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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A-1
(AMENDMENT NO. 1)
(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 $87,469,509.
Number of shares of Common Stock of TCI Music, Inc. outstanding as of January
31, 1998: 18,237,356 shares.
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TABLE OF CONTENTS Page
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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
PART I (pages 3-16) HAS BEEN OMITTED
BECAUSE THERE WERE NO CHANGES TO THIS PART.
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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:
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QUARTER ENDED HIGH LOW
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September 30, 1997 (from July 14, 1997) 7.7500 6.7500
December 31, 1997 7.8125 7.3750
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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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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.)
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SIX MONTHS NINE MONTHS
ENDED ENDED
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DECEMBER 31, JUNE 30, SEPTEMBER 30,
1997 1997 1996 1995 1994 1993
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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
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Net earnings (loss) before income taxes 1,917 (14,708) (33,855) (23,079) (16,505) (16,408)
Income tax expense (2,382) -- -- -- -- --
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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
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(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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SEPTEMBER 30,
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DECEMBER 31, JUNE 30,
1997 1997 1996 1995 1994 1993
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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 2,357 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
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Total liabilities 94,901 27,288 20,106 22,210 14,416 7,794
Convertible preferred stock 35,588 -- -- -- -- --
Stockholders' (deficit) equity 64,238 (16,302) (1,354) (5,128) 184 (920)
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Total liabilities and stockholders' equity
(deficit) $ 194,727 10,986 18,752 17,082 14,600 6,874
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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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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.
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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
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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.
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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.
24
<PAGE> 12
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> 13
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> 14
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> 15
<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> 16
<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> 17
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> 18
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 $50,000 or 10% of the total amounts reported in the Salary and Bonus
columns during the Reporting Period.
31
<PAGE> 19
(b) Option/SAR Grants in Last Fiscal Year
The following table shows all individual grants of stock options and stock
appreciation rights ("SARs") by the Company to each of the named executive
officers during the Reporting Period.
<TABLE>
<CAPTION>
Number of
Securities
Underlying % of Total
Options/ Options/SARs to Exercise
SARs Employees Price Expiration
Name Granted(1) in Fiscal Year ($/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> 20
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> 21
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> 22
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> 23
<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> 24
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> 25
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.
38
<PAGE> 26
<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> 27
<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> 28
<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> 29
(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> 30
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> 31
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> 32
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 $40 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
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<PAGE> 33
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.
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<PAGE> 34
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 (previously filed)
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> 35
<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
(previously filed)
10.3* Affiliation Agreement between Satellite Services, Inc. and DMX Inc., dated July 1, 1997, and letter amendment
dated January 27, 1998 (previously filed)
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. (previously filed)
10.6 Promissory Note, dated September 19, 1997, between TCI Music, Inc. and Liberty Media Corporation (previously filed)
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) (previously filed)
10.10**** Non-Qualified Stock Option and Stock Appreciation Rights Agreement between TCI Music, Inc. and David Koff,
dated July 11, 1997 (previously filed)
10.11**** Non-Qualified Stock Option and Stock Appreciation Rights Agreement between TCI Music, Inc. and Lon Troxel,
dated July 11, 1997 (previously filed)
10.12**** Non-Qualified Stock Option and Stock Appreciation Rights Agreement between TCI Music, Inc. and J.C.
Sparkman, dated July 11, 1997 (previously filed)
</TABLE>
48
<PAGE> 36
<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 (previously filed)
10.14**** Non-Qualified Stock Option and Stock Appreciation Rights Agreement between TCI Music, Inc. and Robert R.
Bennett, dated July 11, 1997 (previously filed)
10.15**** Non-Qualified Stock Option and Stock Appreciation Rights Agreement between TCI Music, Inc. and Donne F.
Fisher, dated July 11, 1997 (previously filed)
10.16**** Non-Qualified Stock Option and Stock Appreciation Rights Agreement between TCI Music, Inc. and Peter J.
Kern, dated July 11, 1997 (previously filed)
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 (previously filed)
10.20 Registration Rights Agreement dated December 31, 1997 between TCI Music, Inc. and Thomas McPartland,
Attorney in fact (previously filed)
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> 37
<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> 38
<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
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<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
(previously filed)
21 Subsidiaries of TCI Music, Inc. (previously filed)
23 Consent of KPMG Peat Marwick LLP (previously filed)
27 Financial Data Schedule (previously filed)
</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> 40
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> 41
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> 42
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> 43
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> 44
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 2,357 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 94,901 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 63,899 136,896
Accumulated deficit (465) (152,787)
Foreign currency translation adjustment (2) (430)
Treasury stock, 85,630 shares at cost -- (578)
--------- ---------
Total stockholders' equity (deficit) 64,238 (16,302)
--------- ---------
Commitments and contingencies (note 12)
$ 194,727 10,986
========= =========
</TABLE>
See accompanying notes to consolidated financial statements
F-4
<PAGE> 45
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> 46
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> 47
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
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 63,899 (465) -- (2) 64,238
================================================================================
</TABLE>
See accompanying notes to consolidated financial statements
F-7
<PAGE> 48
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> 49
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> 50
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> 51
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> 52
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> 53
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> 54
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> 55
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> 56
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> 57
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> 58
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 (3,202,335 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 $ 34,897 44,190
================= =================
Net loss $ (11,150) (18,328)
================= ==================
Pro forma net loss per common share $ (0.14) (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> 59
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> 60
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> 61
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> 62
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> 63
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 stock options
with tandem Stock Appreciation Rights ("SARs") 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 stock options with tandem SARs 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 with tandem SARs 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> 64
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> 65
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> 66
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> 67
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> 68
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> 69
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> 70
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> 71
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/ JOANNE WENDY KIM
-------------------------------- Date: May 1, 1998
Joanne Wendy Kim
Vice President-Finance
<PAGE> 72
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 (previously filed)
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> 73
<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
(previously filed)
10.3* Affiliation Agreement between Satellite Services, Inc. and DMX Inc., dated July 1, 1997, and letter amendment
dated January 27, 1998 (previously filed)
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. (previously filed)
10.6 Promissory Note, dated September 19, 1997, between TCI Music, Inc. and Liberty Media Corporation (previously filed)
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) (previously filed)
10.10**** Non-Qualified Stock Option and Stock Appreciation Rights Agreement between TCI Music, Inc. and David Koff,
dated July 11, 1997 (previously filed)
10.11**** Non-Qualified Stock Option and Stock Appreciation Rights Agreement between TCI Music, Inc. and Lon Troxel,
dated July 11, 1997 (previously filed)
10.12**** Non-Qualified Stock Option and Stock Appreciation Rights Agreement between TCI Music, Inc. and J.C.
Sparkman, dated July 11, 1997 (previously filed)
</TABLE>
<PAGE> 74
<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 (previously filed)
10.14**** Non-Qualified Stock Option and Stock Appreciation Rights Agreement between TCI Music, Inc. and Robert R.
Bennett, dated July 11, 1997 (previously filed)
10.15**** Non-Qualified Stock Option and Stock Appreciation Rights Agreement between TCI Music, Inc. and Donne F.
Fisher, dated July 11, 1997 (previously filed)
10.16**** Non-Qualified Stock Option and Stock Appreciation Rights Agreement between TCI Music, Inc. and Peter J.
Kern, dated July 11, 1997 (previously filed)
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 (previously filed)
10.20 Registration Rights Agreement dated December 31, 1997 between TCI Music, Inc. and Thomas McPartland,
Attorney in fact (previously filed)
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> 75
<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> 76
<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> 77
<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
(previously filed)
21 Subsidiaries of TCI Music, Inc. (previously filed)
23 Consent of KPMG Peat Marwick LLP (previously filed)
27 Financial Data Schedule (previously filed)
</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 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 an 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 highest sale price of such
stock on such date (A) if such stock is listed on a securities exchange, as
reported by the principal securities exchange on which such stock is
traded, or (B) if such stock is quoted on the automated quotation system of
the National Association of Securities Dealers, Inc. or any reputable
successor entity ("NASDAQ") as reported by NASDAQ or (ii) if on any such
date there is no such reported sale, the average of the high bid and low
asked prices of such stock on such date, as reported by NASDAQ or, if no
such price is reported by NASDAQ on such date, as determined 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
2
