATIVE
AGENT OR ANY BANK WOULD NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE THE
FOREGOING WAIVERS AND (ii) ACKNOWLEDGES THAT IT HAS BEEN INDUCED TO ENTER INTO
THIS AGREEMENT AND EACH OTHER LOAN DOCUMENT BY, AMONG OTHER THINGS, THE MUTUAL
WAIVERS AND CERTIFICATIONS IN THIS SECTION. THE PROVISIONS OF THIS SECTION HAVE
BEEN FULLY DISCLOSED BY AND TO THE PARTIES AND THE PROVISIONS SHALL BE SUBJECT
TO NO EXCEPTIONS. NO PARTY HAS IN ANY WAY AGREED WITH OR REPRESENTED TO ANY
OTHER PARTY THAT THE PROVISIONS OF THIS SECTION WILL NOT BE FULLY ENFORCED IN
ALL INSTANCES.
[Remainder of Page Intentionally Left Blank]
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<PAGE> 71
IN WITNESS WHEREOF, the parties hereto have executed this Agreement or
caused it to be executed by their duly authorized officers, all as of the day
and year first above written.
BORROWER: TCI MUSIC, INC., a Delaware corporation
By: /s/ ELISABETH C. SHELTON
----------------------------------------
Title: Authorized Officer
-----------------------------------
ADMINISTRATIVE AGENT,
SYNDICATION AGENTS,
CO-AGENTS and BANKS: BANK OF AMERICA NATIONAL TRUST AND
SAVINGS ASSOCIATION, as Administrative
Agent
By: /s/ JANICE HAMMOND
----------------------------------------
Its: Janice Hammond
Vice President
Agency Specialist
-----------------------------------
BANK OF AMERICA NATIONAL TRUST AND SAVINGS
ASSOCIATION, as a Bank
By: /s/ SHANNON T. WARD
----------------------------------------
Its: SHANNON T. WARD
VICE PRESIDENT
-----------------------------------
ROYAL BANK OF CANADA, as a Syndication Agent
and a Bank
By: /s/ BARBARA MEYIR
----------------------------------------
Its: Senior Manager
-----------------------------------
REVOLVING LOAN AGREEMENT
TCI MUSIC, INC.
Signature Page 1
<PAGE> 72
CREDIT LYONNAIS NEW YORK BRANCH, as a
Syndication Agent and a Bank
By: [ ] CAPELLONE
----------------------------------------
Its: Authorized Officer
-----------------------------------
FLEET NATIONAL BANK, as a Co-Agent and a
Bank
By: /s/ SUE ANDERSON
----------------------------------------
Its: Vice President
-----------------------------------
BANQUE PARIBAS, as a Co-Agent and a Bank
By: /s/ DAVID J. PASTRE
----------------------------------------
David J. Pastre
Its: Vice President
-----------------------------------
By: /s/ STANLEY P. BERKMAN
----------------------------------------
Stanley P. Berkman
Its: General Manager, Western Region
----------------------------------
REVOLVING LOAN AGREEMENT
TCI MUSIC, INC.
Signature Page 2
<PAGE> 1
EXHIBIT 10.3
AFFILIATION AGREEMENT
THIS AGREEMENT, made as of the 1st day of July, 1997 (the "Effective
Date"), is by and between DMX Inc., a Delaware corporation ("Network"), and
Satellite Services, Inc., a Delaware corporation ("Affiliate"), regarding the
cable digital audio programming service currently known as "DMX" (whether in its
current format or in any other format) (the "Service"). The parties hereby
mutually agree as follows:
1. RIGHTS:
(a) Grant of Rights. Network grants to Affiliate, any TCI O&O System (as
defined below), and any Electing Affiliate (as defined below), the
non-exclusive right, but not the obligation, to distribute and subdistribute
the Service by any cable, SMATV, or wireline technolog(ies) or platform(s),
whether now existing or developed in the future. An Electing Affiliate shall
mean any affiliate of Affiliate which owns Systems that are not managed under
the authority of Tele-Communications, Inc. but which affiliate elects to be
governed by this Agreement not later than one hundred twenty (120) days after
the later of (1) the date hereof or (2) the date such affiliate of Affiliate
first met the definition of an affiliate of Affiliate after the date of this
Agreement. An "affiliate of Affiliate" shall include any entity meeting the
requirements of paragraphs I.1, II or III of Exhibit A hereto.
(b) Add and Delete Rights. Affiliate shall have the right, upon written
notice to Network within thirty (30) days thereof, to elect to include under
this Agreement any system or enterprise that meets the system qualifications of
Exhibit A hereto. Any such system or enterprise that Affiliate elects to
include under this Agreement shall be referred to as a "System" or "Systems",
as set forth on Schedule 1 hereto, as such Schedule 1 may added to or deleted
from, from time to time. Upon the addition of a System to this Agreement, any
then-existing agreement between or among Network and any one or more third
parties applicable to such System for distribution of the Service shall
terminate and cease to be effective. Affiliate shall have the right to delete
the Service from any or all Systems, by providing Network with written notice
within thirty (30) days of such deletion.
2. TERM:
(a) Unless earlier terminated pursuant to the terms of this Agreement,
the "Initial Term" of this Agreement shall be for ten (10) years, commencing as
of the Effective Date.
(b) After the expiration of the Initial Term, this Agreement shall
automatically renew for successive five (5) year renewal terms, unless (i) this
Agreement is earlier terminated in accordance with its terms, or (ii) Affiliate
provides notice of termination to Network no later than sixty (60) days before
the end of the Initial Term or any Renewal Term.
3. CONTENT OF THE SERVICE:
(a) Throughout the Term the programming on the Service shall consist
exclusively of
<PAGE> 2
at least 30 channels of commercial-free, digital-quality audio services
programmed across a broad array of customer preferences and tastes, similar to
the programming on the program schedule attached hereto as Exhibit B.
4. DELIVERY AND DISTRIBUTION OF THE SERVICE:
(a) During the Term, Network, at its expense, shall deliver a signal of
the Service to each system, and, for purposes of Section 4(h) hereof, to other
locations within the continental United States designated by Affiliate, in its
discretion, by transmitting such signal via a domestic satellite commonly used
for transmission of cable television programming or such other delivery
mechanism as shall be agreeable between Network and Affiliate.
(b) Each System or other video distribution system or enterprise may
distribute all or any number of the audio channels which are part of the
Service. Each System or other video distribution system or enterprise may carry
the Service (or any or all channels comprising the Service) on the basic level
of service, on any tier, in a package or packages of other services, a la
carte, or in any combination thereof.
(c) Affiliate shall have the right to digitize, compress and reuplink
any or all channels included within the Service for redistribution to Systems,
and to other affiliated and unaffiliated distributors so long as any such other
distributor is authorized by Network (pursuant to a written agreement or
otherwise) to distribute the Service. Network shall not interfere with
Affiliate's (or its affiliates') ability to digitize and compress the Service.
(d) Affiliate shall have the right to transmit the signal of the Service
as received by any System to unaffiliated distributors so long as any such
distributor is authorized by Network (pursuant to a written agreement or
otherwise) to distribute the Service. Affiliate shall have the right to receive
the signal of the Service from any other distributor of the Service.
5. FEES:
(a) Definitions.
(i) "Commercial Per Sub Fee" shall mean, for any month, the
following amounts:
YEAR AMOUNT
------------------------------------
Contract Year 1 [*]
------------------------------------
Contract Year 2 CPI Adjusted Fee
------------------------------------
Contract Year 3 CPI Adjusted Fee
------------------------------------
Contract Year 4 CPI Adjusted Fee
------------------------------------
Contract Year 5 CPI Adjusted Fee
------------------------------------
Contract Year 6 CPI Adjusted Fee
------------------------------------
Contract Year 7 CPI Adjusted Fee
------------------------------------
- --------------
* Indicates that material has been omitted and confidential treatment has been
requested therefor. All such omitted material has been filed separately
with the Commission pursuant to Rule 24b-2.
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<PAGE> 3
Contract Year 8 CPI Adjusted Fee
------------------------------------
Contract Year 9 CPI Adjusted Fee
------------------------------------
Contract Year 10 CPI Adjusted Fee
------------------------------------
(ii) A "Commercial Subscriber" shall mean a Service Subscriber
which is either a "Class A Commercial Establishment" or a "Class B
Commercial Establishment." A "Class A Commercial Establishment" shall mean
each of the following: the common areas, open to the public, of hotels and
motels; night clubs; restaurants; bars; grills; taverns; cocktail lounges
and other establishments in which food or beverages are served; stores;
shops, supermarkets; automobile showrooms; gasoline service stations and
other establishments where goods or services are sold or offered to the
public at retail; and each of such premises located in a shopping center.
A "Class B Commercial Establishment" shall mean each of the following: an
office, factory or plant; a bank; an office or professional building; a
doctor's, dentist's or other professional office; the common areas, open
to the public, or a hospital, clinic, nursing or rest home or
rehabilitation center; a funeral home or mortuary; a library, school,
college or university; a church; a private club owned and operated by the
members as a non-commercial venture; the common areas, open to the public,
of an apartment house, residence, dormitory, sorority house or fraternity
house; a government office; a park or recreation area owned and operated
by the government excluding private or commercial concessions or leased
areas, a garage; a security or commodity broker; an insurance or real
estate agency; a finance or loan office; a savings and loan association; a
warehouse; a trucking terminal, access to which is limited to operators of
such trucks and maintenance men and to which other members of the public
are not generally admitted; a research organization or laboratory; a room
in a commercial establishment occupied solely as a rest room (or lounge);
a room occupied solely as a reception or information area or an employee's
cafeteria in such respective premises; and each such premises located in a
shopping center.
(iii) "Contract Year" shall mean any of the consecutive twelve (12)
month periods commencing on the Effective Date and each anniversary of
the Effective Date.
(iv) The "CPI Adjusted Fee" for any twelve (12)-month period shall
be the pertinent fee for the immediately preceding twelve (12)-month
period (the immediately preceding period shall be referred to herein as
the "Base Year") multiplied by a fraction, the numerator of which is the
CPI as of April 1 of the Base Year and the denominator of which is the
CPI as of April 1 of the twelve (12)-month period immediately preceding
the Base Year. "CPI" shall mean the Consumer Price Index, Urban, U.S.
City Average of "All Items", as published by the Bureau of Labor
Statistics of the United States Department of Labor (or any successor
thereto).
(v) "Electing Affiliate Systems" shall mean all cable television
systems that meet the System Qualifications of Exhibit A hereto and are
managed under the authority of any Electing Affiliate.
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<PAGE> 4
(vi) "Multiple" shall mean [*] in Contract Years four (4) and five
(5), [*] in Contract Years six (6) and seven (7), and [*] in Contract
Years eight (8) through ten (10).
(vii) "Original Commercial Subscribers" shall mean the number of all
Commercial Subscribers in TCI O&O Systems on the Effective Date, as adjusted
pursuant to the terms of this Agreement.
(viii) "Original Residential Subscribers" shall mean the number of all
Residential Subscribers in TCI O&O Systems on the Effective Date, as adjusted
pursuant to the terms of this Agreement.
(ix) "Residential Baseline" shall mean 2,000,000, as adjusted
pursuant to the terms of this Agreement.
(x) "Residential Per Subscriber Fee" shall mean, for any month, the
following amounts:
<TABLE>
<CAPTION>
- --------------------------------------------------
YEAR AMOUNT
- --------------------------------------------------
<S> <C>
CONTRACT YEAR 1 [*]
- --------------------------------------------------
CONTRACT YEAR 2 CPI Adjusted Fee
- --------------------------------------------------
CONTRACT YEAR 3 CPI Adjusted Fee
- --------------------------------------------------
CONTRACT YEAR 4 CPI Adjusted Fee
- --------------------------------------------------
CONTRACT YEAR 5 CPI Adjusted Fee
- --------------------------------------------------
CONTRACT YEAR 6 CPI Adjusted Fee
- --------------------------------------------------
CONTRACT YEAR 7 CPI Adjusted Fee
- --------------------------------------------------
CONTRACT YEAR 8 CPI Adjusted Fee
- --------------------------------------------------
CONTRACT YEAR 9 CPI Adjusted Fee
- --------------------------------------------------
CONTRACT YEAR 10 CPI Adjusted Fee
- --------------------------------------------------
</TABLE>
(xi) A "Residential Subscriber" shall mean any Service Subscriber
which is not a Commercial Subscriber.
(xii) "Service Subscriber(s)" shall mean each location which
Affiliate intentionally authorizes the Service by cable reception. Service
Subscribers shall include each occupied residential or commercial location
where the Service is received. If Affiliate provides the Service to multiple
unit complexes on a bulk-rate basis, then the number of Service Subscribers
attributable to each such bulk-rate subscriber shall be equal to the total
monthly retail rate the complex is charged for the Service or for the level or
package of services in which the Service is distributed, divided by the
standard monthly retail rate a non-bulk rate subscriber is charged for the
Service or for such level or package of services; provided, however, in no
event will the number of Service Subscribers calculated for any such complex
exceed the actual number of occupied dwelling units receiving the Service in
such complex. Service Subscriber shall not include
- --------------
* Indicates that material has been omitted and confidential treatment has been
requested therefor. All such omitted material has been filed separately
with the Commission pursuant to Rule 24b-2.
-4-
<PAGE> 5
(i) subscribers who do not pay any monies to Affiliate to receive the level of
service on which the Service is carried, (ii) public officials, administrative
personnel or public buildings that are not charged for the Service; (iii)
subscribers who have not paid their monthly rate for a given month; or (iv) any
customer who receives the Service, either commercially or residentially,
through any medium other than through cable television delivery, including
without limitation, OVS, DBS, TVRO, or MMDS. Notwithstanding any other
provision of this Agreement to the contrary, neither Affiliate nor any
affiliate of Affiliate shall owe any Fees or pay any charge for the delivery or
distribution of the Service, or any part thereof, through any medium other than
through cable television delivery.
(xiii) "System Original Commercial Subscribers" shall mean, with
respect to each TCI O&O System, the number of Commercial Subscribers in such
System as of the later of the Effective Date or the date such System first met
the System Qualifications of Exhibit A.
(xiv) "System Original Residential Subscribers" shall mean, with
respect to each TCI O&O System, the number of Residential Subscribers in such
System as of the later of the Effective Date or the date such System first met
the System Qualifications of Exhibit A.
(xv) A "TCI O&O System" shall mean a System which is managed under
the authority of one of the operating divisions of Tele-Communications, Inc.
(b) Fees for Commercial Subscribers in TCI O&O Systems.
(i) Each month during Contract Years One through Three, Affiliate
shall pay a Fee to Network for the Commercial Subscribers in all TCI O&O
Systems equal to the following amounts:
<TABLE>
<CAPTION>
- --------------------------------------------------
CONTRACT YEAR FEE
- --------------------------------------------------
<S> <C>
1 [*]
- --------------------------------------------------
2 CPI Adjusted Fee
- --------------------------------------------------
3 CPI Adjusted Fee
- --------------------------------------------------
</TABLE>
(ii) If during any month in Contract Years One through Three a TCI
O&O System is sold, divested or otherwise fails to meet the definition of a TCI
O&O System, the Fee for Commercial Subscribers in TCI O&O Systems shall be
reduced by an amount equal to such Fee multiplied by a fraction, the numerator
of which is the number of System Original Commercial Subscribers in such
divested system (the "Divested Commercial Subscribers") and the denominator of
which is the number of Original Commercial Subscribers; provided, however, that
the Fees shall be reduced only to the extent that the acquiror of such System
agrees to assume the obligation for paying the amount of such reduction to
Network through the expiration of Contract Year Three and agrees to pay a
- --------------
* Indicates that material has been omitted and confidential treatment has been
requested therefor. All such omitted material has been filed separately
with the Commission pursuant to Rule 24b-2.
-5-
<PAGE> 6
proportionate share of the rate set forth in Section 5(b)(iv) hereof for such
System for the time period following the expiration of Contract Year Three
through the end of the Initial Term. If the Fees are so reduced as set forth in
the preceding sentence, the number of Original Commercial Subscribers shall be
reduced by the number of Divested Commercial Subscribers. Any adjustment to the
Fee set forth herein shall be effective as of the effective date of the
divestiture or other disposition, prorated in the month of divestiture or
disposition based on the number of days following such effective date to the end
of such month.
(iii) If during any month in Contract Years One through Three a TCI O&O
System is acquired, the Fee for Commercial Subscribers in TCI O&O Systems for
Contract Years One through Three shall be increased by an amount equal to the
number of Commercial Subscribers in such acquired TCI O&O System as of the
effective date of acquisition (the "Acquisition Subscribers") multiplied by the
Commercial Per Subscriber Fee. The number of Original Commercial Subscribers
shall be increased by the number of Acquisition Subscribers as of the effective
date of acquisition. Any adjustment to the Fee set forth herein shall be
effective as of the effective date of the divestiture or other disposition,
prorated in the month of divestiture or disposition based on the number of days
following such effective date to the end of such month.
(iv) Fees for Contract Years Four through Ten. Each month during
Contract Years Four through Ten, the Fee for TCI O&O Systems shall be
determined in accordance with the following formula:
(A+(BxC))xD
Where:
A = the number of Original Commercial Subscribers.
B = an amount, which may be negative, equal to the number of Commercial
Subscribers in TCI O&O Systems in the month for which Fees are determined minus
the number of Original Commercial Subscribers.
C = the Multiple.
D = the Commercial Per Subscriber Fee.
(v) If during any month in Contract Years Four through Ten a TCI O&O
System is sold, divested or otherwise fails to meet the definition of a TCI O&O
System, Affiliate shall cease to be liable for Fees for such System, and the
number of Original Commercial Subscribers shall be reduced by the number of
System Original Commercial Subscribers in such divested system. Any such
adjustment shall be effective as of the effective date of the divestiture or
other disposition, prorated in the month of divestiture or disposition based on
the number of days following such effective date to the end of
-6-
<PAGE> 7
such month.
(vi) If during any month in Contract Years Four through Ten a TCI O&O
System is acquired, the number of System Original Commercial Subscribers for
such System shall be the number of Commercial Subscribers in such system as of
the effective date of such acquisition, and the number of System Original
Commercial Subscribers shall be added to the number of Original Commercial
Subscribers. Any such adjustment shall be effective as of the effective date of
the acquisition, prorated in the month of divestiture or disposition based on
the number of days following such effective date to the end of such month.
(c) Fees for Residential Subscribers in TCI O&O Systems.
(i) Each month during Contract Years One through Three, Affiliate shall
pay a Fee to Network for Residential Subscribers in TCI O&O Systems as follows:
<TABLE>
<CAPTION>
CONTRACT YEAR FEE
----------------------------------------------------
<S> <C>
1 [*]
----------------------------------------------------
2 CPI Adjusted Fee
----------------------------------------------------
3 CPI Adjusted Fee
----------------------------------------------------
</TABLE>
(ii) If during any month in Contract Years One through Three a TCI O&O
Systems is sold, divested or otherwise fails to meet the definition of a TCI
O&O System, the Fee for Residential Subscribers in TCI O&O Systems shall be
reduced by an amount equal to such Fee multiplied by a fraction, the numerator
of which is the number of System Original Residential Subscribers in such
divested System (the ""Divested Residential Subscribers") and the denominator
of which is the number of Original Residential Subscribers (the "Reduction
Percentage"); provided, however, that the Fees shall be reduced only to the
extent that the acquiror of such System agrees to assume the obligation for
paying the amount of such reduction to Network through the expiration of
Contract Year Three and agrees to pay a proportionate share of the rate set
forth in Section 5(c)(iv) for such System for the time period following the
expiration of Contract Year Three through the end of the Initial Term. If the
Fees are so reduced as set forth in the preceding sentence, the number of
Original Residential Subscribers shall be reduced by the number of Divested
Residential Subscribers, and the Residential Baseline shall be reduced by an
amount equal to the Reduction Percentage multiplied by 2,000,000. Any
adjustment to the Fee set forth herein shall be effective as of the effective
date of the divestiture or other disposition, prorated in the month of
divestiture or disposition based on the number of days following such effective
date to the end of such month.
(iii) If during any month in Contract Years One through Three a TCI O&O
System is acquired, the Fee for Residential Subscribers in TCI O&O Systems for
Contract Years One through Three shall be increased by an amount equal to the
number of Residential Subscribers in such acquired TCI O&O System as of the
effective date of such
- --------------
* Indicates that material has been omitted and confidential treatment has been
requested therefor. All such omitted material has been filed separately
with the Commission pursuant to Rule 24b-2.
-7-
<PAGE> 8
acquisition multiplied by the Residential Per Subscriber Fee. The number of
Original Residential Subscribers and the Residential Baseline shall be
increased by the number of Residential Subscribers in such acquired system
as of the effective date of such acquisition. Any adjustment to the Fee set
forth herein shall be effective as of the effective date of the
acquisition, prorated in the month of acquisition based on the number of
days following such effective date to the end of such month.
(iv) Fees for Contract Years Four through Ten. Each month during
Contract Years Four through Ten, the Fee for Residential Subscribers shall
be determined on a System by System basis for TCI O&O Systems in accordance
with the following formula:
(A + (B x C)) x D
Where:
A = Residential Baseline.
B = an amount, which may be negative, equal to the number of Residential
Subscribers in TCI O&O Systems in the month for which Fees are determined
minus the Residential Baseline.
C = the Multiple.
D = the Residential Per Subscriber Fee.
(v) If during any month in Contract Years Four through Ten a TCI O&O
System is sold, divested or otherwise fails to meet the definition of a TCI
O&O System, Affiliate shall cease to be liable for Fees for such divested
Systems, the number of Original Residential Subscribers shall be reduced by
an amount equal to the number of System Original Residential Subscribers in
such divested System, and the Residential Baseline shall be reduced by an
amount equal to Residential Baseline multiplied by a fraction, the
numerator of which is the number of System Original Residential Subscribers
and the denominator of which is the number of Original Residential
Subscribers, as adjusted. Any such adjustment shall be effective as of the
effective date of the divestiture or other disposition, prorated in the
month of divestiture or disposition based on the number of days following
such effective date to the end of such month.
(vi) If during any month in Contract Years Four through Ten a TCI O&O
System is acquired, the number of Original Residential Subscribers and the
Residential Baseline shall be increased by the number of Residential
Subscribers in such system as of the effective date of such acquisition. In
addition, the number of Residential Subscribers in such system as of the
effective date of such acquisition shall be the number of System Original
Residential Subscribers for such system. Any such adjustment shall be
effective as of the effective date of the acquisition, prorated in the
month of divestiture or disposition based on the number of days following
such effective date to the end of such month.
8
<PAGE> 9
(d) Minimum License Fee Payment. Notwithstanding Sections 5(a) through
5(c) hereof, the sum total of all license fee payments for commercial and
residential subscribers paid by Affiliate hereunder with respect to TCI O&O
Systems, or by any third party with respect to TCI O&O Systems which are
divested, sold or otherwise fail to meet the definition of a TCI O&O System
during the Initial Term hereof, shall equal or exceed in any month during
Contract Years Four through Ten an amount determined in accordance with the
following formula:
(A x B x C) + (D x E x C), where
A = the number of Original Commercial Subscribers as June 30, 2000
B = the Commercial Per Sub Fee
C = a factor determined in accordance with the following schedule:
<TABLE>
<CAPTION>
------------------------------
CONTRACT YEAR FACTOR
------------------------------
<S> <C>
4 [*]
------------------------------
5 [*]
------------------------------
6 [*]
------------------------------
7 [*]
------------------------------
8 [*]
------------------------------
9 [*]
------------------------------
10 [*]
------------------------------
</TABLE>
D = The Residential Baseline as of June 30, 2000.
E = The Residential Per Subscriber Fee.
(e) Electing Affiliate Systems. Each month, Affiliate shall pay Fees to
Network for Electing Affiliate Systems as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
ACCOUNT TYPE MONTHLY FEE
- ------------------------------------------------------------------------------
<S> <C>
Commercial Subscribers Commercial Per Subscriber Fee
- ------------------------------------------------------------------------------
Residential Subscribers who [*]
receive the Service solely
on an a la carte basis
- ------------------------------------------------------------------------------
Residential Subscribers who Residential Per Subscriber Fee
receive the Service on a basis
other than a la carte basis
- ------------------------------------------------------------------------------
</TABLE>
(f) Lump Sum Adjustment for Programming Cost Changes. If in any month
licensing fees payable by Network to ASCAP, BMI and SESAC, in the aggregate
(the "License Fees") for distribution of the Service in Systems increase or
decrease after the Effective Date as a percentage of Fees, the Fees payable by
Affiliate for Systems shall likewise be increased or decreased by an amount
equal to such percentage increase or decrease. For example, if License Fees
increase
- --------------
* Indicates that material has been omitted and confidential treatment has been
requested therefor. All such omitted material has been filed separately
with the Commission pursuant to Rule 24b-2.
-9-
<PAGE> 10
from ten percent (10%) to eleven percent (11%) as a percentage of the Fees,
the Fees shall be increased by one percent (1%).
(g) Network shall have the right to negotiate the Fee(s) applicable to
any Renewal Term ("Renewal Fees"). The Fees in effect for the last year of the
Initial Term, or any Renewal Term for which Renewal Fees were agreed to by the
parties, shall remain in effect until the parties agree on the new Renewal Fees.
In the event that at least ninety (90) days prior to the expiration of the
Initial Term or any Renewal Term, Affiliate and Network have failed to agree on
the Renewal Fees and either party notifies the other party that it chooses to
cease negotiations of the Renewal Fees, then Network shall give Affiliate
notice of the rates to be paid per Residential Subscriber and per Commercial
Subscriber and such rate shall be deemed the Renewal Fee per Service Subscriber
to be paid during the succeeding Renewal Term. Affiliate shall then have the
right, but not the obligation, to terminate this Agreement as provided in
Section 2(b) hereof or to continue to provide the Service pursuant to this
Agreement, except that Affiliate shall have unlimited packaging flexibility
notwithstanding the restrictions, if any, contained in Section 4(e) hereof.
6. REPORTS:
(a) No later than forty-five (45) days after the end of each calendar
month for which Fees or Renewal Fees are payable, Affiliate shall send Network
a mutually acceptable statement (together with Fees owed hereunder) setting
forth the total number of Residential Subscribers and Commercial Subscribers
and any other information that is necessary to compute the amount due to
Network for such calendar month. Notwithstanding the foregoing, each Electing
Affiliate may elect to report and pay separately from Affiliate's reports and
payments hereunder.
(b) In order to verify the compliance with or determine whether full
effect has been given to the provisions of this Agreement (including without
limitation paragraphs 5(e) and 13(f)), each party, at its expense, shall have
the right, during the Term and for one (1) year thereafter, to inspect and
audit at the offices of the audited party during normal business hours all
relevant books and records, upon reasonable notice to the audited party. Each
party's right to perform such audit shall be limited to once in any consecutive
twelve (12)-month period. Any audit shall be limited to an audit with respect
to amounts to be paid in the current and prior calendar years only and any
claim, which must relate to the then-current calendar year or the immediately
preceding calendar year, must be made within the earlier of three (3) months
after the auditing party leaves the audited party's offices, or twenty-four
(24) months after the close of the earliest month that is the subject of a
claim or the auditing party will be deemed to have waived its right, whether
known or unknown, to collect any shortfalls from the audited party for the
period(s) audited.
7. PROMOTION:
(a) Affiliate acknowledges that the names and marks Digital Music Express
and DMX are the exclusive property of Network and its suppliers and that
Affiliate has not and will not acquire any proprietary rights therein by reason
of this Agreement. Network shall have the right
-10-
<PAGE> 11
to approve any use of such names or marks by Affiliate in publicity about
Network or the Service or the products or programming included in the Service.
Use of such names and marks in routine promotional materials such as program
guides, program listings and bill stuffers shall be deemed approved unless
Network specifically notifies Affiliate to the contrary prior to such use by
Affiliate.
(b) Network and Affiliate hereby acknowledge that Network could cause
Affiliate significant harm by the nature of Network's communications to
Affiliate's subscribers, governmental entities or franchise or licensing
authorities whose opinions and actions could adversely affect Affiliate.
Therefore, Network shall not engage in any communications with subscribers,
governmental entities or franchise or licensing authorities in the areas served
by Affiliate and it affiliate without Affiliate's prior written approval, if
such communications could reasonably be expected to adversely interfere with
Affiliate's relations with the subscribers, governmental entities or franchise
or licensing authorities in such areas. This provision shall not apply (i) to
any national advertising by Network in connection with the Service, (ii) to any
proceeding before any judicial body, or (iii) to communications with Congress
or with any other branch or agency of the Federal government. This Section 7(f)
shall survive termination of this Agreement for two (2) years.
8. WARRANTIES AND INDEMNITIES:
(a) Each party represents and warrants to the other that (i) it is duly
organized, validly existing and in good standing under the laws of the state
under which it is organized, (ii) it has the power and authority to enter into
this Agreement and to perform fully its obligations hereunder; (iii) it is
under no contractual or other legal obligation that shall in any way interfere
with its full, prompt and complete performance hereunder; (iv) the individual
executing this Agreement on its behalf has the authority to do so; and (v) the
obligations created by this Agreement, insofar as they purport to be binding on
it, constitute legal, valid and binding obligations enforceable in accordance
with their terms.
(b) Affiliate and Network shall each indemnify, defend and forever hold
harmless the other, the other's affiliated companies and each of the other's
(and the other's affiliated companies') respective present and former officers,
shareholders, directors, employees, partners and agents ("Network Indemnities"
and "Affiliate Indemnities," respectively), against and from any and all
losses, liabilities, claims, costs, damages and expenses, including, without
limitation, fines, forfeitures, reasonable attorneys' fees, disbursements and
court or administrative costs (collectively, "Costs"), arising out of any
breach of any term of this Agreement or any warranty, covenant or
representation contained herein.
(c) Without limiting Section 8(c) hereof, Network shall indemnify, defend
and forever hold harmless the Affiliate Indemnities against and from any and all
Costs, arising directly or indirectly out of (i) the content of the Service or
the use and delivery of the Service hereunder, including, without limitation,
any Cost based upon any suit, lien, encumbrance, charge, lis pendens,
administrative proceeding, governmental investigation, or litigation pending or
threatened (provided that Affiliate shall, to like extent, indemnify the
Network Indemnities for
-11-
<PAGE> 12
Costs arising from any deletion or addition of material by Affiliate to the
Service; (ii) Network's failure to comply with all laws, rules, regulations and
court and administrative decrees to which it is subject or any other failure on
Network's part that causes Affiliate to violate any law, rule, regulation or
court or administrative decree; and (iii) Network's failure to have acquired at
the pertinent time when all or part of the Service is made available to
Affiliate, good title to, and/or each and every property right or other right
necessary for it to satisfy the obligations imposed on it pursuant to this
Agreement.
(d) A party claiming indemnity under this Section 8 must give the
indemnifying party prompt notice of any claim, and the indemnifying party shall
have the right to assume the full defense of any claims to which its indemnity
applies. The indemnified party, at the indemnifying party's cost, will
cooperate fully with the indemnifying party in such defense of any such claim.
If the indemnified party compromises or settles any such claim without the
prior written consent of the indemnifying party, then the indemnifying party
shall be released from its indemnity obligations with respect to the claim so
settled.
(e) The representations, warranties and indemnities contained in this
Section 8 shall continue throughout the Term and the indemnities shall survive
the termination of this Agreement, regardless of the reason for such
termination.
9. EARLY TERMINATION RIGHTS:
(a) In addition to Network's other rights to terminate this Agreement,
Network may, by notifying Affiliate, terminate this Agreement: (i) if Affiliate
is in material breach of this Agreement and Affiliate has not cured such breach
within thirty (30) days of Network's written notice of such breach, unless a
shorter cure period is specified elsewhere in this Agreement for a specific
breach, in which case such shorter cure period will apply; provided, however,
if such breach is confined to a System or to a limited number of Systems,
Network shall have the right to terminate this Agreement only as to such System
or Systems; (ii) if Affiliate has filed a petition in bankruptcy, is insolvent,
or has sought relief under any law related to Affiliate's financial condition
or its ability to meet its payment obligations; or (iii) if any involuntary
petition in bankruptcy has been filed against Affiliate, or any relief under
any such law has been sought by any creditor(s) of Affiliate, unless such
involuntary petition is dismissed, or such relief is denied, within thirty (30)
days after it has been filed or sought.
(b) In addition to Affiliate's other rights to terminate this
Agreement, Affiliate may, by notifying Network, terminate this Agreement: (i)
if Network is in material breach of this Agreement and Network has not cured
such breach within thirty (30) days of Affiliate's written notice of such
breach, unless a shorter cure period is specified elsewhere in this Agreement
for a specific breach, in which case such shorter cure period will apply;
provided, however, if such breach is confined to a System or to a limited
number of Systems, Network shall have the right to terminate this Agreement
only as to such System or Systems; (ii) if Network has filed a petition in
bankruptcy, is insolvent or has sought relief under any law related to
Network's financial condition or its ability to meet its payment obligations;
(iii) if any involuntary petition in bankruptcy has been filed against Network,
or any relief under any such law has been sought by
-12-
<PAGE> 13
any creditor(s) of Network, unless such involuntary petition is dismissed, or
such relief is denied, within thirty (30) days after it has been filed or
sought; or (iv) on at least fifteen (15) days' notice in the event that
delivery of the Service is discontinued or interrupted for a continuous period
of fifteen (15) days.
10. FORCE MAJEURE:
Neither Affiliate nor Network shall have any rights against the other
party hereto for the non-operation of facilities or the non-furnishing of the
Service if such non-operation or non-furnishing is due to an act of God or
other cause (financial inability excepted) beyond such party's reasonable
control (a "Force Majeure Event"). If the Service is interrupted or
discontinued as a result of a Force Majeure Event, Affiliate shall have the
right, immediately, to insert programming of its choice on the channel
otherwise identified with the Service until the Service is fully operational
again. Credit will be given to Affiliate on that portion of the Service that is
affected by any interruption during any month equal to the product of (x) the
Fees or any Renewal Fees that would be due for such month, assuming no
interruption of Service during such month, multiplied by (y) a fraction, the
numerator of which is the total number of hours that the Service is interrupted
during such month and the denominator of which is the total number of hours of
that the Service would have been distributed absent such interruption(s).
11. NOTICES:
Any notice or report to be given under this Agreement shall be in
writing, shall be sent postage prepaid by certified mail, return receipt
requested, or by hand delivery, or by Federal Express or similar overnight
delivery service, or by facsimile transmission, to the other party, at the
following address (unless either party at any time or times designates another
address for itself by notifying the other party by certified mail, in which
case all notices to such party thereafter shall be given at its most recently
so designated address):
To Network: DMX, Inc.
11400 West Olympic Boulevard, Suite 1100
Los Angeles, CA 90064.1506
Facsimile:
Attention: President
cc: Peter Laird, Esq.
Edelstein, Laird & Sobel, L.P.
9255 Sunset Boulevard, Suite 800
Los Angeles, CA 60069
Facsimile: (310) 271-2664
-13-
<PAGE> 14
To Affiliate: Terrace Tower II
5619 DTC Parkway
Englewood, Colorado 80111
Facsimile Number: (303) 488-3218
Attention: President
cc: Legal Department
Notice or report given by hand delivery shall be deemed given on delivery.
Notice or report given by mail shall be deemed given on the earlier to occur of
actual receipt or on the fifth day following mailing if sent in accordance with
the notice requirements of this Section 11. Notice or report given by Federal
Express or similar overnight delivery service shall be deemed given on the next
business day following delivery of the notice or report to such service with
instructions or overnight delivery. Notice or report given by facsimile
transmission shall be deemed given on the day of transmission if a business
day, or on the next business day after the day of transmission if not
transmitted on a business day, provided that the delivery of such facsimile is
confirmed either telephonically or be electronic confirmation.
12. CONFIDENTIALITY:
The terms and conditions, including the existence and duration, of this
Agreement shall be kept confidential, except for disclosure as may be required
by law, regulation, court or government agency of competent jurisdiction
(redacted to the greatest extent possible). This confidentiality provision
shall survive the termination of this Agreement.
13. MISCELLANEOUS:
(a) Assignment; Binding Effect; Reorganization. This Agreement shall be
binding on the respective transferees and successors of the parties hereto,
except that neither this Agreement nor either party's rights or obligations
hereunder shall be assigned or transferred by either party without the prior
written consent of the other party; provided, however, no consent is necessary
in the event of an assignment to a successor entity resulting from a merger,
acquisition or consolidation by either party or assignment to an entity under
common control, controlled by or in control of either party. For purposes of
this Section 13(a), the term "control" means the power to direct the management
and policies of an entity, directly or indirectly, whether through the
ownership of voting securities, by contract or otherwise.
(b) Service Combinations. In the event that the Service is acquired by
or merged or combined with, or Network acquires control of, any other
programming service(s), if Affiliate has (at the time of such merger,
combination or acquisition) an affiliation agreement regarding distribution of
such other service(s), Affiliate has the option to choose to continue
distribution of the Service and of such other service, and/or of any surviving
service after such merger, combination or acquisition, under either this
Agreement or under such other affiliation agreement. If Affiliate does not have
an affiliation agreement regarding distribution of such other service,
Affiliate shall have the option to elect to have this Agreement continue to
apply to the Service
- 14 -
<PAGE> 15
after such merger, combination or acquisition, and/or to any surviving service
after such merger, combination or acquisition.
(c) Entire Agreement; Amendments; Waivers; Cumulative Remedies.
This Agreement, including the Schedule and Exhibits attached hereto, contains
the entire understanding of the parties hereto and supersedes all
contemporaneous and prior understandings of the parties, whether written or
oral, relating to the subject matter hereof. This Agreement may not be modified
except in a writing executed by both parties hereto. Any waiver of any
provision of this Agreement must be in writing and signed by the party whose
rights are being waived. No waiver of any breach of any provision hereof shall
be or be deemed to be a waiver of any preceding or subsequent breach of the
same or any other provision of this Agreement. The failure of Affiliate or
Network to enforce or seek enforcement of the terms of this Agreement following
any breach shall not be construed as a waiver of such breach. All remedies,
whether at law, in equity or pursuant to this Agreement shall be cumulative.
Notwithstanding any provision of this Agreement to the contrary, in the event
of a conflict between this Agreement and the Term Sheet dated as of September
15, 1997 between TCI Music, Inc., DMX, Inc., and Tele-Communications, Inc. (the
"Term Sheet"), the Term Sheet shall control.
(d) Governing Law. The obligations of Affiliate and Network under
this Agreement are subject to all applicable federal, state and local laws,
rules and regulations, and this Agreement and all matters or issues collateral
thereto shall be governed by the laws of the State of New York, without regard
to choice of law rules.
(e) Relationship. Neither party shall be, or hold itself out as,
the agent of the other or as joint venturers under this Agreement. No
subscriber of Affiliate shall be deemed to have any privity of contract or
direct contractual or other relationship with Network and no supplier of
advertising or programming or anything else included in the Service by Network
shall be deemed to have any privity of contract or direct contractual or other
relationship with Affiliate by virtue of this Agreement. Network disclaims any
present or future right, interest or estate in or to the transmission
facilities of Affiliate and its affiliates, such disclaimer being to
acknowledge that neither Affiliate nor the transmission facilities of the
Systems (nor the owners thereof) are common carriers.
(f) Favorable Terms.
(i) Network agrees that if it gives or offers to, has given
or offered to or accepts or has accepted from any third party
(regardless of whether such third party is affiliated with Network or
Affiliate) at any time with respect to Electing Affiliates and after the
expiration of the Initial Term with respect to TCI O&O Systems (A) a
lower net effective rate per subscriber for the Service than Affiliate
is paying per Subscriber hereunder, (B) any marketing or advertising
support or reimbursements, launch support or reimbursements, free or
discounted marketing materials or any other support, credits,
reimbursements, rebates, contributions, adjustments or incentives
related to the marketing of the Service, whether given directly or
indirectly to such third party, or (C) any other economic or
non-economic term, provision, covenant or consideration, which are or is
-15-
<PAGE> 16
more favorable to such third party than Affiliate is receiving
hereunder ((A), (B) and (C) above, individually and collectively, shall
be referred to herein as "More Favorable Provision"). Network will
promptly offer such More Favorable Provision to Affiliate for the same
amount of time that such More Favorable Provision is or was available to
such third party. A More Favorable Provision shall include any
pertinent term, provision, covenant or consideration, regardless of
whether there is a term, provision, covenant or consideration
concerning the subject matter of such More Favorable Provision in this
Agreement or whether such term, provision, covenant or consideration
relates to such third party's entire subscriber base or less than the
entire base (e.g., a More Favorable Provision relating to a "test" or
"sample" group of subscribers).
(ii) Network agrees to provide to Affiliate a written
certification on each annual anniversary date of this Agreement, signed
by a duly authorized officer of Network, stating that Network has
satisfied its obligations under this Section 13(f).
(g) Severability. The invalidity under applicable law of any
provision of this Agreement shall not affect the validity of any other
provision of this Agreement, and in the event that any provision hereof is
determined to be invalid or otherwise illegal, this Agreement shall remain
effective and shall be construed in accordance with its terms as if the invalid
or illegal provision were not contained herein.
(h) No Inference Against Author. Network and Affiliate each
acknowledge that this Agreement was fully negotiated by the parties and,
therefore, no provision of this Agreement shall be interpreted against any
party because such party or its legal representative drafted such provision.
(i) No Third Party Beneficiaries. The provisions of this Agreement
are for the exclusive benefit of the parties hereto and their permitted
assigns, and no third party shall be a beneficiary of, or have any rights by
virtue of, this Agreement.
(j) Headings. The titles and headings of the sections in this
Agreement are for convenience only and shall not in any way affect the
interpretation of this Agreement.
(k) Non-Recourse. Notwithstanding anything contained in this
Agreement to the contrary, it is expressly understood and agreed by the parties
hereto that each and every representation, warranty, covenant, undertaking and
agreement made in this Agreement was not made or intended to be made as a
personal representation, undertaking, warranty, covenant, or agreement on the
part of any individual, and any recourse, whether in common law, in equity, by
statute or otherwise, against any individual is hereby forever waived and
released.
-16-
<PAGE> 17
(l) Taxes. To the extent required by applicable law, Affiliate shall have
the right to withhold any portion of any amounts payable by Affiliate to
Network and to pay any such amounts over to any appropriate governmental
authority. Network shall provide such assistance as is necessary to enable
Affiliate to discharge its obligation to withhold and/or pay taxes on Network's
behalf and shall indemnify Affiliate as provided in Section 8 hereof from and
against any and all Costs arising directly or indirectly out of any tax or
other amount withheld, paid or otherwise collected by Affiliate on Network's
behalf, or owed or paid by Network to any governmental entity.
The parties hereto have executed this Agreement as of the date first above
written.
<TABLE>
<CAPTION>
<S> <C>
AFFILIATE: NETWORK:
By: /s/ LEO J. HINDERY, JR. By: /s/ JOANNE WENDY KIM
---------------------------- ----------------------------
Leo J. Hindery, Jr. Joanne Wendy Kim
Title: Chief Executive Officer and Title: Executive Vice President and
Chairman of the Board Chief Financial Officer
---------------------------- ----------------------------
</TABLE>
- 17 -
<PAGE> 18
[SATELLITE SERVICES INC. LOGO]
January 27, 1998
DMX, Inc.
11400 West Olympic Boulevard, Suite 1100
Los Angeles, CA 90064-1506
RE: Affiliation Agreement between DMX, Inc. and Satellite Services, Inc.
("SSI") dated July 1, 1997
To Whom It May Concern:
This letter will confirm our agreement regarding the timing of elections into
the Affiliation Agreement by affiliates of Affiliate. Notwithstanding the
terms of the Affiliation Agreement, any affiliate of Affiliate may elect into
the Affiliation Agreement by the later of (1) May 31, 1998 or (2) 120 days
after the date such affiliate of Affiliate first met the definition of an
affiliate of Affiliate.
Except as expressly stated in this letter, the terms and conditions of the
Affiliation Agreement shall remain in effect. In the event of a conflict
between this letter agreement and the Affiliation Agreement, this letter
agreement shall control.
Please indicate your agreement with the terms and conditions provided herein
by executing this letter agreement where provided below.
Sincerely,
SATELLITE SERVICES, INC.
By: /s/ MATT BOND
-------------------------------------------------
AGREED TO AND ACCEPTED THIS 3 DAY OF FEBRUARY, 1998:
DMX, INC.
By: /s/ LON TROXEL
------------------------------------------------
<PAGE> 1
EXHIBIT 10.5
REVOLVING CREDIT LINE
$2,000,000 Denver, Colorado
July 31, 1997
FOR VALUE RECEIVED, the undersigned, TCI MUSIC, INC., a Delaware
corporation (the "Borrower"), promises to pay to the order of TCI
COMMUNICATIONS, INC., a Delaware corporation (the "Company"), no later than 180
days after the date of this Note (the "Maturity Date"), the lesser of (i) the
principal sum of Two Million Dollars ($2,000,000) or (ii) the aggregate unpaid
principal amount of all loans made by the Company to the Borrower pursuant to
this Revolving Credit Note. The Borrower further promises to pay to the order
of the Company interest on the unpaid principal hereof from time to time
outstanding at the rate of 10 percent per annum compounded annually and
calculated based on actual days elapsed. Accrued interest shall be payable on
or before the first day of each calendar quarter, beginning with the calendar
quarter commencing on October 1, 1997. Principal of and interest accruing on
this Note shall be prepayable at any time without penalty or premium.
Prepayments shall be applied first to accrued interest, then to outstanding
principal.
All payments (including prepayments of principal and interest hereunder)
shall be due and payable in United States Dollars at 1:00 p.m., Denver, Colorado
time, on the day when due. All payments shall be made to the Company at its
office located at 5619 DTC Parkway, Englewood, Colorado, or at such other office
as the Company may designate, in immediately available funds without setoff,
counterclaim or other deduction of any nature.
If any payment or principal or interest hereunder shall become due and
payable on a day which is not a Business Day (defined as any day on which
commercial banks located in New York City are not authorized or required to
close), such payment shall be made on the next following Business Day and such
extension of time shall be included in computing interest in connection with
such payment.
So long as the Company is the holder of this Note, the unpaid principal
balance hereof and the interest accrued hereto shall be determined from the
records of the Company, absent manifest error.
In the event Borrower fails timely to pay any amount due, payment of the
entire amount of principal and interest may be accelerated at the option of the
Company. If the Company takes any action to collect such amounts, then Borrower
shall pay on demand all costs and expenses of the Company and its agents
connected with such action, including but not limited to reasonable legal fees.
To the extent permitted by law, the Borrower hereby expressly waives
presentment, demand, notice, protest and all other demands and notices in
connection with the delivery, acceptance, performance, default, or enforcement
of the Note and an action for amounts due hereunder or thereunder shall
immediately accrue.
The Company intends to conform to all applicable laws in effect from time
to time limiting the maximum rate of interest that may be charged or collected.
Accordingly, notwithstanding any other provision of this Note, the Borrower
shall not be required to make any payment to the Company, and the Company shall
refund any payment made by the Borrower, to the extent that such requirement or
such failure to refund would violate applicable laws limiting the maximum
amount of interest which may be charged or collected by the Company.
<PAGE> 2
This Note shall be governed by, and construed and enforced in accordance
with, the laws of the State of Colorado without regard to principals of
conflict of laws.
TCI MUSIC, INC.
By: /s/ David B. Koff
------------------------------
Title: CEO
---------------------------
By: /s/ Barney Schotters
------------------------------
Title: Executive Vice President
---------------------------
<PAGE> 1
PROMISSORY NOTE
EXHIBIT 10.6
$2,183,169 September 19, 1997
Englewood, Colorado
FOR VALUE RECEIVED, TCI Music, Inc., a Delaware corporation (the
"Borrower"), unconditionally promises to pay to the order of Liberty Media
Corporation, a Delaware corporation (the "Lender"), the principal amount of
$2,183,169 Dollars, with simple interest accruing on the outstanding principal
balance from the date of this Note at the rate of 10% per annum. Interest shall
be computed for the actual number of days elapsed on the basis of a year
consisting of 365 (or 366, if applicable) days.
Accrued interest on this Note shall be due and payable on December 31, 1997
and on the last day of each March, June, September and December thereafter until
all principal and interest is paid in full. The entire principal amount of this
Note shall be due and payable in full on December 31, 1998. All payments of
principal and interest shall be paid in lawful money of the United States in
immediately available funds at 8101 E. Prentice Ave., Suite 500, Englewood,
Colorado 80111 or such place as may hereafter be designated by written notice
from the Lender to the Borrower. All payments made on this Note shall be
credited first to interest due on the outstanding principal balance of this
Note and, second, to reduce the principal balance of this Note.
The Borrower may prepay amounts owed under this Note, in whole or in part,
at any time without premium or penalty. Any partial prepayment shall first be
applied to any unpaid interest accrued at the time of prepayment on the
outstanding principal and then to principal.
The Borrower waives presentment, demand, protest and notice of any kind.
Upon any failure by the Borrower to pay any amount due under this Note
within three days after notice from the Lender of such failure, the Lender may
at its option declare all principal and accrued interest hereon immediately due
and payable and the principal balance shall from the date of such declaration
bear simple interest at the rate of 11% per annum until this Note is paid in
full.
In the event of any action at law or suit in equity with respect to this
Note, the Borrower, in addition to all other sums which it may be required to
pay hereunder, will pay a reasonable sum for attorneys' fees and expenses
incurred by the Lender in connection with such action or suit and all other
costs and expenses of collection.
In the absence of manifest error, the unpaid principal balance and unpaid
accrued interest from time to time applicable to such balance shall be
determined from the records of the Lender or the holder of this Note.
<PAGE> 2
This Note is executed and delivered in, and shall in all respects be
governed by and construed in accordance with, the laws of the State of
Colorado, including all matters of construction, validity and performance,
shall bind the Borrower, its successors and assigns, and shall inure to the
benefit of any holder hereof, its successors and assigns.
TCI MUSIC, INC.
By: /s/ DAVID B. KOFF
---------------------------
Name: David B. Koff
Title: President
-2-
<PAGE> 1
EXHIBIT 10.10
TCI MUSIC, INC.
1997 STOCK INCENTIVE PLAN
NON-QUALIFIED STOCK OPTION AND
STOCK APPRECIATION RIGHTS AGREEMENT
THIS AGREEMENT (this "Agreement") is made as of the 11th day of
July, 1997 (the "Effective Grant Date"), by and between TCI MUSIC, INC., a
Delaware corporation (the "Company"), and David B. Koff ("Grantee").
The Company has adopted the TCI Music, Inc. 1997 Stock Incentive
Plan (the "Plan"), a copy of which is attached to this Agreement as Exhibit A
and by this reference made a part hereof, for the benefit of certain eligible
persons as set forth in the Plan. Capitalized terms used and not otherwise
defined herein shall have the meaning ascribed thereto in the Plan.
Pursuant to the Plan, the Board has determined that it is in the
interests of the Company and its stockholders to grant the options and rights
provided herein in order to encourage Grantee to remain as a director of the
Company and to increase Grantee's personal interest in the continued success and
progress of the Company by providing a method whereby Grantee is encouraged to
invest in the capital stock of the Company.
The Company and Grantee therefore agree as follows:
1. GRANT OF OPTION; OPTION TERM. Subject to the terms and conditions
herein, the Company grants to the Grantee during the period commencing on the
Effective Grant Date and expiring at 5:00 p.m., Denver, Colorado time ("Close of
Business") on July 11, 2007, the tenth anniversary of the Effective Grant Date
(the "Option Term"), subject to earlier termination as provided in paragraphs 8
and 12(b) below, an option to purchase from the Company, at the price per share
set forth on Schedule 1 hereto (the "Series A Stock Option Price"), the number
of shares of Series A Common Stock of the Company ("Series A Stock") set forth
on said Schedule 1 (the "Series A Stock Option Shares"). The Series A Stock
Option Price and Series A Stock Option Shares are subject to adjustment pursuant
to paragraph 12 below. This option is as a "Nonqualified Stock Option" and is
hereinafter referred to as the "Series A Stock Option".
2. GRANT OF STOCK APPRECIATION RIGHTS. Subject to the terms and
conditions herein and in tandem with the Series A Stock Option, the Grantee
shall also have, during the Option Term, subject to earlier termination as
provided in paragraphs 8 and 12(b) below, a stock appreciation right with
respect to each Series A Stock Option Share (individually, a "Series A Stock
Tandem SAR" and collectively, the "Series A Stock Tandem SARs"). Upon exercise
of a Series A Stock Tandem SAR in accordance with this Agreement, the Company
shall, subject to paragraph 6 below, make payment as follows:
<PAGE> 2
(a) the amount of payment shall equal the amount by which the
Fair Market Value of the Series A Stock Option Share on the date of
exercise of the Series A Stock Tandem SAR exceeds the Series A Stock
Option Price; and
(b) payment of the amount determined in accordance with clause
(a) shall be made in the sole discretion of the Committee in shares of
Series A Stock (valued at their Fair Market Value as of the date of
exercise of such Series A Stock Tandem SAR), in cash, or partly in cash
and partly in shares of Series A Stock.
3. REDUCTION UPON EXERCISE. The exercise of any number of Series A Stock
Tandem SARs shall cause a corresponding reduction in the number of Series A
Stock Option Shares which shall apply against the Series A Stock Option Shares
then available for purchase. The exercise of the Series A Stock Option to
purchase any number of Series A Stock Option Shares shall cause a corresponding
reduction in the number of Series A Stock Tandem SARs.
4. CONDITIONS OF EXERCISE; VESTING. The Series A Stock Option and Series
A Stock Tandem SARs are exercisable only in accordance with the conditions
stated in this paragraph.
(a) Except as otherwise provided in paragraphs 8 and 12(b) below
and in this paragraph 4, the Series A Stock Option may only be exercised
to the extent the Series A Stock Option Shares have become available for
purchase in accordance with the following schedule:
<TABLE>
<CAPTION>
Percentage of Series A Stock Option
Date Shares Available for Purchase
---- -----------------------------
<S> <C>
Effective Grant Date 20%
First Anniversary of Effective Grant Date 40%
Second Anniversary of Effective Grant Date 60%
Third Anniversary of Effective Grant Date 80%
Fourth Anniversary of Effective Grant Date 100%
</TABLE>
Notwithstanding the foregoing, subject to the provisions of
paragraph 8 of this Agreement, all Series A Stock Option Shares shall
become available for purchase if during the Option Term Grantee's
directorship with the Company shall cease for any reason other than
voluntary termination by Grantee.
(b) A Series A Stock Tandem SAR with respect to a Series A Stock
Option Share shall be exercisable only if the Series A Stock Option
Share is then available for purchase in accordance with subparagraph
(a).
(c) To the extent the Series A Stock Option or Series A Stock
Tandem SARs become exercisable, such Series A Stock Option or Series A
Stock Tandem SARs may be
-2-
<PAGE> 3
exercised in whole or in part (at any time or from time to time, except
as otherwise provided herein) until expiration of the Option Term or
earlier termination thereof.
(d) Grantee acknowledges and agrees that the Committee, in its
discretion and as contemplated by Section 7.5 of the Plan, (i) at any
time before complete termination of the Series A Stock Option, may
accelerate the time or times at which the Series A Stock Option may be
exercised in whole or in part (without reducing the term of such Option)
and (ii) may adopt rules and regulations from time to time after the
date hereof with respect to the exercise of any Award and that the
exercise by Grantee of such Award will be subject to the further
condition that such exercise is made in accordance with all such rules
and regulations as the Committee may determine are applicable thereto.
5. MANNER OF EXERCISE. The Series A Stock Option or a Series A Stock
Tandem SAR may be exercised only by delivering to the Company all of the
following and shall be considered exercised (as to the number of Series A Stock
Option Shares or Series A Stock Tandem SARs specified in the notice referred to
in subparagraph (a) below) on the later of (i) the date of exercise designated
in the written notice referred to in subparagraph (a) below (or if the date so
designated is not a business day, the first business day following such date) or
(ii) the first business day on which the Company has received all of the
following:
(a) Written notice, in such form as the Committee may require,
stating that Grantee is exercising the Series A Stock Option and/or the
Series A Stock Tandem SAR, setting forth the date of such exercise and
designating, among other things, the number of Series A Stock Option
Shares to be purchased and/or the number of Series A Stock Tandem SARs
to be exercised; the aggregate purchase price to be paid by Grantee (in
the case of the exercise of Series A Stock Option Shares) and the manner
in which such payment is being made;
(b) If the Series A Stock Option is to be exercised, payment of
the Series A Stock Option Price for each Series A Stock Option Share to
be purchased in cash or in such other form, or combination of forms, as
the Committee, in its sole discretion, may permit, including (i) cash,
(ii) check, (iii) promissory note, (iv) whole shares of Series A Stock
or Series B Stock that the Grantee has owned for a period of at least
six months prior to the date of exercise, (v) the withholding of shares
of Series A Stock issuable upon such exercise of the Series A Stock
Option, (vi) the delivery, together with a properly executed exercise
notice, of irrevocable instructions to a broker to deliver promptly to
the Company the amount of sale or loan proceeds required to pay the
purchase price, (vii) any combination of the foregoing methods of
payment, or (viii) such other consideration and method of payment as may
be permitted for the issuance of shares under the Delaware General
Corporation Law;
(c) Payment of, or other provision acceptable to the Committee
for, any and all withholding taxes required to be withheld by the
Company upon such exercise in accordance with paragraph 6 hereof; and
-3-
<PAGE> 4
(d) Any other documentation that the Committee may reasonably
require (including, without limitation, proof satisfactory to the
Committee that the Award is then exercisable for the number of Series A
Stock Option Shares or Series A Stock Tandem SARs).
6. MANDATORY WITHHOLDING FOR TAXES. It shall be a condition precedent to
any exercise of the Series A Stock Option Shares or the Series A Stock Tandem
SARs that Grantee make provision acceptable to the Company and in accordance
with the Plan for the payment or withholding of any and all federal, state and
local taxes and other amounts required to be withheld by the Company to satisfy
the tax liability associated with such exercise, as determined by the Board.
7. DELIVERY BY THE COMPANY. As soon as practicable after receipt of all
items referred to in paragraph 5, and subject to the withholding referred to in
paragraph 6, the Company shall deliver to the Grantee certificates issued in
Grantee's name for the number of Series A Stock Option Shares purchased by
exercise of the Series A Stock Option and for the number of shares of Series A
Stock to which the Grantee is entitled by the exercise of Series A Stock Tandem
SARs and any cash payment to which the Grantee is entitled by the exercise of
Series A Stock Tandem SARs. If delivery is by mail, delivery of shares of Series
A Stock shall be deemed effected for all purposes when a stock transfer agent of
the Company shall have deposited the certificates in the United States mail,
addressed to the Grantee, and any cash payment shall be deemed effected when a
Company check, payable to Grantee and in an amount equal to the amount of the
cash payment, shall have been deposited in the United States mail, addressed to
the Grantee.
8. EARLY TERMINATION OF OPTION AND TANDEM SARS. Unless otherwise
determined by the Committee in its sole discretion, the Series A Stock Option
and Series A Stock Tandem SARs shall terminate, prior to the expiration of the
Series A Stock Option Term, at the time specified below:
(a) If Grantee voluntarily elects to terminate his directorship
during the Option Term, then the Series A Stock Option and Series A
Stock Tandem SARs shall cease to vest as of the date of termination of
Grantee's directorship and shall terminate at the Close of Business on
the first business day following the expiration of the 90-day period
which began on the date of termination of Grantee's directorship.
(b) If Grantee ceases to be a director of the Company during the
Option Term for any reason other than voluntary termination, including,
but not limited to the death of Grantee, the Series A Stock Option and
Series A Stock Tandem SARs shall terminate at the Close of Business on
the first business day following the expiration of the one-year period
which began on the date of death or date of termination of Grantee's
directorship.
In any event in which the Series A Stock Option and Series A
Stock Tandem SARs remain exercisable for a period of time following the date of
termination of Grantee's directorship as provided above, the Series A Stock
Option and Series A Stock Tandem SARs may be exercised
-4-
<PAGE> 5
during such period of time only to the extent the same were exercisable as
provided in paragraph 4 above on such date of termination of Grantee's
directorship. Notwithstanding any period of time referenced in this paragraph 8
or any other provision of this paragraph to the contrary, the Series A Stock
Option and all Series A Stock Tandem SARs shall in any event terminate upon the
expiration of the Option Term.
9. AUTOMATIC EXERCISE OF SERIES A STOCK TANDEM SARS. Immediately prior
to the termination of the Series A Stock Option, as provided in paragraph 8
above, or the expiration of the Option Term, all remaining Series A Stock Tandem
SARs shall be deemed to have been exercised by the Grantee.
10. NONTRANSFERABILITY OF SERIES A STOCK OPTION AND SERIES A STOCK
TANDEM SARS. During Grantee's lifetime, the Series A Stock Option and Series A
Stock Tandem SARs are not transferable (voluntarily or involuntarily) other than
pursuant to a domestic relations order and, except as otherwise required
pursuant to a domestic relations order, are exercisable only by the Grantee or
Grantee's court appointed legal representative. The Grantee may designate a
beneficiary or beneficiaries to whom the Series A Stock Option and Series A
Stock Tandem SARs shall pass upon Grantee's death and may change such
designation from time to time by filing a written designation of beneficiary or
beneficiaries with the Committee on the form annexed hereto as Exhibit B or such
other form as may be prescribed by the Committee, provided that no such
designation shall be effective unless so filed prior to the death of Grantee. If
no such designation is made or if the designated beneficiary does not survive
the Grantee's death, the Series A Stock Option and Series A Stock Tandem SARs
shall pass by will or the laws of descent and distribution. Following Grantee's
death, the Series A Stock Option and any Series A Stock Tandem SARs, if
otherwise exercisable, may be exercised by the person to whom such option or
right passes according to the foregoing and such person shall be deemed the
Grantee for purposes of any applicable provisions of this Agreement.
11. NO SHAREHOLDER RIGHTS; NO GUARANTEE OF DIRECTORSHIP.
(a) The Grantee shall not be deemed for any purpose to be, or to
have any of the rights of, a stockholder of the Company with respect to
any shares of Series A Stock as to which this Agreement relates until
such shares shall have been issued to Grantee by the Company.
Furthermore, the existence of this Agreement shall not affect in any way
the right or power of the Company or its stockholders to accomplish any
corporate act.
(b) Nothing contained in this Agreement, and no action by the
Company or the Committee with respect hereto, shall confer or be
construed to confer on Grantee any right to continue as a director of
the Company.
12. ADJUSTMENTS.
-5-
<PAGE> 6
(a) The Series A Stock Option and Series A Stock Tandem SARs
shall be subject to adjustment (including, without limitation, as to the
number of Series A Stock Option Shares and the Series A Stock Option
Price per share) in the sole discretion of the Committee and in such
manner as the Committee may deem equitable and appropriate in connection
with the occurrence of any of the events described in, and in accordance
with the provisions of, Section 4.2 of the Plan following the Effective
Grant Date.
(b) In the event of any Approved Transaction, Board Change or
Control Purchase, the Series A Stock Option and all Series A Stock
Tandem SARs shall become exercisable in full without regard to paragraph
4(a); provided, however, that to the extent not theretofore exercised
the Series A Stock Option and all Series A Stock Tandem SARs shall
terminate, unless otherwise determined by the Board, upon the first to
occur of the consummation of the Approved Transaction, the expiration of
the Series A Stock Option Term or the earlier termination of the Series
A Stock Option and Series A Stock Tandem SARs pursuant to paragraph 8
hereof. Notwithstanding the foregoing, the Committee may, in its
discretion, determine that the Series A Stock Option and Series A Stock
Tandem SARs will not become exercisable on an accelerated basis in
connection with an Approved Transaction and/or will not terminate if not
exercised prior to consummation of the Approved Transaction, if the
Board or the surviving or acquiring corporation, as the case may be,
shall have taken or made effective provision for the taking of such
action as in the opinion of the Committee is equitable and appropriate
to substitute a new Award for the Award evidenced by this Agreement or
to assume this Agreement and the Award evidenced hereby and in order to
make such new or assumed Award, as nearly as may be practicable,
equivalent to the Award evidenced by this Agreement as then in effect
(but before giving effect to any acceleration of the exercisability
hereof unless otherwise determined by the Committee), taking into
account, to the extent applicable, the kind and amount of securities,
cash or other assets into or for which the Series A Stock may be
changed, converted or exchanged in connection with the Approved
Transaction.
13. RESTRICTIONS IMPOSED BY LAW. Grantee acknowledges that neither the
Series A Stock Option nor any of the Series A Stock Option Shares has been
registered under the Securities Act of 1933 and that the Series A Stock Option
Shares may not be transferred in the absence of such registration or the
availability of an exemption therefrom under such Act or the rules and
regulations of the Securities and Exchange Commission promulgated thereunder.
Neither the Company nor any other person shall have any obligation to register
any Series A Stock Option Shares, or any transfer of Series A Stock Option
Shares, under the Securities Act of 1933, the Securities Exchange Act of 1934 or
any other state or federal securities law. Certificates representing Series A
Stock Option Shares purchased by Grantee hereunder may bear such restrictive and
other legends as counsel for the Company shall require in order to insure
compliance with any such law or any rule or regulation promulgated thereunder.
Without limiting the generality of Section 11.9 of the Plan, the Grantee agrees
that Grantee will not exercise the Series A Stock Option or any Series A Stock
Tandem SAR and that the Company will not be obligated to deliver any shares of
Series A Stock or make any cash payment, if counsel to the Company determines
that such exercise, delivery or payment would violate
-6-
<PAGE> 7
any applicable law or any rule or regulation of any governmental authority or
any rule or regulation of, or agreement of the Company with, any securities
exchange or association upon which the Series A Stock is listed or quoted. The
Company shall in no event be obligated to take any affirmative action in order
to cause the exercise of the Series A Stock Option or any Series A Stock Tandem
SAR or the resulting delivery of shares of Series A Stock or other payment to
comply with any such law, rule, regulation or agreement.
14. NOTICE. Unless the Company notifies the Grantee in writing of a
different procedure, any notice or other communication to the Company with
respect to this Agreement shall be in writing and shall be:
(a) delivered personally to the following address:
TCI Music, Inc.
c/o Liberty Media Corporation
8101 East Prentice Avenue
Suite 500
Englewood, Colorado 80111
or
(b) sent by first class mail, postage prepaid and addressed as
follows:
TCI Music, Inc.
c/o Tele-Communications, Inc.
5619 DTC Parkway
Englewood, Colorado 80111
Attention: Legal Department
Any notice or other communication to the Grantee with respect to this Agreement
shall be in writing and shall be delivered personally, or shall be sent by first
class mail, postage prepaid, to Grantee's address as listed in the records of
the Company on the Effective Grant Date, unless the Company has received written
notification from the Grantee of a change of address.
15. AMENDMENT. Notwithstanding any other provisions hereof, this
Agreement may be supplemented or amended from time to time as approved by the
Committee as contemplated by Section 11.8 of the Plan. Without limiting the
generality of the foregoing, without the consent of the Grantee,
(a) this Agreement may be amended or supplemented (i) to cure any
ambiguity or to correct or supplement any provision herein which may be
defective or inconsistent with any other provision herein, or (ii) to
add to the covenants and agreements of the Company for the benefit of
Grantee or surrender any right or power reserved to or conferred upon
the
-7-
<PAGE> 8
Company in this Agreement, subject, however, to any required approval of
the Company's stockholders and, provided, in each case, that such
changes or corrections shall not adversely affect the rights of Grantee
with respect to the Award evidenced hereby, or (iii) to make such other
changes as the Company, upon advice of counsel, determines are necessary
or advisable because of the adoption or promulgation of, or change in or
of the interpretation of, any law or governmental rule or regulation,
including any applicable federal or state securities laws; and
(b) subject to Section 11.8 of the Plan and any required approval
of the Company's stockholders, the Award evidenced by this Agreement may
be canceled by the Committee and a new Award made in substitution
therefor, provided that the Award so substituted shall satisfy all of
the requirements of the Plan as of the date such new Award is made and
no such action shall adversely affect the Series A Stock Option or any
Series A Stock Tandem SAR to the extent then exercisable.
16. GOVERNING LAW. This Agreement shall be governed by, and construed in
accordance with, the internal laws of the State of Delaware.
17. CONSTRUCTION. References in this Agreement to "this Agreement" and
the words "herein," "hereof," "hereunder" and similar terms include all Exhibits
and Schedules appended hereto, including the Plan. This Agreement is entered
into, and the Award evidenced hereby is granted, pursuant to the Plan and shall
be governed by and construed in accordance with the Plan and the administrative
interpretations adopted by the Committee thereunder. All decisions of the
Committee upon questions regarding the Plan or this Agreement shall be
conclusive. Unless otherwise expressly stated herein, in the event of any
inconsistency between the terms of the Plan and this Agreement, the terms of the
Plan shall control. The headings of the paragraphs of this Agreement have been
included for convenience of reference only, are not to be considered a part
hereof and shall in no way modify or restrict any of the terms or provisions
hereof.
18. DUPLICATE ORIGINALS. The Company and the Grantee may sign any number
of copies of this Agreement. Each signed copy shall be an original, but all of
them together represent the same agreement.
19. RULES BY COMMITTEE. The rights of the Grantee and obligations of the
Company hereunder shall be subject to such reasonable rules and regulations as
the Committee may adopt from time to time hereafter.
20. ENTIRE AGREEMENT. This Agreement is in satisfaction of and in lieu
of all prior discussions and agreements, oral or written, between the Company
and Grantee regarding the subject matter hereof. Grantee and the Company hereby
declare and represent that no promise or agreement not herein expressed has been
made and that this Agreement contains the entire agreement between the parties
hereto with respect to the Series A Stock Options and Series A Stock Tandem SARs
and
-8-
<PAGE> 9
replaces and makes null and void any prior agreements between Grantee and the
Company regarding the Series A Stock Options.
21. GRANTEE ACCEPTANCE. Grantee shall signify acceptance of the terms
and conditions of this Agreement by signing in the space provided at the end
hereof and returning a signed copy to the Company.
TCI MUSIC, INC.
By: /s/ JOANNE WENDY KIM
-------------------------------------
Name: Joanne Wendy Kim
------------------------------------
Title: Vice President-Finance
-----------------------------------
ACCEPTED:
/s/ DAVID B. KOFF
-----------------------------------------
Name: David B. Koff, Grantee
------------------------------------
-9-
<PAGE> 10
Schedule 1 to Non-Qualified Stock Option
and Stock Appreciation Rights Agreement
dated as of July 11, 1997
TCI MUSIC, INC. 1997 INCENTIVE PLAN
Grantee: David B. Koff
Grant Date: July 11, 1997
Option Price: $6.25 per share
Option Shares: 100,000 shares of Series A TCI Music Common Stock ("Series
A Stock"), $.01 par value per share.
-10-
<PAGE> 1
EXHIBIT 10.11
TCI MUSIC, INC.
1997 STOCK INCENTIVE PLAN
NON-QUALIFIED STOCK OPTION AND
STOCK APPRECIATION RIGHTS AGREEMENT
THIS AGREEMENT (this "Agreement") is made as of the 11th day of
July, 1997 (the "Effective Grant Date"), by and between TCI MUSIC, INC., a
Delaware corporation (the "Company"), and the person signing adjacent to the
caption "Grantee" on the signature page hereof (the "Grantee").
The Company has adopted the TCI Music, Inc. 1997 Stock Incentive
Plan (the "Plan"), a copy of which is attached to this Agreement as Exhibit A
and by this reference made a part hereof, for the benefit of certain eligible
persons as set forth in the Plan. Capitalized terms used and not otherwise
defined herein shall have the meaning ascribed thereto in the Plan.
Pursuant to the Plan, the Committee has determined that it is in
the interests of the Company and its stockholders to grant the options and
rights provided herein in order to provide Grantee with additional remuneration
for services rendered, to encourage Grantee to remain in the employ of the
Company or its Subsidiaries and/or to increase Grantee's personal interest in
the continued success and progress of the Company by providing a method whereby
Grantee is encouraged to invest in the capital stock of the Company.
The Company and Grantee therefore agree as follows:
1. GRANT OF OPTION; OPTION TERM. Subject to the terms and
conditions herein, the Company grants to the Grantee during the period
commencing on the Effective Grant Date and expiring at 5:00 p.m., Denver,
Colorado time ("Close of Business") on July 11, 2007, the tenth anniversary of
the Effective Grant Date (the "Option Term"), subject to earlier termination as
provided in paragraphs 8 and 12(b) below, an option to purchase from the
Company, at the price per share set forth on Schedule 1 hereto (the "Series A
Stock Option Price"), the number of shares of Series A Common Stock of the
Company ("Series A Stock") set forth on said Schedule 1 (the "Series A Stock
Option Shares"). The Series A Stock Option Price and Series A Stock Option
Shares are subject to adjustment pursuant to paragraph 12 below. This option is
as a "Nonqualified Stock Option" and is hereinafter referred to as the "Series A
Stock Option".
2. GRANT OF STOCK APPRECIATION RIGHTS. Subject to the terms and
conditions herein and in tandem with the Series A Stock Option, the Grantee
shall also have, during the Option Term, subject to earlier termination as
provided in paragraphs 8 and 12(b) below, a stock appreciation right with
respect to each Series A Stock Option Share (individually, a "Series A Stock
Tandem SAR" and
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<PAGE> 2
collectively, the "Series A Stock Tandem SARs"). Upon exercise of a Series A
Stock Tandem SAR in accordance with this Agreement, the Company shall, subject
to paragraph 6 below, make payment as follows:
(a) the amount of payment shall equal the amount by which
the Fair Market Value of the Series A Stock Option Share on the date of
exercise of the Series A Stock Tandem SAR exceeds the Series A Stock
Option Price; and
(b) payment of the amount determined in accordance with
clause (a) shall be made in the sole discretion of the Committee in
shares of Series A Stock (valued at their Fair Market Value as of the
date of exercise of such Series A Stock Tandem SAR), in cash, or partly
in cash and partly in shares of Series A Stock.
3. REDUCTION UPON EXERCISE. The exercise of any number of Series A
Stock Tandem SARs shall cause a corresponding reduction in the number of Series
A Stock Option Shares which shall apply against the Series A Stock Option Shares
then available for purchase. The exercise of the Series A Stock Option to
purchase any number of Series A Stock Option Shares shall cause a corresponding
reduction in the number of Series A Stock Tandem SARs.
4. CONDITIONS OF EXERCISE; VESTING. The Series A Stock Option and
Series A Stock Tandem SARs are exercisable only in accordance with the
conditions stated in this paragraph.
(a) Except as otherwise provided in paragraph 12(b) below or
in the last sentence of this subparagraph (a), the Series A Stock Option
may only be exercised to the extent the Series A Stock Option Shares
have become available for purchase in accordance with the following
schedule:
<TABLE>
<CAPTION>
Percentage of Series A Stock Option
Date Shares Available for Purchase
---- -----------------------------------
<S> <C>
Effective Grant Date 20%
First Anniversary of Effective Grant Date 40%
Second Anniversary of Effective Grant Date 60%
Third Anniversary of Effective Grant Date 80%
Fourth Anniversary of Effective Grant Date 100%
</TABLE>
Notwithstanding the foregoing, all Series A Stock Option Shares shall
become available for purchase if during the Option Term Grantee's
employment with the Company and its Subsidiaries (i) shall terminate by
reason of (x) termination by the Company or any Subsidiary without cause
(as defined in Section 11.2(b) of the Plan), (y) termination by Grantee
for good reason (as defined herein) or (z) Disability, (ii) shall
terminate pursuant to provisions of a written employment agreement, if
any, between the Grantee and the Company which expressly permits the
Grantee to terminate such employment upon the occurrence of specified
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<PAGE> 3
events (other than the giving of notice and passage of time), or (iii)
shall terminate because Grantee dies while employed by the Company or a
Subsidiary.
(b) A Series A Stock Tandem SAR with respect to a Series A
Stock Option Share shall be exercisable only if the Series A Stock
Option Share is then available for purchase in accordance with
subparagraph (a).
(c) To the extent the Series A Stock Option or Series A
Stock Tandem SARs become exercisable, such Series A Stock Option or
Series A Stock Tandem SARs may be exercised in whole or in part (at any
time or from time to time, except as otherwise provided herein) until
expiration of the Option Term or earlier termination thereof.
(d) Grantee acknowledges and agrees that the Committee may,
in its discretion and as contemplated by Section 7.5 of the Plan, adopt
rules and regulations from time to time after the date hereof with
respect to the exercise of Series A Stock Tandem SARs and that the
exercise by Grantee of the Series A Tandem SARs will be subject to the
further condition that such exercise is made in accordance with all such
rules and regulations as the Committee may determine are applicable
thereto.
5. MANNER OF EXERCISE. The Series A Stock Option or a Series A
Stock Tandem SAR may be exercised only by delivering to the Company all of the
following and shall be considered exercised (as to the number of Series A Stock
Option Shares or Series A Stock Tandem SARs specified in the notice referred to
in subparagraph (a) below) on the later of (i) the date of exercise designated
in the written notice referred to in subparagraph (a) below (or if the date so
designated is not a business day, the first business day following such date) or
(ii) the first business day on which the Company has received all of the
following:
(a) Written notice, in such form as the Committee may
require, stating that Grantee is exercising the Series A Stock Option
and/or the Series A Stock Tandem SAR, setting forth the date of such
exercise and designating, among other things, the date of exercise, the
number of Series A Stock Option Shares to be purchased and/or the number
of Series A Stock Tandem SARs to be exercised; the aggregate purchase
price to be paid by Grantee (in the case of the exercise of Series A
Stock Option Shares) and the manner in which such payment is being paid;
(b) If the Series A Stock Option is to be exercised, payment
of the Series A Stock Option Price for each Series A Stock Option Share
to be purchased in cash or in such other form, or combination of forms,
of payment contemplated by Section 6.6(a) of the Plan as the Committee,
in its sole discretion, may permit;
(c) Payment of, or other provision acceptable to the
Committee for, any and all withholding taxes required to be withheld by
the Company upon such exercise in accordance with paragraph 6 hereof;
and
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<PAGE> 4
(d) Any other documentation that the Committee may
reasonably require (including, without limitation, proof satisfactory to
the Committee that the Award is then exercisable for the number of
Series A Stock Option Shares or Series A Stock Tandem SARs).
6. MANDATORY WITHHOLDING FOR TAXES. It shall be a condition
precedent to any exercise of the Series A Stock Option Shares or the Series A
Stock Tandem SARs that Grantee make provision acceptable to the Company and in
accordance with the Plan for the payment or withholding of any and all federal,
state and local taxes and other amounts required to be withheld by the Company
to satisfy the tax liability associated with such exercise, as determined by the
Board.
7. DELIVERY BY THE COMPANY. As soon as practicable after receipt of
all items referred to in paragraph 5, and subject to the withholding referred to
in paragraph 6, the Company shall deliver to the Grantee certificates issued in
Grantee's name for the number of Series A Stock Option Shares purchased by
exercise of the Series A Stock Option and for the number of shares of Series A
Stock to which the Grantee is entitled by the exercise of Series A Stock Tandem
SARs and any cash payment to which the Grantee is entitled by the exercise of
Series A Stock Tandem SARs. If delivery is by mail, delivery of shares of Series
A Stock shall be deemed effected for all purposes when a stock transfer agent of
the Company shall have deposited the certificates in the United States mail,
addressed to the Grantee, and any cash payment shall be deemed effected when a
Company check, payable to Grantee and in an amount equal to the amount of the
cash payment, shall have been deposited in the United States mail, addressed to
the Grantee.
8. EARLY TERMINATION OF OPTION AND TANDEM SARS. Unless otherwise
determined by the Committee, in its sole discretion, the Series A Stock Option
and Series A Stock Tandem SARs shall terminate, prior to the expiration of the
Series A Stock Option Term, at the time specified below:
(a) If Grantee's employment with the Company and its
Subsidiaries terminates (i) other than (x) by the Company for "cause"
(as defined in Section 11.2(b) of the Plan) (see (d) below), (y) by the
Grantee with "good reason" (as defined herein) (see (e) below) or (z) by
the Company without cause (see (e) below), and (ii) other than (x) by
reason of death or Disability (see (b) and (c) below), (y) with the
written consent of the Company or the applicable Subsidiary (see (e)
below) or (z) without such consent if such termination is pursuant to
provisions of a written employment agreement (see (e) below), if any,
between the Grantee and the Company which expressly permit the Grantee
to terminate such employment upon the occurrence of specified events
(other than the giving of notice and passage of time), then the Series A
Stock Option and all Series A Stock Tandem SARs shall terminate at the
Close of Business on the first business day following the expiration of
the 90-day period which began on the date of termination of Grantee's
employment;
(b) If Grantee dies while employed by the Company or a
Subsidiary, or prior to the expiration of a period of time following
termination of Grantee's employment during which the Series A Stock
Option and Series A Stock Tandem SARs remain exercisable as
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<PAGE> 5
provided in paragraph (a), the Series A Stock Option and all Series A
Stock Tandem SARs shall terminate at the Close of Business on the first
business day following the expiration of the one-year period which began
on the date of death;
(c) If Grantee's employment with the Company and its
Subsidiaries terminates by reason of Disability, then the Series A Stock
Option and all Series A Stock Tandem SARs shall terminate at the Close
of Business on the first business day following the expiration of the
one-year period which began on the date of termination of Grantee's
employment;
(d) If Grantee's employment with the Company and its
Subsidiaries is terminated by the Company for "cause" (as defined in
Section 11.2(b) of the Plan), then the Series A Stock Option and all
Series A Stock Tandem SARs shall terminate immediately upon such
termination of Grantee's employment; or
(e) If Grantee's employment (i) is terminated by Grantee (x)
with "good reason" (as defined herein), (y) with the written consent of
the Company or the applicable Subsidiary or (z) pursuant to provisions
of a written employment agreement, if any, between the Grantee and the
Company which expressly permit the Grantee to terminate such employment
upon the occurrence of specified events (other than the giving of notice
and passage of time), or (ii) by the Company without "cause" (as defined
in Section 11.2(b) of the Plan), then the Series A Stock Option Term
shall terminate early only as provided for in paragraph 8(b) above or
12(b) below or as provided pursuant to the terms of any such written
employment agreement.
In any event in which the Series A Stock Option and Series A
Stock Tandem SARs remain exercisable for a period of time following the date of
termination of Grantee's employment as provided above, the Series A Stock Option
and Series A Stock Tandem SARs may be exercised during such period of time only
to the extent the same were exercisable as provided in paragraph 4 above on such
date of termination of Grantee's employment. A change of employment is not a
termination of employment within the meaning of this paragraph 8 provided that,
after giving effect to such change, the Grantee continues to be an employee of
the Company or any Subsidiary. Notwithstanding any period of time referenced in
this paragraph 8 or any other provision of this paragraph to the contrary, the
Series A Stock Option and all Series A Stock Tandem SARs shall in any event
terminate upon the expiration of the Option Term.
"Good reason" for purposes of the Agreement shall be deemed to
have occurred upon the happening of any of the following:
(i) any reduction in Grantee's annual rate of salary;
(ii) either (x) a failure of the Company to continue in
effect any employee benefit plan in which Grantee was participating or
(y) the taking of any action by the Company that would adversely affect
Grantee's participation in, or materially reduce Grantee's benefits
under, any such employee benefit plan, unless such failure or such
5
<PAGE> 6
taking of any action, adversely affects the senior members of the
corporate management of the Company generally;
(iii) the assignment to Grantee of duties and responsibilities
that are materially more oppressive or onerous than those attendant to
Grantee's position immediately after the date hereof;
(iv) the relocation of the office location as assigned to
Grantee by the Company to a location more than 20 miles from Grantee's
then current location without Grantee's consent; or
(v) the failure of the Company to obtain, prior to the time
of any reorganization, merger, consolidation, disposition of all or
substantially all of the assets of the Company or similar transaction
effective after the date hereof, in which the Company is not the
surviving person, the unconditional assumption in writing or by
operation of law of the Company's obligations to Grantee under this
Agreement by each direct successor to the Company in any such
transaction.
9. AUTOMATIC EXERCISE OF SERIES A STOCK TANDEM SARS. Immediately
prior to the termination of the Series A Stock Option, as provided in paragraph
8 above, or the expiration of the Option Term, all remaining Series A Stock
Tandem SARs shall be deemed to have been exercised by the Grantee.
10. NONTRANSFERABILITY OF SERIES A STOCK OPTION AND SERIES A STOCK
TANDEM SARS. During Grantee's lifetime, the Series A Stock Option and Series A
Stock Tandem SARs are not transferable (voluntarily or involuntarily) other than
pursuant to a domestic relations order and, except as otherwise required
pursuant to a domestic relations order, are exercisable only by the Grantee or
Grantee's court appointed legal representative. The Grantee may designate a
beneficiary or beneficiaries to whom the Series A Stock Option and Series A
Stock Tandem SARs shall pass upon Grantee's death and may change such
designation from time to time by filing a written designation of beneficiary or
beneficiaries with the Committee on the form annexed hereto as Exhibit B or such
other form as may be prescribed by the Committee, provided that no such
designation shall be effective unless so filed prior to the death of Grantee. If
no such designation is made or if the designated beneficiary does not survive
the Grantee's death, the Series A Stock Option and Series A Stock Tandem SARs
shall pass by will or the laws of descent and distribution. Following Grantee's
death, the Series A Stock Option and any Series A Stock Tandem SARs, if
otherwise exercisable, may be exercised by the person to whom such option or
right passes according to the foregoing and such person shall be deemed the
Grantee for purposes of any applicable provisions of this Agreement.
11. NO SHAREHOLDER RIGHTS; NO GUARANTEE OF EMPLOYMENT.
(a) The Grantee shall not be deemed for any purpose to be,
or to have any of the rights of, a stockholder of the Company with
respect to any shares of Series A Stock as to
6
<PAGE> 7
which this Agreement relates until such shares shall have been issued to
Grantee by the Company. Furthermore, the existence of this Agreement
shall not affect in any way the right or power of the Company or its
stockholders to accomplish any corporate act, including, without
limitation, the acts referred to in Section 11.17 of the Plan.
(b) Nothing contained in this Agreement, and no action by
the Company or the Committee with respect hereto, shall confer or be
construed to confer on Grantee any right to continue in the employ of
the Company or any Subsidiary or interfere in any way with the right of
the Company or any employing Subsidiary to terminate Grantee's
employment at any time, with or without "cause."
12. ADJUSTMENTS.
(a) The Series A Stock Option and Series A Stock Tandem SARs
shall be subject to adjustment (including, without limitation, as to the
number of Series A Stock Option Shares and the Series A Stock Option
Price per share) in the sole discretion of the Committee and in such
manner as the Committee may deem equitable and appropriate in connection
with the occurrence of any of the events described in Section 4.2 of the
Plan following the Effective Grant Date; provided, however, that
adjustments shall be made to the Series A Stock Option if, and in the
same manner that, adjustments are being made in connection with the
occurrence of any such event to any other option granted under the Plan.
Adjustments to the Option Price shall be made on a per share basis so
that the aggregate remaining Series A Stock Option Price is unchanged.
(b) In the event of any Approved Transaction, Board Change
or Control Purchase, the Series A Stock Option and all Series A Stock
Tandem SARs shall become exercisable in full without regard to paragraph
4(a); provided, however, that to the extent not theretofore exercised
the Series A Stock Option and all Series A Stock Tandem SARs shall
terminate upon the first to occur of the consummation of the Approved
Transaction, the expiration of the Series A Stock Option Term or the
earlier termination of the Series A Stock Option and Series A Stock
Tandem SARs pursuant to paragraph 8 hereof. Notwithstanding the
foregoing, the Committee may, in its discretion, determine that the
Series A Stock Option and Series A Stock Tandem SARs will not become
exercisable on an accelerated basis in connection with an Approved
Transaction and/or will not terminate if not exercised prior to
consummation of the Approved Transaction, if the Board or the surviving
or acquiring corporation, as the case may be, shall have taken or made
effective provision for the taking of such action as in the opinion of
the Committee is equitable and appropriate to substitute a new Award for
the Award evidenced by this Agreement or to assume this Agreement and
the Award evidenced hereby and in order to make such new or assumed
Award, as nearly as may be practicable, equivalent to the Award
evidenced by this Agreement as then in effect (but before giving effect
to any acceleration of the exercisability hereof unless otherwise
determined by the Committee), taking into account, to the extent
applicable, the kind and amount of securities, cash or other assets into
or for which the Series A Stock may be changed, converted or exchanged
in connection with the Approved Transaction.
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<PAGE> 8
13. RESTRICTIONS IMPOSED BY LAW. Grantee acknowledges that neither
the Series A Stock Option nor any of the Series A Stock Option Shares has been
registered under the Securities Act of 1933 and that the Series A Stock Option
Shares may not be transferred in the absence of such registration or the
availability of an exemption therefrom under such Act or the rules and
regulations of the Securities and Exchange Commission promulgated thereunder.
Neither the Company nor any other person shall have any obligation to register
any Series A Stock Option Shares, or any transfer of Series A Stock Option
Shares, under the Securities Act of 1933, the Securities Exchange Act of 1934 or
any other state or federal securities law. Certificates representing Series A
Stock Option Shares purchased by Grantee hereunder may bear such restrictive and
other legends as counsel for the Company shall require in order to insure
compliance with any such law or any rule or regulation promulgated thereunder.
Without limiting the generality of Section 11.9 of the Plan, the Grantee agrees
that Grantee will not exercise the Series A Stock Option or any Series A Stock
Tandem SAR and that the Company will not be obligated to deliver any shares of
Series A Stock or make any cash payment, if counsel to the Company determines
that such exercise, delivery or payment would violate any applicable law or any
rule or regulation of any governmental authority or any rule or regulation of,
or agreement of the Company with, any securities exchange or association upon
which the Series A Stock is listed or quoted. The Company shall in no event be
obligated to take any affirmative action in order to cause the exercise of the
Series A Stock Option or any Series A Stock Tandem SAR or the resulting delivery
of shares of Series A Stock or other payment to comply with any such law, rule,
regulation or agreement.
14. NOTICE. Unless the Company notifies the Grantee in writing of a
different procedure, any notice or other communication to the Company with
respect to this Agreement shall be in writing and shall be:
(a) delivered personally to the following address:
TCI Music, Inc.
c/o Liberty Media Corporation
8101 East Prentice Avenue
Suite 500
Englewood, Colorado 80111
or
(b) sent by first class mail, postage prepaid and addressed
as follows:
TCI Music, Inc.
c/o Tele-Communications, Inc.
5619 DTC Parkway
Englewood, Colorado 80111
Attention: Legal Department
8
<PAGE> 9
Any notice or other communication to the Grantee with respect to this Agreement
shall be in writing and shall be delivered personally, or shall be sent by first
class mail, postage prepaid, to Grantee's address as listed in the records of
the Company on the Effective Grant Date, unless the Company has received written
notification from the Grantee of a change of address.
15. AMENDMENT. Notwithstanding any other provisions hereof, this
Agreement may be supplemented or amended from time to time as approved by the
Committee as contemplated by Section 11.8 of the Plan. Without limiting the
generality of the foregoing, without the consent of the Grantee,
(a) this Agreement may be amended or supplemented (i) to
cure any ambiguity or to correct or supplement any provision herein
which may be defective or inconsistent with any other provision herein,
or (ii) to add to the covenants and agreements of the Company for the
benefit of Grantee or surrender any right or power reserved to or
conferred upon the Company in this Agreement, subject, however, to any
required approval of the Company's stockholders and, provided, in each
case, that such changes or corrections shall not adversely affect the
rights of Grantee with respect to the Award evidenced hereby, or (iii)
to make such other changes as the Company, upon advice of counsel,
determines are necessary or advisable because of the adoption or
promulgation of, or change in or of the interpretation of, any law or
governmental rule or regulation, including any applicable federal or
state securities laws; and
(b) subject to Section 11.8 of the Plan and any required
approval of the Company's stockholders, the Award evidenced by this
Agreement may be cancelled by the Committee and a new Award made in
substitution therefor, provided that the Award so substituted shall
satisfy all of the requirements of the Plan as of the date such new
Award is made and no such action shall adversely affect the Series A
Stock Option or any Series A Stock Tandem SAR to the extent then
exercisable.
16. GOVERNING LAW. This Agreement shall be governed by, and
construed in accordance with, the internal laws of the State of Delaware.
17. CONSTRUCTION. References in this Agreement to "this Agreement"
and the words "herein," "hereof," "hereunder" and similar terms include all
Exhibits and Schedules appended hereto, including the Plan. This Agreement is
entered into, and the Award evidenced hereby is granted, pursuant to the Plan
and shall be governed by and construed in accordance with the Plan and the
administrative interpretations adopted by the Committee thereunder. All
decisions of the Committee upon questions regarding the Plan or this Agreement
shall be conclusive. Unless otherwise expressly stated herein, in the event of
any inconsistency between the terms of the Plan and this Agreement, the terms of
the Plan shall control. The headings of the paragraphs of this Agreement have
been included for convenience of reference only, are not to be considered a part
hereof and shall in no way modify or restrict any of the terms or provisions
hereof.
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<PAGE> 10
18. DUPLICATE ORIGINALS. The Company and the Grantee may sign any
number of copies of this Agreement. Each signed copy shall be an original, but
all of them together represent the same agreement.
19. RULES BY COMMITTEE. The rights of the Grantee and obligations of
the Company hereunder shall be subject to such reasonable rules and regulations
as the Committee may adopt from time to time hereafter.
20. ENTIRE AGREEMENT. This Agreement is in satisfaction of and in
lieu of all prior discussions and agreements, oral or written, between the
Company and Grantee regarding the subject matter hereof. Grantee and the Company
hereby declare and represent that no promise or agreement not herein expressed
has been made and that this Agreement contains the entire agreement between the
parties hereto with respect to the Series A Stock Options and Series A Stock
Tandem SARs and replaces and makes null and void any prior agreements between
Grantee and the Company regarding the Series A Stock Options.
21. GRANTEE ACCEPTANCE. Grantee shall signify acceptance of the
terms and conditions of this Agreement by signing in the space provided at the
end hereof and returning a signed copy to the Company.
TCI MUSIC, INC.
By: /s/ JOANNE WENDY KIM
--------------------------------------------
Name: Joanne Wendy Kim
------------------------------------------
Title: Vice President - Finance
-----------------------------------------
ACCEPTED:
/s/ LON A. TROXEL
-----------------------------------------------
Name: Lon A. Troxel
------------------------------------------
10
<PAGE> 11
Schedule 1 to Non-Qualified Stock Option
and Stock Appreciation Rights Agreement
dated as of July 11, 1997
TCI MUSIC, INC. 1997 INCENTIVE PLAN
Grantee: Lon A. Troxel
Grant Date: July 11, 1997
Option Price: $6.25 per share
Option Shares: 200,000 shares of Series A TCI Music Common Stock ("Series
A Stock"), $.01 par value per share.
11
<PAGE> 1
Exhibit 10.12
TCI MUSIC, INC.
NONEMPLOYEE DIRECTOR
NON-QUALIFIED STOCK OPTION AND
STOCK APPRECIATION RIGHTS AGREEMENT
THIS AGREEMENT (this "Agreement") is made as of the 11th day of July,
1997 (the "Effective Grant Date"), by and between TCI MUSIC, INC., a Delaware
corporation (the "Company"), and J.C. Sparkman ("Grantee").
The Board has determined that it is in the interests of the Company and
its stockholders to grant the options and rights provided herein in order to
encourage Grantee to serve in the capacity as a director of the Company and to
increase Grantee's personal interest in the continued success and progress of
the Company.
The Company and Grantee therefore agree as follows:
1. DEFINITIONS. Capitalized terms not defined elsewhere in the
Agreement shall have the following meanings (whether used in the singular or
plural):
"Approved Transaction" means any transaction in which the Board (or, if
approval of the Board is not required as a matter of law, the stockholders of
the Company) shall approve (i) any consolidation or merger of the Company, or
binding share exchange, pursuant to which shares of Common Stock would be
changed or converted into or exchanged for cash, securities or other property,
other than any such transaction in which the holders of the Common Stock
immediately prior to such transaction have the same proportionate ownership of
the Common Stock of, and voting power with respect to, the surviving corporation
immediately after such transaction, (ii) any merger, consolidation or binding
share exchange to which the Company is a party as a result of which the persons
who are holders of the Common Stock immediately prior thereto have less than a
majority of the combined voting power of the outstanding capital stock of the
Company ordinarily (and apart from the rights accruing under special
circumstances) having the right to vote in the election of directors immediately
following such merger, consolidation or binding share exchange, (iii) the
adoption of any plan or proposal for the liquidation or dissolution of the
Company, or (iv) any sale, lease, exchange or other transfer (in one transaction
or a series of related transactions) of all, or substantially all, of the assets
of the Company.
"Award" means the grant of Series A Stock Options and Series A Stock
Tandem SARs under this Agreement.
"Board" means the Board of Directors of the Company.
"Board Change" means, during any period of two consecutive years,
individuals who at the beginning of such period constituted the entire Board
cease for any reason to constitute a majority thereof unless the election, or
the nomination for election, of each new director was approved by a
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<PAGE> 2
vote of at least two-thirds of the directors then still in office who were
directors at the beginning of the period.
"Code" means the Internal Revenue Code of 1986, as amended from time to
time, or any successor statute or statutes thereto.
"Common Stock" means the Series A Stock and the Series B Stock.
"Control Purchase" means any transaction (or series of related
transactions) in which (i) any person (as such term is defined in Sections
13(d)(3) and 14(d)(2) of the Exchange Act), corporation or other entity (other
than Tele-Communications, Inc. ("TCI"), the Company, any Subsidiary or any
employee benefit plan sponsored by the Company or any Subsidiary, or any
Controlling Person (as defined below)) shall purchase any common stock of the
Company (or securities convertible into common stock of the Company) for cash,
securities or any other consideration pursuant to a tender offer or exchange
offer, without the prior consent of the Board, or (ii) any person (as so
defined), corporation or other entity (other than TCI, the Company, any
Subsidiary, any employee benefit plan sponsored by the Company or any
Subsidiary, or any Controlling Person) shall become the "beneficial owner" (as
such term is defined in Rule 13d-3 under the Exchange Act), directly or
indirectly, of securities of the Company representing 20% or more of the
combined voting power of the then outstanding securities of the Company
ordinarily (and apart from rights accruing under special circumstances) having
the right to vote in the election of directors (calculated as provided in Rule
13d-3(d) under the Exchange Act in the case of rights to acquire the Company's
securities), other than in a transaction (or series of related transactions)
approved by the Board or the board of TCI. For purposes of this definition,
"Controlling Person" means each of (a) the Chairman of the Board, the President
and each of the directors of the Company as of the Effective Date of this
Agreement, (b) John C. Malone, (c) Bob Magness, (d) the respective family
members, estates and heirs of each of the persons referred to in clauses (a)
through (c) above and any trust or other investment vehicle for the primary
benefit of any of such persons or their respective family members or heirs and
(e) Kearns-Tribune Corporation, a Delaware corporation. As used with respect to
any person, the term "family member" means the spouse, siblings and lineal
descendants of such person.
"Exchange Act" means the Securities Exchange Act of 1934, as amended
from time to time, or any successor statute or statutes thereto. Reference to
any specific Exchange Act section shall include any successor section.
"Fair Market Value" of a share of Series A Stock or Series B Stock on
any day means the last sale price (or, if no last sale price is reported, the
average of the high bid and low asked prices) for a share of Series A Stock or
Series B Stock, as applicable, on such day (or, if such day is not a trading
day, on the next preceding trading day) as reported on NASDAQ or, if not
reported on NASDAQ, as quoted by the National Quotation Bureau Incorporated, or
if the Series A Stock or Series B Stock is listed on an exchange, on the
principal exchange on which the Series A Stock or Series B Stock, as applicable,
is listed. If for any day the Fair Market Value of a share of Series A Stock or
Series B Stock, as applicable, is not determinable by any of the foregoing
means, then the
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<PAGE> 3
Fair Market Value for such day shall be determined in good faith by the Board on
the basis of such quotations and other considerations as the Board deems
appropriate.
"NASDAQ" means the NASDAQ Stock Market.
"Nonqualified Stock Option" means a stock option that is not an
incentive stock option under Section 422 of the Code.
2. GRANT OF OPTION; OPTION TERM. Subject to the terms and
conditions herein, the Company grants to the Grantee during the period
commencing on the Effective Grant Date and expiring at 5:00 p.m., Denver,
Colorado time ("Close of Business") on July 11, 2007, the tenth anniversary of
the Effective Grant Date (the "Option Term"), subject to earlier termination as
provided in paragraphs 9 and 13(b) below, an option to purchase from the
Company, at the price per share set forth on Schedule 1 hereto (the "Series A
Stock Option Price"), the number of shares of Series A Common Stock of the
Company ("Series A Stock") set forth on said Schedule 1 (the "Series A Stock
Option Shares"). The Series A Stock Option Price and Series A Stock Option
Shares are subject to adjustment pursuant to paragraph 13 below. This option is
as a "Nonqualified Stock Option" and is hereinafter referred to as the "Series A
Stock Option".
3. GRANT OF STOCK APPRECIATION RIGHTS. Subject to the terms and
conditions herein and in tandem with the Series A Stock Option, the Grantee
shall also have, during the Option Term, subject to earlier termination as
provided in paragraphs 9 and 13(b) below, a stock appreciation right with
respect to each Series A Stock Option Share (individually, a "Series A Stock
Tandem SAR" and collectively, the "Series A Stock Tandem SARs"). Upon exercise
of a Series A Stock Tandem SAR in accordance with this Agreement, the Company
shall, subject to paragraph 7 below, make payment as follows:
(a) the amount of payment shall equal the amount by which
the Fair Market Value of the Series A Stock Option Share on the date of
exercise of the Series A Stock Tandem SAR exceeds the Series A Stock
Option Price; and
(b) payment of the amount determined in accordance with
clause (a) shall be made, in the sole discretion of the Board, in shares
of Series A Stock (valued at their Fair Market Value as of the date of
exercise of such Series A Stock Tandem SAR), in cash, or partly in cash
and partly in shares of Series A Stock.
4. REDUCTION UPON EXERCISE. The exercise of any number of Series A
Stock Tandem SARs shall cause a corresponding reduction in the number of Series
A Stock Option Shares which shall apply against the Series A Stock Option Shares
then available for purchase. The exercise of the Series A Stock Option to
purchase any number of Series A Stock Option Shares shall cause a corresponding
reduction in the number of Series A Stock Tandem SARs.
5. CONDITIONS OF EXERCISE; VESTING. The Series A Stock Option and
Series A Stock Tandem SARs are exercisable only in accordance with the
conditions stated in this paragraph.
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<PAGE> 4
(a) Except as otherwise provided in paragraphs 9 and 13(b)
below and in this paragraph 5, the Series A Stock Option may only be
exercised to the extent the Series A Stock Option Shares have become
available for purchase in accordance with the following schedule:
<TABLE>
<CAPTION>
Percentage of Series A Stock Option
Date Shares Available for Purchase
---- -----------------------------------
<S> <C>
Effective Grant Date 20%
First Anniversary of Effective Grant Date 40%
Second Anniversary of Effective Grant Date 60%
Third Anniversary of Effective Grant Date 80%
Fourth Anniversary of Effective Grant Date 100%
</TABLE>
Notwithstanding the foregoing, subject to the provisions of
paragraph 9 of this Agreement, all Series A Stock Option Shares shall
become available for purchase if during the Option Term Grantee's status
as a director of the Company shall cease for any reason other than
voluntary termination by Grantee.
(b) A Series A Stock Tandem SAR with respect to a Series A
Stock Option Share shall be exercisable only if the Series A Stock
Option Share is then available for purchase in accordance with
subparagraph (a).
(c) To the extent the Series A Stock Option or Series A
Stock Tandem SARs become exercisable, such Series A Stock Option or
Series A Stock Tandem SARs may be exercised in whole or in part (at any
time or from time to time, except as otherwise provided herein) until
expiration of the Series A Stock Option Term or earlier termination
thereof.
(d) Grantee acknowledges and agrees that the Board, in its
discretion, (i) at any time before complete termination of the Series A
Stock Option, may accelerate the time or times at which the Option may
be exercised in whole or in part (without reducing the term of such
Option) and (ii) may adopt rules and regulations from time to time after
the date hereof with respect to the exercise of any Award and that the
exercise by Grantee of such Award will be subject to the further
condition that such exercise is made in accordance with all such rules
and regulations as the Board may determine are applicable thereto.
6. MANNER OF EXERCISE. The Series A Stock Option or a Series A
Stock Tandem SAR may be exercised only by delivering to the Company all of the
following and shall be considered exercised (as to the number of Series A Stock
Option Shares or Series A Stock Tandem SARs specified in the notice referred to
in subparagraph (a) below) on the later of (i) the date of exercise designated
in the written notice referred to in subparagraph (a) below (or if the date so
designated is not a business day, the first business day following such date) or
(ii) the first business day on which the Company has received all of the
following:
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<PAGE> 5
(a) Written notice, in such form as the Board may require,
stating that Grantee is exercising the Series A Stock Option and/or the
Series A Stock Tandem SAR, setting forth the date of such exercise and
designating, among other things, the number of Series A Stock Option
Shares to be purchased and/or the number of Series A Stock Tandem SARs
to be exercised, the aggregate purchase price to be paid by Grantee (in
the case of the exercise of Series A Stock Option Shares) and the manner
in which such payment is being made;
(b) If the Series A Stock Option is to be exercised, payment
of the Series A Stock Option Price for each Series A Stock Option Share
to be purchased in such form, or combination of forms, as the Board, in
its sole discretion, may permit, including (i) cash, (ii) check, (iii)
promissory note, (iv) whole shares of Series A Stock or Series B Stock
that the Grantee has owned for a period of at least six months prior to
the date of exercise, (v) the withholding of shares of Series A Stock
issuable upon such exercise of the Series A Stock Option, (vi) the
delivery, together with a properly executed exercise notice, of
irrevocable instructions to a broker to deliver promptly to the Company
the amount of sale or loan proceeds required to pay the purchase price,
(vii) any combination of the foregoing methods of payment, or (viii)
such other consideration and method of payment as may be permitted for
the issuance of shares under the Delaware General Corporation Law;
(c) Payment of, or other provision acceptable to the Board
for, any and all withholding taxes required to be withheld by the
Company upon exercise of such Award in accordance with paragraph 7
hereof; and
(d) Any other documentation that the Board may reasonably
require (including, without limitation, proof satisfactory to the Board
that the Award is then exercisable for the number of Series A Stock
Option Shares or Series A Stock Tandem SARs).
7. MANDATORY WITHHOLDING FOR TAXES. It shall be a condition
precedent to any exercise of the Series A Stock Option Shares or the Series A
Stock Tandem SARs that Grantee make provision acceptable to the Company for the
payment or withholding of any and all federal, state and local taxes and other
amounts required to be withheld by the Company to satisfy the tax liability
associated with such exercise, as determined by the Board.
8. DELIVERY BY THE COMPANY. As soon as practicable after receipt of
all items referred to in paragraph 6, and subject to the withholding referred to
in paragraph 7, the Company shall deliver to the Grantee certificates issued in
Grantee's name for the number of Series A Stock Option Shares purchased by
exercise of the Series A Stock Option and for the number of shares of Series A
Stock to which the Grantee is entitled by the exercise of Series A Stock Tandem
SARs and any cash payment to which the Grantee is entitled by the exercise of
Series A Stock Tandem SARs. If delivery is by mail, delivery of shares of Series
A Stock shall be deemed effected for all purposes when a stock transfer agent of
the Company shall have deposited the certificates in the United States mail,
addressed to the Grantee, and any cash payment shall be deemed effected when a
Company check, payable to Grantee and in an amount equal to the amount of the
cash payment, shall have been deposited in the United States mail, addressed to
the Grantee.
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<PAGE> 6
9. EARLY TERMINATION OF OPTION AND TANDEM SARS. Unless otherwise
determined by the Board in its sole discretion, the Series A Stock Option and
Series A Stock Tandem SARs shall terminate, prior to the expiration of the
Series A Stock Option Term, at the time specified below:
(a) If Grantee voluntarily elects to terminate his
directorship during the Option Term, then the Series A Stock Option and
Series A Stock Tandem SARs shall cease to vest as of the date of
termination of Grantee's directorship and shall terminate at the Close
of Business on the first business day following the expiration of the
90-day period which began on the date of termination of Grantee's
directorship.
(b) If Grantee ceases to be a director of the Company during
the Option Term for any reason other than voluntary termination,
including, but not limited to, the death of Grantee, the Series A Stock
Option and Series A Stock Tandem SARs shall terminate at the Close of
Business on the first business day following the expiration of the
one-year period which began on the date of death or date of termination
of Grantee's directorship.
In any event in which the Series A Stock Option and Series A Stock
Tandem SARs remain exercisable for a period of time following the date of
termination of Grantee's directorship as provided above, the Series A Stock
Option and Series A Stock Tandem SARs may be exercised during such period of
time only to the extent the same were exercisable as provided in paragraph 5
above on such date of termination of Grantee's directorship. Notwithstanding any
period of time referenced in this paragraph 9 or any other provision of this
paragraph that may be construed to the contrary, the Series A Stock Option and
all Series A Stock Tandem SARs shall in any event terminate upon the expiration
of the Option Term.
10. AUTOMATIC EXERCISE OF SERIES A STOCK TANDEM SARS. Immediately
prior to the termination of the Series A Stock Option, as provided in paragraph
9 above, or the expiration of the Option Term, all remaining Series A Stock
Tandem SARs shall be deemed to have been exercised by the Grantee.
11. NONTRANSFERABILITY OF SERIES A STOCK OPTION AND SERIES A STOCK
TANDEM SARS. During Grantee's lifetime, the Series A Stock Option and Series A
Stock Tandem SARs are not transferable (voluntarily or involuntarily) other than
pursuant to a domestic relations order and, except as otherwise required
pursuant to a domestic relations order, are exercisable only by the Grantee or
Grantee's court appointed legal representative. The Grantee may designate a
beneficiary or beneficiaries to whom the Series A Stock Option and Series A
Stock Tandem SARs shall pass upon Grantee's death and may change such
designation from time to time by filing a written designation of beneficiary or
beneficiaries with the Board on the form annexed hereto as Exhibit B or such
other form as may be prescribed by the Board, provided that no such designation
shall be effective unless so filed prior to the death of Grantee. If no such
designation is made or if the designated beneficiary does not survive the
Grantee's death, the Series A Stock Option and Series A Stock Tandem SARs shall
pass by will or the laws of descent and distribution. Following Grantee's death,
the Series A Stock Option and any Series A Stock Tandem SARs, if otherwise
exercisable,
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<PAGE> 7
may be exercised by the person to whom such option or right passes according to
the foregoing and such person shall be deemed the Grantee for purposes of any
applicable provisions of this Agreement.
12. NO SHAREHOLDER RIGHTS; NO GUARANTEE OF DIRECTORSHIP.
(a) The Grantee shall not be deemed for any purpose to be,
or to have any of the rights of, a stockholder of the Company with
respect to any shares of Series A Stock as to which this Agreement
relates until such shares shall have been issued to Grantee by the
Company. Furthermore, the existence of this Agreement shall not affect
in any way the right or power of the Company or its stockholders to
accomplish any corporate act.
(b) Nothing contained in this Agreement, and no action by
the Company or the Board with respect hereto, shall confer or be
construed to confer on Grantee any right to continue as a director of
the Company.
13. ADJUSTMENTS.
(a) The Series A Stock Option and Series A Stock Tandem SARs
shall be subject to adjustment (including, without limitation, as to the
number of Series A Stock Option Shares and the Series A Stock Option
Price per share) in the sole discretion of the Board and in such manner
as the Board may deem equitable and appropriate.
(b) In the event of any Approved Transaction, Board Change
or Control Purchase, the Series A Stock Option and all Series A Stock
Tandem SARs shall become exercisable in full without regard to paragraph
5(a); provided, however, that to the extent not theretofore exercised
the Series A Stock Option and all Series A Stock Tandem SARs shall
terminate, unless otherwise determined by the Board, upon the first to
occur of the consummation of the Approved Transaction, the expiration of
the Series A Stock Option Term or the earlier termination of the Series
A Stock Option and Series A Stock Tandem SARs pursuant to paragraph 9
hereof. Notwithstanding the foregoing, the Board may, in its discretion,
determine that the Series A Stock Option and Series A Stock Tandem SARs
will not become exercisable on an accelerated basis in connection with
an Approved Transaction and/or will not terminate if not exercised prior
to consummation of the Approved Transaction, if the Board or the
surviving or acquiring corporation, as the case may be, shall have taken
or made effective provision for the taking of such action as in the
opinion of the Board is equitable and appropriate to substitute a new
award for the Award evidenced by this Agreement or to assume this
Agreement and the Award evidenced hereby and in order to make such new
award or assumed Award, as nearly as may be practicable, equivalent to
the Award evidenced by this Agreement as then in effect (but before
giving effect to any acceleration of the exercisability hereof unless
otherwise determined by the Board), taking into account, to the extent
applicable, the kind and amount of securities, cash or other assets into
or for which the Series A Stock may be changed, converted or exchanged
in connection with the Approved Transaction.
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<PAGE> 8
14. RESTRICTIONS IMPOSED BY LAW. Grantee acknowledges that neither
the Series A Stock Option nor any of the Series A Stock Option Shares has been
registered under the Securities Act of 1933 and that the Series A Stock Option
Shares may not be transferred in the absence of such registration or the
availability of an exemption therefrom under such Act or the rules and
regulations of the Securities and Exchange Commission promulgated thereunder.
Neither the Company nor any other person shall have any obligation to register
any Series A Stock Option Shares, or any transfer of Series A Stock Option
Shares, under the Securities Act of 1933, the Securities Exchange Act of 1934 or
any other state or federal securities law. Certificates representing Series A
Stock Option Shares purchased by Grantee hereunder may bear such restrictive and
other legends as counsel for the Company shall require in order to insure
compliance with any such law or any rule or regulation promulgated thereunder.
The Grantee agrees that Grantee will not exercise the Series A Stock Option or
any Series A Stock Tandem SAR and that the Company will not be obligated to
deliver any shares of Series A Stock or make any cash payment, if counsel to the
Company determines that such exercise, delivery or payment would violate any
applicable law or any rule or regulation of any governmental authority or any
rule or regulation of, or agreement of the Company with, any securities exchange
or association upon which the Series A Stock is listed or quoted. The Company
shall in no event be obligated to take any affirmative action in order to cause
the exercise of the Series A Stock Option or any Series A Stock Tandem SAR or
the resulting delivery of shares of Series A Stock or other payment to comply
with any such law, rule, regulation or agreement.
15. NOTICE. Unless the Company notifies the Grantee in writing of a
different procedure, any notice or other communication to the Company with
respect to this Agreement shall be in writing and shall be:
(a) delivered personally to the following address:
TCI Music, Inc.
c/o Liberty Media Corporation
8101 East Prentice Avenue, Suite 500
Englewood, Colorado 80111
or
(b) sent by first class mail, postage prepaid and addressed
as follows:
TCI Music, Inc.
c/o Tele-Communications, Inc.
5619 DTC Parkway
Englewood, Colorado 80111
Attn: Legal Department
Any notice or other communication to the Grantee with respect to this Agreement
shall be in writing and shall be delivered personally, or shall be sent by first
class mail, postage prepaid, to Grantee's address as listed in the records of
the Company on the Effective Grant Date, unless the Company has received written
notification from the Grantee of a change of address.
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<PAGE> 9
16. AMENDMENT. Notwithstanding any other provisions hereof, this
Agreement may be supplemented or amended from time to time as approved by the
Board. Without limiting the generality of the foregoing, without the consent of
the Grantee,
(a) this Agreement may be amended or supplemented (i) to
cure any ambiguity or to correct or supplement any provision herein
which may be defective or inconsistent with any other provision herein,
or (ii) to add to the covenants and agreements of the Company for the
benefit of Grantee or surrender any right or power reserved to or
conferred upon the Company in this Agreement, subject, however, to any
required approval of the Company's stockholders and, provided, in each
case, that such changes or corrections shall not adversely affect the
rights of Grantee with respect to the Award evidenced hereby, or (iii)
to make such other changes as the Company, upon advice of counsel,
determines are necessary or advisable because of the adoption or
promulgation of, or change in or of the interpretation of, any law or
governmental rule or regulation, including any applicable federal or
state securities laws; and
(b) subject to any required approval of the Company's
stockholders, the Award evidenced by this Agreement may be canceled by
the Board and a new Award made in substitution therefor, provided that
no such action shall adversely affect the Series A Stock Option or any
Series A Stock Tandem SAR to the extent then exercisable.
17. GOVERNING LAW. This Agreement shall be governed by, and
construed in accordance with, the internal laws of the State of Delaware.
18. CONSTRUCTION. References in this Agreement to "this Agreement"
and the words "herein," "hereof," "hereunder" and similar terms include all
Exhibits and Schedules appended hereto. All decisions of the Board upon
questions regarding this Agreement shall be conclusive. The headings of the
paragraphs of this Agreement have been included for convenience of reference
only, are not to be considered a part hereof and shall in no way modify or
restrict any of the terms or provisions hereof.
19. DUPLICATE ORIGINALS. The Company and the Grantee may sign any
number of copies of this Agreement. Each signed copy shall be an original, but
all of them together represent the same agreement.
20. RULES BY BOARD. The rights of the Grantee and obligations of the
Company hereunder shall be subject to such reasonable rules and regulations as
the Board may adopt from time to time hereafter.
21. ENTIRE AGREEMENT. This Agreement is in satisfaction of and in
lieu of all prior discussions and agreements, oral or written, between the
Company and Grantee regarding the subject matter hereof. Grantee and the Company
hereby declare and represent that no promise or agreement not herein expressed
has been made and that this Agreement contains the entire agreement between
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<PAGE> 10
the parties hereto with respect to the Series A Stock Options and Series A Stock
Tandem SARs and replaces and makes null and void any prior agreements between
Grantee and the Company regarding the Series A Stock Options.
22. GRANTEE ACCEPTANCE. Grantee shall signify acceptance of the
terms and conditions of this Agreement by signing in the space provided at the
end hereof and returning a signed copy to the Company.
TCI MUSIC, INC.
By: /s/ JOANNE WENDY KIM
--------------------------------------------
Name: Joanne Wendy Kim
------------------------------------------
Title: Vice President - Finance
-----------------------------------------
ACCEPTED:
/s/ J.C. Sparkman
-----------------------------------------------
J.C. Sparkman, Grantee
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<PAGE> 11
Schedule 1 to Non-Qualified Stock Option
and Stock Appreciation Rights Agreement
dated as of July 11, 1997
TCI MUSIC, INC.
NON-QUALIFIED STOCK OPTION AND
STOCK APPRECIATION RIGHTS AGREEMENT
Grantee: J.C. Sparkman
Grant Date: July 11, 1997
Option Price: $6.25 per share
Option Shares: 100,000 shares of Series A TCI Music Common Stock ("Series
A Stock"), $.01 par value per share.
11
<PAGE> 1
Exhibit 10.13
TCI MUSIC, INC.
NONEMPLOYEE DIRECTOR
NON-QUALIFIED STOCK OPTION AND
STOCK APPRECIATION RIGHTS AGREEMENT
THIS AGREEMENT (this "Agreement") is made as of the 11th day of July,
1997 (the "Effective Grant Date"), by and between TCI MUSIC, INC., a Delaware
corporation (the "Company"), and Leo J. Hindery, Jr. ("Grantee").
The Board has determined that it is in the interests of the Company and
its stockholders to grant the options and rights provided herein in order to
encourage Grantee to serve in the capacity as a director of the Company and to
increase Grantee's personal interest in the continued success and progress of
the Company.
The Company and Grantee therefore agree as follows:
1. DEFINITIONS. Capitalized terms not defined elsewhere in the
Agreement shall have the following meanings (whether used in the singular or
plural):
"Approved Transaction" means any transaction in which the Board (or, if
approval of the Board is not required as a matter of law, the stockholders of
the Company) shall approve (i) any consolidation or merger of the Company, or
binding share exchange, pursuant to which shares of Common Stock would be
changed or converted into or exchanged for cash, securities or other property,
other than any such transaction in which the holders of the Common Stock
immediately prior to such transaction have the same proportionate ownership of
the Common Stock of, and voting power with respect to, the surviving corporation
immediately after such transaction, (ii) any merger, consolidation or binding
share exchange to which the Company is a party as a result of which the persons
who are holders of the Common Stock immediately prior thereto have less than a
majority of the combined voting power of the outstanding capital stock of the
Company ordinarily (and apart from the rights accruing under special
circumstances) having the right to vote in the election of directors immediately
following such merger, consolidation or binding share exchange, (iii) the
adoption of any plan or proposal for the liquidation or dissolution of the
Company, or (iv) any sale, lease, exchange or other transfer (in one transaction
or a series of related transactions) of all, or substantially all, of the assets
of the Company.
"Award" means the grant of Series A Stock Options and Series A Stock
Tandem SARs under this Agreement.
"Board" means the Board of Directors of the Company.
"Board Change" means, during any period of two consecutive years,
individuals who at the beginning of such period constituted the entire Board
cease for any reason to constitute a majority thereof unless the election, or
the nomination for election, of each new director was approved by a
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<PAGE> 2
vote of at least two-thirds of the directors then still in office who were
directors at the beginning of the period.
"Code" means the Internal Revenue Code of 1986, as amended from time to
time, or any successor statute or statutes thereto.
"Common Stock" means the Series A Stock and the Series B Stock.
"Control Purchase" means any transaction (or series of related
transactions) in which (i) any person (as such term is defined in Sections
13(d)(3) and 14(d)(2) of the Exchange Act), corporation or other entity (other
than Tele-Communications, Inc. ("TCI"), the Company, any Subsidiary or any
employee benefit plan sponsored by the Company or any Subsidiary, or any
Controlling Person (as defined below)) shall purchase any common stock of the
Company (or securities convertible into common stock of the Company) for cash,
securities or any other consideration pursuant to a tender offer or exchange
offer, without the prior consent of the Board, or (ii) any person (as so
defined), corporation or other entity (other than TCI, the Company, any
Subsidiary, any employee benefit plan sponsored by the Company or any
Subsidiary, or any Controlling Person) shall become the "beneficial owner" (as
such term is defined in Rule 13d-3 under the Exchange Act), directly or
indirectly, of securities of the Company representing 20% or more of the
combined voting power of the then outstanding securities of the Company
ordinarily (and apart from rights accruing under special circumstances) having
the right to vote in the election of directors (calculated as provided in Rule
13d-3(d) under the Exchange Act in the case of rights to acquire the Company's
securities), other than in a transaction (or series of related transactions)
approved by the Board or the board of TCI. For purposes of this definition,
"Controlling Person" means each of (a) the Chairman of the Board, the President
and each of the directors of the Company as of the Effective Date of this
Agreement, (b) John C. Malone, (c) Bob Magness, (d) the respective family
members, estates and heirs of each of the persons referred to in clauses (a)
through (c) above and any trust or other investment vehicle for the primary
benefit of any of such persons or their respective family members or heirs and
(e) Kearns-Tribune Corporation, a Delaware corporation. As used with respect to
any person, the term "family member" means the spouse, siblings and lineal
descendants of such person.
"Exchange Act" means the Securities Exchange Act of 1934, as amended
from time to time, or any successor statute or statutes thereto. Reference to
any specific Exchange Act section shall include any successor section.
"Fair Market Value" of a share of Series A Stock or Series B Stock on
any day means the last sale price (or, if no last sale price is reported, the
average of the high bid and low asked prices) for a share of Series A Stock or
Series B Stock, as applicable, on such day (or, if such day is not a trading
day, on the next preceding trading day) as reported on NASDAQ or, if not
reported on NASDAQ, as quoted by the National Quotation Bureau Incorporated, or
if the Series A Stock or Series B Stock is listed on an exchange, on the
principal exchange on which the Series A Stock or Series B Stock, as applicable,
is listed. If for any day the Fair Market Value of a share of Series A Stock or
Series B Stock, as applicable, is not determinable by any of the foregoing
means, then the
2
<PAGE> 3
Fair Market Value for such day shall be determined in good faith by the Board on
the basis of such quotations and other considerations as the Board deems
appropriate.
"NASDAQ" means the NASDAQ Stock Market.
"Nonqualified Stock Option" means a stock option that is not an
incentive stock option under Section 422 of the Code.
2. GRANT OF OPTION; OPTION TERM. Subject to the terms and
conditions herein, the Company grants to the Grantee during the period
commencing on the Effective Grant Date and expiring at 5:00 p.m., Denver,
Colorado time ("Close of Business") on July 11, 2007, the tenth anniversary of
the Effective Grant Date (the "Option Term"), subject to earlier termination as
provided in paragraphs 9 and 13(b) below, an option to purchase from the
Company, at the price per share set forth on Schedule 1 hereto (the "Series A
Stock Option Price"), the number of shares of Series A Common Stock of the
Company ("Series A Stock") set forth on said Schedule 1 (the "Series A Stock
Option Shares"). The Series A Stock Option Price and Series A Stock Option
Shares are subject to adjustment pursuant to paragraph 13 below. This option is
as a "Nonqualified Stock Option" and is hereinafter referred to as the "Series A
Stock Option".
3. GRANT OF STOCK APPRECIATION RIGHTS. Subject to the terms and
conditions herein and in tandem with the Series A Stock Option, the Grantee
shall also have, during the Option Term, subject to earlier termination as
provided in paragraphs 9 and 13(b) below, a stock appreciation right with
respect to each Series A Stock Option Share (individually, a "Series A Stock
Tandem SAR" and collectively, the "Series A Stock Tandem SARs"). Upon exercise
of a Series A Stock Tandem SAR in accordance with this Agreement, the Company
shall, subject to paragraph 7 below, make payment as follows:
(a) the amount of payment shall equal the amount by which
the Fair Market Value of the Series A Stock Option Share on the date of
exercise of the Series A Stock Tandem SAR exceeds the Series A Stock
Option Price; and
(b) payment of the amount determined in accordance with
clause (a) shall be made, in the sole discretion of the Board, in shares
of Series A Stock (valued at their Fair Market Value as of the date of
exercise of such Series A Stock Tandem SAR), in cash, or partly in cash
and partly in shares of Series A Stock.
4. REDUCTION UPON EXERCISE. The exercise of any number of Series A
Stock Tandem SARs shall cause a corresponding reduction in the number of Series
A Stock Option Shares which shall apply against the Series A Stock Option Shares
then available for purchase. The exercise of the Series A Stock Option to
purchase any number of Series A Stock Option Shares shall cause a corresponding
reduction in the number of Series A Stock Tandem SARs.
5. CONDITIONS OF EXERCISE; VESTING. The Series A Stock Option and
Series A Stock Tandem SARs are exercisable only in accordance with the
conditions stated in this paragraph.
3
<PAGE> 4
(a) Except as otherwise provided in paragraphs 9 and 13(b)
below and in this paragraph 5, the Series A Stock Option may only be
exercised to the extent the Series A Stock Option Shares have become
available for purchase in accordance with the following schedule:
<TABLE>
<CAPTION>
Percentage of Series A Stock Option
Date Shares Available for Purchase
---- -----------------------------------
<S> <C>
Effective Grant Date 20%
First Anniversary of Effective Grant Date 40%
Second Anniversary of Effective Grant Date 60%
Third Anniversary of Effective Grant Date 80%
Fourth Anniversary of Effective Grant Date 100%
</TABLE>
Notwithstanding the foregoing, subject to the provisions of
paragraph 9 of this Agreement, all Series A Stock Option Shares shall
become available for purchase if during the Option Term Grantee's status
as a director of the Company shall cease for any reason other than
voluntary termination by Grantee.
(b) A Series A Stock Tandem SAR with respect to a Series A
Stock Option Share shall be exercisable only if the Series A Stock
Option Share is then available for purchase in accordance with
subparagraph (a).
(c) To the extent the Series A Stock Option or Series A
Stock Tandem SARs become exercisable, such Series A Stock Option or
Series A Stock Tandem SARs may be exercised in whole or in part (at any
time or from time to time, except as otherwise provided herein) until
expiration of the Series A Stock Option Term or earlier termination
thereof.
(d) Grantee acknowledges and agrees that the Board, in its
discretion, (i) at any time before complete termination of the Series A
Stock Option, may accelerate the time or times at which the Option may
be exercised in whole or in part (without reducing the term of such
Option) and (ii) may adopt rules and regulations from time to time after
the date hereof with respect to the exercise of any Award and that the
exercise by Grantee of such Award will be subject to the further
condition that such exercise is made in accordance with all such rules
and regulations as the Board may determine are applicable thereto.
6. MANNER OF EXERCISE. The Series A Stock Option or a Series A
Stock Tandem SAR may be exercised only by delivering to the Company all of the
following and shall be considered exercised (as to the number of Series A Stock
Option Shares or Series A Stock Tandem SARs specified in the notice referred to
in subparagraph (a) below) on the later of (i) the date of exercise designated
in the written notice referred to in subparagraph (a) below (or if the date so
designated is not a business day, the first business day following such date) or
(ii) the first business day on which the Company has received all of the
following:
4
<PAGE> 5
(a) Written notice, in such form as the Board may require,
stating that Grantee is exercising the Series A Stock Option and/or the
Series A Stock Tandem SAR, setting forth the date of such exercise and
designating, among other things, the number of Series A Stock Option
Shares to be purchased and/or the number of Series A Stock Tandem SARs
to be exercised, the aggregate purchase price to be paid by Grantee (in
the case of the exercise of Series A Stock Option Shares) and the manner
in which such payment is being made;
(b) If the Series A Stock Option is to be exercised, payment
of the Series A Stock Option Price for each Series A Stock Option Share
to be purchased in such form, or combination of forms, as the Board, in
its sole discretion, may permit, including (i) cash, (ii) check, (iii)
promissory note, (iv) whole shares of Series A Stock or Series B Stock
that the Grantee has owned for a period of at least six months prior to
the date of exercise, (v) the withholding of shares of Series A Stock
issuable upon such exercise of the Series A Stock Option, (vi) the
delivery, together with a properly executed exercise notice, of
irrevocable instructions to a broker to deliver promptly to the Company
the amount of sale or loan proceeds required to pay the purchase price,
(vii) any combination of the foregoing methods of payment, or (viii)
such other consideration and method of payment as may be permitted for
the issuance of shares under the Delaware General Corporation Law;
(c) Payment of, or other provision acceptable to the Board
for, any and all withholding taxes required to be withheld by the
Company upon exercise of such Award in accordance with paragraph 7
hereof; and
(d) Any other documentation that the Board may reasonably
require (including, without limitation, proof satisfactory to the Board
that the Award is then exercisable for the number of Series A Stock
Option Shares or Series A Stock Tandem SARs).
7. MANDATORY WITHHOLDING FOR TAXES. It shall be a condition
precedent to any exercise of the Series A Stock Option Shares or the Series A
Stock Tandem SARs that Grantee make provision acceptable to the Company for the
payment or withholding of any and all federal, state and local taxes and other
amounts required to be withheld by the Company to satisfy the tax liability
associated with such exercise, as determined by the Board.
8. DELIVERY BY THE COMPANY. As soon as practicable after receipt of
all items referred to in paragraph 6, and subject to the withholding referred to
in paragraph 7, the Company shall deliver to the Grantee certificates issued in
Grantee's name for the number of Series A Stock Option Shares purchased by
exercise of the Series A Stock Option and for the number of shares of Series A
Stock to which the Grantee is entitled by the exercise of Series A Stock Tandem
SARs and any cash payment to which the Grantee is entitled by the exercise of
Series A Stock Tandem SARs. If delivery is by mail, delivery of shares of Series
A Stock shall be deemed effected for all purposes when a stock transfer agent of
the Company shall have deposited the certificates in the United States mail,
addressed to the Grantee, and any cash payment shall be deemed effected when a
Company check, payable to Grantee and in an amount equal to the amount of the
cash payment, shall have been deposited in the United States mail, addressed to
the Grantee.
5
<PAGE> 6
9. EARLY TERMINATION OF OPTION AND TANDEM SARS. Unless otherwise
determined by the Board in its sole discretion, the Series A Stock Option and
Series A Stock Tandem SARs shall terminate, prior to the expiration of the
Series A Stock Option Term, at the time specified below:
(a) If Grantee voluntarily elects to terminate his
directorship during the Option Term, then the Series A Stock Option and
Series A Stock Tandem SARs shall cease to vest as of the date of
termination of Grantee's directorship and shall terminate at the Close
of Business on the first business day following the expiration of the
90-day period which began on the date of termination of Grantee's
directorship.
(b) If Grantee ceases to be a director of the Company during
the Option Term for any reason other than voluntary termination,
including, but not limited to, the death of Grantee, the Series A Stock
Option and Series A Stock Tandem SARs shall terminate at the Close of
Business on the first business day following the expiration of the
one-year period which began on the date of death or date of termination
of Grantee's directorship.
In any event in which the Series A Stock Option and Series A Stock
Tandem SARs remain exercisable for a period of time following the date of
termination of Grantee's directorship as provided above, the Series A Stock
Option and Series A Stock Tandem SARs may be exercised during such period of
time only to the extent the same were exercisable as provided in paragraph 5
above on such date of termination of Grantee's directorship. Notwithstanding any
period of time referenced in this paragraph 9 or any other provision of this
paragraph that may be construed to the contrary, the Series A Stock Option and
all Series A Stock Tandem SARs shall in any event terminate upon the expiration
of the Option Term.
10. AUTOMATIC EXERCISE OF SERIES A STOCK TANDEM SARS. Immediately
prior to the termination of the Series A Stock Option, as provided in paragraph
9 above, or the expiration of the Option Term, all remaining Series A Stock
Tandem SARs shall be deemed to have been exercised by the Grantee.
11. NONTRANSFERABILITY OF SERIES A STOCK OPTION AND SERIES A STOCK
TANDEM SARS. During Grantee's lifetime, the Series A Stock Option and Series A
Stock Tandem SARs are not transferable (voluntarily or involuntarily) other than
pursuant to a domestic relations order and, except as otherwise required
pursuant to a domestic relations order, are exercisable only by the Grantee or
Grantee's court appointed legal representative. The Grantee may designate a
beneficiary or beneficiaries to whom the Series A Stock Option and Series A
Stock Tandem SARs shall pass upon Grantee's death and may change such
designation from time to time by filing a written designation of beneficiary or
beneficiaries with the Board on the form annexed hereto as Exhibit B or such
other form as may be prescribed by the Board, provided that no such designation
shall be effective unless so filed prior to the death of Grantee. If no such
designation is made or if the designated beneficiary does not survive the
Grantee's death, the Series A Stock Option and Series A Stock Tandem SARs shall
pass by will or the laws of descent and distribution. Following Grantee's death,
the Series A Stock Option and any Series A Stock Tandem SARs, if otherwise
exercisable,
6
<PAGE> 7
may be exercised by the person to whom such option or right passes according to
the foregoing and such person shall be deemed the Grantee for purposes of any
applicable provisions of this Agreement.
12. NO SHAREHOLDER RIGHTS; NO GUARANTEE OF DIRECTORSHIP.
(a) The Grantee shall not be deemed for any purpose to be,
or to have any of the rights of, a stockholder of the Company with
respect to any shares of Series A Stock as to which this Agreement
relates until such shares shall have been issued to Grantee by the
Company. Furthermore, the existence of this Agreement shall not affect
in any way the right or power of the Company or its stockholders to
accomplish any corporate act.
(b) Nothing contained in this Agreement, and no action by
the Company or the Board with respect hereto, shall confer or be
construed to confer on Grantee any right to continue as a director of
the Company.
13. ADJUSTMENTS.
(a) The Series A Stock Option and Series A Stock Tandem SARs
shall be subject to adjustment (including, without limitation, as to the
number of Series A Stock Option Shares and the Series A Stock Option
Price per share) in the sole discretion of the Board and in such manner
as the Board may deem equitable and appropriate.
(b) In the event of any Approved Transaction, Board Change
or Control Purchase, the Series A Stock Option and all Series A Stock
Tandem SARs shall become exercisable in full without regard to paragraph
5(a); provided, however, that to the extent not theretofore exercised
the Series A Stock Option and all Series A Stock Tandem SARs shall
terminate, unless otherwise determined by the Board, upon the first to
occur of the consummation of the Approved Transaction, the expiration of
the Series A Stock Option Term or the earlier termination of the Series
A Stock Option and Series A Stock Tandem SARs pursuant to paragraph 9
hereof. Notwithstanding the foregoing, the Board may, in its discretion,
determine that the Series A Stock Option and Series A Stock Tandem SARs
will not become exercisable on an accelerated basis in connection with
an Approved Transaction and/or will not terminate if not exercised prior
to consummation of the Approved Transaction, if the Board or the
surviving or acquiring corporation, as the case may be, shall have taken
or made effective provision for the taking of such action as in the
opinion of the Board is equitable and appropriate to substitute a new
award for the Award evidenced by this Agreement or to assume this
Agreement and the Award evidenced hereby and in order to make such new
award or assumed Award, as nearly as may be practicable, equivalent to
the Award evidenced by this Agreement as then in effect (but before
giving effect to any acceleration of the exercisability hereof unless
otherwise determined by the Board), taking into account, to the extent
applicable, the kind and amount of securities, cash or other assets into
or for which the Series A Stock may be changed, converted or exchanged
in connection with the Approved Transaction.
7
<PAGE> 8
14. RESTRICTIONS IMPOSED BY LAW. Grantee acknowledges that neither
the Series A Stock Option nor any of the Series A Stock Option Shares has been
registered under the Securities Act of 1933 and that the Series A Stock Option
Shares may not be transferred in the absence of such registration or the
availability of an exemption therefrom under such Act or the rules and
regulations of the Securities and Exchange Commission promulgated thereunder.
Neither the Company nor any other person shall have any obligation to register
any Series A Stock Option Shares, or any transfer of Series A Stock Option
Shares, under the Securities Act of 1933, the Securities Exchange Act of 1934 or
any other state or federal securities law. Certificates representing Series A
Stock Option Shares purchased by Grantee hereunder may bear such restrictive and
other legends as counsel for the Company shall require in order to insure
compliance with any such law or any rule or regulation promulgated thereunder.
The Grantee agrees that Grantee will not exercise the Series A Stock Option or
any Series A Stock Tandem SAR and that the Company will not be obligated to
deliver any shares of Series A Stock or make any cash payment, if counsel to the
Company determines that such exercise, delivery or payment would violate any
applicable law or any rule or regulation of any governmental authority or any
rule or regulation of, or agreement of the Company with, any securities exchange
or association upon which the Series A Stock is listed or quoted. The Company
shall in no event be obligated to take any affirmative action in order to cause
the exercise of the Series A Stock Option or any Series A Stock Tandem SAR or
the resulting delivery of shares of Series A Stock or other payment to comply
with any such law, rule, regulation or agreement.
15. NOTICE. Unless the Company notifies the Grantee in writing of a
different procedure, any notice or other communication to the Company with
respect to this Agreement shall be in writing and shall be:
(a) delivered personally to the following address:
TCI Music, Inc.
c/o Liberty Media Corporation
8101 East Prentice Avenue, Suite 500
Englewood, Colorado 80111
or
(b) sent by first class mail, postage prepaid and addressed
as follows:
TCI Music, Inc.
c/o Tele-Communications, Inc.
5619 DTC Parkway
Englewood, Colorado 80111
Attn: Legal Department
Any notice or other communication to the Grantee with respect to this Agreement
shall be in writing and shall be delivered personally, or shall be sent by first
class mail, postage prepaid, to Grantee's address as listed in the records of
the Company on the Effective Grant Date, unless the Company has received written
notification from the Grantee of a change of address.
8
<PAGE> 9
16. AMENDMENT. Notwithstanding any other provisions hereof, this
Agreement may be supplemented or amended from time to time as approved by the
Board. Without limiting the generality of the foregoing, without the consent of
the Grantee,
(a) this Agreement may be amended or supplemented (i) to
cure any ambiguity or to correct or supplement any provision herein
which may be defective or inconsistent with any other provision herein,
or (ii) to add to the covenants and agreements of the Company for the
benefit of Grantee or surrender any right or power reserved to or
conferred upon the Company in this Agreement, subject, however, to any
required approval of the Company's stockholders and, provided, in each
case, that such changes or corrections shall not adversely affect the
rights of Grantee with respect to the Award evidenced hereby, or (iii)
to make such other changes as the Company, upon advice of counsel,
determines are necessary or advisable because of the adoption or
promulgation of, or change in or of the interpretation of, any law or
governmental rule or regulation, including any applicable federal or
state securities laws; and
(b) subject to any required approval of the Company's
stockholders, the Award evidenced by this Agreement may be canceled by
the Board and a new Award made in substitution therefor, provided that
no such action shall adversely affect the Series A Stock Option or any
Series A Stock Tandem SAR to the extent then exercisable.
17. GOVERNING LAW. This Agreement shall be governed by, and
construed in accordance with, the internal laws of the State of Delaware.
18. CONSTRUCTION. References in this Agreement to "this Agreement"
and the words "herein," "hereof," "hereunder" and similar terms include all
Exhibits and Schedules appended hereto. All decisions of the Board upon
questions regarding this Agreement shall be conclusive. The headings of the
paragraphs of this Agreement have been included for convenience of reference
only, are not to be considered a part hereof and shall in no way modify or
restrict any of the terms or provisions hereof.
19. DUPLICATE ORIGINALS. The Company and the Grantee may sign any
number of copies of this Agreement. Each signed copy shall be an original, but
all of them together represent the same agreement.
20. RULES BY BOARD. The rights of the Grantee and obligations of the
Company hereunder shall be subject to such reasonable rules and regulations as
the Board may adopt from time to time hereafter.
21. ENTIRE AGREEMENT. This Agreement is in satisfaction of and in
lieu of all prior discussions and agreements, oral or written, between the
Company and Grantee regarding the subject matter hereof. Grantee and the Company
hereby declare and represent that no promise or agreement not herein expressed
has been made and that this Agreement contains the entire agreement between
9
<PAGE> 10
the parties hereto with respect to the Series A Stock Options and Series A Stock
Tandem SARs and replaces and makes null and void any prior agreements between
Grantee and the Company regarding the Series A Stock Options.
22. GRANTEE ACCEPTANCE. Grantee shall signify acceptance of the
terms and conditions of this Agreement by signing in the space provided at the
end hereof and returning a signed copy to the Company.
TCI MUSIC, INC.
By: /s/ JOANNE WENDY KIM
--------------------------------------------
Name: Joanne Wendy Kim
------------------------------------------
Title: Vice President - Finance
-----------------------------------------
ACCEPTED:
/s/ LEO J. HINDERY, JR.
-----------------------------------------------
Leo J. Hindery, Jr., Grantee
10
<PAGE> 11
Schedule 1 to Non-Qualified Stock Option
and Stock Appreciation Rights Agreement
dated as of July 11, 1997
TCI MUSIC, INC.
NON-QUALIFIED STOCK OPTION AND
STOCK APPRECIATION RIGHTS AGREEMENT
Grantee: Leo J. Hindery, Jr.
Grant Date: July 11, 1997
Option Price: $6.25 per share
Option Shares: 833,334 shares of Series A TCI Music Common Stock ("Series
A Stock"), $.01 par value per share.
11
<PAGE> 1
EXHIBIT 10.14
TCI MUSIC, INC.
NONEMPLOYEE DIRECTOR
NON-QUALIFIED STOCK OPTION AND
STOCK APPRECIATION RIGHTS AGREEMENT
THIS AGREEMENT (this "Agreement") is made as of the 11th day of July,
1997 (the "Effective Grant Date"), by and between TCI MUSIC, INC., a Delaware
corporation (the "Company"), and Robert R. Bennett ("Grantee").
The Board has determined that it is in the interests of the Company and
its stockholders to grant the options and rights provided herein in order to
encourage Grantee to serve in the capacity as a director of the Company and to
increase Grantee's personal interest in the continued success and progress of
the Company.
The Company and Grantee therefore agree as follows:
1. DEFINITIONS. Capitalized terms not defined elsewhere in the
Agreement shall have the following meanings (whether used in the singular or
plural):
"Approved Transaction" means any transaction in which the Board (or, if
approval of the Board is not required as a matter of law, the stockholders of
the Company) shall approve (i) any consolidation or merger of the Company, or
binding share exchange, pursuant to which shares of Common Stock would be
changed or converted into or exchanged for cash, securities or other property,
other than any such transaction in which the holders of the Common Stock
immediately prior to such transaction have the same proportionate ownership of
the Common Stock of, and voting power with respect to, the surviving corporation
immediately after such transaction, (ii) any merger, consolidation or binding
share exchange to which the Company is a party as a result of which the persons
who are holders of the Common Stock immediately prior thereto have less than a
majority of the combined voting power of the outstanding capital stock of the
Company ordinarily (and apart from the rights accruing under special
circumstances) having the right to vote in the election of directors immediately
following such merger, consolidation or binding share exchange, (iii) the
adoption of any plan or proposal for the liquidation or dissolution of the
Company, or (iv) any sale, lease, exchange or other transfer (in one transaction
or a series of related transactions) of all, or substantially all, of the assets
of the Company.
"Award" means the grant of Series A Stock Options and Series A Stock
Tandem SARs under this Agreement.
"Board" means the Board of Directors of the Company.
"Board Change" means, during any period of two consecutive years,
individuals who at the beginning of such period constituted the entire Board
cease for any reason to constitute a majority thereof unless the election, or
the nomination for election, of each new director was approved by a
1
<PAGE> 2
vote of at least two-thirds of the directors then still in office who were
directors at the beginning of the period.
"Code" means the Internal Revenue Code of 1986, as amended from time to
time, or any successor statute or statutes thereto.
"Common Stock" means the Series A Stock and the Series B Stock.
"Control Purchase" means any transaction (or series of related
transactions) in which (i) any person (as such term is defined in Sections
13(d)(3) and 14(d)(2) of the Exchange Act), corporation or other entity (other
than Tele-Communications, Inc. ("TCI"), the Company, any Subsidiary or any
employee benefit plan sponsored by the Company or any Subsidiary, or any
Controlling Person (as defined below)) shall purchase any common stock of the
Company (or securities convertible into common stock of the Company) for cash,
securities or any other consideration pursuant to a tender offer or exchange
offer, without the prior consent of the Board, or (ii) any person (as so
defined), corporation or other entity (other than TCI, the Company, any
Subsidiary, any employee benefit plan sponsored by the Company or any
Subsidiary, or any Controlling Person) shall become the "beneficial owner" (as
such term is defined in Rule 13d-3 under the Exchange Act), directly or
indirectly, of securities of the Company representing 20% or more of the
combined voting power of the then outstanding securities of the Company
ordinarily (and apart from rights accruing under special circumstances) having
the right to vote in the election of directors (calculated as provided in Rule
13d-3(d) under the Exchange Act in the case of rights to acquire the Company's
securities), other than in a transaction (or series of related transactions)
approved by the Board or the board of TCI. For purposes of this definition,
"Controlling Person" means each of (a) the Chairman of the Board, the President
and each of the directors of the Company as of the Effective Date of this
Agreement, (b) John C. Malone, (c) Bob Magness, (d) the respective family
members, estates and heirs of each of the persons referred to in clauses (a)
through (c) above and any trust or other investment vehicle for the primary
benefit of any of such persons or their respective family members or heirs and
(e) Kearns-Tribune Corporation, a Delaware corporation. As used with respect to
any person, the term "family member" means the spouse, siblings and lineal
descendants of such person.
"Exchange Act" means the Securities Exchange Act of 1934, as amended
from time to time, or any successor statute or statutes thereto. Reference to
any specific Exchange Act section shall include any successor section.
"Fair Market Value" of a share of Series A Stock or Series B Stock on
any day means the last sale price (or, if no last sale price is reported, the
average of the high bid and low asked prices) for a share of Series A Stock or
Series B Stock, as applicable, on such day (or, if such day is not a trading
day, on the next preceding trading day) as reported on NASDAQ or, if not
reported on NASDAQ, as quoted by the National Quotation Bureau Incorporated, or
if the Series A Stock or Series B Stock is listed on an exchange, on the
principal exchange on which the Series A Stock or Series B Stock, as applicable,
is listed. If for any day the Fair Market Value of a share of Series A Stock or
Series B Stock, as applicable, is not determinable by any of the foregoing
means, then the
2
<PAGE> 3
Fair Market Value for such day shall be determined in good faith by the Board on
the basis of such quotations and other considerations as the Board deems
appropriate.
"NASDAQ" means the NASDAQ Stock Market.
"Nonqualified Stock Option" means a stock option that is not an
incentive stock option under Section 422 of the Code.
2. GRANT OF OPTION; OPTION TERM. Subject to the terms and conditions
herein, the Company grants to the Grantee during the period commencing on the
Effective Grant Date and expiring at 5:00 p.m., Denver, Colorado time ("Close of
Business") on July 11, 2007, the tenth anniversary of the Effective Grant Date
(the "Option Term"), subject to earlier termination as provided in paragraphs 9
and 13(b) below, an option to purchase from the Company, at the price per share
set forth on Schedule 1 hereto (the "Series A Stock Option Price"), the number
of shares of Series A Common Stock of the Company ("Series A Stock") set forth
on said Schedule 1 (the "Series A Stock Option Shares"). The Series A Stock
Option Price and Series A Stock Option Shares are subject to adjustment pursuant
to paragraph 13 below. This option is as a "Nonqualified Stock Option" and is
hereinafter referred to as the "Series A Stock Option".
3. GRANT OF STOCK APPRECIATION RIGHTS. Subject to the terms and
conditions herein and in tandem with the Series A Stock Option, the Grantee
shall also have, during the Option Term, subject to earlier termination as
provided in paragraphs 9 and 13(b) below, a stock appreciation right with
respect to each Series A Stock Option Share (individually, a "Series A Stock
Tandem SAR" and collectively, the "Series A Stock Tandem SARs"). Upon exercise
of a Series A Stock Tandem SAR in accordance with this Agreement, the Company
shall, subject to paragraph 7 below, make payment as follows:
(a) the amount of payment shall equal the amount by which the
Fair Market Value of the Series A Stock Option Share on the date of
exercise of the Series A Stock Tandem SAR exceeds the Series A Stock
Option Price; and
(b) payment of the amount determined in accordance with clause
(a) shall be made, in the sole discretion of the Board, in shares of
Series A Stock (valued at their Fair Market Value as of the date of
exercise of such Series A Stock Tandem SAR), in cash, or partly in cash
and partly in shares of Series A Stock.
4. REDUCTION UPON EXERCISE. The exercise of any number of Series A Stock
Tandem SARs shall cause a corresponding reduction in the number of Series A
Stock Option Shares which shall apply against the Series A Stock Option Shares
then available for purchase. The exercise of the Series A Stock Option to
purchase any number of Series A Stock Option Shares shall cause a corresponding
reduction in the number of Series A Stock Tandem SARs.
5. CONDITIONS OF EXERCISE; VESTING. The Series A Stock Option and Series
A Stock Tandem SARs are exercisable only in accordance with the conditions
stated in this paragraph.
3
<PAGE> 4
(a) Except as otherwise provided in paragraphs 9 and 13(b) below
and in this paragraph 5, the Series A Stock Option may only be exercised
to the extent the Series A Stock Option Shares have become available for
purchase in accordance with the following schedule:
<TABLE>
<CAPTION>
Percentage of Series A Stock Option
Date Shares Available for Purchase
<S> <C>
Effective Grant Date 20%
First Anniversary of Effective Grant Date 40%
Second Anniversary of Effective Grant Date 60%
Third Anniversary of Effective Grant Date 80%
Fourth Anniversary of Effective Grant Date 100%
</TABLE>
Notwithstanding the foregoing, subject to the provisions of
paragraph 9 of this Agreement, all Series A Stock Option Shares shall
become available for purchase if during the Option Term Grantee's status
as a director of the Company shall cease for any reason other than
voluntary termination by Grantee.
(b) A Series A Stock Tandem SAR with respect to a Series A Stock
Option Share shall be exercisable only if the Series A Stock Option
Share is then available for purchase in accordance with subparagraph
(a).
(c) To the extent the Series A Stock Option or Series A Stock
Tandem SARs become exercisable, such Series A Stock Option or Series A
Stock Tandem SARs may be exercised in whole or in part (at any time or
from time to time, except as otherwise provided herein) until expiration
of the Series A Stock Option Term or earlier termination thereof.
(d) Grantee acknowledges and agrees that the Board, in its
discretion, (i) at any time before complete termination of the Series A
Stock Option, may accelerate the time or times at which the Option may
be exercised in whole or in part (without reducing the term of such
Option) and (ii) may adopt rules and regulations from time to time after
the date hereof with respect to the exercise of any Award and that the
exercise by Grantee of such Award will be subject to the further
condition that such exercise is made in accordance with all such rules
and regulations as the Board may determine are applicable thereto.
6. MANNER OF EXERCISE. The Series A Stock Option or a Series A Stock
Tandem SAR may be exercised only by delivering to the Company all of the
following and shall be considered exercised (as to the number of Series A Stock
Option Shares or Series A Stock Tandem SARs specified in the notice referred to
in subparagraph (a) below) on the later of (i) the date of exercise designated
in the written notice referred to in subparagraph (a) below (or if the date so
designated is not a business day, the first business day following such date) or
(ii) the first business day on which the Company has received all of the
following:
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<PAGE> 5
(a) Written notice, in such form as the Board may require,
stating that Grantee is exercising the Series A Stock Option and/or the
Series A Stock Tandem SAR, setting forth the date of such exercise and
designating, among other things, the number of Series A Stock Option
Shares to be purchased and/or the number of Series A Stock Tandem SARs
to be exercised, the aggregate purchase price to be paid by Grantee (in
the case of the exercise of Series A Stock Option Shares) and the manner
in which such payment is being made;
(b) If the Series A Stock Option is to be exercised, payment of
the Series A Stock Option Price for each Series A Stock Option Share to
be purchased in such form, or combination of forms, as the Board, in its
sole discretion, may permit, including (i) cash, (ii) check, (iii)
promissory note, (iv) whole shares of Series A Stock or Series B Stock
that the Grantee has owned for a period of at least six months prior to
the date of exercise, (v) the withholding of shares of Series A Stock
issuable upon such exercise of the Series A Stock Option, (vi) the
delivery, together with a properly executed exercise notice, of
irrevocable instructions to a broker to deliver promptly to the Company
the amount of sale or loan proceeds required to pay the purchase price,
(vii) any combination of the foregoing methods of payment, or (viii)
such other consideration and method of payment as may be permitted for
the issuance of shares under the Delaware General Corporation Law;
(c) Payment of, or other provision acceptable to the Board for,
any and all withholding taxes required to be withheld by the Company
upon exercise of such Award in accordance with paragraph 7 hereof; and
(d) Any other documentation that the Board may reasonably require
(including, without limitation, proof satisfactory to the Board that the
Award is then exercisable for the number of Series A Stock Option Shares
or Series A Stock Tandem SARs).
7. MANDATORY WITHHOLDING FOR TAXES. It shall be a condition precedent to
any exercise of the Series A Stock Option Shares or the Series A Stock Tandem
SARs that Grantee make provision acceptable to the Company for the payment or
withholding of any and all federal, state and local taxes and other amounts
required to be withheld by the Company to satisfy the tax liability associated
with such exercise, as determined by the Board.
8. DELIVERY BY THE COMPANY. As soon as practicable after receipt of all
items referred to in paragraph 6, and subject to the withholding referred to in
paragraph 7, the Company shall deliver to the Grantee certificates issued in
Grantee's name for the number of Series A Stock Option Shares purchased by
exercise of the Series A Stock Option and for the number of shares of Series A
Stock to which the Grantee is entitled by the exercise of Series A Stock Tandem
SARs and any cash payment to which the Grantee is entitled by the exercise of
Series A Stock Tandem SARs. If delivery is by mail, delivery of shares of Series
A Stock shall be deemed effected for all purposes when a stock transfer agent of
the Company shall have deposited the certificates in the United States mail,
addressed to the Grantee, and any cash payment shall be deemed effected when a
Company check, payable to Grantee and in an amount equal to the amount of the
cash payment, shall have been deposited in the United States mail, addressed to
the Grantee.
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<PAGE> 6
9. EARLY TERMINATION OF OPTION AND TANDEM SARS. Unless otherwise
determined by the Board in its sole discretion, the Series A Stock Option and
Series A Stock Tandem SARs shall terminate, prior to the expiration of the
Series A Stock Option Term, at the time specified below:
(a) If Grantee voluntarily elects to terminate his directorship
during the Option Term, then the Series A Stock Option and Series A
Stock Tandem SARs shall cease to vest as of the date of termination of
Grantee's directorship and shall terminate at the Close of Business on
the first business day following the expiration of the 90-day period
which began on the date of termination of Grantee's directorship.
(b) If Grantee ceases to be a director of the Company during the
Option Term for any reason other than voluntary termination, including,
but not limited to, the death of Grantee, the Series A Stock Option and
Series A Stock Tandem SARs shall terminate at the Close of Business on
the first business day following the expiration of the one-year period
which began on the date of death or date of termination of Grantee's
directorship.
In any event in which the Series A Stock Option and Series A Stock
Tandem SARs remain exercisable for a period of time following the date of
termination of Grantee's directorship as provided above, the Series A Stock
Option and Series A Stock Tandem SARs may be exercised during such period of
time only to the extent the same were exercisable as provided in paragraph 5
above on such date of termination of Grantee's directorship. Notwithstanding any
period of time referenced in this paragraph 9 or any other provision of this
paragraph that may be construed to the contrary, the Series A Stock Option and
all Series A Stock Tandem SARs shall in any event terminate upon the expiration
of the Option Term.
10. AUTOMATIC EXERCISE OF SERIES A STOCK TANDEM SARS. Immediately prior
to the termination of the Series A Stock Option, as provided in paragraph 9
above, or the expiration of the Option Term, all remaining Series A Stock Tandem
SARs shall be deemed to have been exercised by the Grantee.
11. NONTRANSFERABILITY OF SERIES A STOCK OPTION AND SERIES A STOCK
TANDEM SARS. During Grantee's lifetime, the Series A Stock Option and Series A
Stock Tandem SARs are not transferable (voluntarily or involuntarily) other than
pursuant to a domestic relations order and, except as otherwise required
pursuant to a domestic relations order, are exercisable only by the Grantee or
Grantee's court appointed legal representative. The Grantee may designate a
beneficiary or beneficiaries to whom the Series A Stock Option and Series A
Stock Tandem SARs shall pass upon Grantee's death and may change such
designation from time to time by filing a written designation of beneficiary or
beneficiaries with the Board on the form annexed hereto as Exhibit B or such
other form as may be prescribed by the Board, provided that no such designation
shall be effective unless so filed prior to the death of Grantee. If no such
designation is made or if the designated beneficiary does not survive the
Grantee's death, the Series A Stock Option and Series A Stock Tandem SARs shall
pass by will or the laws of descent and distribution. Following Grantee's death,
the Series A Stock Option and any Series A Stock Tandem SARs, if otherwise
exercisable,
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<PAGE> 7
may be exercised by the person to whom such option or right passes according to
the foregoing and such person shall be deemed the Grantee for purposes of any
applicable provisions of this Agreement.
12. NO SHAREHOLDER RIGHTS; NO GUARANTEE OF DIRECTORSHIP.
(a) The Grantee shall not be deemed for any purpose to be, or to
have any of the rights of, a stockholder of the Company with respect to
any shares of Series A Stock as to which this Agreement relates until
such shares shall have been issued to Grantee by the Company.
Furthermore, the existence of this Agreement shall not affect in any way
the right or power of the Company or its stockholders to accomplish any
corporate act.
(b) Nothing contained in this Agreement, and no action by the
Company or the Board with respect hereto, shall confer or be construed
to confer on Grantee any right to continue as a director of the Company.
13. ADJUSTMENTS.
(a) The Series A Stock Option and Series A Stock Tandem SARs
shall be subject to adjustment (including, without limitation, as to the
number of Series A Stock Option Shares and the Series A Stock Option
Price per share) in the sole discretion of the Board and in such manner
as the Board may deem equitable and appropriate.
(b) In the event of any Approved Transaction, Board Change or
Control Purchase, the Series A Stock Option and all Series A Stock
Tandem SARs shall become exercisable in full without regard to paragraph
5(a); provided, however, that to the extent not theretofore exercised
the Series A Stock Option and all Series A Stock Tandem SARs shall
terminate, unless otherwise determined by the Board, upon the first to
occur of the consummation of the Approved Transaction, the expiration of
the Series A Stock Option Term or the earlier termination of the Series
A Stock Option and Series A Stock Tandem SARs pursuant to paragraph 9
hereof. Notwithstanding the foregoing, the Board may, in its discretion,
determine that the Series A Stock Option and Series A Stock Tandem SARs
will not become exercisable on an accelerated basis in connection with
an Approved Transaction and/or will not terminate if not exercised prior
to consummation of the Approved Transaction, if the Board or the
surviving or acquiring corporation, as the case may be, shall have taken
or made effective provision for the taking of such action as in the
opinion of the Board is equitable and appropriate to substitute a new
award for the Award evidenced by this Agreement or to assume this
Agreement and the Award evidenced hereby and in order to make such new
award or assumed Award, as nearly as may be practicable, equivalent to
the Award evidenced by this Agreement as then in effect (but before
giving effect to any acceleration of the exercisability hereof unless
otherwise determined by the Board), taking into account, to the extent
applicable, the kind and amount of securities, cash or other assets into
or for which the Series A Stock may be changed, converted or exchanged
in connection with the Approved Transaction.
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<PAGE> 8
14. RESTRICTIONS IMPOSED BY LAW. Grantee acknowledges that neither the
Series A Stock Option nor any of the Series A Stock Option Shares has been
registered under the Securities Act of 1933 and that the Series A Stock Option
Shares may not be transferred in the absence of such registration or the
availability of an exemption therefrom under such Act or the rules and
regulations of the Securities and Exchange Commission promulgated thereunder.
Neither the Company nor any other person shall have any obligation to register
any Series A Stock Option Shares, or any transfer of Series A Stock Option
Shares, under the Securities Act of 1933, the Securities Exchange Act of 1934 or
any other state or federal securities law. Certificates representing Series A
Stock Option Shares purchased by Grantee hereunder may bear such restrictive and
other legends as counsel for the Company shall require in order to insure
compliance with any such law or any rule or regulation promulgated thereunder.
The Grantee agrees that Grantee will not exercise the Series A Stock Option or
any Series A Stock Tandem SAR and that the Company will not be obligated to
deliver any shares of Series A Stock or make any cash payment, if counsel to the
Company determines that such exercise, delivery or payment would violate any
applicable law or any rule or regulation of any governmental authority or any
rule or regulation of, or agreement of the Company with, any securities exchange
or association upon which the Series A Stock is listed or quoted. The Company
shall in no event be obligated to take any affirmative action in order to cause
the exercise of the Series A Stock Option or any Series A Stock Tandem SAR or
the resulting delivery of shares of Series A Stock or other payment to comply
with any such law, rule, regulation or agreement.
15. NOTICE. Unless the Company notifies the Grantee in writing of a
different procedure, any notice or other communication to the Company with
respect to this Agreement shall be in writing and shall be:
(a) delivered personally to the following address:
TCI Music, Inc.
c/o Liberty Media Corporation
8101 East Prentice Avenue, Suite 500
Englewood, Colorado 80111
or
(b) sent by first class mail, postage prepaid and addressed as
follows:
TCI Music, Inc.
c/o Tele-Communications, Inc.
5619 DTC Parkway
Englewood, Colorado 80111
Attn: Legal Department
Any notice or other communication to the Grantee with respect to this Agreement
shall be in writing and shall be delivered personally, or shall be sent by first
class mail, postage prepaid, to Grantee's address as listed in the records of
the Company on the Effective Grant Date, unless the Company has received written
notification from the Grantee of a change of address.
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<PAGE> 9
16. AMENDMENT. Notwithstanding any other provisions hereof, this
Agreement may be supplemented or amended from time to time as approved by the
Board. Without limiting the generality of the foregoing, without the consent of
the Grantee,
(a) this Agreement may be amended or supplemented (i) to cure any
ambiguity or to correct or supplement any provision herein which may be
defective or inconsistent with any other provision herein, or (ii) to
add to the covenants and agreements of the Company for the benefit of
Grantee or surrender any right or power reserved to or conferred upon
the Company in this Agreement, subject, however, to any required
approval of the Company's stockholders and, provided, in each case, that
such changes or corrections shall not adversely affect the rights of
Grantee with respect to the Award evidenced hereby, or (iii) to make
such other changes as the Company, upon advice of counsel, determines
are necessary or advisable because of the adoption or promulgation of,
or change in or of the interpretation of, any law or governmental rule
or regulation, including any applicable federal or state securities
laws; and
(b) subject to any required approval of the Company's
stockholders, the Award evidenced by this Agreement may be canceled by
the Board and a new Award made in substitution therefor, provided that
no such action shall adversely affect the Series A Stock Option or any
Series A Stock Tandem SAR to the extent then exercisable.
17. GOVERNING LAW. This Agreement shall be governed by, and construed in
accordance with, the internal laws of the State of Delaware.
18. CONSTRUCTION. References in this Agreement to "this Agreement" and
the words "herein," "hereof," "hereunder" and similar terms include all Exhibits
and Schedules appended hereto. All decisions of the Board upon questions
regarding this Agreement shall be conclusive. The headings of the paragraphs of
this Agreement have been included for convenience of reference only, are not to
be considered a part hereof and shall in no way modify or restrict any of the
terms or provisions hereof.
19. DUPLICATE ORIGINALS. The Company and the Grantee may sign any number
of copies of this Agreement. Each signed copy shall be an original, but all of
them together represent the same agreement.
20. RULES BY BOARD. The rights of the Grantee and obligations of the
Company hereunder shall be subject to such reasonable rules and regulations as
the Board may adopt from time to time hereafter.
21. ENTIRE AGREEMENT. This Agreement is in satisfaction of and in lieu
of all prior discussions and agreements, oral or written, between the Company
and Grantee regarding the subject matter hereof. Grantee and the Company hereby
declare and represent that no promise or agreement not herein expressed has been
made and that this Agreement contains the entire agreement between
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<PAGE> 10
the parties hereto with respect to the Series A Stock Options and Series A Stock
Tandem SARs and replaces and makes null and void any prior agreements between
Grantee and the Company regarding the Series A Stock Options.
22. GRANTEE ACCEPTANCE. Grantee shall signify acceptance of the terms
and conditions of this Agreement by signing in the space provided at the end
hereof and returning a signed copy to the Company.
TCI MUSIC, INC.
By: /s/ JOANNE WENDY KIM
---------------------------------
Name: Joanne Wendy Kim
--------------------------------
Title: Vice President - Finance
-------------------------------
ACCEPTED:
/s/ ROBERT R. BENNETT
------------------------------------
Robert R. Bennett, Grantee
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<PAGE> 11
Schedule 1 to Non-Qualified Stock Option
and Stock Appreciation Rights Agreement
dated as of July 11, 1997
TCI MUSIC, INC.
NON-QUALIFIED STOCK OPTION AND
STOCK APPRECIATION RIGHTS AGREEMENT
Grantee: Robert R. Bennett
Grant Date: July 11, 1997
Option Price: $6.25 per share
Option Shares: 100,000 shares of Series A TCI Music Common Stock ("Series
A Stock"), $.01 par value per share.
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<PAGE> 1
EXHIBIT 10.15
TCI MUSIC, INC.
NONEMPLOYEE DIRECTOR
NON-QUALIFIED STOCK OPTION AND
STOCK APPRECIATION RIGHTS AGREEMENT
THIS AGREEMENT (this "Agreement") is made as of the 11th day of July,
1997 (the "Effective Grant Date"), by and between TCI MUSIC, INC., a Delaware
corporation (the "Company"), and Donne F. Fisher ("Grantee").
The Board has determined that it is in the interests of the Company and
its stockholders to grant the options and rights provided herein in order to
encourage Grantee to serve in the capacity as a director of the Company and to
increase Grantee's personal interest in the continued success and progress of
the Company.
The Company and Grantee therefore agree as follows:
1. DEFINITIONS. Capitalized terms not defined elsewhere in the
Agreement shall have the following meanings (whether used in the singular or
plural):
"Approved Transaction" means any transaction in which the Board (or, if
approval of the Board is not required as a matter of law, the stockholders of
the Company) shall approve (i) any consolidation or merger of the Company, or
binding share exchange, pursuant to which shares of Common Stock would be
changed or converted into or exchanged for cash, securities or other property,
other than any such transaction in which the holders of the Common Stock
immediately prior to such transaction have the same proportionate ownership of
the Common Stock of, and voting power with respect to, the surviving corporation
immediately after such transaction, (ii) any merger, consolidation or binding
share exchange to which the Company is a party as a result of which the persons
who are holders of the Common Stock immediately prior thereto have less than a
majority of the combined voting power of the outstanding capital stock of the
Company ordinarily (and apart from the rights accruing under special
circumstances) having the right to vote in the election of directors immediately
following such merger, consolidation or binding share exchange, (iii) the
adoption of any plan or proposal for the liquidation or dissolution of the
Company, or (iv) any sale, lease, exchange or other transfer (in one transaction
or a series of related transactions) of all, or substantially all, of the assets
of the Company.
"Award" means the grant of Series A Stock Options and Series A Stock
Tandem SARs under this Agreement.
"Board" means the Board of Directors of the Company.
"Board Change" means, during any period of two consecutive years,
individuals who at the beginning of such period constituted the entire Board
cease for any reason to constitute a majority thereof unless the election, or
the nomination for election, of each new director was approved by a
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<PAGE> 2
vote of at least two-thirds of the directors then still in office who were
directors at the beginning of the period.
"Code" means the Internal Revenue Code of 1986, as amended from time to
time, or any successor statute or statutes thereto.
"Common Stock" means the Series A Stock and the Series B Stock.
"Control Purchase" means any transaction (or series of related
transactions) in which (i) any person (as such term is defined in Sections
13(d)(3) and 14(d)(2) of the Exchange Act), corporation or other entity (other
than Tele-Communications, Inc. ("TCI"), the Company, any Subsidiary or any
employee benefit plan sponsored by the Company or any Subsidiary, or any
Controlling Person (as defined below)) shall purchase any common stock of the
Company (or securities convertible into common stock of the Company) for cash,
securities or any other consideration pursuant to a tender offer or exchange
offer, without the prior consent of the Board, or (ii) any person (as so
defined), corporation or other entity (other than TCI, the Company, any
Subsidiary, any employee benefit plan sponsored by the Company or any
Subsidiary, or any Controlling Person) shall become the "beneficial owner" (as
such term is defined in Rule 13d-3 under the Exchange Act), directly or
indirectly, of securities of the Company representing 20% or more of the
combined voting power of the then outstanding securities of the Company
ordinarily (and apart from rights accruing under special circumstances) having
the right to vote in the election of directors (calculated as provided in Rule
13d-3(d) under the Exchange Act in the case of rights to acquire the Company's
securities), other than in a transaction (or series of related transactions)
approved by the Board or the board of TCI. For purposes of this definition,
"Controlling Person" means each of (a) the Chairman of the Board, the President
and each of the directors of the Company as of the Effective Date of this
Agreement, (b) John C. Malone, (c) Bob Magness, (d) the respective family
members, estates and heirs of each of the persons referred to in clauses (a)
through (c) above and any trust or other investment vehicle for the primary
benefit of any of such persons or their respective family members or heirs and
(e) Kearns-Tribune Corporation, a Delaware corporation. As used with respect to
any person, the term "family member" means the spouse, siblings and lineal
descendants of such person.
"Exchange Act" means the Securities Exchange Act of 1934, as amended
from time to time, or any successor statute or statutes thereto. Reference to
any specific Exchange Act section shall include any successor section.
"Fair Market Value" of a share of Series A Stock or Series B Stock on
any day means the last sale price (or, if no last sale price is reported, the
average of the high bid and low asked prices) for a share of Series A Stock or
Series B Stock, as applicable, on such day (or, if such day is not a trading
day, on the next preceding trading day) as reported on NASDAQ or, if not
reported on NASDAQ, as quoted by the National Quotation Bureau Incorporated, or
if the Series A Stock or Series B Stock is listed on an exchange, on the
principal exchange on which the Series A Stock or Series B Stock, as applicable,
is listed. If for any day the Fair Market Value of a share of Series A Stock or
Series B Stock, as applicable, is not determinable by any of the foregoing
means, then the
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<PAGE> 3
Fair Market Value for such day shall be determined in good faith by the Board on
the basis of such quotations and other considerations as the Board deems
appropriate.
"NASDAQ" means the NASDAQ Stock Market.
"Nonqualified Stock Option" means a stock option that is not an
incentive stock option under Section 422 of the Code.
2. GRANT OF OPTION; OPTION TERM. Subject to the terms and
conditions herein, the Company grants to the Grantee during the period
commencing on the Effective Grant Date and expiring at 5:00 p.m., Denver,
Colorado time ("Close of Business") on July 11, 2007, the tenth anniversary of
the Effective Grant Date (the "Option Term"), subject to earlier termination as
provided in paragraphs 9 and 13(b) below, an option to purchase from the
Company, at the price per share set forth on Schedule 1 hereto (the "Series A
Stock Option Price"), the number of shares of Series A Common Stock of the
Company ("Series A Stock") set forth on said Schedule 1 (the "Series A Stock
Option Shares"). The Series A Stock Option Price and Series A Stock Option
Shares are subject to adjustment pursuant to paragraph 13 below. This option is
as a "Nonqualified Stock Option" and is hereinafter referred to as the "Series A
Stock Option".
3. GRANT OF STOCK APPRECIATION RIGHTS. Subject to the terms and
conditions herein and in tandem with the Series A Stock Option, the Grantee
shall also have, during the Option Term, subject to earlier termination as
provided in paragraphs 9 and 13(b) below, a stock appreciation right with
respect to each Series A Stock Option Share (individually, a "Series A Stock
Tandem SAR" and collectively, the "Series A Stock Tandem SARs"). Upon exercise
of a Series A Stock Tandem SAR in accordance with this Agreement, the Company
shall, subject to paragraph 7 below, make payment as follows:
(a) the amount of payment shall equal the amount by which
the Fair Market Value of the Series A Stock Option Share on the date of
exercise of the Series A Stock Tandem SAR exceeds the Series A Stock
Option Price; and
(b) payment of the amount determined in accordance with
clause (a) shall be made, in the sole discretion of the Board, in shares
of Series A Stock (valued at their Fair Market Value as of the date of
exercise of such Series A Stock Tandem SAR), in cash, or partly in cash
and partly in shares of Series A Stock.
4. REDUCTION UPON EXERCISE. The exercise of any number of Series A
Stock Tandem SARs shall cause a corresponding reduction in the number of Series
A Stock Option Shares which shall apply against the Series A Stock Option Shares
then available for purchase. The exercise of the Series A Stock Option to
purchase any number of Series A Stock Option Shares shall cause a corresponding
reduction in the number of Series A Stock Tandem SARs.
5. CONDITIONS OF EXERCISE; VESTING. The Series A Stock Option and
Series A Stock Tandem SARs are exercisable only in accordance with the
conditions stated in this paragraph.
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<PAGE> 4
(a) Except as otherwise provided in paragraphs 9 and 13(b)
below and in this paragraph 5, the Series A Stock Option may only be
exercised to the extent the Series A Stock Option Shares have become
available for purchase in accordance with the following schedule:
<TABLE>
<CAPTION>
Percentage of Series A Stock Option
Date Shares Available for Purchase
---- -----------------------------------
<S> <C>
Effective Grant Date 20%
First Anniversary of Effective Grant Date 40%
Second Anniversary of Effective Grant Date 60%
Third Anniversary of Effective Grant Date 80%
Fourth Anniversary of Effective Grant Date 100%
</TABLE>
Notwithstanding the foregoing, subject to the provisions of
paragraph 9 of this Agreement, all Series A Stock Option Shares shall
become available for purchase if during the Option Term Grantee's status
as a director of the Company shall cease for any reason other than
voluntary termination by Grantee.
(b) A Series A Stock Tandem SAR with respect to a Series A
Stock Option Share shall be exercisable only if the Series A Stock
Option Share is then available for purchase in accordance with
subparagraph (a).
(c) To the extent the Series A Stock Option or Series A
Stock Tandem SARs become exercisable, such Series A Stock Option or
Series A Stock Tandem SARs may be exercised in whole or in part (at any
time or from time to time, except as otherwise provided herein) until
expiration of the Series A Stock Option Term or earlier termination
thereof.
(d) Grantee acknowledges and agrees that the Board, in its
discretion, (i) at any time before complete termination of the Series A
Stock Option, may accelerate the time or times at which the Option may
be exercised in whole or in part (without reducing the term of such
Option) and (ii) may adopt rules and regulations from time to time after
the date hereof with respect to the exercise of any Award and that the
exercise by Grantee of such Award will be subject to the further
condition that such exercise is made in accordance with all such rules
and regulations as the Board may determine are applicable thereto.
6. MANNER OF EXERCISE. The Series A Stock Option or a Series A
Stock Tandem SAR may be exercised only by delivering to the Company all of the
following and shall be considered exercised (as to the number of Series A Stock
Option Shares or Series A Stock Tandem SARs specified in the notice referred to
in subparagraph (a) below) on the later of (i) the date of exercise designated
in the written notice referred to in subparagraph (a) below (or if the date so
designated is not a business day, the first business day following such date) or
(ii) the first business day on which the Company has received all of the
following:
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<PAGE> 5
(a) Written notice, in such form as the Board may require,
stating that Grantee is exercising the Series A Stock Option and/or the
Series A Stock Tandem SAR, setting forth the date of such exercise and
designating, among other things, the number of Series A Stock Option
Shares to be purchased and/or the number of Series A Stock Tandem SARs
to be exercised, the aggregate purchase price to be paid by Grantee (in
the case of the exercise of Series A Stock Option Shares) and the manner
in which such payment is being made;
(b) If the Series A Stock Option is to be exercised, payment
of the Series A Stock Option Price for each Series A Stock Option Share
to be purchased in such form, or combination of forms, as the Board, in
its sole discretion, may permit, including (i) cash, (ii) check, (iii)
promissory note, (iv) whole shares of Series A Stock or Series B Stock
that the Grantee has owned for a period of at least six months prior to
the date of exercise, (v) the withholding of shares of Series A Stock
issuable upon such exercise of the Series A Stock Option, (vi) the
delivery, together with a properly executed exercise notice, of
irrevocable instructions to a broker to deliver promptly to the Company
the amount of sale or loan proceeds required to pay the purchase price,
(vii) any combination of the foregoing methods of payment, or (viii)
such other consideration and method of payment as may be permitted for
the issuance of shares under the Delaware General Corporation Law;
(c) Payment of, or other provision acceptable to the Board
for, any and all withholding taxes required to be withheld by the
Company upon exercise of such Award in accordance with paragraph 7
hereof; and
(d) Any other documentation that the Board may reasonably
require (including, without limitation, proof satisfactory to the Board
that the Award is then exercisable for the number of Series A Stock
Option Shares or Series A Stock Tandem SARs).
7. MANDATORY WITHHOLDING FOR TAXES. It shall be a condition
precedent to any exercise of the Series A Stock Option Shares or the Series A
Stock Tandem SARs that Grantee make provision acceptable to the Company for the
payment or withholding of any and all federal, state and local taxes and other
amounts required to be withheld by the Company to satisfy the tax liability
associated with such exercise, as determined by the Board.
8. DELIVERY BY THE COMPANY. As soon as practicable after receipt of
all items referred to in paragraph 6, and subject to the withholding referred to
in paragraph 7, the Company shall deliver to the Grantee certificates issued in
Grantee's name for the number of Series A Stock Option Shares purchased by
exercise of the Series A Stock Option and for the number of shares of Series A
Stock to which the Grantee is entitled by the exercise of Series A Stock Tandem
SARs and any cash payment to which the Grantee is entitled by the exercise of
Series A Stock Tandem SARs. If delivery is by mail, delivery of shares of Series
A Stock shall be deemed effected for all purposes when a stock transfer agent of
the Company shall have deposited the certificates in the United States mail,
addressed to the Grantee, and any cash payment shall be deemed effected when a
Company check, payable to Grantee and in an amount equal to the amount of the
cash payment, shall have been deposited in the United States mail, addressed to
the Grantee.
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<PAGE> 6
9. EARLY TERMINATION OF OPTION AND TANDEM SARS. Unless otherwise
determined by the Board in its sole discretion, the Series A Stock Option and
Series A Stock Tandem SARs shall terminate, prior to the expiration of the
Series A Stock Option Term, at the time specified below:
(a) If Grantee voluntarily elects to terminate his
directorship during the Option Term, then the Series A Stock Option and
Series A Stock Tandem SARs shall cease to vest as of the date of
termination of Grantee's directorship and shall terminate at the Close
of Business on the first business day following the expiration of the
90-day period which began on the date of termination of Grantee's
directorship.
(b) If Grantee ceases to be a director of the Company during
the Option Term for any reason other than voluntary termination,
including, but not limited to, the death of Grantee, the Series A Stock
Option and Series A Stock Tandem SARs shall terminate at the Close of
Business on the first business day following the expiration of the
one-year period which began on the date of death or date of termination
of Grantee's directorship.
In any event in which the Series A Stock Option and Series A Stock
Tandem SARs remain exercisable for a period of time following the date of
termination of Grantee's directorship as provided above, the Series A Stock
Option and Series A Stock Tandem SARs may be exercised during such period of
time only to the extent the same were exercisable as provided in paragraph 5
above on such date of termination of Grantee's directorship. Notwithstanding any
period of time referenced in this paragraph 9 or any other provision of this
paragraph that may be construed to the contrary, the Series A Stock Option and
all Series A Stock Tandem SARs shall in any event terminate upon the expiration
of the Option Term.
10. AUTOMATIC EXERCISE OF SERIES A STOCK TANDEM SARS. Immediately
prior to the termination of the Series A Stock Option, as provided in paragraph
9 above, or the expiration of the Option Term, all remaining Series A Stock
Tandem SARs shall be deemed to have been exercised by the Grantee.
11. NONTRANSFERABILITY OF SERIES A STOCK OPTION AND SERIES A STOCK
TANDEM SARS. During Grantee's lifetime, the Series A Stock Option and Series A
Stock Tandem SARs are not transferable (voluntarily or involuntarily) other than
pursuant to a domestic relations order and, except as otherwise required
pursuant to a domestic relations order, are exercisable only by the Grantee or
Grantee's court appointed legal representative. The Grantee may designate a
beneficiary or beneficiaries to whom the Series A Stock Option and Series A
Stock Tandem SARs shall pass upon Grantee's death and may change such
designation from time to time by filing a written designation of beneficiary or
beneficiaries with the Board on the form annexed hereto as Exhibit B or such
other form as may be prescribed by the Board, provided that no such designation
shall be effective unless so filed prior to the death of Grantee. If no such
designation is made or if the designated beneficiary does not survive the
Grantee's death, the Series A Stock Option and Series A Stock Tandem SARs shall
pass by will or the laws of descent and distribution. Following Grantee's death,
the Series A Stock Option and any Series A Stock Tandem SARs, if otherwise
exercisable,
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<PAGE> 7
may be exercised by the person to whom such option or right passes according to
the foregoing and such person shall be deemed the Grantee for purposes of any
applicable provisions of this Agreement.
12. NO SHAREHOLDER RIGHTS; NO GUARANTEE OF DIRECTORSHIP.
(a) The Grantee shall not be deemed for any purpose to be,
or to have any of the rights of, a stockholder of the Company with
respect to any shares of Series A Stock as to which this Agreement
relates until such shares shall have been issued to Grantee by the
Company. Furthermore, the existence of this Agreement shall not affect
in any way the right or power of the Company or its stockholders to
accomplish any corporate act.
(b) Nothing contained in this Agreement, and no action by
the Company or the Board with respect hereto, shall confer or be
construed to confer on Grantee any right to continue as a director of
the Company.
13. ADJUSTMENTS.
(a) The Series A Stock Option and Series A Stock Tandem SARs
shall be subject to adjustment (including, without limitation, as to the
number of Series A Stock Option Shares and the Series A Stock Option
Price per share) in the sole discretion of the Board and in such manner
as the Board may deem equitable and appropriate.
(b) In the event of any Approved Transaction, Board Change
or Control Purchase, the Series A Stock Option and all Series A Stock
Tandem SARs shall become exercisable in full without regard to paragraph
5(a); provided, however, that to the extent not theretofore exercised
the Series A Stock Option and all Series A Stock Tandem SARs shall
terminate, unless otherwise determined by the Board, upon the first to
occur of the consummation of the Approved Transaction, the expiration of
the Series A Stock Option Term or the earlier termination of the Series
A Stock Option and Series A Stock Tandem SARs pursuant to paragraph 9
hereof. Notwithstanding the foregoing, the Board may, in its discretion,
determine that the Series A Stock Option and Series A Stock Tandem SARs
will not become exercisable on an accelerated basis in connection with
an Approved Transaction and/or will not terminate if not exercised prior
to consummation of the Approved Transaction, if the Board or the
surviving or acquiring corporation, as the case may be, shall have taken
or made effective provision for the taking of such action as in the
opinion of the Board is equitable and appropriate to substitute a new
award for the Award evidenced by this Agreement or to assume this
Agreement and the Award evidenced hereby and in order to make such new
award or assumed Award, as nearly as may be practicable, equivalent to
the Award evidenced by this Agreement as then in effect (but before
giving effect to any acceleration of the exercisability hereof unless
otherwise determined by the Board), taking into account, to the extent
applicable, the kind and amount of securities, cash or other assets into
or for which the Series A Stock may be changed, converted or exchanged
in connection with the Approved Transaction.
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<PAGE> 8
14. RESTRICTIONS IMPOSED BY LAW. Grantee acknowledges that neither
the Series A Stock Option nor any of the Series A Stock Option Shares has been
registered under the Securities Act of 1933 and that the Series A Stock Option
Shares may not be transferred in the absence of such registration or the
availability of an exemption therefrom under such Act or the rules and
regulations of the Securities and Exchange Commission promulgated thereunder.
Neither the Company nor any other person shall have any obligation to register
any Series A Stock Option Shares, or any transfer of Series A Stock Option
Shares, under the Securities Act of 1933, the Securities Exchange Act of 1934 or
any other state or federal securities law. Certificates representing Series A
Stock Option Shares purchased by Grantee hereunder may bear such restrictive and
other legends as counsel for the Company shall require in order to insure
compliance with any such law or any rule or regulation promulgated thereunder.
The Grantee agrees that Grantee will not exercise the Series A Stock Option or
any Series A Stock Tandem SAR and that the Company will not be obligated to
deliver any shares of Series A Stock or make any cash payment, if counsel to the
Company determines that such exercise, delivery or payment would violate any
applicable law or any rule or regulation of any governmental authority or any
rule or regulation of, or agreement of the Company with, any securities exchange
or association upon which the Series A Stock is listed or quoted. The Company
shall in no event be obligated to take any affirmative action in order to cause
the exercise of the Series A Stock Option or any Series A Stock Tandem SAR or
the resulting delivery of shares of Series A Stock or other payment to comply
with any such law, rule, regulation or agreement.
15. NOTICE. Unless the Company notifies the Grantee in writing of a
different procedure, any notice or other communication to the Company with
respect to this Agreement shall be in writing and shall be:
(a) delivered personally to the following address:
TCI Music, Inc.
c/o Liberty Media Corporation
8101 East Prentice Avenue, Suite 500
Englewood, Colorado 80111
or
(b) sent by first class mail, postage prepaid and addressed
as follows:
TCI Music, Inc.
c/o Tele-Communications, Inc.
5619 DTC Parkway
Englewood, Colorado 80111
Attn: Legal Department
Any notice or other communication to the Grantee with respect to this Agreement
shall be in writing and shall be delivered personally, or shall be sent by first
class mail, postage prepaid, to Grantee's address as listed in the records of
the Company on the Effective Grant Date, unless the Company has received written
notification from the Grantee of a change of address.
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<PAGE> 9
16. AMENDMENT. Notwithstanding any other provisions hereof, this
Agreement may be supplemented or amended from time to time as approved by the
Board. Without limiting the generality of the foregoing, without the consent of
the Grantee,
(a) this Agreement may be amended or supplemented (i) to
cure any ambiguity or to correct or supplement any provision herein
which may be defective or inconsistent with any other provision herein,
or (ii) to add to the covenants and agreements of the Company for the
benefit of Grantee or surrender any right or power reserved to or
conferred upon the Company in this Agreement, subject, however, to any
required approval of the Company's stockholders and, provided, in each
case, that such changes or corrections shall not adversely affect the
rights of Grantee with respect to the Award evidenced hereby, or (iii)
to make such other changes as the Company, upon advice of counsel,
determines are necessary or advisable because of the adoption or
promulgation of, or change in or of the interpretation of, any law or
governmental rule or regulation, including any applicable federal or
state securities laws; and
(b) subject to any required approval of the Company's
stockholders, the Award evidenced by this Agreement may be canceled by
the Board and a new Award made in substitution therefor, provided that
no such action shall adversely affect the Series A Stock Option or any
Series A Stock Tandem SAR to the extent then exercisable.
17. GOVERNING LAW. This Agreement shall be governed by, and
construed in accordance with, the internal laws of the State of Delaware.
18. CONSTRUCTION. References in this Agreement to "this Agreement"
and the words "herein," "hereof," "hereunder" and similar terms include all
Exhibits and Schedules appended hereto. All decisions of the Board upon
questions regarding this Agreement shall be conclusive. The headings of the
paragraphs of this Agreement have been included for convenience of reference
only, are not to be considered a part hereof and shall in no way modify or
restrict any of the terms or provisions hereof.
19. DUPLICATE ORIGINALS. The Company and the Grantee may sign any
number of copies of this Agreement. Each signed copy shall be an original, but
all of them together represent the same agreement.
20. RULES BY BOARD. The rights of the Grantee and obligations of the
Company hereunder shall be subject to such reasonable rules and regulations as
the Board may adopt from time to time hereafter.
21. ENTIRE AGREEMENT. This Agreement is in satisfaction of and in
lieu of all prior discussions and agreements, oral or written, between the
Company and Grantee regarding the subject matter hereof. Grantee and the Company
hereby declare and represent that no promise or agreement not herein expressed
has been made and that this Agreement contains the entire agreement between
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<PAGE> 10
the parties hereto with respect to the Series A Stock Options and Series A Stock
Tandem SARs and replaces and makes null and void any prior agreements between
Grantee and the Company regarding the Series A Stock Options.
22. GRANTEE ACCEPTANCE. Grantee shall signify acceptance of the
terms and conditions of this Agreement by signing in the space provided at the
end hereof and returning a signed copy to the Company.
TCI MUSIC, INC.
By: /s/ JOANNE WENDY KIM
--------------------------------------------
Name: Joanne Wendy Kim
------------------------------------------
Title: Vice President - Finance
-----------------------------------------
ACCEPTED:
/s/ DONNE F. FISHER
-----------------------------------------------
Donne F. Fisher, Grantee
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<PAGE> 11
Schedule 1 to Non-Qualified Stock Option
and Stock Appreciation Rights Agreement
dated as of July 11, 1997
TCI MUSIC, INC.
NON-QUALIFIED STOCK OPTION AND
STOCK APPRECIATION RIGHTS AGREEMENT
Grantee: Donne F. Fisher
Grant Date: July 11, 1997
Option Price: $6.25 per share
Option Shares: 833,334 shares of Series A TCI Music Common Stock ("Series
A Stock"), $.01 par value per share.
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<PAGE> 1
EXHIBIT 10.16
TCI MUSIC, INC.
NONEMPLOYEE DIRECTOR
NON-QUALIFIED STOCK OPTION AND
STOCK APPRECIATION RIGHTS AGREEMENT
THIS AGREEMENT (this "Agreement") is made as of the 11th day of July,
1997 (the "Effective Grant Date"), by and between TCI MUSIC, INC., a Delaware
corporation (the "Company"), and Peter M. Kern ("Grantee").
The Board has determined that it is in the interests of the Company and
its stockholders to grant the options and rights provided herein in order to
encourage Grantee to serve in the capacity as a director of the Company and to
increase Grantee's personal interest in the continued success and progress of
the Company.
The Company and Grantee therefore agree as follows:
1. DEFINITIONS. Capitalized terms not defined elsewhere in the
Agreement shall have the following meanings (whether used in the singular or
plural):
"Approved Transaction" means any transaction in which the Board (or, if
approval of the Board is not required as a matter of law, the stockholders of
the Company) shall approve (i) any consolidation or merger of the Company, or
binding share exchange, pursuant to which shares of Common Stock would be
changed or converted into or exchanged for cash, securities or other property,
other than any such transaction in which the holders of the Common Stock
immediately prior to such transaction have the same proportionate ownership of
the Common Stock of, and voting power with respect to, the surviving corporation
immediately after such transaction, (ii) any merger, consolidation or binding
share exchange to which the Company is a party as a result of which the persons
who are holders of the Common Stock immediately prior thereto have less than a
majority of the combined voting power of the outstanding capital stock of the
Company ordinarily (and apart from the rights accruing under special
circumstances) having the right to vote in the election of directors immediately
following such merger, consolidation or binding share exchange, (iii) the
adoption of any plan or proposal for the liquidation or dissolution of the
Company, or (iv) any sale, lease, exchange or other transfer (in one transaction
or a series of related transactions) of all, or substantially all, of the assets
of the Company.
"Award" means the grant of Series A Stock Options and Series A Stock
Tandem SARs under this Agreement.
"Board" means the Board of Directors of the Company.
"Board Change" means, during any period of two consecutive years,
individuals who at the beginning of such period constituted the entire Board
cease for any reason to constitute a majority thereof unless the election, or
the nomination for election, of each new director was approved by a
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<PAGE> 2
vote of at least two-thirds of the directors then still in office who were
directors at the beginning of the period.
"Code" means the Internal Revenue Code of 1986, as amended from time to
time, or any successor statute or statutes thereto.
"Common Stock" means the Series A Stock and the Series B Stock.
"Control Purchase" means any transaction (or series of related
transactions) in which (i) any person (as such term is defined in Sections
13(d)(3) and 14(d)(2) of the Exchange Act), corporation or other entity (other
than Tele-Communications, Inc. ("TCI"), the Company, any Subsidiary or any
employee benefit plan sponsored by the Company or any Subsidiary, or any
Controlling Person (as defined below)) shall purchase any common stock of the
Company (or securities convertible into common stock of the Company) for cash,
securities or any other consideration pursuant to a tender offer or exchange
offer, without the prior consent of the Board, or (ii) any person (as so
defined), corporation or other entity (other than TCI, the Company, any
Subsidiary, any employee benefit plan sponsored by the Company or any
Subsidiary, or any Controlling Person) shall become the "beneficial owner" (as
such term is defined in Rule 13d-3 under the Exchange Act), directly or
indirectly, of securities of the Company representing 20% or more of the
combined voting power of the then outstanding securities of the Company
ordinarily (and apart from rights accruing under special circumstances) having
the right to vote in the election of directors (calculated as provided in Rule
13d-3(d) under the Exchange Act in the case of rights to acquire the Company's
securities), other than in a transaction (or series of related transactions)
approved by the Board or the board of TCI. For purposes of this definition,
"Controlling Person" means each of (a) the Chairman of the Board, the President
and each of the directors of the Company as of the Effective Date of this
Agreement, (b) John C. Malone, (c) Bob Magness, (d) the respective family
members, estates and heirs of each of the persons referred to in clauses (a)
through (c) above and any trust or other investment vehicle for the primary
benefit of any of such persons or their respective family members or heirs and
(e) Kearns-Tribune Corporation, a Delaware corporation. As used with respect to
any person, the term "family member" means the spouse, siblings and lineal
descendants of such person.
"Exchange Act" means the Securities Exchange Act of 1934, as amended
from time to time, or any successor statute or statutes thereto. Reference to
any specific Exchange Act section shall include any successor section.
"Fair Market Value" of a share of Series A Stock or Series B Stock on
any day means the last sale price (or, if no last sale price is reported, the
average of the high bid and low asked prices) for a share of Series A Stock or
Series B Stock, as applicable, on such day (or, if such day is not a trading
day, on the next preceding trading day) as reported on NASDAQ or, if not
reported on NASDAQ, as quoted by the National Quotation Bureau Incorporated, or
if the Series A Stock or Series B Stock is listed on an exchange, on the
principal exchange on which the Series A Stock or Series B Stock, as applicable,
is listed. If for any day the Fair Market Value of a share of Series A Stock or
Series B Stock, as applicable, is not determinable by any of the foregoing
means, then the
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<PAGE> 3
Fair Market Value for such day shall be determined in good faith by the Board on
the basis of such quotations and other considerations as the Board deems
appropriate.
"NASDAQ" means the NASDAQ Stock Market.
"Nonqualified Stock Option" means a stock option that is not an
incentive stock option under Section 422 of the Code.
2. GRANT OF OPTION; OPTION TERM. Subject to the terms and
conditions herein, the Company grants to the Grantee during the period
commencing on the Effective Grant Date and expiring at 5:00 p.m., Denver,
Colorado time ("Close of Business") on July 11, 2007, the tenth anniversary of
the Effective Grant Date (the "Option Term"), subject to earlier termination as
provided in paragraphs 9 and 13(b) below, an option to purchase from the
Company, at the price per share set forth on Schedule 1 hereto (the "Series A
Stock Option Price"), the number of shares of Series A Common Stock of the
Company ("Series A Stock") set forth on said Schedule 1 (the "Series A Stock
Option Shares"). The Series A Stock Option Price and Series A Stock Option
Shares are subject to adjustment pursuant to paragraph 13 below. This option is
as a "Nonqualified Stock Option" and is hereinafter referred to as the "Series A
Stock Option".
3. GRANT OF STOCK APPRECIATION RIGHTS. Subject to the terms and
conditions herein and in tandem with the Series A Stock Option, the Grantee
shall also have, during the Option Term, subject to earlier termination as
provided in paragraphs 9 and 13(b) below, a stock appreciation right with
respect to each Series A Stock Option Share (individually, a "Series A Stock
Tandem SAR" and collectively, the "Series A Stock Tandem SARs"). Upon exercise
of a Series A Stock Tandem SAR in accordance with this Agreement, the Company
shall, subject to paragraph 7 below, make payment as follows:
(a) the amount of payment shall equal the amount by which
the Fair Market Value of the Series A Stock Option Share on the date of
exercise of the Series A Stock Tandem SAR exceeds the Series A Stock
Option Price; and
(b) payment of the amount determined in accordance with
clause (a) shall be made, in the sole discretion of the Board, in shares
of Series A Stock (valued at their Fair Market Value as of the date of
exercise of such Series A Stock Tandem SAR), in cash, or partly in cash
and partly in shares of Series A Stock.
4. REDUCTION UPON EXERCISE. The exercise of any number of Series A
Stock Tandem SARs shall cause a corresponding reduction in the number of Series
A Stock Option Shares which shall apply against the Series A Stock Option Shares
then available for purchase. The exercise of the Series A Stock Option to
purchase any number of Series A Stock Option Shares shall cause a corresponding
reduction in the number of Series A Stock Tandem SARs.
5. CONDITIONS OF EXERCISE; VESTING. The Series A Stock Option and
Series A Stock Tandem SARs are exercisable only in accordance with the
conditions stated in this paragraph.
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<PAGE> 4
(a) Except as otherwise provided in paragraphs 9 and 13(b)
below and in this paragraph 5, the Series A Stock Option may only be
exercised to the extent the Series A Stock Option Shares have become
available for purchase in accordance with the following schedule:
<TABLE>
<CAPTION>
Percentage of Series A Stock Option
Date Shares Available for Purchase
---- -----------------------------------
<S> <C>
Effective Grant Date 20%
First Anniversary of Effective Grant Date 40%
Second Anniversary of Effective Grant Date 60%
Third Anniversary of Effective Grant Date 80%
Fourth Anniversary of Effective Grant Date 100%
</TABLE>
Notwithstanding the foregoing, subject to the provisions of
paragraph 9 of this Agreement, all Series A Stock Option Shares shall
become available for purchase if during the Option Term Grantee's status
as a director of the Company shall cease for any reason other than
voluntary termination by Grantee.
(b) A Series A Stock Tandem SAR with respect to a Series A
Stock Option Share shall be exercisable only if the Series A Stock
Option Share is then available for purchase in accordance with
subparagraph (a).
(c) To the extent the Series A Stock Option or Series A
Stock Tandem SARs become exercisable, such Series A Stock Option or
Series A Stock Tandem SARs may be exercised in whole or in part (at any
time or from time to time, except as otherwise provided herein) until
expiration of the Series A Stock Option Term or earlier termination
thereof.
(d) Grantee acknowledges and agrees that the Board, in its
discretion, (i) at any time before complete termination of the Series A
Stock Option, may accelerate the time or times at which the Option may
be exercised in whole or in part (without reducing the term of such
Option) and (ii) may adopt rules and regulations from time to time after
the date hereof with respect to the exercise of any Award and that the
exercise by Grantee of such Award will be subject to the further
condition that such exercise is made in accordance with all such rules
and regulations as the Board may determine are applicable thereto.
6. MANNER OF EXERCISE. The Series A Stock Option or a Series A
Stock Tandem SAR may be exercised only by delivering to the Company all of the
following and shall be considered exercised (as to the number of Series A Stock
Option Shares or Series A Stock Tandem SARs specified in the notice referred to
in subparagraph (a) below) on the later of (i) the date of exercise designated
in the written notice referred to in subparagraph (a) below (or if the date so
designated is not a business day, the first business day following such date) or
(ii) the first business day on which the Company has received all of the
following:
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<PAGE> 5
(a) Written notice, in such form as the Board may require,
stating that Grantee is exercising the Series A Stock Option and/or the
Series A Stock Tandem SAR, setting forth the date of such exercise and
designating, among other things, the number of Series A Stock Option
Shares to be purchased and/or the number of Series A Stock Tandem SARs
to be exercised, the aggregate purchase price to be paid by Grantee (in
the case of the exercise of Series A Stock Option Shares) and the manner
in which such payment is being made;
(b) If the Series A Stock Option is to be exercised, payment
of the Series A Stock Option Price for each Series A Stock Option Share
to be purchased in such form, or combination of forms, as the Board, in
its sole discretion, may permit, including (i) cash, (ii) check, (iii)
promissory note, (iv) whole shares of Series A Stock or Series B Stock
that the Grantee has owned for a period of at least six months prior to
the date of exercise, (v) the withholding of shares of Series A Stock
issuable upon such exercise of the Series A Stock Option, (vi) the
delivery, together with a properly executed exercise notice, of
irrevocable instructions to a broker to deliver promptly to the Company
the amount of sale or loan proceeds required to pay the purchase price,
(vii) any combination of the foregoing methods of payment, or (viii)
such other consideration and method of payment as may be permitted for
the issuance of shares under the Delaware General Corporation Law;
(c) Payment of, or other provision acceptable to the Board
for, any and all withholding taxes required to be withheld by the
Company upon exercise of such Award in accordance with paragraph 7
hereof; and
(d) Any other documentation that the Board may reasonably
require (including, without limitation, proof satisfactory to the Board
that the Award is then exercisable for the number of Series A Stock
Option Shares or Series A Stock Tandem SARs).
7. MANDATORY WITHHOLDING FOR TAXES. It shall be a condition
precedent to any exercise of the Series A Stock Option Shares or the Series A
Stock Tandem SARs that Grantee make provision acceptable to the Company for the
payment or withholding of any and all federal, state and local taxes and other
amounts required to be withheld by the Company to satisfy the tax liability
associated with such exercise, as determined by the Board.
8. DELIVERY BY THE COMPANY. As soon as practicable after receipt of
all items referred to in paragraph 6, and subject to the withholding referred to
in paragraph 7, the Company shall deliver to the Grantee certificates issued in
Grantee's name for the number of Series A Stock Option Shares purchased by
exercise of the Series A Stock Option and for the number of shares of Series A
Stock to which the Grantee is entitled by the exercise of Series A Stock Tandem
SARs and any cash payment to which the Grantee is entitled by the exercise of
Series A Stock Tandem SARs. If delivery is by mail, delivery of shares of Series
A Stock shall be deemed effected for all purposes when a stock transfer agent of
the Company shall have deposited the certificates in the United States mail,
addressed to the Grantee, and any cash payment shall be deemed effected when a
Company check, payable to Grantee and in an amount equal to the amount of the
cash payment, shall have been deposited in the United States mail, addressed to
the Grantee.
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<PAGE> 6
9. EARLY TERMINATION OF OPTION AND TANDEM SARS. Unless otherwise
determined by the Board in its sole discretion, the Series A Stock Option and
Series A Stock Tandem SARs shall terminate, prior to the expiration of the
Series A Stock Option Term, at the time specified below:
(a) If Grantee voluntarily elects to terminate his
directorship during the Option Term, then the Series A Stock Option and
Series A Stock Tandem SARs shall cease to vest as of the date of
termination of Grantee's directorship and shall terminate at the Close
of Business on the first business day following the expiration of the
90-day period which began on the date of termination of Grantee's
directorship.
(b) If Grantee ceases to be a director of the Company during
the Option Term for any reason other than voluntary termination,
including, but not limited to, the death of Grantee, the Series A Stock
Option and Series A Stock Tandem SARs shall terminate at the Close of
Business on the first business day following the expiration of the
one-year period which began on the date of death or date of termination
of Grantee's directorship.
In any event in which the Series A Stock Option and Series A Stock
Tandem SARs remain exercisable for a period of time following the date of
termination of Grantee's directorship as provided above, the Series A Stock
Option and Series A Stock Tandem SARs may be exercised during such period of
time only to the extent the same were exercisable as provided in paragraph 5
above on such date of termination of Grantee's directorship. Notwithstanding any
period of time referenced in this paragraph 9 or any other provision of this
paragraph that may be construed to the contrary, the Series A Stock Option and
all Series A Stock Tandem SARs shall in any event terminate upon the expiration
of the Option Term.
10. AUTOMATIC EXERCISE OF SERIES A STOCK TANDEM SARS. Immediately
prior to the termination of the Series A Stock Option, as provided in paragraph
9 above, or the expiration of the Option Term, all remaining Series A Stock
Tandem SARs shall be deemed to have been exercised by the Grantee.
11. NONTRANSFERABILITY OF SERIES A STOCK OPTION AND SERIES A STOCK
TANDEM SARS. During Grantee's lifetime, the Series A Stock Option and Series A
Stock Tandem SARs are not transferable (voluntarily or involuntarily) other than
pursuant to a domestic relations order and, except as otherwise required
pursuant to a domestic relations order, are exercisable only by the Grantee or
Grantee's court appointed legal representative. The Grantee may designate a
beneficiary or beneficiaries to whom the Series A Stock Option and Series A
Stock Tandem SARs shall pass upon Grantee's death and may change such
designation from time to time by filing a written designation of beneficiary or
beneficiaries with the Board on the form annexed hereto as Exhibit B or such
other form as may be prescribed by the Board, provided that no such designation
shall be effective unless so filed prior to the death of Grantee. If no such
designation is made or if the designated beneficiary does not survive the
Grantee's death, the Series A Stock Option and Series A Stock Tandem SARs shall
pass by will or the laws of descent and distribution. Following Grantee's death,
the Series A Stock Option and any Series A Stock Tandem SARs, if otherwise
exercisable,
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<PAGE> 7
may be exercised by the person to whom such option or right passes according to
the foregoing and such person shall be deemed the Grantee for purposes of any
applicable provisions of this Agreement.
12. NO SHAREHOLDER RIGHTS; NO GUARANTEE OF DIRECTORSHIP.
(a) The Grantee shall not be deemed for any purpose to be,
or to have any of the rights of, a stockholder of the Company with
respect to any shares of Series A Stock as to which this Agreement
relates until such shares shall have been issued to Grantee by the
Company. Furthermore, the existence of this Agreement shall not affect
in any way the right or power of the Company or its stockholders to
accomplish any corporate act.
(b) Nothing contained in this Agreement, and no action by
the Company or the Board with respect hereto, shall confer or be
construed to confer on Grantee any right to continue as a director of
the Company.
13. ADJUSTMENTS.
(a) The Series A Stock Option and Series A Stock Tandem SARs
shall be subject to adjustment (including, without limitation, as to the
number of Series A Stock Option Shares and the Series A Stock Option
Price per share) in the sole discretion of the Board and in such manner
as the Board may deem equitable and appropriate.
(b) In the event of any Approved Transaction, Board Change
or Control Purchase, the Series A Stock Option and all Series A Stock
Tandem SARs shall become exercisable in full without regard to paragraph
5(a); provided, however, that to the extent not theretofore exercised
the Series A Stock Option and all Series A Stock Tandem SARs shall
terminate, unless otherwise determined by the Board, upon the first to
occur of the consummation of the Approved Transaction, the expiration of
the Series A Stock Option Term or the earlier termination of the Series
A Stock Option and Series A Stock Tandem SARs pursuant to paragraph 9
hereof. Notwithstanding the foregoing, the Board may, in its discretion,
determine that the Series A Stock Option and Series A Stock Tandem SARs
will not become exercisable on an accelerated basis in connection with
an Approved Transaction and/or will not terminate if not exercised prior
to consummation of the Approved Transaction, if the Board or the
surviving or acquiring corporation, as the case may be, shall have taken
or made effective provision for the taking of such action as in the
opinion of the Board is equitable and appropriate to substitute a new
award for the Award evidenced by this Agreement or to assume this
Agreement and the Award evidenced hereby and in order to make such new
award or assumed Award, as nearly as may be practicable, equivalent to
the Award evidenced by this Agreement as then in effect (but before
giving effect to any acceleration of the exercisability hereof unless
otherwise determined by the Board), taking into account, to the extent
applicable, the kind and amount of securities, cash or other assets into
or for which the Series A Stock may be changed, converted or exchanged
in connection with the Approved Transaction.
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<PAGE> 8
14. RESTRICTIONS IMPOSED BY LAW. Grantee acknowledges that neither
the Series A Stock Option nor any of the Series A Stock Option Shares has been
registered under the Securities Act of 1933 and that the Series A Stock Option
Shares may not be transferred in the absence of such registration or the
availability of an exemption therefrom under such Act or the rules and
regulations of the Securities and Exchange Commission promulgated thereunder.
Neither the Company nor any other person shall have any obligation to register
any Series A Stock Option Shares, or any transfer of Series A Stock Option
Shares, under the Securities Act of 1933, the Securities Exchange Act of 1934 or
any other state or federal securities law. Certificates representing Series A
Stock Option Shares purchased by Grantee hereunder may bear such restrictive and
other legends as counsel for the Company shall require in order to insure
compliance with any such law or any rule or regulation promulgated thereunder.
The Grantee agrees that Grantee will not exercise the Series A Stock Option or
any Series A Stock Tandem SAR and that the Company will not be obligated to
deliver any shares of Series A Stock or make any cash payment, if counsel to the
Company determines that such exercise, delivery or payment would violate any
applicable law or any rule or regulation of any governmental authority or any
rule or regulation of, or agreement of the Company with, any securities exchange
or association upon which the Series A Stock is listed or quoted. The Company
shall in no event be obligated to take any affirmative action in order to cause
the exercise of the Series A Stock Option or any Series A Stock Tandem SAR or
the resulting delivery of shares of Series A Stock or other payment to comply
with any such law, rule, regulation or agreement.
15. NOTICE. Unless the Company notifies the Grantee in writing of a
different procedure, any notice or other communication to the Company with
respect to this Agreement shall be in writing and shall be:
(a) delivered personally to the following address:
TCI Music, Inc.
c/o Liberty Media Corporation
8101 East Prentice Avenue, Suite 500
Englewood, Colorado 80111
or
(b) sent by first class mail, postage prepaid and addressed
as follows:
TCI Music, Inc.
c/o Tele-Communications, Inc.
5619 DTC Parkway
Englewood, Colorado 80111
Attn: Legal Department
Any notice or other communication to the Grantee with respect to this Agreement
shall be in writing and shall be delivered personally, or shall be sent by first
class mail, postage prepaid, to Grantee's address as listed in the records of
the Company on the Effective Grant Date, unless the Company has received written
notification from the Grantee of a change of address.
8
<PAGE> 9
16. AMENDMENT. Notwithstanding any other provisions hereof, this
Agreement may be supplemented or amended from time to time as approved by the
Board. Without limiting the generality of the foregoing, without the consent of
the Grantee,
(a) this Agreement may be amended or supplemented (i) to
cure any ambiguity or to correct or supplement any provision herein
which may be defective or inconsistent with any other provision herein,
or (ii) to add to the covenants and agreements of the Company for the
benefit of Grantee or surrender any right or power reserved to or
conferred upon the Company in this Agreement, subject, however, to any
required approval of the Company's stockholders and, provided, in each
case, that such changes or corrections shall not adversely affect the
rights of Grantee with respect to the Award evidenced hereby, or (iii)
to make such other changes as the Company, upon advice of counsel,
determines are necessary or advisable because of the adoption or
promulgation of, or change in or of the interpretation of, any law or
governmental rule or regulation, including any applicable federal or
state securities laws; and
(b) subject to any required approval of the Company's
stockholders, the Award evidenced by this Agreement may be canceled by
the Board and a new Award made in substitution therefor, provided that
no such action shall adversely affect the Series A Stock Option or any
Series A Stock Tandem SAR to the extent then exercisable.
17. GOVERNING LAW. This Agreement shall be governed by, and
construed in accordance with, the internal laws of the State of Delaware.
18. CONSTRUCTION. References in this Agreement to "this Agreement"
and the words "herein," "hereof," "hereunder" and similar terms include all
Exhibits and Schedules appended hereto. All decisions of the Board upon
questions regarding this Agreement shall be conclusive. The headings of the
paragraphs of this Agreement have been included for convenience of reference
only, are not to be considered a part hereof and shall in no way modify or
restrict any of the terms or provisions hereof.
19. DUPLICATE ORIGINALS. The Company and the Grantee may sign any
number of copies of this Agreement. Each signed copy shall be an original, but
all of them together represent the same agreement.
20. RULES BY BOARD. The rights of the Grantee and obligations of the
Company hereunder shall be subject to such reasonable rules and regulations as
the Board may adopt from time to time hereafter.
21. ENTIRE AGREEMENT. This Agreement is in satisfaction of and in
lieu of all prior discussions and agreements, oral or written, between the
Company and Grantee regarding the subject matter hereof. Grantee and the Company
hereby declare and represent that no promise or agreement not herein expressed
has been made and that this Agreement contains the entire agreement between
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<PAGE> 10
the parties hereto with respect to the Series A Stock Options and Series A Stock
Tandem SARs and replaces and makes null and void any prior agreements between
Grantee and the Company regarding the Series A Stock Options.
22. GRANTEE ACCEPTANCE. Grantee shall signify acceptance of the
terms and conditions of this Agreement by signing in the space provided at the
end hereof and returning a signed copy to the Company.
TCI MUSIC, INC.
By: /s/ JOANNE WENDY KIM
--------------------------------------------
Name: Joanne Wendy Kim
------------------------------------------
Title: Vice President - Finance
-----------------------------------------
ACCEPTED:
/s/ PETER M. KERN
-----------------------------------------------
Peter M. Kern, Grantee
10
<PAGE> 11
Schedule 1 to Non-Qualified Stock Option
and Stock Appreciation Rights Agreement
dated as of July 11, 1997
TCI MUSIC, INC.
NON-QUALIFIED STOCK OPTION AND
STOCK APPRECIATION RIGHTS AGREEMENT
Grantee: Peter M. Kern
Grant Date: July 11, 1997
Option Price: $6.25 per share
Option Shares: 833,334 shares of Series A TCI Music Common Stock ("Series
A Stock"), $.01 par value per share.
11
<PAGE> 1
EXHIBIT 10.19
PARADIGM MUSIC ENTERTAINMENT COMPANY, INC.
67 Irving Place, 4th Floor
New York, New York 10003
January 1, 1996
Mr. Thomas McPartland
145 Glenlawn Avenue
Sea Cliff, New York 11579
Dear Tom:
Paradigm Music Entertainment Corporation, Inc., a New York corporation
(hereinafter referred to as "Paradigm"), agrees to employ you and you agree to
accept such employment under the following terms and conditions:
1. TERM OF EMPLOYMENT.
Except for earlier termination as provided in this Agreement, your employment
under this Agreement shall be for a term of three (3) years commencing on the
date hereof and terminating on December 31, 1998 (hereinafter referred to as
the "Term").
2. COMPENSATION.
(a) You shall be compensated for all services rendered by you under this
Agreement at the rate of Three Hundred Seventy-five Thousand Dollars ($375,000)
per annum (your "base salary"), payable in such manner as is consistent with
Paradigm's payroll practices for its most senior executive employees. Paradigm
currently pays its employees on a bi-weekly basis. Prior to December 31 of each
year during your employment with Paradigm, commencing with December 31, 1997,
the Board of Directors shall review your performance, the earnings of Paradigm
during the prior year and Paradigm's economic prospects for the coming year and
shall consider in its good faith business judgment and discretion whether to
increase the base salary payable to you hereunder.
(b) During the Term of your employment hereunder at such time as
determined by the Board following the completion of the audit of Paradigm's
financial statements for the fiscal year of Paradigm ending during such year of
employment, but in no case later than March 31, you shall receive additional
compensation in the form of a cash bonus based upon such performance goals and
objectives as shall be mutually determined, in good faith, by you and the Board.
<PAGE> 2
(c) Notwithstanding subparagraphs 2(a) and (b) hereinabove, you hereby
acknowledge and agree that your base salary shall not be increased during the
first thirteen (13) months of the Term.
(d) In addition to your salary, you shall be entitled to receive bonus
compensation for each of the calendar years, commencing February 1997, during
the Term, which will be based upon the measurement of performance against
reasonable objectives, mutually determined by you and the Board, in accordance
with the Paradigm incentive plan, as same may be amended from time to time.
3. EMPLOYMENT OF EXECUTIVE, ACCEPTANCE OF EMPLOYMENT; TIME AND ATTENTION.
(a) Paradigm hereby employs you as President, Chief Executive Officer and
Chairman of the Board of Paradigm to perform such duties and responsibilities
incident to such office, subject at all times to the reasonable control and
reasonable direction of the Board of Directors of Paradigm (hereinafter
referred to as the "Board"). You may be elected to such other offices as may,
from time to time, be determined by the mutual agreement of you and the Board.
(b) You hereby accept such employment and agree that throughout the period
of your employment hereunder, you will devote such time, attention, knowledge
and skills, faithfully, diligently, and to the best of your ability, in
furtherance of the business of Paradigm as is necessary to perform your duties
and responsibilities herein. As Chief Executive Officer, you shall be the
principal Executive Officer of Paradigm and shall in general, manage and
control all of the day-to-day operations of Paradigm. You shall have the
responsibility for and control of the day-to-day operations of the Paradigm,
including, but not limited to, developing and reviewing Paradigm's business
plans and its profit and cash budgets, formulating policies and marketing
strategies, setting inventory levels, selecting product manufacturers
evaluating personnel and subject to the reasonable approval of the Board, the
selection of operating officers and managers of Paradigm. You shall also
perform such specific duties and shall exercise such specific authority related
to the management of the day-to-day operations of Paradigm consistent with your
position of Chief Executive Officer as may be reasonably assigned to you from
time to time by the Board. You shall be President and Chief Executive Officer
of Paradigm. Promptly after the execution hereof you will be appointed a
Director of the Corporation.
Notwithstanding the foregoing in this paragraph, you shall not be
precluded from engaging in recreational, eleemosynary, educational and other
activities which do not materially interfere with his duties hereunder.
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<PAGE> 3
4. BENEFITS.
You shall be entitled to four (4) weeks vacation during each year of your
employment with Paradigm you shall be entitled to any other employee benefits
which are provided to senior executives of Paradigm. For example, you will be
eligible to participate in life and medical insurance, 401 (k), stock option
and other similar plans as the Board may have approved or may from time to time
hereafter approve for its senior executive employees and in accordance with the
terms of such plans. The foregoing, however, shall not be construed to require
Paradigm to establish any such plans or to prevent Paradigm from modifying or
terminating any such plans, and no such action or failure thereof shall affect
this Agreement.
5. EXPENSES.
Paradigm will promptly reimburse you for reasonable expenses, including
traveling expenses, actually incurred by you in connection with the business of
Paradigm upon the presentation by you of appropriate substantiation for such
expenses.
6. RESTRICTIVE COVENANTS.
(a) During such time as you shall be employed by Paradigm (the
"Restricted Period"), you shall not, without the consent of the Board, directly
or indirectly, become associated with, render services to, invest in,
represent, advise or otherwise participate in as an officer, employee,
director, stockholder, partner, promoter, agent of, consultant for or
otherwise, any business which is conducted in any of the jurisdictions in which
Paradigm's business is conducted and which is competitive with the business in
which Paradigm is engaged or plans to be engaged at the time your employment
with Paradigm ceases; provided, however, that nothing contained herein will
prevent you from owning less than five percent (5%) of any class of equity or
debt securities listed on a national securities exchange or traded in any
established over-the-counter securities market, so long as such involvement
with the issuer of any such securities is solely that of a passive investor.
(b) During the Restricted Period, you shall not employ or otherwise
engage, or offer to employ or otherwise engage, or solicit, entice or induce
for you or any other person, entity or corporation, the services or employment
of any person who is or has been an employee, sales representative, consultant
to or agent of Paradigm at the time of, or at any time during the year prior
to, the termination of your employment with Paradigm.
(c) The parties hereto intend that the covenants contained in this
Section 6 shall be deemed a series of separate covenants for each country,
state, county and city. If, in any judicial
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<PAGE> 4
proceeding, a court shall refuse to enforce all the separate covenants deemed
included in this Section 6 because, taken together, they cover too extensive a
geographic area the parties intend that those of such covenants (taken in order
of the cities, counties, states and countries therein which are least populous)
which if eliminated would permit the remaining separate covenants to be enforced
in such proceeding shall, for the purpose of such proceeding, be deemed
eliminated from the provisions of this Section 6.
(d) The provisions of this Section 6 shall survive your employment
hereunder and the termination of this Agreement for any reason whatsoever.
7. CONFIDENTIALITY, NON-INTERFERENCE AND PROPRIETARY INFORMATION.
(a) Confidentiality. In the course of your employment by Paradigm, you
will have access to and possession of valuable and important confidential or
proprietary data or information of Paradigm and its operations. You will not at
any time divulge or communicate to any person nor shall you direct any of
Paradigm's employees to divulge or communicate to any person (other than to a
person bound by confidentiality obligations similar to those contained herein
and other than as necessary in performing your duties hereunder) or use to the
detriment of Paradigm or for the benefit of any other person, any of such
confidential or proprietary data or information or make or remove any copies
thereof, whether or not marked or otherwise identified as confidential or
secret. You shall take all reasonable precautions in handling the confidential
or proprietary data or information, shall limit the use and circulation of the
confidential or proprietary data or information within Paradigm to a strict
need-to-know basis and shall comply with any and all security systems and
measures adopted from time to time by Paradigm to protect the confidentiality
of the confidential or proprietary data or information, however, you may
disclose such information when you are required to do so pursuant to a court or
governmental order.
(b) Confidential or Proprietary Data or Information. The term
"confidential or proprietary data or information" as used in this Agreement
shall mean information not generally available within industry or received from
a non-affiliated third party who is not bound by confidentiality, including,
without limitation, personnel information, financial information, customer
lists, supplier lists, trade secrets, information regarding operations,
systems, services, know how, computer and any other processed or collated data,
computer programs, pricing, marketing and advertising data.
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<PAGE> 5
(c) Non-Interference. You agree that, for the period one (1) year after
the termination or expiration of your employment hereunder, you will not at any
time after the termination of your employment with Paradigm, for your own
account or for the account of any other person, unduly interferes with
Paradigm's relationship with any of its suppliers, customers or employees.
However, this sub-paragraph is not intended to prevent you from pursuing the
professional services of performing artists which are not and have not been
under contract to Paradigm.
(d) Return of Property. All written materials, records and documents made
by you or coming into your possession during your employment concerning any
products, processes or equipment manufactured, used, developed, investigated or
considered by Paradigm or otherwise concerning the business or affairs of
Paradigm shall be the sole property of Paradigm, and upon termination of your
employment, or upon request of Paradigm during your employment, you shall
promptly deliver the same to Paradigm. In addition, upon termination of your
employment, or upon request of Paradigm during your employment, you will
deliver to Paradigm all other property belonging to Paradigm in your possession
or under your control, including, but not limited to, financial statements,
marketing and sales data, customer and supplier lists and other documents, and
all Paradigm credit cards.
(e) Paradigm. For purposes of this Section 7,"Paradigm" shall mean the
Company and any subsidiaries or affiliates of Paradigm.
(f) Survival. The provisions of this Section 7 shall survive your
employment hereunder and the termination of this Agreement for any reason
whatsoever.
8. EQUITABLE RELIEF.
With respect to the covenants contained in Sections 6 and 7 of this Agreement,
you agree that any remedy at law for any breach or threatened or attempted
breach of such covenants may be inadequate and that Paradigm shall be entitled
to seek specific performance or any other mode of injunctive and/or other
equitable relief to enforce its rights hereunder or any other relief to enforce
its rights hereunder or any other relief a court might award.
9. EARLIER TERMINATION.
(a) Your employment under this Agreement shall terminate on the
following terms and conditions:
(i) Your employment under this Agreement shall terminate
automatically on the date of your death.
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<PAGE> 6
ii) Your employment under this Agreement shall terminate immediately
upon a determination in the sole judgment of a third party physician that you
have been unable by reason of physical or mental disability to adequately
perform fully your duties hereunder for an aggregate of 90 calendar days
(whether or not continuous) during any period of 360 consecutive calendar days.
iii) Your employment under this Agreement shall terminate immediately
upon Paradigm sending your written notice terminating your employment hereunder
for just cause. For purposes of this Agreement, "just cause" shall include, but
not be limited to, (A) action by you involving dishonesty, fraud or misconduct,
(B) your conviction of a felony, or your willful refusal or any material
failure by you to perform your duties in accordance with this Agreement. A
written notice of termination in reasonable detail given to you by Paradigm
shall specify the reason(s) for such termination, and in the case where a cause
for termination shall be susceptible of cure, and such notice of termination is
the first notice of termination given to you for such reason, if you fail to
cure such cause for termination within fifteen (15) business days after the
date of such notice, termination shall be effective upon the expiration date of
such fifteen (15) day period, and if you cure such cause within said period,
such notice of termination shall be ineffective.
iv) If your employment is terminated during the Term pursuant to
Paragraph 9(a)(i), (ii) or (iii) herein above, Paradigm will pay you, in lieu
of any other payments hereunder, your base salary, bonus and vacation pay that
has accrued to that date and is payable under Paradigm's standard policies. You
acknowledge that upon receipt of such payment, Paradigm will have no further
obligations to you under this agreement.
(b) If Paradigm terminates this Agreement other than for cause, you
shall have the right to receive, for the unexpired Term, your base salary,
benefits and bonus, plus any base salary that has actually accrued to the date
of termination without regard to mitigation or offset by you.
10. ENTIRE AGREEMENT; MODIFICATION.
This Agreement constitutes the full and complete understanding of the parties
hereto and supersedes all prior agreements and understandings, oral or written,
with respect to the subject matter hereof, and as to any such prior agreements
and understandings you hereby acknowledge that you have no outstanding or
contingent rights or claims of any nature. Each party to this Agreement
acknowledges that no representations, inducements, promises or agreements oral
or otherwise, have been made by either party, or anyone acting on behalf of
either party, which are not embodied herein and that no other agreement,
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<PAGE> 7
statement or promise not contained in this Agreement shall be valid or binding.
This Agreement may not be modified or amended except by an instrument in writing
signed by the party against which enforcement may be sought.
11. SEVERABILITY.
Any term or provision of this Agreement which is invalid or unenforceable in any
jurisdiction shall, as to such jurisdiction, be ineffective to the extent of
such invalidity or unenforceability without rendering invalid or unenforceable
the remaining terms and provisions of this Agreement or affecting the validity
or enforceability of any of the terms or provisions of this Agreement in any
other jurisdiction.
12. WAIVER OF BREACH.
The waiver by either party of a breach of any provision of this Agreement, which
waiver must be in writing to be effective, shall not operate as or be construed
as a waiver of any subsequent breach.
13. NOTICES.
All notices hereunder shall be in writing and shall be sent by express mail or
by certified or registered mail, postage prepaid, return receipt requested, if
to you, to your residence as listed in Paradigm's records; and if to Paradigm,
to Paradigm Music Entertainment Company, 62 Irving Place, 4th floor, New York,
NY 10003 and to Olshan Grundman Frome & Rosenzweig LLP, 505 Park Avenue, New
York, New York 10022, Attention: Barry H. Platnick, Esq.
13. ASSIGNABILITY: BINDING EFFECT
This Agreement shall not be assignable by you. This Agreement shall be binding
upon and inure to the benefit of you, your legal representatives, heirs and
distributees, and shall be binding upon and inure to the benefit of Paradigm,
its successors and assigns.
14. THIRD PARTIES
Except as specifically set forth or referred to herein, nothing in this
Agreement, expressed or implied, is intended or shall be construed to confer
upon or give to any person or corporation other than the parties hereto and
their successors or permitted assigns any rights or remedies under or by reason
of this Agreement.
15. GOVERNING LAW.
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<PAGE> 8
This Agreement shall be construed and governed in accordance with the laws of
the State of New York, without giving effect to the conflicts or choice of law
provisions thereof.
16. HEADINGS.
The headings in this Agreement are intended solely for convenience of reference
and shall be given no effect in the construction or interpretation of this
Agreement.
17. REVIEW OF THIS AGREEMENT: NO CONFLICTING AGREEMENTS.
The parties hereto hereby acknowledge that they have carefully read this
Agreement and each hereby represents and warrants to each other that they are
entering into this Agreement, and the respective obligations and duties
undertaken by them hereunder, will not conflict with, constitute a breach of or
otherwise violate the terms of any employment or other agreement to which they
are a party and that each party is not required to obtain the consent of any
person, firm, corporation or other entity in order to enter into this Agreement.
If this letter correctly sets forth our understanding, please sign the
duplicate original in the space provided below and return it to Paradigm,
whereupon this shall constitute the Employment Agreement between you and
Paradigm effective for the term as stated herein.
PARADIGM MUSIC ENTERTAINMENT
COMPANY, INC.
By: /s/ LOUIS A. FALCIGNO
---------------------------
Louis A. Falcigno
Agreed as of the date
first above written:
/s/ THOMAS MCPARTLAND
- ---------------------
THOMAS MCPARTLAND
-8-
<PAGE> 1
EXHIBIT 10.20
REGISTRATION RIGHTS AGREEMENT
This Registration Rights Agreement (this "Agreement"), dated as of
December 31, 1997, is made by and between the undersigned stockholder or
warrantholder (the "Stockholder") of Paradigm Music Entertainment Company, a
Delaware corporation (the "Company"), and TCI Music, Inc., a Delaware
corporation ("TCI Music").
PRELIMINARY STATEMENTS
The Company and TCI Music have entered into an Agreement of Merger dated
as of December 8, 1997 (as the same may be amended from time to time, the
"Merger Agreement"), providing for the merger (the "Merger") of TCI Para Merger
Sub, Inc., a Delaware corporation and wholly owned subsidiary of TCI Music, with
and into the Company pursuant to the terms and conditions of the Merger
Agreement.
Upon consummation of the Merger, the stockholders of the Company will be
entitled to receive shares of TCI Music Common Stock in exchange for shares of
Company Common Stock owned by them, and certain holders of warrants to acquire
Company Common Stock ("Warrants"), in consideration of their agreement to cancel
such Warrants prior to the Effective Time, will be entitled to receive shares of
TCI Music Common Stock, in each case in amounts as set forth in the Merger
Agreement.
Pursuant to the terms of the Merger Agreement, TCI Music has agreed to
prepare and file with the SEC a Registration Statement (the "Registration
Statement") on Form S-3, or other appropriate form selected by TCI Music, with
respect to the public resale by those persons who are stockholders of the
Company as of the Effective Time or warrantholders who agree to cancel their
Warrants prior to the Effective Time, in each case who have executed and
delivered to TCI Music an agreement in the form of this Agreement and who
receive shares of TCI Music Common Stock in the Merger. The Stockholder desires
to have the shares of TCI Music Common Stock to be issued to the Stockholder in
the Merger (the "Shares") covered by the Registration Statement.
NOW, THEREFORE, for good and valuable consideration, the receipt,
sufficiency and adequacy of which are hereby acknowledged, the parties to this
Agreement agree as follows:
1. Defined Terms. Capitalized terms used in this Agreement and not
otherwise defined herein have the meanings assigned to them in the Merger
Agreement.
2. Registration.
(a) Registration. TCI Music shall file and shall use commercially
reasonable efforts to cause to become effective, on or before September 1, 1998,
or, if earlier, as soon as reasonably
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<PAGE> 2
practicable after expiration of the TCI Rights, a Registration Statement under
the Securities Act registering the sale of all the Shares issued in the Merger.
Any Shares required to be registered pursuant to this Agreement are referred to
herein as "Registrable Shares." The Stockholder may elect not to include all or
any portion of the Stockholder's Shares in the Registration Statement by giving
notice to TCI Music to that effect at any time before the Registration Statement
becomes effective, but thereafter shall not be entitled to any further rights to
have Shares registered pursuant to this Agreement. Registrable Shares sold
pursuant to the Registration Statement will be sold only in accordance with a
plan of distribution substantially to the effect set forth in Appendix A, which
plan of distribution will be set forth in the Prospectus included as part of the
Registration Statement. The Stockholder's registration rights under this
Agreement will terminate automatically at such time as the Stockholder is able
to sell without registration all of the Stockholder's Shares in a single
transaction pursuant to any exemption under the Securities Act. TCI Music shall
cease to have any obligation to effect a registration of the Registrable Shares
pursuant to this Agreement after one Registration Statement is declared
effective and remains effective for the period prescribed in Section 2(b)(i).
(b) Preparation and Filing of Registration Statement. In connection
with its obligation pursuant to this Agreement to use commercially reasonable
efforts to effect a registration of Registrable Shares, TCI Music shall, as
expeditiously as practicable:
(i) use commercially reasonable efforts to cause a
Registration Statement to become and remain effective for a period of 120 days
or until all of the Registrable Shares have been disposed of (if earlier);
(ii) furnish, at least five business days before filing the
Registration Statement, a draft of the prospectus to be included therein
("Prospectus") and any amendments or supplements relating to such Registration
Statement or Prospectus, to one legal counsel selected by a majority of the
holders of the Registrable Shares (the "Stockholders' Counsel"), and copies of
all other documents proposed to be filed (it being understood that such
five-business-day period need not apply to successive drafts of the same
document proposed to be filed so long as such successive drafts are supplied to
such Stockholders' Counsel in advance of the proposed filing by a period of time
that is reasonable under the circumstances);
(iii) prepare and file with the SEC such amendments and
supplements to such Registration Statement and Prospectus as may be necessary to
keep such Registration Statement effective for at least a period of 120 days or
until all of the Registrable Shares have been disposed of (if earlier) and to
comply with the provisions of the Securities Act with respect to the sale or
other disposition of the Registrable Shares;
(iv) notify the Stockholders' Counsel promptly in writing (A)
of any comments by the SEC with respect to such Registration Statement or
Prospectus, or any request by the SEC for the amending or supplementing thereof,
or for additional information with respect thereto, (B) of the issuance by the
SEC of any stop order suspending the effectiveness of such
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<PAGE> 3
Registration Statement or Prospectus or any amendment or supplement thereto or
the initiation of any proceedings for that purpose and (C) of the receipt by TCI
Music of any notification with respect to the suspension of the qualification of
the Registrable Shares for sale in any jurisdiction or the initiation or
threatening of any proceeding for such purposes;
(v) use commercially reasonable efforts to register or
qualify the Registrable Shares under the securities or blue sky laws of such
jurisdictions as any seller of Registrable Shares reasonably requests and do any
and all other acts and things which may be reasonably necessary or advisable to
enable such seller to consummate the disposition of Registrable Shares in such
jurisdictions; provided, however, that TCI Music will not be required to qualify
generally to do business, subject itself to general taxation or consent to
general service of process in any jurisdiction where it otherwise would not be
required to do so but for this clause;
(vi) furnish to each seller of Registrable Shares such number
of copies of the Prospectus, including a preliminary Prospectus, in conformity
with the requirements of the Securities Act, and such other documents as such
seller of Registrable Shares may reasonably request, in order to facilitate the
public sale or other disposition of the Registrable Shares;
(vii) use commercially reasonable efforts to cause the
Registrable Shares to be registered with or approved by such other governmental
agencies or authorities as may be necessary by virtue of the business and
operations of TCI Music to enable the seller or sellers thereof to consummate
the disposition of the Registrable Shares;
(viii) notify on a timely basis each seller of Registrable
Shares at any time when a Prospectus relating to the Registrable Shares is
required to be delivered under the Securities Act within the appropriate period
mentioned in clause (i) of this Section of the happening of any event as a
result of which the Prospectus included in such Registration Statement, as then
in effect, includes an untrue statement of a material fact or omits to state a
material fact required to be stated therein or necessary to make the statements
therein not misleading in light of the circumstances then existing and, at the
request of such seller, prepare and furnish to such seller a reasonable number
of copies of a supplement to or an amendment of such Prospectus as may be
necessary so that, as thereafter delivered to the offerees of such Registrable
Shares, such Prospectus shall not include an untrue statement of a material fact
or omit to state a material fact required to be stated therein or necessary to
make the statements therein not misleading in light of the circumstances then
existing;
(ix) make available for inspection by any seller of
Registrable Shares, and any attorney, accountant or other agent retained by any
such seller (collectively, the "Inspectors"), all pertinent financial, business
or other records, corporate documents and properties of TCI Music (collectively,
the "Records") as shall be reasonably necessary to enable them to exercise their
due diligence responsibility, and cause TCI Music's officers, directors and
employees to supply all information (together with the Records, the
"Information") reasonably requested by any such Inspector in connection with
such Registration Statement (and any of the Information which TCI Music
determines in good faith to be confidential, and of which determination the
Inspectors are so
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<PAGE> 4
notified, shall not be disclosed by the Inspectors unless (A) the disclosure of
such Information is necessary to avoid or correct a misstatement or omission in
the Registration Statement, (B) the release of such Information is ordered
pursuant to a subpoena or other order from a court of competent jurisdiction or
(C) such Information has been made generally available to the public, and the
seller of Registrable Shares agrees that it will, upon learning that disclosure
of such Information is sought in a court of competent jurisdiction, give notice
to TCI Music and allow TCI Music, at TCI Music's expense, to undertake
appropriate action to prevent disclosure of the Information deemed
confidential);
(x) provide a transfer agent and registrar (which may be the
same entity and which may be TCI Music) for the Registrable Shares;
(xi) use commercially reasonable efforts to list Registrable
Shares on any national securities exchange on which any shares of the Common
Stock of TCI Music are listed, or if TCI Music Common Stock is not listed on a
national securities exchange, use commercially reasonable efforts to qualify the
Registrable Shares for quotation on the NASDAQ or such other national securities
exchange as the holders of a majority of the Registrable Shares shall request;
(xii) use commercially reasonable efforts to comply with all
applicable rules and regulations of the SEC, and make available to its
stockholders, as soon as reasonably practicable, earnings statements (which need
not be audited) covering a period of 12 months beginning within three months
after the effective date of the Registration Statement, which earnings
statements shall satisfy the provisions of Section 11(a) of the Securities Act;
and
(xiii) use commercially reasonable efforts to take all other
steps necessary to effect the registration of the sale of the Registrable Shares
contemplated hereby and to keep such registration effective during the period
prescribed by Section 2(b)(i), except as provided in Section 2(c).
(c) Blackout Rights. Notwithstanding any other provision of this
Agreement to the contrary, if at any time after the 15th day after the
Registration Statement is declared effective by the SEC, TCI Music determines,
in its reasonable business judgment, that the registration and offering to be
effected pursuant to the Registration Statement could interfere with or
otherwise adversely affect any financing, acquisition, sale, merger,
consolidation or other material transaction or development involving TCI Music
or any of its affiliates or require TCI Music to disclose any matter that
otherwise would not be required to be disclosed at such time, then TCI Music may
require the suspension by the Stockholder of the distribution of any of the
Registrable Shares by giving notice to the Stockholder. Any such notice need not
specify the reasons for such suspension if TCI Music determines, in its
reasonable judgment, that doing so would interfere with or adversely affect such
transaction or development or would result in the disclosure of material
non-public information. Subject to the following sentence, until TCI Music has
determined, in its reasonable judgment, that such suspension is no longer
necessary and has given notice of that determination to the Stockholder, TCI
Music's obligations to use commercially reasonable efforts to cause the
Registration Statement
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<PAGE> 5
to remain effective and the Stockholder's right to sell Registrable Shares under
the Registration Statement will be suspended. TCI Music may exercise its right
to suspend the Stockholder's registration rights pursuant to this subparagraph
(c) on only one occasion and then for a period not to exceed 30 days, and the
period during which TCI Music is required to cause the Registration Statement to
remain effective will be extended by a period equal to the period of such
suspension. In addition, TCI Music's right to suspend the Stockholder's
registration rights pursuant to this subparagraph (c) is subject to the
condition that such suspension shall apply similarly to all other Stockholders
who acquire Shares in the Merger and to each other holder of TCI Music Common
Stock having registration rights reasonably comparable to those granted under
this Agreement.
3. Information and Compliance with Legal Requirements. The Stockholder
agrees to cooperate fully with TCI Music in the preparation and filing of a
Registration Statement pursuant to this Agreement and further covenants that all
information supplied or to be supplied in writing to TCI Music by the
Stockholder or any of the Stockholder's representatives expressly for inclusion
in the Registration Statement, any Prospectus and any amendment or supplement
thereto will not contain any untrue statement of a material fact or omit to
state any material fact required to be stated therein or necessary in order to
make the statements therein, in light of the circumstances under which they were
made, not misleading.
4. Expenses. TCI Music will be responsible for all expenses incurred by TCI
Music in complying with Section 2, including, without limitation, all
registration and filing fees, fees and expenses of complying with securities and
blue sky laws, printing expenses and fees and expenses of TCI Music's counsel
and accountants. The Stockholder will be responsible for all underwriting or
broker's discounts and commissions and transfer taxes, if any, relating to the
resale by the Stockholder of the Stockholder's Shares, as well as all fees and
expenses of counsel and of any other advisor to the Stockholder.
5. Indemnification.
(a) Indemnification by TCI Music. TCI Music agrees to indemnify and
hold harmless the Stockholder and each person (if any) who controls such
Stockholder within the meaning of either the Securities Act or the Exchange Act
(collectively, the "Seller Indemnified Parties") from and against any losses,
claims, damages or liabilities (collectively "Losses"), joint or several, to
which such Seller Indemnified Parties may become subject, insofar as such
losses, claims, damages or liabilities (or actions in respect thereof) are based
upon any untrue statement or alleged untrue statement of a material fact
contained in the Registration Statement or the Prospectus, or any omission or
alleged omission to state therein a material fact required to be stated therein
or necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading; and, subject to Section 5(c), TCI Music
will reimburse such Seller Indemnified Parties for any legal or other expenses
reasonably incurred by them in connection with investigating or defending any
such Losses; provided, however, that TCI Music will not indemnify or hold
harmless any Seller Indemnified Party from or against any such Losses (i) that
arise out of or are based upon any violation of any federal or state securities
laws, rules or regulations committed by any of the Seller Indemnified
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<PAGE> 6
Parties (or any person who controls any of them or any agent, broker-dealer or
underwriter engaged by them) or in the case of a non-underwritten offering, any
failure by such Stockholder to give any purchaser of Registrable Shares, at or
prior to the written confirmation of such sale, a copy of the most recent
Prospectus or (ii) if the untrue statement, omission or allegation thereof upon
which such Losses or expenses are based (x) was made in reliance upon and in
conformity with the information provided by or on behalf of any Seller
Indemnified Party specifically for use or inclusion in the Registration
Statement or any Prospectus, or (y) was made in any Prospectus used after such
time as TCI Music advised such Stockholder that the filing of a post-effective
amendment or supplement thereto was required, except the Prospectus as so
amended or supplemented, or (z) was made in any Prospectus used after such time
as the obligation of TCI Music hereunder to keep the Registration Statement
effective and current has expired or been suspended hereunder.
(b) Indemnification by Stockholder. The Stockholder, severally and
not jointly, agrees to indemnify and hold harmless TCI Music, its directors and
officers and each person, if any, who controls TCI Music within the meaning of
either the Securities Act or the Exchange Act (the "TCI Music Indemnified
Parties"), from and against any Losses, joint or several, to which the TCI Music
Indemnified Parties may become subject, insofar as such Losses (or actions in
respect thereof) arise out of or are based upon (i) any untrue statement or
alleged untrue statement of a material fact contained in the Registration
Statement or the Prospectus, or any omission or alleged omission to state
therein a material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading, if the statement or omission was made in reliance upon and in
conformity with the information provided by or on behalf of such Stockholder or
any person who controls such Stockholder specifically for use or inclusion in
the Registration Statement or any Prospectus, (ii) the use of any Prospectus
after such time as TCI Music has advised such Stockholder that the filing of a
post-effective amendment or supplement thereto is required, except the
Prospectus as so amended or supplemented, (iii) the use of any Prospectus after
such time as the obligation of TCI Music hereunder to keep the Registration
Statement effective and current has expired or been suspended hereunder or (iv)
any violation by such Stockholder or any person who controls such Stockholder
within the meaning of either the Securities Act or the Exchange Act (or any
agent, broker-dealer or underwriter engaged by such Stockholder or any such
controlling person) of any federal or state securities law or rule or regulation
thereunder or any failure by such Stockholder to give any purchaser of
Registrable Shares at or prior to the written confirmation of such sale a copy
of the most recent Prospectus; and, subject to Section 5(c), such Stockholder
will reimburse such TCI Music Indemnified Parties for any legal or other
expenses reasonably incurred by them in connection with investigating or
defending any such Losses. For purposes of this Agreement, including but not
limited to clause (i) of the preceding sentence and clause (ii) of the last
sentence of Section 5(a), any information concerning any Seller Indemnified
Party or plan of distribution included in any Registration Statement or
Prospectus which is provided to the Stockholder for his review within a
reasonable period before filing or use thereof and as to which such Stockholder
has not promptly provided written notice of objection or correction to TCI Music
will be deemed to have been provided by such Stockholder specifically for use in
such Registration Statement or Prospectus.
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<PAGE> 7
(c) Indemnification Procedure. Each party entitled to
indemnification under this Section 5 (the "Indemnified Party") will give notice
to the party required to provide indemnification (the "Indemnifying Party")
promptly after such Indemnified Party has actual knowledge of any claim as to
which indemnity may be sought, and the Indemnifying Party may participate at its
own expense in the defense, or if it so elects, to assume the defense of any
such claim and any action or proceeding resulting therefrom, including the
employment of counsel and the payment of all expenses. The failure of any
Indemnified Party to give notice as provided herein will not relieve the
Indemnifying Party from its obligations to indemnify such Indemnified Party,
except to the extent the Indemnified Party's failure to so notify actually
prejudices the Indemnifying Party's ability to defend against such claim, action
or proceeding. If the Indemnifying Party elects to assume the defense in any
action or proceeding, the Indemnified Party will have the right to employ
separate counsel in any such action or proceeding and to participate in the
defense thereof, but the fees and expenses of such separate counsel will be such
Indemnified Party's expense unless (i) the Indemnifying Party has agreed to pay
such fees and expenses or (ii) the named parties to any such action or
proceeding (including any impleaded parties) include an Indemnified Party and
the Indemnifying Party, and such Indemnified Party will have been advised by
counsel that there may be a conflict of interest between such Indemnified Party
and the Indemnifying Party in the conduct of the defense of such action (in
which case, if such Indemnified Party notifies the Indemnifying Party in writing
that it elects to employ separate counsel at the expense of the Indemnifying
Party, the Indemnifying Party will not assume the defense of such action or
proceeding on such Indemnified Party's behalf, it being understood, however,
that the Indemnifying Party will not, in connection with any one such action or
proceeding or separate but substantially similar or related actions or
proceedings arising out of the same general allegations or circumstances, be
liable for the reasonable fees and expenses of more than one separate firm of
attorneys at any time for all Indemnified Parties, which firm will be designated
in writing by the Stockholder or TCI Music, as the case may be). No Indemnifying
Party, in the defense of any such claim or litigation, will, except with the
consent of the Indemnified Party, consent to entry of any judgment or enter into
any settlement which does not include as an unconditional term thereof the
giving by the claimant or plaintiff to such Indemnified Party of a release from
all liability with respect to such claim or litigation. The Indemnifying Party
will not be liable for any settlement of any such action or proceeding effected
without its written consent, but if settled with its written consent, or if
there be a final judgment for the plaintiff in any such action or proceeding,
the Indemnifying Party will indemnify and hold harmless the Indemnified Party
from and against any loss or liability by reason of such settlement or judgment.
(d) Allocation and Contribution. If the indemnification provided for
under this Section 5 is unavailable to or insufficient to hold the Indemnified
Party harmless in respect of any Losses referred to in subparagraphs (a) or (b)
above for any reason other than as specified therein, then the Indemnifying
Party will contribute to the amount paid or payable by such Indemnified Party as
a result of such losses, claims, damages or liabilities (i) in such proportion
as is appropriate to reflect the relative benefits received by the Indemnifying
Party on the one
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<PAGE> 8
hand and such Indemnified Party on the other from the subject offering or
distribution or (ii) if the allocation provided by clause (i) above is not
permitted by applicable law, in such proportion as is appropriate to reflect not
only the relative benefits referred to in clause (i) above but also the relative
fault of the Indemnifying Party on the one hand and such Indemnified Party on
the other in connection with the statements or omissions which resulted in such
Losses as well as any other relevant equitable considerations. The relative
benefits received by the Indemnifying Party on the one hand and the Indemnified
Party on the other hand will be deemed to be in the same proportion as the net
proceeds of the offering or other distribution (after deducting expenses)
received by the Indemnifying Party bears to the net proceeds of the offering or
other distribution (after deducting expenses) received by the Indemnified Party.
The relative fault will be determined by reference to, among other things,
whether the untrue or alleged untrue statement of a material fact or the
omission or alleged omission to state a material fact relates to information
supplied by (or omitted to be supplied by) TCI Music or the Stockholder, the
parties' relative intent, knowledge, access to information and opportunity to
correct or prevent such statement or omission, the relative benefits received by
each party from the sale of the Registrable Shares and any other equitable
considerations appropriate under the circumstances. The amount paid or payable
by an Indemnified Party as a result of the Losses referred to above in this
subsection (d) will be deemed to include any legal or other expenses reasonably
incurred by such Indemnified Party in connection with investigating or defending
any such action or claim. No person who was guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Securities Act)
will be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation.
6. Further Assurances. For one year after the Closing Date, the Stockholder
will take such other actions and enter into such other agreements as may be
deemed reasonably necessary or advisable by TCI Music in connection with any
resale by the Stockholder of the Shares.
7. Miscellaneous.
(a) Entire Agreement. This Agreement constitutes the entire
agreement between the parties with respect to the subject matter hereof and
supersedes all prior written and oral, and all contemporaneous oral, agreements
and understandings with respect to the subject matter of this Agreement.
(b) Notices. All notices and other communications hereunder will be
in writing and will be deemed to have been duly given when delivered in person,
by telecopy, or by registered or certified mail (postage prepaid, return receipt
requested) to the respective parties as follows:
If to TCI Music: TCI Music, Inc.
8101 East Prentice Avenue, Suite 500
Englewood, Colorado 80111
Telecopy: (303) 721-5443
Attention: President
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<PAGE> 9
With a copy to: Legal Department
Terrace Tower II
5619 DTC Parkway
Englewood, Colorado 80111-3000
Telecopy: (303) 488-3217
And a copy to: Sherman & Howard L.L.C.
633 Seventeenth Street, Suite 3000
Denver, Colorado 80202
Telecopy: (303) 298-0940
Attention: Charles Y. Tanabe, Esq.
If to Stockholder: To the address or telecopy number set forth for
the Stockholder on the signature page hereof
or to such other address as the party to whom notice is given may have
previously furnished to the others in writing in the manner set forth above. Any
notice or communication delivered in person will be deemed effective on
delivery. Any notice or communication sent by telecopy will be deemed effective
when confirmed. Any notice or communication sent by registered or certified
mail, return receipt requested, will be deemed effective when received, as
evidenced by the return receipt.
(c) GOVERNING LAW. THIS AGREEMENT WILL BE GOVERNED BY AND CONSTRUED
IN ACCORDANCE WITH THE LAWS OF THE STATE OF DELAWARE REGARDLESS OF THE LAWS THAT
MIGHT OTHERWISE GOVERN UNDER PRINCIPLES OF CONFLICTS OF LAWS APPLICABLE THERETO.
(d) Rules of Construction. The descriptive headings in this
Agreement are inserted for convenience of reference only and are not intended to
be part of or to affect the meaning or interpretation of this Agreement. Words
used in this Agreement, regardless of the gender and number specifically used,
will be deemed and construed to include any other gender, masculine, feminine,
or neuter, and any other number, singular or plural, as the context requires. As
used in this Agreement, the word "including" is not limiting, and the word "or"
is not exclusive.
(e) Parties in Interest. This Agreement will be binding upon and
inure solely to the benefit of the parties to this Agreement and their legal
successors-in-interest, and nothing in this Agreement, express or implied, is
intended to confer upon any other person any rights or remedies of any nature
whatsoever under or by reason of this Agreement.
(f) Counterparts. This Agreement may be executed in counterparts,
each of which will be deemed to be an original, but all of which will constitute
one and the same agreement.
(g) Assignment. This Agreement may not be assigned by either party
to this Agreement.
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<PAGE> 10
(h) Amendment. This Agreement may not be amended except by an
instrument in writing signed on behalf of both the parties.
(i) Extension; Waiver. Either party to this Agreement may (a) agree
to extend the time for the performance of any of the obligations or other acts
of the other party to this Agreement, (b) waive any inaccuracies in the
representations and warranties of the other party contained herein or in any
document, certificate, or writing delivered pursuant to this Agreement by the
other party, or ( c) waive compliance by the other party with any of the
agreements or conditions contained herein or any breach thereof. Any agreement
on the part of either party to any such extension or waiver will be valid only
if set forth in an instrument in writing signed on behalf of such party.
(j) Legal Fees; Costs. If either party to this Agreement institutes
any action or proceeding, whether before a court or arbitrator, to enforce any
provision of this Agreement, the prevailing party therein will be entitled to
receive from the losing party reasonable attorneys' fees and costs incurred in
such action or proceeding, whether or not such action or proceeding is
prosecuted to judgment.
IN WITNESS WHEREOF, the parties have executed and delivered this
Agreement as of the date first written above.
TCI MUSIC, INC.
By: /s/ DAVID B. KOFF
----------------------------------------
David B. Koff, President
STOCKHOLDER
By: /s/ THOMAS MCPARTLAND, ATTORNEY-IN-FACT
----------------------------------------
Thomas McPartland, Attorney-in-Fact
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APPENDIX A
The Registrable Shares may be sold by the selling stockholders directly
or through agents designated from time to time or to or through broker-dealers
designated from time to time. To the extent required, the name of any such agent
or broker-dealer involved in the offer and sale of the Registrable Shares and
any applicable commissions, discounts or other items constituting compensation
to such agents or broker-dealers will be set forth in a Prospectus Supplement.
The distribution of the Registrable Shares may be effected from time to
time in one or more transactions at a fixed price or prices, which may be
changed, at market prices prevailing at the time of sale, at prices related to
such prevailing market prices or at prices determined on a negotiated or
competitive bid basis. Registrable Shares may be sold through a broker-dealer
acting as agent or broker for selling stockholders, or to a broker-dealer acting
as principal. In the latter case, the broker-dealer may then resell such
Registrable Shares to the public at varying prices to be determined by such
broker-dealer at the time of resale.
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<PAGE> 1
EXHIBIT 10.58
Execution Agreement
AFFILIATION AGREEMENT
THIS AGREEMENT made as of the 27th day of February, 1997 is by and
between THE BOX Worldwide, Inc., a Florida corporation ("Network"), and
Satellite Services, Inc., a Delaware corporation ("Affiliate"), regarding the
cable television programming services collectively and currently known as "The
Box" (whether in their current analog format or in any other digitized,
compressed, modified, replaced or otherwise manipulated format; whether
satellite-delivered [the "Satellite Service"] and/or locally individualized,
constituted and delivered [the "Primary Service"] via a music video
server/jukebox [an "Earthbox"], which programming services may be referred to
hereinafter together or singly as the "Services" or the "Service", and which
references shall all be interpreted, whether in the singular or plural form, in
the way most favorable to Affiliate). The parties hereby mutually agree as
follows:
1. RIGHTS:
(a) Grant of Rights. Network hereby grants to Affiliate and
its affiliates, and Affiliate hereby accepts on behalf of itself and its
affiliates,
(i) the non-exclusive right, but not the obligation, to
exhibit, distribute and authorize the reception of each Service
by cable or other wire or fiber optic transmission system or any
other transmission path provided by a material substance, whether
now existing or developed in the future, ("Cable") in the
Operating Areas (as defined herein) of Cable Systems (as defined
herein);
(ii) the non-exclusive right, but not the obligation, to
exhibit, distribute and authorize the reception of each Service
by any satellite master antenna television system ("SMATV"),
multipoint distribution service ("MDS"), multichannel multipoint
distribution service ("MMDS"), any system or enterprise
(regardless of whether such system or enterprise is affiliated
with the owner and/or operator of any required distribution
equipment) that distributes audio/visual signals and/or
programming over the distribution facilities of a common carrier
by means of a video dialtone connection or other common carrier
arrangement, whether now existing or developed in the future
("OVS/VDT"), and/or any other system or enterprise that
distributes audio/visual signals and/or programming by any other
means of distribution, whether
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now existing or developed in the future, that meets the System
Qualifications of Exhibit A hereto;
(iii) the non-exclusive right, but not the obligation, to
exhibit and subdistribute each Service to, and authorize the
reception of each Service by, any MDS, MMDS and/or any other
system or enterprise that distributes audio/visual signals and/or
programming by any other means of distribution (other than Cable
and OVS/VDT), whether now existing or developed in the future,
that does not meet the System Qualifications of Exhibit A hereto,
but that is located within and/or serving customers located
within the Distribution Areas (as defined herein) of Cable
Systems or any other video distribution system or enterprise that
meets the System Qualifications of Exhibit A hereto;
(iv) the non-exclusive right, but not the obligation, to
exhibit and subdistribute the Service to, and authorize the
reception of the Service by, any SMATV that does not meet the
System Qualifications of Exhibit A hereto; and
(iv) the non-exclusive right, but not the obligation, to
exhibit, distribute, subdistribute and authorize the reception of
each Service nationwide (including, collectively, the United
States, the District of Columbia and the territories, possessions
and commonwealths of the United States) to any person or entity
that receives the signal of either or both of the Services by
means of equipment capable of receiving audio/visual signals
and/or programming directly from any satellite, whether now
existing or developed in the future, including, without
limitation, C-Band and Ku-Band signals, whether or not such
signals are digitized, compressed, modified, replaced or
otherwise manipulated, including tier-bit access rights and
tier-addressed messaging rights ("Satellite").
The rights granted to Affiliate in this Section 1(a) and elsewhere in
this Agreement are also granted hereby to any affiliate of Affiliate. As used in
this Agreement, an "affiliate of Affiliate" shall include any entity meeting the
requirements of paragraphs I.1, II or III of Exhibit A hereto as if such entity
were a Cable television system or other video distribution system or enterprise.
"Operating Area" of a Cable television system or other video
distribution system or enterprise shall mean that geographic area where the
owner or operator of the system or enterprise is authorized by appropriate
governmental authority to operate an audio or video distribution facility and is
operating an audio or video distribution facility within such area; provided,
however, that if a franchise or license is not required for the distribution of
television services in a particular geographic
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<PAGE> 3
area, then the Operating Area of a system or enterprise shall mean that
geographic area where the system or enterprise is operating regardless of the
presence or absence of a franchise or license.
"Distribution Area" of a Cable television system or other video
distribution system or enterprise shall mean (A) the Operating Area of such
system or enterprise, (B) other areas of counties in which the Operating Area of
such system or enterprise is wholly or partially located but which areas are not
the subject of a Cable television franchise or license or, if a Cable television
franchise or license exists in such areas, the owner or operator of such
franchise or license is not distributing the Services, and (C) areas of counties
(which areas are contiguous to counties where an Operating Area of a system or
enterprise is wholly or partially located) that are not the subject of a Cable
television franchise or license or, if a Cable television franchise or license
exists in such areas, the owner or operator of such franchise or license is not
distributing the Services within such areas.
"Cable System(s)" shall mean any audio and/or video distribution system
or enterprise that (1) meets the System Qualifications of Exhibit A hereto, and
(2) provides television services, which may include other audio/visual services,
by Cable.
"Subdistribute" or "subdistribution" shall mean the distribution of a
Service by Affiliate, or an affiliate of Affiliate, to an unaffiliated third
party who in turn sells such Service to a viewing customer, where such third
party pays Affiliate, or an affiliate of Affiliate, fees for licensing of such
Service, as opposed to only transport fees, some portion of which is then paid
to Network by Affiliate pursuant to the terms of this Agreement.
"Alternative Technology(ies)" shall mean SMATV, MDS, MMDS, OVS/VDT,
Satellite and/or any other means of distribution (other than Cable) whether now
existing or developed in the future.
(b) Affiliate shall have the right, upon written notice to Network
within thirty (30) days thereof, to elect to include under this Agreement, and
to demand authorization from Network, if necessary, and if elected by Affiliate,
to launch, relaunch, or to continue to distribute (x) the Satellite Service
and/or (y) subject to the provisions of Section 4(b) hereof, the Primary Service
on any Cable television system or other video distribution system or enterprise
(regardless of whether such system or enterprise is affiliated with the owner of
any required distribution equipment) that meets the System Qualifications of
Exhibit A hereto (or for which Affiliate has and exercises subdistribution
rights as provided in Sections 1(a)(iii) through (v) hereof and regardless of
whether such system or enterprise is a Cable television system. Any Cable
television system or other video distribution system or enterprise that
Affiliate elects to include under this Agreement shall be referred to in this
Agreement, individually, as a "System" or, collectively, as
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<PAGE> 4
"Systems". Upon receipt of such a notice, Schedule 1 hereof shall be deemed to
include such System, and such System shall be included as a System under this
Agreement as of the later of: (i) the launch or relaunch date of a Service on
such System, (ii) the date such System first meets the qualifications of Exhibit
A hereto, or (iii) the date for inclusion specified in such notice if such
notice is properly given pursuant to Section 11 hereof. Any then-existing
agreement between or among Network and any one or more third parties applicable
to any such System for carriage of such Service shall terminate and cease to be
effective with respect to such System as of the effective date of the addition
or deemed addition of such System to Schedule 1. Affiliate shall have the right,
in Affiliate's sole and absolute discretion, to discontinue carriage of either
or both Services on any or all Systems, and to delete any or all Systems from
Schedule 1 hereto, by providing Network with written notice within forty-five
(45) days of such deletion.
2. TERM:
(a) Unless earlier terminated pursuant to the terms of this
Agreement, the "Term" of this Agreement shall consist of, collectively, the
Initial Term and any number of Renewal Terms (each as defined herein). The
"Initial Term" of this Agreement shall be for seven (7) years commencing as of
the date hereof.
(b) This Agreement shall automatically renew for successive five
(5) year periods (each a "Renewal Term" and the first such Renewal Term, if any,
shall be referred to herein as the "First Renewal Term") after the expiration of
the Initial Term, and each Renewal Term, unless either, (i) this Agreement is
terminated earlier in accordance with the terms hereof, or (ii) Affiliate
provides written notice to Network of its intent to terminate this Agreement, in
Affiliate's sole and absolute discretion, a minimum of forty-five (45) days
prior to the end of the Initial Term or any Renewal Term.
3. CONTENT OF THE SERVICES:
(a) Based upon a weekly average, during the Term the programming on
the Primary Service shall contain not less than [ * ] music
videos. Based upon a weekly average, during the Term the programming on the
Satellite Service shall contain not less than [ * ] music videos.
Neither advertising announcements (for which Network is compensated by a third
party, not including affiliated entities), nor marketing and promotional
announcements (for which Network is not compensated by a third party, including
affiliated entities) shall be deemed to be programming for the purpose of
calculating the percentages set forth in the first two sentences of this Section
3(a). Network shall, during each month of the Term, send one (1) copy of its
monthly program schedule for each Service (if any) to Affiliate, in care of:
Programming Department. Network agrees that neither of the Services shall
contain (i) programming that has received, or had it been rated would have
received, an MPAA "X" or "NC-17"
* Indicates that material has been omitted and confidential treatment has
been requested therefor. All such omitted material has been filed separately
with the Commission pursuant to Rule 24b-2.
4
<PAGE> 5
rating; (ii) religious programming; (iii) a sufficient quantity of children's
programming such that either Service could be characterized as a children's
programming service; (iv) live or taped excerpts or entire portions of actual
courtroom trials, hearings or other similar proceedings as a substantial
component of the programming; (v) pay-per-view movies or events; (vi) financial
news; (vii) blackouts; or (viii) direct on air sales programming (as defined
herein). Notwithstanding the foregoing, each Service may include direct on-air
sales programming (not to exceed [ * ] in length) in the commercial
announcement time allotted to Network pursuant to Section 3(b) hereof; and up to
[ * ] in each hour for the marketing of Network products and Network
licensed merchandise ("Network Merchandising") as provided in Section 3(b)
hereof.
(b) Network shall make available to Affiliate not less than
[ * ] of commercial announcement time per hour of each Service, to be used at
Affiliate's option and control. All such commercial announcement time shall be
equally distributed throughout each and every hour of the applicable Service.
Furthermore, at any time the programming on either Service is anything other
than music videos, none of the commercial announcement time provided to
Affiliate in connection with such programming shall occur during a terminal
break. For purposes of this Section 3(b), "terminal break" shall mean the period
between the actual or apparent end of one program and the actual or apparent
beginning of another program. Affiliate shall have the right to retain for
itself all of the proceeds derived from the sale of the commercial announcement
time furnished to it hereunder. Network commercial announcement time on either
Service shall not exceed ten (10) minutes in any hour; provided, however, that
Network Merchandising shall not be included for purposes of determining the
number of commercial announcement minutes allotted to Network under this Section
3(b). If, in any System, Affiliate is not using the commercial announcement time
allotted to it hereunder, then Network may use Affiliate's unused commercial
announcement time in such System for its own promotional (but not commercial)
announcements. If, pursuant to the immediately preceding sentence, Network is
using any or all of Affiliate's commercial announcement minutes for promotional
announcements on either Service, such announcements may be pre-empted by such
System at any time to insert its own commercial or promotional announcements.
Network shall properly "tone-switch", using industry-recognized equipment, via
audible or inaudible signals, all commercial announcement minutes contained
within the programming of the Satellite Service to enable Affiliate to insert
its commercial announcements. At Affiliate's sole option, Network shall either
(x) properly program each Earthbox with the necessary switching cues to enable
Affiliate to insert its commercial announcements in the Primary Service or (y)
insert Affiliate's commercial announcements in a manner to be mutually agreed on
by the parties hereto. If Network fails properly to "tone-switch" (or, in the
case of an Earthbox, otherwise to identify such commercial announcement minutes)
to enable Affiliate to insert its commercial announcements as provided herein
then, in addition to
* Indicates that material has been omitted and confidential treatment has
been requested therefor. All such omitted material has been filed separately
with the Commission pursuant to Rule 24b-2.
5
<PAGE> 6
Affiliate's other remedies hereunder or at law or in equity, Affiliate shall
have the right, without first notifying Network, to preempt the applicable
Service to insert its commercial announcements. Network shall reimburse
Affiliate for all costs incurred by Affiliate or any affiliate of Affiliate
associated with any change by Network in the method of identifying such
commercial announcement minutes in either Service.
(c) If for any reason, including, without limitation, causes beyond
the control of Network, Affiliate, in good faith, determines that either or both
Service(s) include(s) programming prohibited in Section 3(a) hereof and/or does
not include programming of at least the quantity, quality, type and content as
required in Section 3(a) hereof, Affiliate may, in addition to any and all
remedies available to Affiliate hereunder, at law or in equity, at its option,
either (i) discontinue carriage of the applicable Service(s) on any or all
Systems and delete such System or Systems from Schedule 1 hereof, effective at
any time by giving notice to Network within ten (10) days thereof; or (ii)
receive a credit against the Fees (as defined herein) or any Renewal Amounts (as
defined herein) payable by Affiliate to Network pursuant to this Agreement in
the proportion that the hours of programming each day that either is prohibited
by Section 3(a) hereof or deviates from the programming required in Section 3(a)
hereof bears to the total hours the applicable Service(s) are transmitted each
day; such credit to be applied against the Fees payable in any month.
(d) No less than once per day in alternating day parts, but
including each and every day part, each Service shall include the following
audible message: "This programming is brought to you through the cooperation and
support of your local cable company."
(e) During the Term, Network shall provide the Satellite Service in
its entirety to Affiliate. When the phrase "in its entirety" is used in this
Section 3(e), it means that each Service Subscriber receiving the Satellite
Service (a "Satellite Subscriber") shall be able to receive, at all points in
time, programming received at each such point in time by any other subscriber to
the Satellite Service, and if any other subscriber to the Satellite Service is
receiving, at a given point in time, programming that is different from the
programming received by any Satellite Subscriber at such point in time,
Affiliate shall have the unconditional right (in addition to any other remedies
available to Affiliate at law or in equity) to elect which programming it
desires to receive and utilize at any System, which programming it desires to
subdistribute hereunder, and/or which programming it will authorize for
reception by Satellite Subscribers.
(f) In the event that any System, in its sole and absolute
judgment, notifies Network it is unsatisfied with the playlist format of music
videos installed in such System's Earthbox, Network shall, within fifteen (15)
days of such notice, furnish such System with copies of the playlist formats in
all of
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<PAGE> 7
Network's other Earthboxes. If such System then notifies Network of its
desire to select any of such playlist formats (a "Reprogram System"), then
Network shall duplicate such playlist format in the designated Earthboxes in
such Reprogram System no later than thirty (30) days after notification of such
selection. Such Reprogram System shall guarantee to Network [ * ] percent
[ * ] of the per-subscriber revenue received by Network from Primary Subscribers
(as defined herein) served by the applicable Earthbox in such Reprogram System
in the month immediately prior to the month that it became a Reprogram System.
Any Reprogram System may terminate its obligation to guarantee such revenue to
Network by subsequently agreeing to allow Network to resume selection of the
programming for the applicable Earthboxes. A Reprogram System shall have no
obligation to guarantee such revenue to Network if it notifies Network that it
wishes to review the playlist formats of any other distributor of the Primary
Service that is operating in any area with reasonably similar demographics in
two categories: [ * ] and [ * ] . Network shall,
within fifteen (15) days of such notice, furnish such Reprogram System with
copies of such playlist formats and such Reprogram System may then notify
Network of its selection of any such playlist format, which Network shall
duplicate in the designated Earthboxes no later than thirty (30) days after
notification of such selection. Furthermore, Network agrees that the price it
charges Primary Subscribers who call Network to program the music videos
provided by an Earthbox shall not be more than the price it charges any
subscriber receiving the Primary Service who is served by a distributor of the
Primary Service operating in any part of Affiliate's Distribution Area; provided
that Network shall not be required to equalize such prices in such Distribution
Area until Affiliate or any System so requests in a written notice to Network.
Furthermore, notwithstanding any other provision of this Agreement to the
contrary, if Affiliate's Cable television subscribers constitute not less than
fifty percent (50%) of the multi-channel video programming subscribers in a
given community, then Affiliate shall be entitled to "genre exclusivity" in such
community; that is, no other distributor in such community shall be permitted by
Network to operate any playlist format the genre of which is substantially
similar to any playlist format operated by Affiliate in such community
hereunder.
(g) Network agrees that it shall not authorize the terrestrial
broadcast television exhibition of either Service, any portion thereof, or any
programming derived therefrom within the Distribution Areas of any System;
provided, however, that Network may authorize the terrestrial broadcast
television exhibition of either Service within the Distribution Area of any
System on any terrestrial broadcast television station (i) that is owned and
operated either by Network or an affiliate of Network and (ii) that is located
within the Distribution Area of any System in which either (A) less than
twenty-five percent (25%) of the cable television households in the Designated
Marketing Area ("DMA") (the "Minimum Distribution") of such station are
subscribers of such System, or (B) neither Service is carried on a level of
* Indicates that material has been omitted and confidential treatment has
been requested therefor. All such omitted material has been filed separately
with the Commission pursuant to Rule 24b-2.
7
<PAGE> 8
service that is the first or second most highly penetrated level of service on a
sufficient number of headends in such System to meet the Minimum Distribution.
In the event Network authorizes the terrestrial broadcast television exhibition
of either Service in an area that is also served by a Cable television system
that (x) becomes a System hereunder after the date of such broadcast
authorization, (y) either has or subsequently attains the requisite Minimum
Distribution and (z) carries a Service on a level of service that is the first
or second most highly penetrated level of service on a sufficient number of
headends in such System to meet the Minimum Distribution, then Network shall
permanently cease such exhibition no later than twelve (12) months after the
date the applicable Service is first launched in such System. Notwithstanding
the foregoing provisions of this Section 3(g), Network may authorize the
terrestrial broadcast television exhibition of the Primary Service in the DMAs
of Chicago, Illinois, and/or St. Louis, Missouri, and/or within the political
boundaries of New York City, New York; provided that such terrestrial broadcast
may only be through a low-power television transmitter, as that term is defined
by the rules and regulations of the Federal Communications Commission.
(h) For purposes of this Agreement, "direct on-air sales
programming" shall mean any programming that includes the direct on-air
marketing, offering for sale and/or sales of products and/or services,
including, without limitation, home-shopping, infomercials and direct response
advertising, regardless of the length of such programming, which may include
product or service demonstrations, promotions, testimonials and/or referrals and
may be in a documentary, talk-show, news, information or other disguised format.
Direct on-air sales programming shall not include Network's regularly scheduled
commercial announcement time (i.e., the commercial announcements distributed
throughout the Services during other programming that are generally less than
thirty (30) seconds in length and primarily used for promotional announcements
or third party advertising of products and services that are not directly sold
to the viewer during such commercial announcements).
4. DELIVERY AND DISTRIBUTION OF THE SERVICES:
(a) During the Term, Network shall, at its own expense, deliver a
signal of the Satellite Service to the earth station of each System designated
by Affiliate or an affiliate of Affiliate to receive the Satellite Service (a
"Satellite System"), to each Satellite Subscriber and, for the purposes of
Section 4(h) hereof, to other locations within the continental United States
designated by Affiliate (in its sole and absolute discretion), by transmitting
such signal via a domestic satellite commonly used for transmission of Cable
television programming. No later than the date upon which the aggregate number
of subscribers (including Service Subscribers) to the Satellite Service first
exceeds [ * ] , Network shall fully encrypt the satellite
signal of the Satellite Service utilizing scrambling technology commonly used in
the domestic Cable television industry. Except
* Indicates that material has been omitted and confidential treatment has
been requested therefor. All such omitted material has been filed separately
with the Commission pursuant to Rule 24b-2.
8
<PAGE> 9
as otherwise provided in this Section 4(a), Affiliate shall, at its own expense,
furnish an earth station and all other facilities necessary for the receipt of
such satellite transmission and the delivery of the signal of the Satellite
Service to the Satellite Subscribers in such Satellite Systems. In the event
Network either (i) changes the satellite to which the Satellite Service is
transmitted to a satellite or other transmission medium not susceptible to
viewing by a Satellite System's or Satellite Systems' then-existing earth
station equipment without affecting the receipt of the signals of any other
programming or other services then received or committed to being received by
such Satellite System(s), (ii) changes the technology used by Network to encrypt
the signal of the Satellite Service to a technology not compatible with a
Satellite System's or Satellite Systems' then existing descrambling equipment,
or (iii) compresses, digitizes, or otherwise modifies the signal of the
Satellite Service in such a manner that it cannot be received or utilized by a
Satellite System(s), then Affiliate shall have the right to delete from Schedule
1 of this Agreement, immediately, any such Satellite System(s), and to
discontinue carriage of the Satellite Service, immediately, in any such
Satellite System(s); provided that this right of deletion and discontinuance
shall not apply to any Satellite System(s) if: (1) Network agrees,
unconditionally, to reimburse promptly such Satellite System(s), as the case may
be, for (A) the cost to such Satellite System(s) to acquire and install
equipment necessary to receive the signal of the Satellite Service from such new
satellite, and/or (B) the cost to such Satellite System(s) to acquire and
install equipment necessary for them to descramble, receive and/or utilize the
signal of the Satellite Service; (2) physical space exists at the then-existing
headend or earth station site to accommodate the necessary equipment; and (3)
current zoning and other restrictions permit such additional equipment. Network
agrees to provide Affiliate with at least 120 days' prior written notice of a
satellite or technology change as set forth in subsections (i) through (iii)
above; provided, however, that if a satellite change is the result of a force
majeure event as set forth in Section 10 hereof, no prior written notice shall
be required.
(b) Each System that carries the Primary Service is set forth on
Schedule 1 hereto. During the Term, Affiliate shall notify Network of any
additional System or Systems that will carry the Primary Service. Within
forty-two (42) days of such notification, Network shall deliver and install a
number of Earthboxes in each such System or Systems as set forth below. The
number of Earthboxes Network shall be required to deliver and install shall be
determined by the aggregate number of subscribers in each such System or Systems
that receive the level or levels of service on which the Primary Service is to
be carried ("Primary Subscribers"), as set forth below, for a minimum of
eighteen (18) hours per day. Network shall not be required to deliver and
install any Earthbox in any System (x) with fewer than [ * ] subscribers or (y)
the largest headend of which serves fewer than [ * ]
subscribers, unless mutually agreed to by Affiliate and Network; provided that
Affiliate may purchase,
* Indicates that material has been omitted and confidential treatment has
been requested therefor. All such omitted material has been filed separately
with the Commission pursuant to Rule 24b-2.
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<PAGE> 10
install and maintain the requisite equipment for systems serving fewer than
[ * ] subscribers and Network shall provide all assistance
Affiliate reasonably requires to program and operate such equipment.
<TABLE>
<CAPTION>
If the number of Primary then, the number of Earthboxes
Subscribers in a System is: required to be installed shall be:
- --------------------------- ----------------------------------
<S> <C>
[ * ] [ * ]
[ * ] [ * ]
</TABLE>
In addition to the foregoing requirements, Network shall be required to deliver
and install one (1) additional Earthbox for each incremental [ * ] Primary
Subscribers over [ * ] Primary Subscribers in each System. Each Earthbox
delivered and installed by Network hereunder shall (i) include all programming
and equipment ("Earthbox Systems") necessary and appropriate for Network to
fulfill its obligations under this Agreement, (ii) be in good working condition
(including the Earthbox Systems), and (iii) be maintained in good working
condition (including the Earthbox Systems). In the event of a total failure of
any Earthbox or Earthbox System, Network shall (A) deliver a "DigiCipher"
receiver (or equivalent equipment) within twenty-four (24) hours of Affiliate's
or an affiliate of Affiliate's notification of such failure to Network, to
enable the affected System to receive and temporarily cablecast the Satellite
Service in lieu of the Primary Service, and (B) deliver and install replacements
for the failed Earthbox or Earthbox Systems at such System within seven (7) days
of Affiliate's or an affiliate of Affiliate's first notification of such failure
to Network. In the event of a partial failure of any Earthbox or Earthbox
System, Network shall deliver and install replacement parts at such System
within twenty-four (24) hours of Affiliate's or an affiliate of Affiliate's
notification of such failure to Network. Network shall be responsible for all
costs and liabilities arising from or relating to: (1) the delivery,
installation, maintenance and repair of the Earthboxes and Earthbox Systems, and
(2) the delivery of the requisite DigiCipher receivers (or equivalent
equipment), unless such costs or liabilities result from the negligence of
Affiliate or an affiliate of Affiliate, in which case Affiliate shall be
responsible only for the direct costs and liabilities arising from such
negligence. In addition, Network shall have a technical staff available to
Affiliate and any affiliate of Affiliate via telephone twenty-four (24) hours
per day throughout the Term hereof to assist with any problems or questions
relating to the Earthboxes or Earthbox Systems. This Agreement does not convey,
sell, or assign to Affiliate or any affiliate of Affiliate any right or interest
in or to the Earthboxes or the Earthbox Systems. In the event of the expiration
or termination of this Agreement as to any or all Systems, each such System
shall use commercially reasonable efforts to make the Earthbox(es) and Earthbox
System(s) in such System(s) available to Network for the orderly removal of the
same in a timely manner.
* Indicates that material has been omitted and confidential treatment has
been requested therefor. All such omitted material has been filed separately
with the Commission pursuant to Rule 24b-2.
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<PAGE> 11
(c) Network shall provide to each Satellite System, to each Primary
System, to each Satellite Subscriber and to each Primary Subscriber a video and
audio signal of the applicable Service of a technical quality equivalent to the
greater of the following: (i) comparable to the technical quality of audio and
video signals delivered by other Cable television programming services, or (ii)
the analog technical standards set forth in Exhibit B hereof for a Cable
television programming service delivered in an analog format. Each System, if
any, shall deliver to its Service Subscribers a principal video and audio signal
of each Service of a technical quality at least comparable to other Cable
television programming services, but in no event shall Affiliate be obligated to
deliver a signal of either Service of a quality that is higher than the
technical quality of such Service as provided by Network hereunder. In the event
Network commences delivery of a Service in a digital or other non-analog format,
Network and Affiliate shall negotiate in good faith to establish applicable
technical standards, which standards shall result in a signal of such Service
that is at least as high in quality, as perceived by a typical viewer of such
Service, as the analog standards set forth in Exhibit B hereto.
(d) Affiliate and each System shall have the right to exhibit,
distribute, subdistribute and authorize the reception of either or both Services
pursuant to this Agreement as full-time or part-time services in an analog form,
a digital or modified format, or in any combination thereof. Except as otherwise
provided herein, the Systems, if any, shall distribute the Services during the
hours each such Service is carried by such Systems, without alteration, editing
or delay. Network agrees that Affiliate shall have complete authority to
control, to designate and to change the channel(s) over which each Service is to
be carried on each System.
(e) Network retains and reserves any and all rights in and to all
signal distribution capacity contained within the bandwidth of the signal of the
Satellite Service, including, without limitation, the vertical blanking interval
("VBI"), audio subcarriers and all other distribution capacity contained within
the bandwidth of the signal of the Satellite Service between Network's uplink
facilities and the Systems or Affiliate's other first downlink facilities. In
addition, Network shall have the right to use the signal distribution capacity
contained within the bandwidth of the signal that Network uses to communicate
with the Earthboxes solely for the purposes of programming, controlling and
updating the Earthbox Systems to facilitate distribution of the Primary Service
hereunder. Affiliate retains and reserves any and all rights in and to, and may
use in its sole discretion, all signal distribution capacity contained within
the bandwidth of the signal of the Services, including, without limitation, the
VBI, audio subcarriers or channels and any other portions of the bandwidth that
may be created or made usable as a result of the conversion of the signal of one
or both of the Services to a compressed, digital or other non-analog format as
received at each System or Affiliate's other first downlink facilities from such
11
<PAGE> 12
System or other first downlink facility (or, in the case of the Primary Service,
the System headend or other location of the Earthbox) to the Service Subscribers
served by such System or other first downlink facility. Nothing herein shall
preclude Affiliate from exercising and exploiting the rights retained and
reserved by Affiliate pursuant to this Section 4(e) by any means and in any
locations freely and without restriction; provided, however, that any such use
by Affiliate or the Systems shall not materially degrade, or otherwise
materially interfere with, the picture quality of the Services or the audio
portion of the signal of the Services that is the principal audio carriage
frequency of the Services. In the event Network uses the signal distribution
capacity of either Service as permitted hereunder, including, without
limitation, the VBI or audio subcarriers, for the transmission of any other
service, programming, material or product, Network shall not promote such
service, programming, material or product on the Service without the prior
written consent of Affiliate. Furthermore, Network covenants that no other
information, service, programming, data, material or product shall be contained
on the same line(s) of the VBI as any closed-captioning service and/or
identification rating data.
(f) Each System or other distribution system or enterprise may
carry either or both of the Services on the basic level of service, on any tier,
in a package of other services, a la carte, or in any combination thereof.
(g) Except as otherwise permitted herein, Affiliate shall not
itself, and shall not authorize others to, copy, tape or otherwise reproduce any
part of either Service without Network's prior written authorization and in each
of the Systems shall take reasonable and practical security measures to prevent
the unauthorized or otherwise unlawful copying, taping or other reproduction of
either Service by others through the facilities of a System. Neither Network nor
its affiliates shall make any claim against Affiliate or its affiliates for any
home taping by anyone viewing either Service and Affiliate may promote home
taping as part of Affiliate's marketing efforts. Network acknowledges that this
Section 4(g) does not restrict Affiliate's practice of connecting its
subscribers' videocassette recorders or other devices susceptible to use for
home duplication of video programming to the facilities of a System.
(h) Network hereby grants Affiliate, and any affiliate of
Affiliate, the right to receive the signals of the Services, to digitize,
compress, modify, replace or otherwise technologically manipulate the signals,
and to transmit the signals (one or more times) as so altered (the "Altered
Signals") to a satellite(s), or to a location(s) within the continental United
States designated by Affiliate (in its sole and absolute discretion), for
redistribution to terrestrial or other reception sites capable of receiving and
utilizing the Altered Signals, provided that no such alteration, transmission,
redistribution, reception or other use shall cause a material change in a
viewer's perception of the principal video or principal audio presentation of
the Services.
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<PAGE> 13
Network hereby grants Affiliate, any affiliate of Affiliate, and any System (i)
the right to transmit the Altered Signals for the uses set forth in Section 1(a)
of this Agreement or for any other purpose consistent with the intent of the
parties hereto, and (ii) the right to transmit the Altered Signals to any third
party, provided that such third party is authorized by Network pursuant to a
written agreement or otherwise to receive and or distribute the Services. In
addition, Network grants Affiliate the right to receive the signals of the
Services, to digitize, compress or modify the signal of the Services into a
three-dimensional or other augmented or enhanced version, and to distribute such
version to a System(s) or to any other party on the same terms and conditions
set forth herein with respect to distribution of the Services. Furthermore,
Network shall not change the signals of the Services in such a way as to
interfere with, or technically or technologically to defeat, Affiliate's, any
affiliate of Affiliate's, or any System's rights under this Section 4(h). In the
event Network interferes with or otherwise prevents receipt, digitization,
compression, modification, replacement, utilization or manipulation of the
signals of either or both of the Services by Affiliate, any affiliate of
Affiliate, or any System or any location pursuant to the terms of this Section
4(h), then Affiliate shall have the right, in addition to any and all remedies
available to Affiliate at law or in equity, to delete any or all Systems from
Schedule 1 of this Agreement, immediately, and to discontinue carriage,
immediately, of such Service in any or all Systems.
(i) Network hereby grants to Affiliate the right to transmit the
signals of the Services as received or generated at the headend of any System to
the Cable television system(s) of one or more unaffiliated third parties, the
physical facilities of which are connected by Cable or microwave transmission to
the physical facilities of the headend of such System, provided that such third
party is authorized by Network pursuant to a written agreement or otherwise to
receive and/or distribute the signal of an applicable Service. Network also
hereby grants Affiliate the right to receive the signals of the Services from
any unaffiliated third party, the physical facilities of which are connected by
Cable or microwave transmission to the physical facilities of the headend of a
System.
(j) Notwithstanding anything herein to the contrary, and provided
the Satellite Service is programmed by Network and is not programmed
interactively by viewers of the Satellite Service, Affiliate shall have the
right, but not the obligation, to preempt the Satellite Service on the Systems
for up to: [ * ] each day during the Term of this
Agreement to insert other programming (the "Affiliate Inserts"). Affiliate shall
provide Network with at least thirty (30) days' prior written notice of the time
periods during which Affiliate will preempt the Satellite Service for the
Affiliate Inserts; provided, however, that Affiliate may preempt the Satellite
Service for the Affiliate Inserts up to [ * ] without prior
notice to Network. Affiliate may preempt the Satellite Service
* Indicates that material has been omitted and confidential treatment has
been requested therefor. All such omitted material has been filed separately
with the Commission pursuant to Rule 24b-2.
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<PAGE> 14
for an Affiliate Insert only during a terminal break. Affiliate's preemption of
the Satellite Service for the exhibition of the Affiliate Inserts shall be
subject to the following limitations: (i) Affiliate shall not preempt the
Satellite Service for more than one (1), thirty (30) minute period during the
time period from 8:00 p.m. to 11:00 p.m., Eastern Time ("Prime Time"); (ii) the
Affiliate Inserts shall not comprise a simulcast or tape-delayed segment of
programming from any other cable television service, other than a news,
informational, or political service created for Affiliate or an affiliate of
Affiliate; (iii) the Affiliate Inserts shall be spaced at least one (1) hour
apart; provided, however, that Affiliate may preempt the Satellite Service for
one (1) continuous hour during any time period other than Prime Time, with
Network's consent, which consent shall not be unreasonably withheld or delayed
by Network; (iv) the editorial and production quality of the Affiliate Inserts,
as measured by the average viewer, shall be materially similar or better than
the editorial and production quality of the Satellite Service, taking into
account any differences in content and format; (v) during any hour of the
Satellite Service that is preempted for one (1), thirty (30) minute Affiliate
Insert, Affiliate shall be entitled to only fifty percent (50%) of the
commercial announcement time to which Affiliate would otherwise be entitled
during such hour pursuant to Section 3(b) hereof; and (vi) during any hour of
the Satellite Service that is preempted for one (1) continuous hour, Affiliate
shall not be entitled to the commercial announcement time for such hour to which
Affiliate would otherwise be entitled during such hour pursuant to Section 3(b)
hereof.
k) Upon request by Affiliate, Network and Affiliate shall negotiate
in good faith regarding the joint creation, development and distribution of
multimedia, interactive and/or computer applications related to or based on
either Service or either Service's programming; provided, however, that neither
Network nor Affiliate shall have such an obligation to negotiate regarding any
such application if Network is the sole owner of such application and if Network
is creating, developing and distributing such application itself without the
involvement of any third party, except for a third party that is assisting
Network solely as an employee or independent contractor. Network further agrees
that if it grants or offers, or has granted or offered, to any third party
(including an affiliate of Network) the rights to exhibit, distribute,
subdistribute and/or authorize the reception of any multimedia, interactive or
computer application(s) relating to or based on either Service or either
Service's programming, whether or not such application is to be offered in
conjunction with or separate from such Service, Network shall promptly offer
such rights to Affiliate upon terms and conditions, each of which is at least as
favorable as that contained in any such third party grant or offer of rights.
Affiliate shall be entitled to exhibit, distribute, subdistribute and/or
authorize the reception of any such multimedia, interactive or computer
application(s) at a rate no greater than [ * ] of the lower
of (i) Network's then current cable television industry average rate for such
rights or (ii) Network's then-current cable television
* Indicates that material has been omitted and confidential treatment has
been requested therefor. All such omitted material has been filed separately
with the Commission pursuant to Rule 24b-2.
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industry rate card for such rights, if such rate card then exists.
5. FEES:
In consideration of the terms and conditions set forth herein, Affiliate
and Network shall, subject to Sections 5(b) (i), (ii), (iii) and (iv), each pay
the following amounts:
(a) For each calendar month during the Initial Term and the First
Renewal Term (if any), each of the parties hereto shall pay to the other party,
if applicable, the following amounts calculated on a System-by-System basis:
i. DISTRIBUTION OF THE PRIMARY SERVICE ON A FULL-TIME BASIS
Affiliate shall elect, for each System carrying the Primary Service
full-time, to be governed by either subsection i.A or i.B of this
Section 5(a). Affiliate shall notify Network of its election no more
than two (2) times each calendar year, and each election shall be
effective until notification of a subsequent election.
A. Affiliate shall pay [*] Fee (as defined below) for the Primary
Service. Network shall pay Affiliate the greater of either (x)
[ * ] of the net telephone collections (i.e., total revenues
received from AT&T or a similar telephone service, less only any
applicable sales taxes) received by Network from calls from viewers ho
request specific music videos offered by such System on the Primary
Service via an Earthbox located at such System's headend (or other
location of such Earthbox) each month during the Term and the First
Renewal Term (if any) (the "Affiliate Share"), plus any amounts payable
by Network to Affiliate pursuant to Section 7(e) hereof, or (y) the
amount obtained by multiplying, each month during the pertinent calendar
quarter, [*] times the number of Service Subscribers served by such
System (the "Guaranteed Amount").
B. Affiliate shall pay Network a per Service Subscriber fee of [*]
multiplied each month by the number of Service Subscribers in the System
who receive the Primary Service during such month (the "Fee"), which
number shall be calculated pursuant to Section (5)(e) hereof. Network
shall pay Affiliate for promotional support of the Primary Service (the
"Promotional Payment") a monthly amount equal to [*] multiplied by the
number of Service Subscribers in the applicable System who receive the
Primary Service during such month. Affiliate and Network hereby agree
that each System may use the Promotional Payment for, among other
things, cross-channel promotional announcements, which shall be valued
at the applicable System's then-current commercial advertising rate
card.
* Indicates that material has been omitted and confidential treatment has
been requested therefor. All such omitted material has been filed separately
with the Commission pursuant to Rule 24b-2.
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<PAGE> 16
ii. DISTRIBUTION OF THE PRIMARY SERVICE ON A PART-TIME BASIS
Affiliate shall elect, for each System carrying the Primary Service
part-time, to be governed by either subsection ii.A or ii.B of this
Section 5(a). Affiliate shall notify Network of its election no more
than two (2) times each calendar year, and each election shall be
effective until notification of a subsequent election.
A. Affiliate shall pay [*] Fee for the Primary Service. Network
shall pay Affiliate the Affiliate Share for each System that elects this
option. Network shall have no obligation to pay Affiliate a Guaranteed
Amount for any such System; or
B. Affiliate shall pay Network the Fee for each such System that
elects this option. Network shall pay Affiliate the Promotional Payment
for each such System.
iii. DISTRIBUTION OF THE SATELLITE SERVICE ON EITHER A FULL-TIME BASIS
OR A PART-TIME BASIS
Except as provided in Section 5(a)(iv) below, Affiliate shall pay
Network the Fee for each System distributing the Satellite Service;
provided, however, that the Satellite Service shall be
[ * ] following the initial launch of the
Satellite Service in such System, regardless of when the Satellite
Service is first launched in such System.
iv. DISTRIBUTION OF BOTH THE PRIMARY SERVICE ON A FULL-TIME BASIS AND
THE SATELLITE SERVICE ON EITHER A FULL-TIME BASIS OR A PART-TIME BASIS
In the event a System is carrying both (x) the Primary Service on a
full-time basis and on the first or second most highly penetrated level
of service in such System, and (y) the Satellite Service on either a
full-time basis or a part-time basis then, regardless of whether
Affiliate is receiving payment pursuant to Section 5(a)(i)(A) or Section
5(a)(i)(B), Affiliate shall be entitled to carry the Satellite Service
in such System and free of any obligation to pay a Fee therefor.
(b) "Service Subscriber(s)" shall mean each location to which
Affiliate, pursuant to this Agreement, intentionally authorizes a Service
directly, through an affiliate, or through the subdistribution of such Service
to an unaffiliated third party. Service Subscribers shall include each occupied
single family dwelling, each occupied dwelling in a multiple unit building and
each bar, restaurant and other residential or commercial location where such
Service is received. If Affiliate provides such Service to multiple unit
complexes, including,
* Indicates that material has been omitted and confidential treatment has
been requested therefor. All such omitted material has been filed separately
with the Commission pursuant to Rule 24b-2.
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<PAGE> 17
without limitation, apartments, hotels and motels, on a bulk-rate basis, then
the number of Service Subscribers attributable to each such bulk-rate subscriber
shall be equal to the total monthly retail rate the complex is charged in the
applicable System for such Service or for the level or package of services in
which such Service is carried, as the case may be, divided by Affiliate's, or
the pertinent affiliate of Affiliate's, standard monthly retail rate a non-bulk
rate subscriber is charged in the applicable System for such Service or for such
level or package of services, as the case may be; provided, that if any such
multiple-unit complex is situated outside a System's Distribution Area, then the
number of Service Subscribers attributable to such bulk-rate subscriber shall be
equal to the total monthly retail rate such complex is charged for such Service
or for the level or package of services in which such Service is carried, as the
case may be, divided by the monthly retail rate a non-bulk rate subscriber is
charged for such Service or for a substantially similar level or package of
services, as the case may be, in the System that is geographically nearest to
such complex, provided, however, that in no event will the number of Service
Subscribers calculated for any such complex exceed the actual number of occupied
dwelling units receiving such Service in such complex. Service Subscriber shall
not include (i) employees of Affiliate or any affiliated party who are not
charged for such Service; (ii) public officials, administrative personnel or
public buildings that are not charged for such Service; (iii) subscribers who
have not paid their monthly rate to Affiliate, or an affiliate of Affiliate, for
a given month and are subsequently disconnected; or (iv) any location to which
Affiliate or an affiliate of Affiliate indirectly provides such Service through
an unaffiliated third party pursuant to the rights granted in Sections 4(h) and
4(i) hereof. Any subscriber who receives such Service in more than one package
of services or on more than one basis from any System shall be included in the
Service Subscriber count as only one Service Subscriber.
(c) Network shall have the right to negotiate the Fee or Fees,
Affiliate Share, Guaranteed Amount and/or Promotional Payment applicable to any
Renewal Term after the First Renewal Term (if any) upon written notice to
Affiliate at least twelve (12) months prior to the end of the First Renewal Term
(if any) or any succeeding Renewal Term. Any such revised amount (collectively,
"Renewal Amounts") shall be effective upon the later of the commencement of such
Renewal Term or the January 1 following agreement of the parties as to the
Renewal Amounts. The amounts provided for herein for the last year of the First
Renewal Term (or any succeeding Renewal Term for which the parties have agreed
to Renewal Amounts) shall remain in effect after the expiration of such earlier
Term until the Renewal Amounts become effective as provided in the immediately
preceding sentence. Such Renewal Amounts shall be effective for the remainder of
such five (5) year Renewal Term.
(d) Notwithstanding any provision of this Agreement to the
contrary, in the event that at any time during the Initial Term or
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<PAGE> 18
during any Renewal Term, Network proposes and Affiliate accepts any surcharge
for any programming on a Service, any increase in the Fees or Renewal Amounts
due during a Renewal Term and otherwise payable hereunder or any reduction in
the Affiliate Share, the Guaranteed Amount or the Promotional Payment, Affiliate
shall have the right, but not the obligation, to carry the applicable Service in
any or all Systems on the basic level of service, on any tier, in a package of
other services, a la carte, or in any combination thereof. Likewise,
notwithstanding any provision of this Agreement to the contrary, in the event
that at least sixty (60) days prior to the expiration of the First Renewal Term
(if any) hereunder, Affiliate and Network have failed to agree on the Renewal
Amounts and either Affiliate or Network notifies the other party that such first
party chooses to cease negotiations of the Renewal Amounts, Network shall give
Affiliate notice of the Renewal Amounts to be paid hereunder and such Renewal
Amounts shall be deemed the Renewal Amounts to be paid during such succeeding
Renewal Term. Affiliate shall then have the right, but not the obligation, in
its sole and absolute discretion, to continue to provide the applicable Service
pursuant to this Agreement, on the basic level of service, on any tier, in any
package of other services, a la carte or in any combination thereof.
(e) Any undisputed Fees or undisputed Renewal Amounts payable by
Affiliate to Network shall be due and payable forty-five (45) days after the end
of the pertinent calendar month during the Term. In the event of a good faith
dispute regarding any such Fees or Renewal Amounts, no such disputed Fees or
Renewal Amounts shall be due or payable by Affiliate to Network nor subject to
the recovery of prejudgment interest or the terms or conditions of Section 5(f)
below, unless and until such dispute has been resolved to the satisfaction of
Affiliate and Network. Any undisputed amounts payable by Network to Affiliate
hereunder shall be due and payable no later than forty-five (45) days after the
end of each quarter calendar year during the Term. Notwithstanding the foregoing
provisions of this Section 5(e), in the event Affiliate is distributing the
Service to not fewer than [ * ] Service Subscribers on February 28, 1997, then
Affiliate shall pay such amounts to Affiliate as set forth in the succeeding
sentence. Any amounts payable by Network to Affiliate hereunder shall first be
estimated and then shall be due and payable not later than on the twelfth
calendar day after the end of the pertinent month in the following manner: all
such amounts shall be estimated based on the average monthly payment for the
preceding twelve (12) months for such payment in such System (the "Estimated
Payments"); where there have been fewer than twelve (12) such payments for such
System, then the monthly average for all Affiliate's Systems receiving a similar
payment shall instead be used, until such time as there have been twelve
Corrected Payments (as defined below) for the applicable kind of payment in the
applicable System; as soon as Network has complete actual data in respect of
such payment and such System, Network shall submit a report, in a form
reasonably acceptable to Affiliate, detailing such actual data (the "Corrected
Payment"); and the variance
* Indicates that material has been omitted and confidential treatment has
been requested therefor. All such omitted material has been filed separately
with the Commission pursuant to Rule 24b-2.
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<PAGE> 19
between the Corrected Payment and the Estimated Payment shall be accounted for
as an adjustment to the next Estimated Payment for such System. For each
calendar quarter during the Term for which Fees or Renewal Amounts are payable,
the number of Service Subscribers shall be equal to the number of Service
Subscribers as of the first day of each calendar year, adjusted quarterly for
launches, acquisitions, deletions and divestitures. Service Subscribers in
launched or acquired Systems shall be added in the calendar quarter following
completion of the launch or acquisition. Service Subscribers in divested or
deleted Systems shall be deducted from the Service Subscribers count effective
in the calendar quarter of the completion of the divestiture or deletion.
Notwithstanding the foregoing, in no event shall Affiliate be required to pay
Fees or Renewal Amounts on a number of Service Subscribers in any calendar
quarter greater than the average of the actual number of Service Subscribers as
of the first day of the applicable quarter and the actual number of Service
Subscribers as of the last day of the applicable quarter. For each month during
the Term for which amounts are payable by Network to Affiliate hereunder, the
number of Service Subscribers shall be equal to the number of Service
Subscribers as of the first day of each month.
(f) Any undisputed Fees or undisputed Renewal Amounts, and any
amounts payable by Network to Affiliate hereunder that are unpaid after they are
due and payable shall accrue interest at one and one-half percent (1.5%) per
month or the highest lawful rate, whichever is less, from the due date until
payment is received by Network or Affiliate, respectively. The party that is
late in making such payments shall be liable to the other party for all
reasonable costs and expenses (including, but not limited to, fines,
forfeitures, attorneys' fees, disbursements and administrative or court costs)
in connection with the collection of any such overdue amounts.
(g) Affiliate shall have the right to preview the Satellite Service
in any system or enterprise that meets the System Qualifications of Exhibit A
hereto, on a full-time or part-time basis free of any obligation to pay Fees
therefor for periods of up to one (1) month (which such periods may not be
continuous) in order to determine subscriber preferences; provided, however,
that no system or enterprise may preview the Satellite Service more often than
twice per year. Any System or other enterprise that meets the System
Qualifications of Exhibit A hereto and that provides programming services to a
number of subscribers at least equal to the minimums set forth in Sections
4(b)(x) and (y) hereof, shall have the right to preview the Primary Service, on
a full-time or part-time basis, free of any obligation to pay Fees or Renewal
Amounts therefor for periods of up to one (1) month; provided, however, that no
such system or enterprise may preview the Primary Service more than once during
the Term hereof.
6. REPORTS:
(a) Affiliate shall send to Network, as soon as is
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<PAGE> 20
reasonably practicable after the beginning of each calendar month for which a
payment from Network to Affiliate is to be made hereunder, a statement on a form
mutually acceptable to Affiliate and Network. Each statement shall set forth the
total number of Service Subscribers and such other information pertinent
hereunder that relates to the computation of the amount(s) due from Network for
such calendar month. Affiliate shall send to Network, not later than forty-five
(45) days after the end of each calendar quarter during the Term, a statement on
a form mutually acceptable to Affiliate and Network. Each statement shall set
forth the total number of Primary Subscribers and Satellite Subscribers and such
other information as Network may reasonably request that is pertinent hereunder
and which relates directly to the computation of the amount due to Network for
such calendar quarter. Affiliate shall deliver such statement to Network prior
to or along with the amount payable to Network as provided in this Agreement.
(b) Affiliate and Network each agree to keep and maintain accurate
books and records of all matters directly relating to this Agreement in
accordance with generally accepted accounting principles. During the Term and
for one (1) year after the termination of this Agreement, such books and records
of each party shall be available to the other party for inspection and audit,
during normal business hours, at the inspecting party's expense, at the other
party's offices upon reasonable notice to the other party. Each party's right to
perform such audit shall be limited to once in any twelve (12) month period
during the Term and shall be limited to an audit with respect to amounts to be
paid in the current and prior calendar years only. If either party audits the
other party's books hereunder, the inspecting party must make any claim against
the other party within the earlier of three (3) months after the inspecting
party or the inspecting party's representative leaves the other party's offices,
or twenty-four (24) months after the close of the earliest month that is the
subject of such claim. In addition, any such claim, if and when made, must
relate to the then-current calendar year or the immediately preceding calendar
year only. If a claim is not made within any limitation set forth herein, then
the Fees, any Renewal Amounts, and all reports required hereunder shall be
deemed final and incontestable, and the inspecting party shall be deemed to have
forever and conclusively waived its right, whether known or unknown, to collect
any shortfalls from the other party for the period(s) audited. Notwithstanding
the foregoing, Affiliate shall have the unconditional right, at any time during
the Term, and for one (1) year after the expiration or termination of this
Agreement (regardless of the reason for such expiration or termination) to audit
Network's books and records to ascertain whether Network has complied with the
provisions of Section 13(f) hereof; and Affiliate shall have the unconditional
right, at any time during the Term and for one (1) year after the expiration or
termination of this Agreement (regardless of the reason for such expiration or
termination) to make a claim against Network if Affiliate determines, based upon
such audit, that Network has not complied with the provisions of Section 13(f)
hereof.
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7. PROMOTION:
(a) Affiliate shall use reasonable efforts to promote the Services
within the Operating Areas of the Systems. Network shall provide promotional,
marketing and sales material to Affiliate, as available and at Network's cost.
Network agrees (i) to spend television and radio broadcast advertising monies in
DMAs that include substantial portions of the Operating Areas of the Systems
therein and (ii) to spend other marketing monies (i.e., other than broadcast
advertising monies) within the Operating Areas of the Systems to maximize sales
of the Services to Affiliate's cable television subscribers and satellite
subscribers and to Affiliate's potential cable television subscribers and
satellite subscribers in an amount, in both cases, relative to all advertising
and marketing monies spent by Network that is equal to or greater than the ratio
of the number of Affiliate's cable television subscribers (in the Systems) to
the total number of cable television subscribers in cable television systems
carrying a Service, including Affiliate's cable television subscribers (in the
Systems); provided, however, that Network's spending on advertising and
marketing monies in DMAs where neither Service is distributed except by
terrestrial broadcast television authorized by Network pursuant to the terms of
Section 3(g) hereof.
(b) Except to the extent prohibited by any bona fide agreement
negotiated at arm's length between Network and any third party rights holder of
the programming on the Services regarding distribution of the programming
comprising the Services, Affiliate may create, edit, reproduce, distribute and
exhibit promotional segments or clips of the programming of the Services for
purposes of promoting such Services, including, without limitation, use of such
promotional segments or clips on any pay-per-view preview service or any
on-screen programming guide service. Affiliate may tape or otherwise reproduce
any portion of either Service in the exercise of the rights granted herein.
Network agrees to use its best efforts to obtain all the rights necessary for
Affiliate to utilize the programming comprising each Service in the manner set
forth in this Section 7(b).
(c) Network may not undertake marketing tests, surveys, rating
polls and/or other research targeted and/or focused on the Systems or the
Systems' subscribers in connection with a Service without Affiliate's prior
written consent, which consent may be withheld or delayed in Affiliate's sole
and absolute discretion. Network shall provide Affiliate, without cost to
Affiliate, with the results of such research to the extent it applies to a
System or Systems or the subscribers therein. With respect to any tests,
surveys, rating polls and/or other research that apply to a System or Systems
for which Network seeks Affiliate's cooperation, Network shall notify Affiliate
of the nature and scope of each such project and, upon Affiliate's prior written
consent to such project (which consent may be withheld in Affiliate's sole and
absolute discretion), Affiliate shall, to the extent permitted by applicable law
and company policy, cooperate in such research by rendering such assistance as
Network may reasonably request and as
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Affiliate can reasonably provide, the cost of which assistance shall be borne by
Network. Network shall otherwise keep the results of all research relating to a
System or Systems confidential under the provisions of Section 12 hereof and
shall retain the results of such research in an aggregate form only, which
results do not identify any subscriber, Cable television system, Alternative
Technology system, Cable television operator, or Alternative Technology
Operator.
(d) Affiliate acknowledges that the names and marks "THE BOX", "THE
BOX" (with design), "THE BOX, MUSIC TELEVISION YOU CONTROL" (with design),
"MUSIC TELEVISION YOU CONTROL", "XPOSURE" (with design), "BOXtalk", "BOXtunes",
and "THE BOX Worldwide", (and the names of certain programs that appear in the
Services) are the exclusive property of Network and its suppliers and that
Affiliate has not and will not acquire any proprietary rights therein by reason
of this Agreement. Network shall have the right to approve any use of such names
or marks by Affiliate in publicity about Network or the products or programming
included in the Services. Use of such names and marks in routine promotional
materials such as program guides, program listings and bill stuffers shall be
deemed approved unless Network specifically notifies Affiliate to the contrary
prior to such use by Affiliate.
(e) In addition to the amounts Network may become obligated to pay
to Affiliate pursuant to the other provisions of this Agreement, Network agrees
that, in the event Network includes any direct on-air sales programming on
either of the Services, Network shall pay to Affiliate the greater of (i) [*] of
Net Sales (as defined herein) or (ii) the then prevailing industry average home
shopping service rebate (the greater of the rebates described in clauses (i) and
(ii) of this Section 7(e) is referred to herein as the "Prevailing Rebate") on
all products and services sold to respondents in the Systems' zip code areas by
such direct on-air sales programming on the Services. Furthermore, Network shall
pay Affiliate the Prevailing Rebate on all products and services sold to
respondents in the Systems' zip code areas who call Network or its agent to
program music videos within the Primary Service. "Net Sales" means gross sales
less taxes, fees, returns and allowances, freight out and cash discounts.
Network agrees that, in the event Network includes any direct on air sales
programming on either of the Services, Network shall, to the extent not
prohibited by applicable law, provide Affiliate with lists of the names and
addresses of respondents from within the zip code areas of the Systems who
respond to such direct on-air sales programming or who purchase products or
services after calling Network to program music videos within the Primary
Service, for use by Affiliate, any affiliate of Affiliate, or any System or
Systems. For the purposes of calculating all of the commissions payable to
Affiliate by Network pursuant to this Section 7(e), where a zip code area is
occupied by a System and one or more distributors of a Service, Affiliate shall
receive a pro rata share of the Net Sales as set forth above, but based on the
ratio of Service Subscribers to total subscribers (including Service
Subscribers) to such Service in the zip code.
* Indicates that material has been omitted and confidential treatment has
been requested therefor. All such omitted material has been filed separately
with the Commission pursuant to Rule 24b-2.
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(f) Network and Affiliate hereby acknowledge that (i) their
interests are often in direct conflict, (ii) their relationship is often
adversarial, and (iii) Network could cause Affiliate significant harm by the
nature of Network's communications to Affiliate's subscribers or to the
governmental entities or franchise or licensing authorities whose opinions and
actions could adversely affect Affiliate's cable television systems or other
video distribution systems or enterprises. Therefore, Network shall not initiate
communications with any subscribers or franchise or licensing authorities or
governmental entities in the Operating Area of any cable television system or
other video distribution systems or enterprises that meet the System
Qualifications of Exhibit A hereto without Affiliate's prior written approval,
and under no circumstances shall Network engage in any communications with any
subscribers or franchise or licensing authority or governmental entity in the
Operating Area of any such system or enterprise that would, or could, adversely
interfere with Affiliate's relations with subscribers, or Affiliate's relations
with any governmental entity or community in any such Operating Area. This
provision shall not apply, (A) to any national advertising by Network in
connection with a Service, (B) to any proceeding before any judicial body, or
(C) to communications with Congress or with any other branch or agency of the
Federal government. This Section 7(f) shall survive the expiration or
termination of this Agreement (regardless of the reason for such expiration or
termination) for a period of two (2) years.
(g) Network shall not include in a Service any advertisements for
"888", "800," "900," or "976" telephone services, or other telephone services or
similar services that bill a caller for placing or confirming the call (other
than for the telephone company's cost of the call), that relate directly or
indirectly to gambling, astrological, psychic, occult, sexual or romantic
activities, or adults-only services, or that are directed at children; provided,
however, that notwithstanding the foregoing, Network may include in a Service
advertisements for dating, psychic and astrological services until the earlier
to occur of: (i) the date on which the number of subscribers receiving the
signal of a Service nationwide (including Service Subscribers but excluding
terrestrial broadcast television exhibition of such Service) first exceeds
[ * ] ; (ii) the date on which Network first reports
[ * ] dollars [ * ] or more in gross advertising revenue for any
twelve-month period; or (iii) the date on which the number of Service
Subscribers exceeds [ * ] .
(h) In addition to any other amounts Network may be obligated to
pay to Affiliate hereunder, Affiliate agrees to pay, for ongoing marketing and
promotional support of the Services in the Systems, the amount of [ * ] per
Service Subscriber in Systems where a Service was launched between and including
January 1, 1996 and July 1, 1997. Affiliate shall not be required to submit to
Network affidavits or any other proof of performance relating to
* Indicates that material has been omitted and confidential treatment has
been requested therefor. All such omitted material has been filed separately
with the Commission pursuant to Rule 24b-2.
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the expenditure of such payments.
8. WARRANTIES AND INDEMNITIES:
(a) Network represents and warrants to Affiliate that (i) Network
is a corporation duly organized, validly existing and in good standing under the
laws of the State of Florida; (ii) Network has the power and authority to enter
into this Agreement and to perform its obligations hereunder fully; (iii)
Network is under no contractual or other legal obligation that will in any way
interfere with its full, prompt and complete performance hereunder; (iv) the
individual executing this Agreement on behalf of Network has the authority to do
so; (v) Network is in compliance with all laws, rules, regulations and court and
administrative decrees to which it is subject including, without limitation, all
applicable rules and regulations of the Federal Communications Commission (the
"FCC"); (vi) Network has, or will have acquired at the pertinent time when all
or part of a Service is made available to Affiliate, good title to, and/or each
and every property right (whether relative to tangible or intangible property),
or license, usage or other right necessary or appropriate whatsoever to
effectuate the acts or performances contemplated by, or satisfy the obligations
imposed on it pursuant to, this Agreement, including all permits, rights,
licenses and approvals necessary, required or appropriate for any and all
performances through to the premises and to the listeners frequenting the
premises of Service Subscribers; (vii) neither the Services, any program related
thereto, or any component thereof is subject to, or the subject of, any lien,
encumbrance, charge, lis pendens, administrative proceeding, governmental
investigation, or litigation pending or threatened; (viii) the use and
exhibition of the Services by Affiliate, as contemplated by this Agreement, will
not cause Affiliate to violate any law, rule, regulation or court or
administrative decree; and (ix) the obligations created by this Agreement,
insofar as they purport to be binding on Network, constitute legal, valid and
binding obligations of Network enforceable in accordance with their terms.
(b) Affiliate represents and warrants to Network that (i) Affiliate
is a corporation duly organized and validly existing under the laws of the State
of Delaware; (ii) Affiliate has the power and authority to enter into this
Agreement and to perform its obligations hereunder fully; (iii) Affiliate is
under no contractual or other legal obligation that will in any way interfere
with its full, prompt and complete performance hereunder; (iv) the individual
executing this Agreement on behalf of Affiliate has the authority to do so; and
(v) the obligations created by this Agreement, insofar as they purport to be
binding on Affiliate, constitute legal, valid and binding obligations of
Affiliate enforceable in accordance with their terms.
(c) Network represents, warrants and covenants that (i) the
Services comply, and will continue to comply, in all respects with the
commercial matter limitations of the Children's Television Act of 1990, Public
Law 101-437 (October 18, 1990) and
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the regulations of the FCC promulgated thereunder, as the same may apply to
cable television systems and cable operators, including 47 C.F.R. Section
76.225, 76.305, and as the same may be amended from time to time ("Children's
Television Regulations") and that Network shall provide Affiliate with all
records demonstrating such compliance under the Children's Television
Regulations as are necessary for Affiliate to demonstrate its timely compliance
as a cable operator with the commercial matter limitations and record keeping
requirements of the Children's Television Regulations; and (ii) the Services
comply, and will continue to comply, in all respects with all origination
cablecasting regulations of the FCC, including but not limited to 47 C.F.R.
Sections 76.205 - 76.221 (political equal time, personal attack, lotteries and
sponsorship identification), as the same may be amended from time to time
("Origination Cablecasting Requirements"), and that Network shall provide
Affiliate with all necessary documentation required thereunder for Affiliate to
meet its documentation and public file requirements under the Origination
Cablecasting Requirements in a timely manner. In the event that any other
programming offered by the Services is among the kind of programming that is
regulated by federal, state or local law, as the same may apply to cable
television systems and cable operators, or other non-broadcast television
distributors, then Network shall provide Affiliate with all statements, records
or other documents reasonably necessary for Affiliate to demonstrate timely
compliance as a cable operator or distributor with such laws and regulations.
(d) Affiliate and Network shall each indemnify, defend and forever
hold harmless the other, the other's affiliated companies and each of the
other's (and the other's affiliated companies') respective present and former
officers, shareholders, directors, employees, partners and agents, against and
from any and all losses, liabilities, claims, costs, damages and expenses
(including, without limitation, fines, forfeitures, attorneys' fees,
disbursements and court or administrative costs) arising out of any breach of
any term of this Agreement or any warranty, covenant or representation contained
herein.
(e) Without limiting the provisions of Section 8(d) hereof, Network
shall indemnify, defend and forever hold Affiliate and Affiliate's affiliated
companies and each of Affiliate's and Affiliate's affiliated companies'
respective present and former officers, shareholders, directors, employees,
partners and agents harmless from and against any and all losses, liabilities,
claims, costs, damages and expenses (including, without limitation, fines,
forfeitures, attorneys' fees, disbursements and court or administrative costs)
arising directly or indirectly out of: (i) the content of the Services, or the
use and delivery of the Services hereunder (including, but not limited to,
sponsorship, promotional and advertising spots, any background music and
anything else inserted by Network or any party other than Affiliate), including,
without limitation, any losses, liabilities, claims, costs, damages and expenses
based upon any suit, lien, encumbrance, charge, lis pendens, administrative
proceeding, government investigation or litigation relating to the
25
<PAGE> 26
Services, any program included therein or any component thereof, or based upon
alleged or proven libel, slander, defamation, invasion of the right of privacy
or publicity, or violation or infringement of copyright (including music
performance rights for any and all performances through to Affiliate's
subscribers), literary or music synchronization rights, obscenity, indecency, or
any other form or forms of speech (whether or not protected by the Constitution
of the United States or any State) or otherwise arising out of the content of
the Services as furnished by Network hereunder or caused by or arising out of
any breach of any of Network's representations or warranties hereunder (provided
that Affiliate shall, to like extent, indemnify Network and Network's affiliated
companies and each of Network's and Network's affiliated companies' respective
present and former officers, shareholders, directors, employees, partners and
agents for any deletion or addition of material by Affiliate to a Service which
deletion from, or addition to, such Service gives rise to losses, liabilities,
claims, costs, damages and expenses (including, without limitation, fines,
forfeitures, attorneys' fees, disbursements and court or administrative costs));
or (ii) the sale or marketing of any products or services by, through or on the
Services, including, without limitation, claims related to product liability,
patent, trademark, copyright infringement, right of privacy or publicity,
express or implied warranties, warranties relating to compliance with any
applicable governmental laws or regulations, obscenity and personal injuries
(physical, economic or otherwise), to any person who may use, consume or be
affected by the products and services sold or marketed by, through or on the
Services.
(f) In connection with any indemnification provided for in this
Section 8, each party shall so indemnify the other only if the party claiming
the indemnity shall give the indemnifying party prompt notice of any claim or
litigation to which its indemnity applies; it being agreed that the indemnifying
party shall have the right to assume the full defense of any or all
negotiations, claims or litigation to which its indemnity applies. The
indemnified party shall cooperate fully (at the cost of the indemnifying party)
with the indemnifying party in such defense and in the settlement of such claim
or litigation, and the indemnified party shall make no compromise or settlement
of any such claim without the prior written consent of the indemnifying party.
The settlement of any claim or action by the indemnified party without the prior
written consent of the indemnifying party shall release the indemnifying party
from its obligations hereunder with respect to such claim or action so settled.
(g) Network represents, warrants and covenants that (i) it has
procured and shall maintain during the Term, general liability insurance
covering the Service, the Programming and all elements thereof from a nationally
recognized insurance carrier and in accordance with industry standards; (ii)
such insurance shall have minimum limits of at least $1,000,000 per occurrence
and a $3,000,000 annual aggregate for all claims, and shall carry a deductible
of not more than $10,000 for any single claim; (iii)
26
<PAGE> 27
such insurance shall provide coverage not only with respect to claims asserted
during the term of the insurance policy, but also with respect to claims that
are asserted during a period of not less than three (3) years following
expiration of such term; (iv) Affiliate shall be named as an additional insured
and loss payee on the insurance policy and such policy shall provide that the
proceeds thereof shall be payable to Affiliate; (v) Network shall provide
Affiliate with documentation to such effect upon the execution hereof; (vi) at
least thirty (30) days' prior to the expiration of such policy, Network shall
provide Affiliate with appropriate proof of issuance of a policy that continues
in force and effect the insurance coverage of the insurance so expiring; and
(vii) Network shall provide Affiliate with thirty (30) days' written notice of
any changes in such policy; provided, however, that Network shall not make any
revisions to such policy that could adversely affect Affiliate's rights without
Affiliate's prior written consent.
(h) The representations, warranties and indemnities contained in
this Section 8 shall continue throughout the Term and the indemnities shall
survive the expiration or termination of this Agreement, regardless of the
reason for such expiration or termination.
9. EARLY TERMINATION RIGHTS:
(a) In addition to Network's other rights at law or in equity or
pursuant to other provisions of this Agreement, Network may, by so notifying
Affiliate, terminate this Agreement: (i) if Affiliate is in material breach of
this Agreement; provided, however, that if such breach is of the type that is
curable, then Network shall not exercise its termination or other rights at law
or in equity hereunder unless Network has, by so notifying Affiliate in writing,
given Affiliate at least thirty (30) days from the time such notice is received
by Affiliate to cure such material breach fully and to demonstrate to Network
that such material breach has been cured, and provided further, that if such
breach is confined to a System or to a limited number of Systems, Network shall
have the right to terminate this Agreement only as to such System or Systems; or
(ii) if Affiliate has filed a petition in bankruptcy, is insolvent, or has
sought relief under any law related to Affiliate's financial condition or its
ability to meet its payment obligations; or (iii) if any involuntary petition in
bankruptcy has been filed against Affiliate, or any relief under any such law
has been sought by any creditor(s) of Affiliate, unless such involuntary
petition is dismissed, or such relief is denied within thirty (30) days after it
has been filed or sought.
(b) In addition to Affiliate's other rights at law or in equity or
pursuant to other provisions of this Agreement, and in addition to any other
right to terminate provided hereunder, Affiliate may, by so notifying Network,
terminate this Agreement: (i) if Network is in material breach of this
Agreement, provided, however, if such breach is of the type that is curable,
then
27
<PAGE> 28
Affiliate shall not exercise its termination or other rights at law or in equity
hereunder unless Affiliate has, by so notifying Network, given Network at least
thirty (30) days from the time such notice is sent, to cure such material breach
fully and to demonstrate to Affiliate that such material breach has been cured,
unless a shorter cure period is specified elsewhere in this Agreement for a
specific breach, in which case such shorter cure period shall apply; or (ii) if
Network has filed a petition in bankruptcy, is insolvent or has sought relief
under any law related to Network's financial condition or its ability to meet
its payment obligations; or (iii) if any involuntary petition in bankruptcy has
been filed against Network, or any relief under any such law has been sought by
any creditor(s) of Network, unless such involuntary petition is dismissed, or
such relief is denied, within thirty (30) days after it has been filed or
sought; or (iv) on at least fifteen (15) days' notice in the event that delivery
of a Service is discontinued or interrupted for a continuous period of fifteen
(15) days.
10. FORCE MAJEURE:
Except as herein provided to the contrary, neither Affiliate nor Network
shall have any rights against the other party hereto for the non-operation of
facilities or the non-furnishing of a Service if such non-operation or
non-furnishing is due to an act of God; inevitable accident; fire; lockout;
flood; tornado; hurricane; strike or other labor dispute; riot or civil
commotion; earthquake; war; act of government or governmental instrumentality
(whether federal, state or local); failure of performance by a common carrier;
failure in whole or in part of technical facilities; or other cause (financial
inability excepted) beyond such party's reasonable control. In the event of
non-operation or non-furnishing of a Service, Affiliate shall have the right,
immediately, to insert programming of its choice on the channel otherwise
identified with such Service until such time as such Service is fully
operational again. If such non-operation or non-furnishing of a Service is
caused by any incapacity in Network's distribution facilities, then credit shall
be given or payment made to Affiliate on that portion of such Service that is
affected by any interruption during any month equal to the product of (x) the
Fees, any Renewal Amounts, Affiliate Share, Guaranteed Amount and/or Promotional
Payment, respectively, for the applicable Service that would be due for such
month, calculated in accordance with this Agreement, assuming no interruption of
such Service during such month, multiplied by (y) a fraction, the numerator of
which is the total number of hours of interruption of such Service during such
month and the denominator of which is the total number of hours of such Service
that would have been provided and carried by a System or Systems during such
month absent such interruption(s). If such non-operation or non-furnishing of a
Service is caused by any incapacity in Affiliate's distribution facilities,
then, if Affiliate is paying Fees for the receipt of such Service, Affiliate
shall receive a credit on Fees on that portion of such Service that is affected
by any such interruption during any month, to be calculated as set forth in the
immediately
28
<PAGE> 29
preceding sentence; and if Network is paying Affiliate the Affiliate Share,
Guaranteed Amount and/or Promotional Payment for carriage of such Service,
Network shall not be required to make such payments to Affiliate during the
period of such interruption.
11. NOTICES:
Any notice or report given under this Agreement shall be in writing,
shall be sent postage prepaid by registered or certified mail return receipt
requested or by hand or messenger delivery, or by Federal Express or similar
overnight delivery service, or by facsimile transmission, to the other party, at
the following address (unless either party at any time or times designates
another address for itself by notifying the other party thereof by certified
mail, in which case all notices to such party thereafter shall be given at its
most recently so designated address):
To Network: THE BOX Worldwide, Inc.
1221 Collins Avenue
Miami Beach, Florida 33139
Attention: Chief Financial Officer
To Affiliate: Terrace Tower II
5619 DTC Parkway
Englewood, Colorado 80111
Facsimile Number: (303) 488-3218
Attention: Senior Vice President,
Programming
cc: Legal Department
Notice or report given by personal delivery shall be deemed given on delivery.
Notice or report given by mail shall be deemed given on the earlier to occur of
actual receipt thereof or on the fifth day following mailing thereof in
accordance with the notice requirements of this Section 11. Notice or report
given by Federal Express or similar overnight delivery service shall be deemed
given on the next business day following delivery of the notice or report to
such service with instructions for overnight delivery. Notice or report given by
facsimile transmission shall be deemed given on the day of transmission if a
business day, or on the next business day after the day of transmission if not
transmitted on a business day.
12. CONFIDENTIALITY; PRESS RELEASES:
Neither Affiliate nor Network shall disclose (whether orally or in
writing, or by press release or otherwise) to any third party (other than each
party's respective officers, directors and employees, in their capacity as such,
and their respective auditors and attorneys; provided, however, that the
disclosing party agrees to be responsible for any breach of the provisions of
this Section 12 by such officers, directors, employees, auditors or attorneys),
any information with respect to the terms and provisions of this Agreement, any
information obtained in any inspection and/or audit of the other party's books
and records,
29
<PAGE> 30
any information contained in any data or report required or delivered hereunder
or any materials related thereto; and Network shall not use or disclose to any
third party any information regarding Affiliate's promotion of a Service,
including, but not limited to, Affiliate's promotional or marketing plans,
programs or strategies, as well as the results therefrom, and any information
regarding Affiliate's, any affiliate of Affiliate's or any System's subscribers,
or Alternative Technology subscribers including, but not limited to, the number
of such subscribers, including Alternative Technology subscribers except (as to
all of the preceding): (i) to the extent necessary (but redacted to the greatest
extent possible) to comply with law or with the valid order of an administrative
agency or a court of competent jurisdiction, in which event the party making
such disclosure shall so notify the other as promptly as practicable (and, if
possible, prior to making such disclosure) and shall seek confidential treatment
of such information; (ii) as part of its normal reporting or review procedure to
its parent company, its auditors or its attorneys; provided, however, that the
disclosing party agrees to be responsible for any breach of the provisions of
this Section 12 by such parent company, its auditors or attorneys; (iii) in
order to enforce its rights or perform its obligations pursuant to this
Agreement provided that prior to such disclosure such party shall seek
confidential treatment of such information; and (iv) if mutually agreed by
Affiliate and Network, in advance of such disclosure, in writing. Network shall
not use or disclose information (whether personally identifiable information or
not) to any third party regarding Affiliate's or any affiliate of Affiliate's
cable television subscribers or Alternative Technology subscribers (unless such
information is obtained from the subscribers themselves in a communication that
does not violate the provisions of Section 7(f) hereof) and shall not engage in
any direct mailing or telephone solicitation, for any purpose, to cable
television subscribers or Alternative Technology subscribers of Affiliate or any
affiliate of Affiliate. This Section 12 shall survive, indefinitely, the
expiration or termination of this Agreement regardless of the reason for such
expiration or termination.
13. MISCELLANEOUS:
(a) Assignment; Binding Effect; Reorganization. This Agreement,
including both its obligations and benefits, shall redound to the benefit of,
and be binding on the respective transferees and successors of the parties,
except that neither this Agreement nor either party's rights or obligations
hereunder shall be assigned or transferred by either party without the prior
written consent of the other party; provided, however, no consent shall be
necessary in the event of an assignment to a successor entity resulting from a
merger, acquisition or consolidation by either party or assignment to an entity
under common control, controlled by or in control of either party.
Notwithstanding the foregoing, Network shall give Affiliate thirty (30) days'
prior written notice of a change in the control or ownership of a Service or
Network. In such event, this Agreement shall continue
30
<PAGE> 31
but, upon the date of such change of control, at Affiliate's option, (i)
Affiliate may carry such Service on the basic level of service, on any tier, in
any package or packages, or on an a la carte basis in any or all Systems; or
(ii) any or all of the Systems may be deemed deleted from Schedule 1 hereto and
carriage of such Service may be discontinued on any or all of the Systems;
provided, however, that Affiliate shall have the option to continue or restore
carriage of such Service in any or all Systems at any time during the Term. For
purposes of this paragraph, the term "control" means the power to direct the
management and policies of an entity, directly or indirectly, whether through
the ownership of voting securities, by contract or otherwise.
(b) Service Combinations. In the event that a Service(s) is(are)
merged with, or Network acquires control of, or Network is acquired by or merges
with, or control of Network is acquired by, or such Service(s) is(are) acquired
by, any other programming service or the owner of any other programming service,
if Affiliate has (at the time of such merger or acquisition) an affiliation
agreement with any such other service or entity, Affiliate shall have the option
to choose to continue carriage of such Service(s) and of such other service, as
the case may be, under either this Agreement or under such other affiliation
agreement. If Affiliate does not have an affiliation agreement with such other
service or entity, Affiliate shall have the option to elect to have this
Agreement continue to apply to such Service(s) after such merger or acquisition,
or to any surviving service after such merger or acquisition.
(c) Entire Agreement; Amendments; Waivers. This Agreement contains
the entire understanding of the parties and supersedes and abrogates all
contemporaneous and prior understandings of the parties, whether written or
oral, relating to the subject matter hereof, including in particular the letter
agreement between Network and Affiliate dated March 7, 1995. This Agreement may
not be modified except in writing executed by both parties hereto. Any waiver of
any provision of, or right included in, this Agreement must be in writing and
signed by the party whose rights are being waived. No waiver by either Affiliate
or Network of any breach of any provision hereof shall be or be deemed to be a
waiver of any preceding or subsequent breach of the same or any other provision
of this Agreement. The failure of Affiliate or Network to enforce or seek
enforcement of the terms of this Agreement following any breach shall not be
construed as a waiver of such breach.
(d) Governing Law. The obligations of Affiliate and Network under
this Agreement are subject to all applicable federal, state and local laws,
rules and regulations (including, but not limited to, the Communications Act of
1934, as the same may be amended from time to time, and the rules and
regulations of the FCC promulgated thereunder), and this Agreement and all
matters or issues collateral thereto shall be governed by the laws of the State
of New York (except for issues of perpetuity which shall be governed by the laws
of the State of Colorado), without
31
<PAGE> 32
regard to choice of law rules.
(e) Relationship. Neither Affiliate nor Network shall be, or hold
itself out as, the agent of the other under this Agreement. No subscriber of
Affiliate shall be deemed to have any privity of contract or direct contractual
or other relationship with Network by virtue of this Agreement or Network's
delivery of a Service to Affiliate hereunder. Likewise, no supplier of
advertising or programming or anything else included in a Service by Network
shall be deemed to have any privity of contract or direct contractual or other
relationship with Affiliate by virtue of this Agreement or Affiliate's carriage
of such Service hereunder. Nothing contained herein shall be deemed to create,
and the parties do not intend to create, any relationship of partners, joint
venturers or agents, as between Affiliate and Network, and neither party is
authorized to or shall act toward third parties or the public in any manner that
would indicate any such relationship with the other. Network disclaims any
present or future right, interest or estate in or to the transmission facilities
of Affiliate and any affiliate of Affiliate and the parents, subsidiaries,
partnerships or joint venturers controlling the Systems on which a Service is
transmitted, such disclaimer being to acknowledge that neither Affiliate nor the
transmission facilities of the Systems (nor the owners thereof) are common
carriers.
(f) Favorable Terms. Network agrees that if it gives or offers, or
has given or offered, to any third party (i) a lower net effective rate per
subscriber for a Service than Affiliate is paying per Service Subscriber
hereunder, (ii) the right to demand an Earthbox with fewer subscribers to the
Primary Service in a Cable television system than is provided herein, (iii) a
more favorable Promotional Payment, (iv) a more favorable Affiliate Share, (v) a
more favorable Guaranteed Amount, or (vi) any other economic or non-economic
term, provision, covenant or consideration, that are or is more favorable to
such third party than Affiliate is receiving hereunder (clauses (i) through (vi)
above, individually and collectively, shall be referred to herein as a "More
Favorable Provision"), then Network shall promptly offer such More Favorable
Provision to Affiliate for the same amount of time such More Favorable Provision
is or was available to such third party. A More Favorable Provision shall not
include any pertinent term, provision, covenant or consideration given or
offered to any third party, provided it is the identical term, provision,
covenant or consideration offered and granted to Affiliate the same number of
times at one or more previous points in time. A More Favorable Provision shall
include any term, provision, covenant or consideration, regardless of whether
there is a corresponding term, provision, covenant or consideration concerning
the subject matter of such More Favorable Provision in this Agreement or whether
such term, provision, covenant or consideration relates to such third party's
entire subscriber base or less than the entire base (e.g., a More Favorable
Provision relating to a "test" of "sample" group of subscribers). The
calculation of net effective rate shall include all economic and
32
<PAGE> 33
non-economic terms and provisions of an agreement that involve financial or
other outlays (excluding contingent liabilities) by either party for the benefit
of the other or in direct or indirect connection with the rates for the
Services, or that involve direct or indirect consideration payable by either
party to the other, such as discounts, credits, marketing support or adjustments
of any kind including, but not limited to, actual per subscriber rates, launch
reimbursements, advertising support, volume or other discounts, reimbursements,
channel position fees, discounts, credits or rebates, pre-payment of loans,
deductions for uncollected accounts, market contributions and other incentives,
cash payments (whether conditional or not), sales or leases of equipment, studio
facility discounts, free or discounted marketing materials, payment terms and
other financings. In determining "net effective rates," the actual number of
subscribers to each Service (rather than projected or expected subscribers or
the number of such third party's subscribers who are not actually subscribers to
such Service) will be considered.
When comparing the "net effective rates" of Affiliate and any third
party distributor of the Services, all subscribers to the Services of Affiliate
and each distributor shall first be divided into six (6) classes, and then the
"net effective rates" for the subscribers in each class shall be separately
compared; the six (6) classes of subscribers to the Services shall be: (A) all
subscribers to whom the Primary Service is available full-time but for whom no
Fee is paid; (B) all subscribers to whom the Primary Service is available
full-time and for whom a Fee is paid; (C) all subscribers to whom the Primary
Service is available part-time but for whom no Fee is paid; (D) all subscribers
to whom the Primary Service is available part-time and for whom a Fee is paid;
(E) all subscribers to whom the Satellite Service (but not the Primary Service)
is available; and (F) all subscribers to whom the Primary Service is available
full-time and the Satellite Service is also available either full-time or part
time, provided only that both Services are available on the first or second most
highly penetrated levels of service.
Without limiting the foregoing, and for purposes of comparing the actual
rate per subscriber to a Service payable by Affiliate to the actual rate per
subscriber to such Service payable by a third party distributor of such Service
distributing such Service through the use of any television distribution system
or enterprise, the penetration of such Service for such third party distributor
shall be calculated as if the denominator includes all recipients of any
television service through such system or enterprise, regardless of the number
of parties distributing television services through such system or enterprise.
Network agrees to provide to Affiliate a written certification on each
annual anniversary date of this Agreement, signed by a duly authorized officer
of Network, stating that Network has satisfied its obligations under this
Section 13(f). Notwithstanding the foregoing, the provisions of this Section
13(f) shall not apply to any agreement between Network and any
33
<PAGE> 34
distributor that has expired prior to the date hereof.
(g) Severability. The invalidity under applicable law of any
provision of this Agreement shall not affect the validity of any other provision
of this Agreement, and in the event that any provision hereof is determined to
be invalid or otherwise illegal, this Agreement shall remain effective and shall
be construed in accordance with its terms as if the invalid or illegal provision
were not contained herein; provided, however, that both parties shall negotiate
in good faith with respect to an equitable modification of the provision, or
application thereof, held to be invalid and provisions logically related
thereto.
(h) No Inference Against Author. Network and Affiliate each
acknowledge that this Agreement was fully negotiated by the parties and,
therefore, no provision of this Agreement shall be interpreted against any party
because such party or its legal representative drafted such provision.
(i) No Third Party Beneficiaries. The provisions of this Agreement
are for the exclusive benefit of the parties hereto and their permitted assigns,
and no third party shall be a beneficiary of, or have any rights by virtue of,
this Agreement.
(j) Headings. The titles and headings of the sections in this
Agreement are for convenience only and shall not in any way affect the
interpretation of this Agreement.
(k) Non-Recourse. Notwithstanding anything contained in this
Agreement to the contrary, it is expressly understood and agreed by the parties
hereto that each and every representation, warranty, covenant, undertaking and
agreement made in this Agreement was not made nor intended to be made as a
personal representation, undertaking, warranty, covenant, or agreement on the
part of any incorporator, stockholder, director, officer, partner, employee or
agent, past, present or future, or any of them, and any recourse, whether at
common law, in equity, by statute or otherwise, against any of them is hereby
forever waived and released.
(l) Taxes. Affiliate shall have the right to withhold any portion
of any amounts payable by Affiliate to Network that Affiliate is required to
withhold by applicable law, and to pay any such amounts over to any appropriate
governmental authority. Network shall provide such assistance as is necessary to
enable Affiliate to discharge its obligation to withhold and/or pay taxes on
Network's behalf. Network shall indemnify, defend and forever hold harmless
Affiliate and any affiliate of Affiliate from and against any and all
liabilities, claims, costs (including attorneys' fees), damages, liens,
encumbrances, charges, suits or actions arising directly or indirectly out of
any tax or other amount withheld, paid or otherwise collected by Affiliate on
Network's behalf, or owed or paid by Network to any governmental entity.
34
<PAGE> 35
The parties hereto have executed this Agreement as of the date first
above written.
AFFILIATE: NETWORK:
By:/s/ DAVID A. JENSEN By:/s/ STANLEY H. GREEN
------------------------------ -----------------------------
Title: Vice President-Programming Title: President, The Box U.S.A
-------------------------- -------------------------
35
<PAGE> 1
EXHIBIT 21
List of Subsidiaries
DMX Inc.
a Delaware Corporation
TEMPO Sound, Inc.,
an Oklahoma Corporation
450714 B.C.,
a British Columbia, Canada Corporation
DMX-Europe N.V.,
a Netherlands Corporation
Paradigm Music Entertainment Company
a Delaware Corporation
SonicNet, Inc.
a Delaware Corporation
Purple Demon, Inc.
a New York Corporation
The Box Worldwide, Inc.
a Florida Corporation
The Box Worldwide - USA, Inc., a Delaware Corporation
VJN LPTV CORP., a Delaware Corporation
The Box Worldwide - Europe, B.V., A Netherlands Corporation
The Box Worldwide - Latin America, Inc., a British Virgin Islands
Corporation
VJN Management Services, Inc., a British Virgin Islands Corporation
Video Jukebox Network Europe, Ltd., a United Kingdom Corporation
The Box Holland, B.V., a Netherlands Corporation
The Box Argentina, Sri., an Argentina Corporation
The Box Italy, Srl., an Italy Corporation
<PAGE> 1
The Board of Directors
TCI Music, Inc.
We consent to incorporation by reference in the registration statement
(No 333-44245) on Form S-8 of TCI Music, Inc. of our report dated February 20,
1998, relating to the consolidated balance sheets of TCI Music, Inc. and
subsidiaries as of December 31, 1997, and the related consolidated statements
of operations, stockholders' equity and cash flows for the six month period
ended December 31, 1997, and relating to the consolidated balance sheets of DMX
Inc. and subsidiaries (Predecessor) as of June 30, 1997 and the related
consolidated statement of operations, stockholders' equity (deficit) and cash
flows for the nine months ended June 30, 1997 and the years ended September 30,
1996 and 1995, which report appears in the December 31, 1997 annual report of
Form 10-K of TCI Music, Inc.
KPMG Peat Marwick LLP
Los Angeles, California
March 30, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JUL-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 7,915,439
<SECURITIES> 0
<RECEIVABLES> 8,765,414
<ALLOWANCES> 523,914
<INVENTORY> 6,713,487
<CURRENT-ASSETS> 25,863,124
<PP&E> 14,601,273
<DEPRECIATION> 1,113,641
<TOTAL-ASSETS> 194,727,178
<CURRENT-LIABILITIES> 32,138,246
<BONDS> 0
805,992
35,588,068
<COMMON> 0
<OTHER-SE> 63,725,458
<TOTAL-LIABILITY-AND-EQUITY> 194,727,178
<SALES> 22,954,908
<TOTAL-REVENUES> 22,954,908
<CGS> 0
<TOTAL-COSTS> 20,610,340
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 280,573
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