<PAGE> 1
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES
EXCHANGE ACT OF 1934 (AMENDMENT NO. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
<TABLE>
<S> <C>
[ ] Preliminary Proxy Statement [ ] Confidential, for Use of the
Commission Only (as permitted by
Rule 14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
</TABLE>
TCI Music, Inc.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified in Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if Other Than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[ ] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1) Title of each class of securities to which transaction applies:
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(2) Aggregate number of securities to which transaction applies:
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(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined):
-----------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
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(5) Total fee paid:
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[X] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
number, or the form or Schedule and the date of its filing.
(1) Amount Previously Paid:
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(2) Form, Schedule or Registration Statement No.:
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(3) Filing Party:
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(4) Date Filed:
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<PAGE> 2
[TCI MUSIC LOGO]
Dear Shareholder: July 30, 1999
You are cordially invited to attend the annual meeting of shareholders of
TCI Music, Inc., which will be held at 9197 South Peoria Street, Englewood,
Colorado on September 8, 1999, starting at 10:00 a.m. local time. A notice of
the annual meeting, a proxy card, a proxy statement containing important
information about the matters to be acted upon at the annual meeting, and TCI
Music's 1998 Annual Report to Shareholders are enclosed.
You will be asked at the annual meeting to consider and vote upon:
- a proposal to approve the transactions contemplated by a Contribution
Agreement dated as of April 23, 1999 among TCI Music, Liberty Media
Corporation and wholly owned subsidiaries of Liberty (collectively, "the
Contribution Transaction") under which the following will occur:
- A wholly owned subsidiary of Liberty will contribute to the Company
all of the outstanding stock of its wholly owned subsidiaries that
were formed solely to hold some of Liberty's investments in
interactive programming and content related assets;
- Liberty (through a wholly owned subsidiary) will assign to TCI Music
its rights relating to channel capacity on AT&T Corporation's cable
television systems for the provision of interactive video services
under an agreement between Liberty and AT&T entered into in
connection with the merger of AT&T and Tele-Communications, Inc.,
the former parent of Liberty;
- Liberty (through a wholly owned subsidiary) will contribute to TCI
Music a combination of cash and notes payable to Liberty or one or
more of its wholly owned subsidiaries by the contributed
subsidiaries and TCI Music equal to $150 million;
- TCI Music will adopt a deferred compensation and stock appreciation
rights plan for key executives of the Company; and
- In consideration of all of the foregoing, TCI Music will issue to a
wholly owned subsidiary of Liberty, (1) 109,450,167 shares of Series
B common stock and (2) 150,000 shares of a newly authorized series
of preferred stock, TCI Music convertible preferred stock, Series B,
having an initial aggregate liquidation preference of $150 million.
- a proposal to approve amendments to TCI Music's Certificate of
Incorporation to:
- change the name of TCI Music to Liberty Digital, Inc.;
- increase the number of authorized shares of its capital stock,
Series A common stock and Series B common stock; and
- eliminate the prohibition against shareholder action without a
meeting, thereby permitting shareholder action by written consent.
- a proposal to approve a deferred compensation and stock appreciation
rights plan for key executives of the Company pursuant to which common
stock may be issued.
- the election of three directors to hold office until the annual meeting
of shareholders in the year 2002 and until their successors are elected
and qualified.
67 Irving Place North, 4th Floor, New York, NY 10003 212.387.7700 Fax
212.387.8171
<PAGE> 3
- to transact such other business as may properly come before the annual
meeting.
The Board of Directors recommends that you vote FOR each proposal. Detailed
descriptions of the Contribution Agreement and the Contribution Transaction and
a discussion of the factors considered by the Board of Directors in evaluating
the Contribution Transaction and other important information are set forth in
the accompanying proxy statement. I urge you to consider it carefully.
Liberty is an affiliate of the Company. Liberty beneficially owns
approximately 86.3% of the Company's outstanding shares of voting securities,
which represents approximately 98.2% of the voting power of all outstanding
voting securities. Liberty has agreed to cause its controlled affiliates to vote
all shares of voting securities owned by them in favor of each proposal. Because
of Liberty's voting power, the proposals will be approved at the annual meeting,
whether or not any other shareholder votes for them. Upon completion of the
transactions under the Contribution Agreement, Liberty will own beneficially
approximately 50.3% of the Series A common stock, 100% of the Series B common
stock, and 100% of the newly issued Series B convertible preferred stock. As a
result, Liberty will beneficially own shares representing approximately 99.4% of
the voting power of all outstanding capital stock of the Company. In addition,
Liberty will be able to acquire beneficial ownership of up to an additional
25,751,100 shares of Series B common stock upon conversion of the Series B
convertible preferred stock.
Whether or not you are able to attend the annual meeting in person, please
complete, sign and date the enclosed proxy card and return it in the enclosed
prepaid envelope as soon as possible. This action will not limit your right to
vote in person if you wish to attend the annual meeting and vote personally.
Sincerely yours,
/s/ Lee Masters
------------------------------------
Lee Masters
President and Chief Executive
Officer
<PAGE> 4
TCI MUSIC, INC.
67 IRVING PLACE NORTH, 4TH FLOOR
NEW YORK, NEW YORK 10003
------------------------
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD ON SEPTEMBER 8, 1999
AND
PROXY STATEMENT
------------------------
NOTICE IS HEREBY GIVEN that the annual meeting of shareholders (including
any adjournment or postponement thereof, the "annual meeting") of TCI Music,
Inc., a Delaware corporation, will be held at 9197 South Peoria Street,
Englewood, Colorado, starting at 10:00 a.m. local time, on September 8, 1999, to
consider and vote upon the following proposals. This proxy statement and the
accompanying form of proxy will be mailed to the shareholders of TCI Music on or
about August 3, 1999.
The effectiveness of Proposal 1, Proposal 2 and Proposal 3 are each
conditioned upon approval of the other two proposals.
1. A proposal to approve the transactions contemplated by a Contribution
Agreement dated as of April 23, 1999 among TCI Music, Liberty Media
Corporation and wholly owned subsidiaries of Liberty (collectively, the
"Contribution Transaction") under which the following will occur:
- A wholly owned subsidiary of Liberty will contribute to the Company
all of the outstanding stock of its wholly owned subsidiaries that
were formed solely to hold some of Liberty's investments in
interactive programming and content related assets (the "Contributed
Subsidiaries");
- Liberty (through a wholly owned subsidiary) will assign to TCI Music
its rights relating to channel capacity on AT&T Corporation's
("AT&T") cable television systems for the provision of interactive
video services under a letter agreement dated March 9, 1999 between
Liberty and AT&T (the "Access Agreement") entered into in connection
with the merger of AT&T and Tele-Communications, Inc., the former
parent of Liberty (the "AT&T Merger");
- Liberty (through a wholly owned subsidiary) will contribute to TCI
Music a combination of cash and notes payable to Liberty or one or
more of its wholly owned subsidiaries by the contributed
subsidiaries and TCI Music equal to $150 million;
- TCI Music will adopt a deferred compensation and stock appreciation
rights plan for key executives of the Company (the "Deferred
Compensation and Stock Appreciation Rights Plan"); and
- In consideration of all of the foregoing, TCI Music will issue to a
wholly owned subsidiary of Liberty, (1) 109,450,167 shares of Series
B common stock and (2) 150,000 shares of a newly authorized series
of preferred stock, TCI Music convertible preferred stock, Series B
("Series B preferred stock"), having an initial aggregate
liquidation preference of $150 million.
2. A proposal to approve amendments to TCI Music's Certificate of
Incorporation to
- change the name of TCI Music to Liberty Digital, Inc.;
- increase the number of authorized shares of its capital stock,
Series A common stock, and Series B common stock; and
- eliminate the prohibition against shareholder action without a
meeting, thereby permitting shareholder action by written consent.
<PAGE> 5
3. A proposal to approve the Deferred Compensation and Stock Appreciation
Rights Plan pursuant to which common stock may be issued.
4. The election of three directors to hold office until the annual meeting
of shareholders in the year 2002 and until their successors are elected and
qualified.
5. To transact such other business as may properly come before the annual
meeting.
This proxy statement is being furnished to you in connection with the
solicitation by the Board of Directors of TCI Music of proxies for use at the
annual meeting. Detailed descriptions of the Contribution Agreement and the
Contribution Transaction and a discussion of the factors considered by the Board
of Directors in evaluating the Contribution Transaction and other important
information are set forth in the accompanying proxy statement. Proxies are being
solicited from the holders of Series A common stock and Series B common stock
(together with the Series A common stock, the "common stock"). These securities
are referred to in this proxy statement, from time to time, as the "Voting
Securities."
Holders of record of Series A common stock and Series B common stock, at
the close of business on July 26, 1999, the record date for the annual meeting,
are entitled to notice of and to vote at the annual meeting.
Liberty is an affiliate of the Company. Liberty beneficially owns
approximately 86.3% of the Company's outstanding shares of Voting Securities,
which represents approximately 98.2% of the voting power of all outstanding
Voting Securities. Liberty has agreed to cause its controlled affiliates to vote
all shares of voting securities owned by them in favor of each proposal. Because
of Liberty's voting power, the proposals will be approved at the annual meeting,
whether or not any other shareholder votes for them. Upon completion of the
Contribution Transaction, Liberty will beneficially own approximately 50.3% of
the outstanding shares of Series A common stock, 100% of the outstanding shares
of Series B common stock, and 100% of the outstanding shares of Series B
preferred stock. As a result, Liberty will beneficially own shares representing
approximately 99.4% of the voting power of all outstanding shares of capital
stock of the Company. In addition, Liberty will be able to acquire beneficial
ownership of up to an additional 25,751,100 shares of Series B common stock upon
conversion of the Series B preferred stock.
The Board of Directors has approved and recommends that you vote for
approval of each proposal.
A list of shareholders entitled to vote at the annual meeting will be open
to the examination of any shareholder, for any purpose appropriate to the
meeting, during normal business hours, for a period of ten days prior to the
annual meeting at TCI Music's offices at 67 Irving Place North, 4th Floor, New
York, New York 10003.
By Order of the Board of Directors,
/s/ Lee Masters
------------------------------------
Lee Masters
President and Chief Executive
Officer
New York, New York
The date of this proxy statement is July 30, 1999
Please execute and return the enclosed proxy promptly, whether or not you intend
to be present at the annual meeting.
ii
<PAGE> 6
CAUTIONARY STATEMENT
This proxy statement contains forward-looking statements that involve risk
and uncertainties, including statements contained in the Summary, Proposal
1 -- Approval of Contribution Transaction, Proposal 2 -- Approval of Amendments
to the Company's Certificate of Incorporation, Proposal 3 -- Approval of
Deferred Compensation and Stock Appreciation Rights Plan and elsewhere in this
proxy statement. The statements contained in this proxy statement that are not
purely historical are forward-looking statements within the meaning of Section
27A of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"). When used in this proxy
statement, or in the documents incorporated by reference into this proxy
statement, the words "anticipate," "believe," "estimate," "intend" and "expect"
and similar expressions are intended to identify such forward-looking
statements. Such forward-looking statements involve known and unknown risks,
uncertainties and other important factors that could cause the actual results,
performance or achievements of the Company and its subsidiaries or industry
results to differ materially from any future results, performance or
achievements expressed or implied by such forward-looking statements. Such
risks, uncertainties and other factors include, among others: general economic
and business conditions and industry trends; the continued strength of the
multichannel video programming distribution industry and the satellite services
industry; uncertainties inherent in proposed business strategies and development
plans; uncertainties inherent in the change over to the year 2000; rapid
technological changes; future financial performance, including availability,
terms and deployment of capital; availability of qualified personnel; changes
in, or the failure or the inability to comply with, government regulation,
including, without limitation, regulations of the Federal Communications
Commission, and adverse outcomes from regulatory proceedings; changes in the
nature of key strategic relationships with partners and joint venturers;
competitor responses to the Company's products and services, and the overall
market acceptance of such products and services, including acceptance of the
pricing of such products and services; and other factors. These forward-looking
statements speak only as of the date of this proxy statement. The Company
expressly disclaims any obligation or undertaking to disseminate any updates or
revisions to any forward-looking statement contained herein to reflect any
change in the Company's expectations with regard thereto or any change in
events, conditions or circumstances on which any such statement is based. Any
statement contained within or incorporated by reference into this proxy
statement related to the year 2000 are hereby denominated as "Year 2000
Statements" within the meaning of the Year 2000 Information and Readiness
Disclosure Act.
iii
<PAGE> 7
TABLE OF CONTENTS
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CAUTIONARY STATEMENT........................................ iii
SUMMARY..................................................... 1
TCI Music................................................. 1
Liberty................................................... 1
PROPOSAL 1 -- APPROVAL OF CONTRIBUTION TRANSACTION........ 1
General................................................ 1
TCI Music's Reasons for the Contribution Transaction;
Recommendation of the TCI Music Board................. 2
Market and Market Prices............................... 3
Tax and Accounting Treatment........................... 3
Risk Factors Relating to the Contribution
Transaction........................................... 3
Recommendation of the Board............................ 3
PROPOSAL 2 -- APPROVAL OF AMENDMENTS TO THE COMPANY'S
CERTIFICATE OF INCORPORATION........................... 3
PROPOSAL 3 -- APPROVAL OF DEFERRED COMPENSATION AND STOCK
APPRECIATION RIGHTS PLAN............................... 4
PROPOSAL 4 -- ELECTION OF DIRECTORS....................... 7
Selected Financial Information............................ 7
THE ANNUAL MEETING.......................................... 10
Time and Place; Purposes.................................. 10
Voting Rights; Votes Required for Approval................ 10
Proxies................................................... 11
RECENT DEVELOPMENTS......................................... 12
PROPOSAL 1 -- APPROVAL OF CONTRIBUTION TRANSACTION.......... 13
Background of the Contribution Transaction................ 13
Description of Contribution Transaction................... 17
Risk Factors Relating to the Contribution Transaction..... 23
The Set Top Boxes Required for Interactive Television
May Not be Developed or Deployed...................... 23
The Physical Plant Upgrades Necessary for Interactive
Television May Not Occur on a Timely Basis............ 23
We Will Have to Raise Significant Funds to Develop
Interactive Television and Make Investments in
Interactive Programming and Content Related Assets.... 23
Terms and Conditions of Agreements to be Entered Into
in Connection with the Access Agreement are Uncertain
and May Not Be Favorable to the Company............... 24
Our Success Depends upon Distribution of Interactive
Television Services to MSOs other than AT&T........... 25
The Creation of an Interactive Television Business
Depends on Our Ability to Enter into Strategic Content
Alliances and Agreements for Network and Fulfillment
Services.............................................. 25
Our Success in Developing the Interactive Television
Business Depends on Customer Acceptance............... 25
Our New Business Depends on Key Personnel.............. 26
Others May Develop Competing Interactive Television
Services.............................................. 26
There are Limitations on Liberty's Policy that May
Adversely Affect TCI Music's Pursuit of Opportunities
in Interactive Programming............................ 26
Selling Our Equity Investments May Present Certain
Risks................................................. 27
The Fluctuating Value of the Assets of the Contributed
Subsidiaries May Affect the Value of the Company...... 28
The Market for the Company's Stock is Volatile......... 28
Conflicts of Interest.................................. 28
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iv
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TCI Music's Reasons for the Contribution Transaction;
Recommendation of the TCI Music Board.................. 29
Information and Factors Considered by TCI Music........ 30
Recommendation of the TCI Music Board.................. 31
Opinion of Morgan Stanley.............................. 31
Interests of Certain Persons in the Contribution
Transaction............................................ 37
Tax and Accounting Treatment.............................. 37
No Appraisal Rights....................................... 37
No Governmental Approvals................................. 37
Votes Required For Approval............................... 38
DESCRIPTION OF THE CONTRIBUTION AGREEMENT AND RELATED
AGREEMENTS................................................ 39
The Contribution Agreement................................ 39
Series B Preferred Stock.................................. 43
Other Agreements.......................................... 47
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL
INFORMATION............................................... 48
PROPOSAL 2 -- APPROVAL OF AMENDMENTS TO THE COMPANY'S
CERTIFICATE OF INCORPORATION.............................. 53
PROPOSAL 3 -- APPROVAL OF DEFERRED COMPENSATION AND STOCK
APPRECIATION RIGHTS PLAN.................................. 55
PROPOSAL 4 -- ELECTION OF DIRECTORS......................... 58
EXECUTIVE OFFICERS.......................................... 62
EXECUTIVE COMPENSATION...................................... 63
REPORT OF THE COMPENSATION COMMITTEE ON EXECUTIVE
COMPENSATION.............................................. 67
STOCK PERFORMANCE GRAPHS.................................... 71
CONCERNING THE BOARD OF DIRECTORS........................... 73
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT................................................ 74
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.............. 76
INDEPENDENT AUDITORS........................................ 79
EXPERTS..................................................... 79
SHAREHOLDERS' PROPOSALS..................................... 79
OTHER BUSINESS.............................................. 80
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE........... 80
INDEX OF DEFINED TERMS...................................... 81
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v
<PAGE> 9
SUMMARY
This summary highlights certain information contained in this proxy
statement and may not contain all of the information that is important to you.
TO UNDERSTAND THE PROPOSALS MORE FULLY, YOU ARE URGED TO READ THIS PROXY
STATEMENT AND ITS APPENDICES IN THEIR ENTIRETY. Unless the context otherwise
requires, the terms "Company" and "TCI Music" refer to TCI Music, Inc. and its
consolidated subsidiaries. Many of the capitalized terms used in this summary
and throughout this proxy statement are referenced in the Index to Defined Terms
at the end of this proxy statement.
TCI MUSIC
TCI Music is a music entertainment company delivering audio music services
to commercial and residential consumers via satellite. TCI Music is comprised of
DMX, LLC ("DMX"), which programs, markets, and distributes the premium digital
audio music service known as Digital Music Express and a 10% interest in a joint
venture with MTV Networks, a division of Viacom International Inc. ("MTVN"),
which was formed to develop and operate audio and video music, music-related and
music-themed services online. Until July 15, 1999, TCI Music also consisted of
The Box Worldwide, Inc. ("The Box"), which programs and distributes the
interactive music video television network, The Box Music Network, and Sonic
Net, Inc.("SonicNet"), which operates SonicNet, a leading Internet music network
consisting of a group of websites. On that date TCI Music contributed
substantially all of the assets and liabilities of The Box and SonicNet to the
joint venture with MTVN. The principal executive offices of the Company are
located at 67 Irving Place North, 4th Floor, New York, New York 10003;
telephone: (212) 387-7700.
LIBERTY
TCI Music is a 86.3% owned subsidiary of Liberty Media Corporation and
three of TCI Music's eight directors are also employees, officers and/or
directors of Liberty or its affiliates other than TCI Music. Liberty is a part
of the Liberty Media Group of AT&T. Liberty Media Group holds interests in a
broad range of video programming, communications, technology and Internet
businesses in the United States, Europe, South America and Asia. The Class A and
Class B Liberty Media Group common stock are tracking stocks of AT&T and are
traded on the New York Stock Exchange under the symbols LMG.A and LMG.B,
respectively. Liberty, through its subsidiaries and affiliates, produces,
acquires and distributes entertainment, sports and informational programming
services to various video distribution media, principally cable television
systems, and holds investments in international cable systems and Internet,
digital services and other technology. As used in this proxy statement, the term
"Liberty" includes Liberty Media Corporation and its consolidated subsidiaries
(other than TCI Music), unless the context indicates otherwise. The principal
executive offices of Liberty are located at 9197 South Peoria Street, Englewood,
Colorado 80112, telephone (720) 875-5400.
PROPOSAL 1 -- APPROVAL OF CONTRIBUTION TRANSACTION
GENERAL
The Company is seeking approval of the Contribution Transaction. Pursuant
to the Contribution Transaction,
- A wholly owned subsidiary of Liberty will contribute to the Company all
of the outstanding stock of the Contributed Subsidiaries;
- Liberty (through a wholly owned subsidiary) will assign to TCI Music its
rights relating to channel capacity on AT&T's cable television systems
for the provision of interactive video services under the Access
Agreement;
- Liberty (through a wholly owned subsidiary) will contribute to TCI Music
a combination of cash and notes payable to Liberty or one or more wholly
owned subsidiaries of Liberty by the contributed subsidiaries and TCI
Music equal to $150 million;
<PAGE> 10
- TCI Music will adopt the Deferred Compensation and Stock Appreciation
Rights Plan; and
- In consideration of all of the foregoing, TCI Music will issue to a
wholly owned subsidiary of Liberty, (1) 109,450,167 shares of Series B
common stock and (2) 150,000 shares of Series B preferred stock having an
initial aggregate liquidation preference of $150 million.
TCI MUSIC'S REASONS FOR THE CONTRIBUTION TRANSACTION; RECOMMENDATION OF THE TCI
MUSIC BOARD
The following briefly describes the material reasons, factors and
information taken into account by the Board in deciding to approve the
Contribution Transaction and to recommend that TCI Music shareholders approve
the Contribution Transaction.
- Strategic Opportunity. Since its formation, the Company's goal has been
to develop a portfolio of integrated interactive digitally delivered
music entertainment services. The Board believes that the Contribution
Transaction provides a strategic opportunity to increase shareholder
value by broadening the Company's focus from distributing digital music
to a broad Internet and interactive television business. Upon completion
of the Contribution Transaction the Company will have three components to
its business -- its DMX music business, the development of an interactive
television business and its equity investments in businesses that take
advantage of the opportunities of interactive programming and content and
interactive television. The rights under the Access Agreement will
provide the Company with the opportunity to develop an interactive
television programming business. The Company believes there are
significant opportunities to develop electronic commerce, interactive
advertising and other fee transactions in an interactive television
business. In addition, the Company believes that it may have the
opportunity to develop strategic alliances with the companies in which
the Contributed Subsidiaries hold equity investments to obtain the rights
to use the products and technology of such companies in interactive
television. Lee Masters and Bruce W. Ravenel were appointed President and
Chief Executive Officer and Executive Vice President, respectively, of
the Company after the announcement of the Contribution Transaction. They
have been working to implement the interactive television business since
January 1, 1999 through an affiliate of Liberty. Their experience and
know-how and any progress they have made will carry over to the benefit
of the Company after the closing of the Contribution Transaction. The
Board believes that, based on the market's perception of Internet and
interactive technology businesses, the Contribution Transaction has the
potential to increase shareholder value and provide the Company with the
currency, in the form of equity securities, for additional growth and
development of its new business.
- Additional Investment Opportunities. Pursuant to the Contribution
Agreement, Liberty has adopted a general policy that the Company will be
the primary (but not exclusive) vehicle for the pursuit of corporate
opportunities involving investments in and/or development of interactive
programming and content, subject to certain exclusions and limitations.
The Board believes that, as a result of Liberty's profile as an investor
in the technology and Internet industries, and the expertise and
reputation of Messrs. Masters and Ravenel in those industries, the
Company will be presented with quality investment opportunities which
will enhance the Company's investment portfolio as well as result in
strategic opportunities to obtain interactive programming or content for
its interactive television business.
- Additional Capital; Enhanced Financing Ability. As of the date of the
Contribution Agreement, the Company had no funds available under its
revolving loan agreement and believes that it would not be able to
readily obtain additional financing from outside sources on acceptable
terms. The cash to be contributed to the Company in connection with the
Contribution Transaction may provide some of the additional capital
needed to permit the Company to continue to expand its current music
operations and to acquire additional interactive programming and content
related investments and to develop interactive television. The Board also
believes that the Contribution Transaction will provide the Company with
an increased ability to obtain debt financing from third parties to fund
its operations, if necessary. In addition, the higher market value of the
Series A common stock improves the Company's opportunities for issuing
its stock to raise capital or as consideration in future transactions.
2
<PAGE> 11
MARKET AND MARKET PRICES
The shares of Series A common stock are, and until June 8, 1999 the shares
of Series A preferred stock were, listed on the Nasdaq SmallCap Market under the
symbols "TUNE" and "TUNEP", respectively. On April 6, 1999, the last trading
date prior to the announcement of the proposed transaction, the high and low
sales prices of the Series A common stock were $8.375 and $5.875, respectively
and of the Series A preferred stock were $35.00 and $17.125, respectively. All
outstanding shares of the Series A preferred stock were redeemed on June 11,
1999. On July 29, 1999 the high and low sale prices for a share of Series A
common stock were $32.375 and $25.50, respectively.
TAX AND ACCOUNTING TREATMENT
The Contribution Transaction has been structured so that it should qualify
as a tax-free exchange under Section 351 and Section 1032 of the Internal
Revenue Code 1986, as amended (the "Code"). Consequently, the Contribution
Transaction should not give rise to any federal income tax liability for any of
the parties to the Contribution Agreement, subject to certain exceptions
described in this proxy statement under the heading "Proposal 1 -- Approval of
the Contribution Transaction -- Tax and Accounting Treatment." Although the
parties to the Contribution Agreement believe that the Contribution Transaction
will not give rise to any federal income tax liability, no tax opinion or ruling
will be obtained with respect to the Contribution Transaction.
The Contribution Transaction will be accounted for as a combination of
entities under common control in a manner similar to a pooling of interests.
RISK FACTORS RELATING TO THE CONTRIBUTION TRANSACTION
Shareholders should carefully consider the matters set forth under
"Proposal 1 -- Approval of Contribution Transaction -- Risk Factors Relating to
the Contribution Transaction" in addition to matters set forth elsewhere in this
proxy statement and its appendices in deciding how to vote on the proposal to
approve the Contribution Transaction.
THE PROPOSAL TO APPROVE THE CONTRIBUTION TRANSACTION IS CONTINGENT ON THE
APPROVAL BY THE SHAREHOLDERS OF THE PROPOSALS TO APPROVE THE AMENDMENTS TO THE
COMPANY'S CERTIFICATE OF INCORPORATION AND THE DEFERRED COMPENSATION AND STOCK
APPRECIATION RIGHTS PLAN.
RECOMMENDATION OF THE BOARD
THE BOARD RECOMMENDS THAT SHAREHOLDERS VOTE FOR APPROVAL OF THE
CONTRIBUTION TRANSACTION.
PROPOSAL 2 -- APPROVAL OF AMENDMENTS TO THE COMPANY'S
CERTIFICATE OF INCORPORATION
GENERAL
The Company is seeking approval of amendments to the Company's Certificate
of Incorporation to (1) change the Company's name to "Liberty Digital, Inc.,"
(2) increase the number of authorized shares of its capital stock, Series A
common stock and Series B common stock and (3) eliminate the prohibition against
shareholder action without a meeting, thereby permitting shareholder action by
written consent.
NAME CHANGE
The Board of Directors is proposing to change the Company's name to Liberty
Digital, Inc. The Board believes that the name Liberty Digital, Inc. will better
reflect the Company's association with its parent, Liberty Media Corporation,
and more accurately communicate the Company's broadened focus on Internet and
interactive television businesses and investments as a result of the
Contribution Transaction.
3
<PAGE> 12
INCREASE IN AUTHORIZED SHARES
The Board is proposing to increase the number of authorized shares of its
capital stock, Series A common stock and Series B common stock. The purpose of
this proposal is to ensure that sufficient shares of Series A common stock and
Series B common stock will be available (1) for issuance in connection with the
transactions contemplated by the Contribution Agreement, (2) for issuance upon
conversion of the Series B common stock and Series B preferred stock to be
issued in the Contribution Transaction and (3) if and when needed for issuance
from time to time for any proper purpose approved by the Board. The Board
believes that the availability of the number of additional authorized shares for
issuance upon approval of the Board will be beneficial to the Company and its
shareholders by providing the Company with the flexibility required to consider
and respond to future business opportunities and needs as they arise.
ELIMINATE PROHIBITION ON SHAREHOLDER CONSENT
The Board is proposing to eliminate the prohibition against shareholder
action without a meeting. A provision prohibiting shareholder action by written
consent in lieu of a meeting is often considered to be part of an anti-takeover
defensive strategy. The Board believes that this provision is not appropriate
for the Company given the voting power of the stock held by Liberty, which is
sufficient to determine the outcome of the vote on any matter submitted to the
shareholders for their approval. Accordingly, the Board believes that the
Company's Certificate of Incorporation should be amended to eliminate this
provision.
THE PROPOSAL TO AMEND THE COMPANY'S CERTIFICATE OF INCORPORATION IS
CONTINGENT ON THE APPROVAL BY THE SHAREHOLDERS OF THE PROPOSALS TO APPROVE THE
CONTRIBUTION TRANSACTION AND THE DEFERRED COMPENSATION AND STOCK APPRECIATION
RIGHTS PLAN.
The resolution adopted by the Board provides that, even if the shareholders
approve the amendments to the Company's Certificate of Incorporation at the
annual meeting, the amendments may be abandoned by the Board at any time prior
to filing of a certificate of amendment to the Certificate of Incorporation with
the Secretary of State of Delaware.
RECOMMENDATION OF THE BOARD
THE BOARD RECOMMENDS THAT SHAREHOLDERS VOTE FOR APPROVAL OF THE PROPOSAL TO
AMEND THE COMPANY'S CERTIFICATE OF INCORPORATION.
PROPOSAL 3 -- APPROVAL OF DEFERRED COMPENSATION
AND STOCK APPRECIATION RIGHTS PLAN
BACKGROUND AND REASONS FOR THE DEFERRED COMPENSATION AND STOCK APPRECIATION
RIGHTS PLAN
The Board is proposing that shareholders approve the Deferred Compensation
and Stock Appreciation Rights Plan. As part of the Contribution Transaction, TCI
Music will adopt the Deferred Compensation and Stock Appreciation Rights Plan.
During the negotiations of the terms and conditions of the Contribution
Agreement, the parties determined that it was appropriate that the employment
compensation arrangements of Messrs. Masters and Ravenel become the obligations
of TCI Music, since following the closing of the transactions contemplated by
the Contribution Agreement the assets that they were hired to develop and manage
and that relate to stock appreciation rights granted to them by Liberty would be
owned by TCI Music. Accordingly, it was determined that the Deferred
Compensation and Stock Appreciation Rights Plan be adopted to replace the stock
appreciation rights previously granted by Liberty to Messrs. Masters and Ravenel
and to permit any compensation paid to participants under the Deferred
Compensation and Stock Appreciation Rights Plan to be deductible for federal
income tax purposes. If the Company assumed an assignment of the existing stock
appreciation rights in their present form, a portion of any compensation paid
pursuant to the stock appreciation rights may not have been deductible. Pursuant
to a Tax Liability Allocation and Indemnification Agreement between Liberty and
Liberty Media Group LLC and the Company to be entered into in connection with
the Contribution Transaction (the "Tax Sharing Agreement"), the Company will
4
<PAGE> 13
reimburse Liberty for any tax benefit to the Company from any deductions arising
from compensation paid pursuant to the Deferred Compensation and Stock
Appreciation Rights Plan. If the Deferred Compensation and Stock Appreciation
Rights Plan is approved, it will replace the existing stock appreciation rights,
which will be terminated. In consideration for assuming the liability under the
Deferred Compensation and Stock Appreciation Rights Plan, it was determined that
the number of shares of Series B common stock that Liberty would otherwise
receive pursuant to the proposed transaction would be reduced by 19,305,193
shares.
The Deferred Compensation and Stock Appreciation Rights Plan is comprised
of a deferred compensation component and stock appreciation rights grants. The
deferred compensation component provides Messrs. Masters and Ravenel with the
right to receive an aggregate of 9 1/2% of the appreciation in the Series A
common stock (as reflected by its market price) over $2.46 per share, subject to
a maximum amount; and the stock appreciation rights provide participants with
the appreciation in the market price of the TCI Music Series A common stock
above the maximum amount payable under the deferred compensation component. The
existing Masters and Ravenel stock appreciation rights are referred to in this
proxy statement as the Executive SARs. The Deferred Compensation and Stock
Appreciation Rights Plan will be effective only upon the closing of the
Contribution Transaction.
DEFERRED COMPENSATION
Pursuant to the deferred compensation component of the Deferred
Compensation and Stock Appreciation Rights Plan, Messrs. Masters and Ravenel
will be entitled to deferred compensation in an aggregate amount equal to the
appreciation in the fair market value above $2.46 per share (an amount
equivalent to the base threshold established to measure the appreciation under
the Executive SARs) on 19,295,193 shares of TCI Music Series A common stock. The
19,295,193 shares represent 9 1/2% of the aggregate number of shares of Series A
common stock and Series B common stock that would have been held by Liberty
after the consummation of the transactions contemplated by the Contribution
Transaction but for the adjustments negotiated with TCI Music regarding the
adoption of the Deferred Compensation and Stock Appreciation Rights Plan in
substitution for the Executive SARs, less 10,000 shares. The aggregate amount of
deferred compensation payable pursuant to the deferred compensation component of
the Deferred Compensation and Stock Appreciation Rights Plan is capped at the
difference between (1) the fair market value of a share of TCI Music Series A
common stock on the date of the grant (the "Strike Price") of the deferred
compensation rights under the Deferred Compensation and Stock Appreciation
Rights Plan (the "Effective Date," which will be the date of grant of the awards
under the Deferred Compensation and Stock Appreciation Rights Plan) and (2) the
base threshold price per share, multiplied by 19,295,193 (the number of shares
on which the deferred compensation is calculated).
Each of Messrs. Masters and Ravenel will be entitled to deferred
compensation in an amount equal to the difference between (1) the lesser of the
Strike Price and the Valuation Price Per Share (as defined below) of a share of
Series A common stock and (2) the base threshold price per share, multiplied by
the number of shares attributable to him. Under the Deferred Compensation and
Stock Appreciation Rights Plan, rights to deferred compensation with respect to
15,230,942 shares will be granted to Mr. Masters and rights to deferred
compensation with respect to 4,064,251 shares will be granted to Mr. Ravenel by
the Compensation Committee of the board of directors. The deferred compensation
is payable only if the fair market value of the TCI Music Series A common stock
on the Valuation Date (as defined below) exceeds the base threshold price plus
interest on that amount from January 1, 1999 at the rate of 10% per annum,
compounded annually.
The "Valuation Price Per Share" is either the average closing price of a
share of Series A common stock during the 60 day period beginning 120 days after
the public announcement of the termination of an executive's employment or, in
the case of Mr. Masters, the intent not to renew his employment agreement or the
fair market value of a share of Series A common stock on the Valuation Date.
No payments under the deferred compensation component of the Deferred
Compensation and Stock Appreciation Rights Plan will be made until after
termination of employment with TCI Music.
5
<PAGE> 14
STOCK APPRECIATION RIGHTS
On the Effective Date, Mr. Masters will also be granted stock appreciation
rights with respect to 15,230,942 shares of Series A common stock and Mr.
Ravenel will be granted an option to purchase 4,064,251 shares of Series A
common stock at the Strike Price, which will be the same amount as the amount
used to determine the cap on the deferred compensation component of the Deferred
Compensation and Stock Appreciation Rights Plan. Upon exercise of a stock
appreciation right, executives will receive the difference between the fair
market value of a share of Series A common stock on the date of exercise and the
Strike Price; provided however in the case of a deemed exercise on a Valuation
Date, executives will receive the difference between the Valuation Price Per
Share of a share of Series A common stock and the Strike Price. All vested but
unexercised stock appreciation rights are automatically deemed exercised (to the
extent they are in-the-money) on the Valuation Date. All unexercised options
expire immediately after the Valuation Date.
PAYMENT; LIBERTY OPTION
Subject to Liberty's option described below, payment of deferred
compensation may be made at TCI Music's option in cash or TCI Music stock. On
any payment date, Liberty will have the right to direct TCI Music to pay amounts
due in cash and to purchase from TCI Music a number of shares of Series B common
stock equal to the amount of cash to be paid divided by the value of a share of
Series A common stock used to determine the amount of the payment to the
participant in order to provide Liberty the opportunity to restore its equity
position in TCI Music to what it would have been if the Contribution Transaction
had been consummated without the adoption of the Deferred Compensation and Stock
Appreciation Rights Plan and the corresponding reduction in the number of shares
of Series B common stock issued in connection with the Contribution Transaction.
As an alternative to the foregoing payment procedure, Liberty may, in the case
of an exercise of a stock appreciation right, purchase a number of shares of
Series B common stock equal to the number of shares subject to the stock
appreciation right from TCI Music for the value of a share of Series A common
stock used to determine the amount of the payment to participant multiplied by
the number of stock appreciation rights exercised. In no event will Liberty have
the right to purchase more than an aggregate of 19,295,193 shares of Series A
common stock Contribution Transaction.
VESTING
Mr. Masters and Mr. Ravenel will become vested in the rights to
appreciation under the deferred compensation component and the stock
appreciation rights granted under the Deferred Compensation and Stock
Appreciation Rights Plan with respect to 20% of the shares attributable to each
of them on each December 15 beginning December 15, 1999. Upon the sale of the
Company, a change of control of the Company (as defined), executive's death,
termination of executive's employment or by the Company for any reason other
than cause (as defined) or termination of the Participant's employment by him
for good reason (as defined) all such rights and options will become fully
vested. All rights and options not vested will be forfeited by executive if he
is terminated for cause (as defined).
TAX TREATMENT
The Deferred Compensation and Stock Appreciation Rights Plan has been
designed to enable the stock appreciation rights to qualify as performance-based
compensation for purposes of Section 162(m) of the Code. See "Proposal
3 -- Approval of Deferred Compensation and Stock Appreciation Rights Plan --
Federal Income Tax Consequences."
THE PROPOSAL TO APPROVE THE DEFERRED COMPENSATION AND STOCK APPRECIATION
RIGHTS PLAN IS CONTINGENT ON THE APPROVAL BY THE SHAREHOLDERS OF THE PROPOSALS
TO APPROVE THE CONTRIBUTION TRANSACTION AND THE AMENDMENTS TO THE COMPANY'S
CERTIFICATE OF INCORPORATION.
6
<PAGE> 15
RECOMMENDATION OF THE BOARD
THE BOARD RECOMMENDS THAT SHAREHOLDERS VOTE FOR APPROVAL OF THE PROPOSAL TO
APPROVE THE DEFERRED COMPENSATION AND STOCK APPRECIATION RIGHTS PLAN.
PROPOSAL 4 -- ELECTION OF DIRECTORS
Three directors, Robert R. Bennett, Peter M. Kern and Bruce W. Ravenel,
have been nominated by the Board to stand for reelection to hold office until
the 2002 annual meeting.
RECOMMENDATION OF THE BOARD
THE BOARD RECOMMENDS THAT SHAREHOLDERS VOTE FOR THE ELECTION OF THE
NOMINEES FOR DIRECTOR.
SELECTED FINANCIAL INFORMATION
The selected historical financial data of TCI Music as of and for the three
months ended March 31, 1999 and 1998, are derived from the unaudited
consolidated financial statements of TCI Music, which in the opinion of
management contain adjustments (consisting of only normal recurring adjustments)
necessary for a fair presentation thereof, which are incorporated by reference
in this proxy statement. The selected historical financial data of TCI Music as
of December 31, 1998 and 1997 are derived from the audited consolidated
financial statements of TCI Music incorporated by reference in this proxy
statement. The selected historical financial data of TCI Music for the year
ended December 31, 1998 and for the six months ended December 31, 1997, are
derived from the audited consolidated financial statements of TCI Music
incorporated by reference in this proxy statement. The selected historical
financial data of DMX LLC (Predecessor) for the nine months ended June 30, 1997
and the year ended September 30, 1996, are derived from the audited consolidated
financial statements of DMX LLC (Predecessor) incorporated by reference in this
proxy statement. The selected historical financial data of DMX LLC (Predecessor)
as of June 30, 1997, September 30, 1996, 1995 and 1994 and for each for the
years in the two year period ended September 30, 1995, are derived from the
audited consolidated financial statements of DMX LLC (Predecessor) not included
in this proxy statement.
7
<PAGE> 16
The unaudited proforma condensed combined balance sheet as of March 31,
1999 and the unaudited proforma condensed combined statements of operations for
the three months ended March 31, 1999 and for the year ended December 31, 1998
give proforma effect to (1) the Contribution Transaction, which includes (A) the
contribution of the contributed assets in exchange for common and preferred
stock and (B) the assignment of the rights to provide Interactive Video Services
(as defined below) under the Access Agreement (as discussed elsewhere herein),
(2) the exchange of SonicNet and The Box, for a 10% ownership interest in the
venture with MTVN (as discussed elsewhere herein), (3) the conversion of shares
of the Series A preferred stock prior to redemption and the redemption of the
Series A preferred stock and (4) the related tax effects of the transactions.
The unaudited proforma information gives effect to the transactions as if they
had occurred as of March 31, 1999, for the unaudited condensed combined balance
sheet and as of January 1, 1998 and 1999 for the unaudited condensed combined
statements of operations.
<TABLE>
<CAPTION>
PROFORMA TCI MUSIC, INC.
--------- --------------------- TCI MUSIC, INC.
THREE THREE THREE PROFORMA ---------------------------
MONTHS MONTHS MONTHS ------------ SIX MONTHS
ENDED ENDED ENDED YEAR ENDED YEAR ENDED ENDED
MARCH 31, MARCH 31, MARCH 31, DECEMBER 31 DECEMBER 31 DECEMBER 31,
1999 1999 1998 1998 1998 1997
--------- --------- --------- ------------ ------------ ------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA
Revenue............................. $15,725 $22,591 $18,428 $ 56,553 $ 84,452 $22,955
Operating, selling, general and
administrative expenses........... 10,391 20,899 16,070 38,194 76,720 14,294
Depreciation and amortization....... 10,882 6,837 5,218 42,494 24,120 6,317
Inventory writedown................. -- -- -- -- 1,102 --
Loss on disposal of DMX-Europe
N.V............................... -- -- -- -- -- --
------- ------- ------- -------- -------- -------
Net operating income (loss)......... (5,548) (5,145) (2,860) (24,135) (17,490) 2,344
Interest income (expense), net...... (1,569) (1,518) (1,040) (5,370) (5,370) (280)
Share of earnings (loss) of
affiliates........................ (61) (106) (105) (344) (526) 76
Other income (expense), net......... (14) (51) (6) 616 (135) (223)
------- ------- ------- -------- -------- -------
Net earnings (loss) from continuing
operations before income taxes.... (7,192) (6,820) (4,011) (29,233) (23,521) 1,917
Income tax benefit (expense)........ 590 441 91 3,514 1,229 (2,382)
------- ------- ------- -------- -------- -------
Net loss from continuing
operations........................ $(6,602) $(6,379) $(3,920) $(25,719) $(22,292) $ (465)
======= ======= ======= ======== ======== =======
Net loss from continuing operations
attributable to common
shareholders...................... $(8,477) $(6,757) $(4,801) $(33,219) $(30,467) $ (589)
======= ======= ======= ======== ======== =======
Basic and diluted loss from
continuing operations attributable
to common shareholders from
continuing operations per common
share............................. $ (0.04) $ (0.08) $ (0.05) $ (0.17) $ (0.29) $ (0.01)
======= ======= ======= ======== ======== =======
Weighted average number of common
shares............................ 195,680 81,377 80,749 195,349 81,046 77,423
======= ======= ======= ======== ======== =======
<CAPTION>
DMX, LLC (PREDECESSOR)
--------------------------------------------
NINE MONTHS
ENDED YEARS ENDED SEPTEMBER 30,
JUNE 30, ------------------------------
1997 1996 1995 1994
----------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
INCOME STATEMENT DATA
Revenue............................. $ 16,594 $ 17,326 $ 12,773 $ 9,377
Operating, selling, general and
administrative expenses........... 27,437 30,459 22,166 20,559
Depreciation and amortization....... 1,789 1,884 1,342 1,065
Inventory writedown................. -- -- -- --
Loss on disposal of DMX-Europe
N.V............................... 1,738 7,153 -- --
-------- -------- -------- --------
Net operating income (loss)......... (14,370) (22,170) (10,735) (12,247)
Interest income (expense), net...... (422) (300) (209) 38
Share of earnings (loss) of
affiliates........................ 203 (11,657) (12,964) (4,522)
Other income (expense), net......... (119) 272 829 226
-------- -------- -------- --------
Net earnings (loss) from continuing
operations before income taxes.... (14,708) (33,855) (23,079) (16,505)
Income tax benefit (expense)........ -- -- -- --
-------- -------- -------- --------
Net loss from continuing
operations........................ $(14,708) $(33,855) $(23,079) $(16,505)
======== ======== ======== ========
Net loss from continuing operations
attributable to common
shareholders...................... $(14,708) $(33,855) $(23,079) $(16,505)
======== ======== ======== ========
Basic and diluted loss from
continuing operations attributable
to common shareholders from
continuing operations per common
share............................. $ (0.25) $ (0.68) $ (0.60) $ (0.48)
======== ======== ======== ========
Weighted average number of common
shares............................ 59,587 49,676 38,585 34,436
======== ======== ======== ========
</TABLE>
8
<PAGE> 17
<TABLE>
<CAPTION>
TCI MUSIC, INC. DMX, LLC (PREDECESSOR)
PROFORMA TCI MUSIC, INC. ------------------- ---------------------------------------
---------- -------------------- DECEMBER 31, SEPTEMBER 30,
MARCH 31, MARCH 31, MARCH 31 ------------------- JUNE 30, ---------------------------
1999 1999 1998 1998 1997 1997 1996 1995 1994
---------- --------- -------- -------- -------- --------- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA
Current assets................ $ 69,185 $ 26,206 $26,043 $ 27,623 $ 25,502 $ 6,186 $ 7,719 $12,123 $ 9,651
Net assets of discontinued
operation................... -- 604 -- 132 4,649 -- -- -- --
Investments in affiliates,
accounted for under the
equity and cost method...... 650,725 882 1,185 962 1,051 558 504 457 450
Property and equipment, net... 14,687 25,258 15,883 23,596 13,320 4,132 5,894 4,336 4,444
Intangibles and other assets,
net......................... 352,083 155,666 163,713 158,906 149,356 110 4,635 166 55
---------- -------- -------- -------- -------- --------- ------- ------- -------
Total assets.......... $1,086,680 $208,616 $206,824 $211,219 $193,878 $ 10,986 $18,752 $17,082 $14,600
========== ======== ======== ======== ======== ========= ======= ======= =======
Current liabilities........... 14,635 19,656 19,891 22,395 23,857 14,705 16,932 3,626 3,824
Other liabilities............. 2,199 4,320 2,400 4,072 2,357 2,082 1,773 1,252 713
Related party debt and accrued
interest.................... 1,739 1,739 1,061 226 2,733 3,887 -- -- --
Debt.......................... 101,078 101,078 71,986 96,244 53,236 23 1,401 1,446 1,704
Deferred income taxes......... 352,588 -- 2,728 -- 2,811 -- -- -- --
Negative investment in
DMX-Europe N.V. ............ 9,058 9,058 9,058 9,058 9,058 6,591 -- 15,886 8,175
---------- -------- -------- -------- -------- --------- ------- ------- -------
Total liabilities..... 481,297 135,851 107,124 131,995 94,052 27,288 20,106 22,210 14,416
Redeemable convertible
preferred stock............. 150,000 34,679 35,962 34,322 35,588 -- -- -- --
Shareholders' equity
(deficit)................... 455,383 38,086 63,738 44,902 64,238 (16,302) (1,354) (5,128) 184
---------- -------- -------- -------- -------- --------- ------- ------- -------
Total liabilities and
shareholders' equity
(deficit)........... $1,086,680 $208,616 $206,824 $211,219 $193,878 $ 10,986 $18,752 $17,082 $14,600
========== ======== ======== ======== ======== ========= ======= ======= =======
</TABLE>
9
<PAGE> 18
THE ANNUAL MEETING
TIME AND PLACE; PURPOSES
The enclosed proxy is solicited by the Board of Directors for use at the
annual meeting to be held at 9197 South Peoria Street, Englewood, Colorado, on
September 8, 1999, starting at 10:00 a.m. local time for the purposes set forth
in the Notice of Annual Meeting furnished with this proxy statement.
This proxy statement and the accompanying form of proxy will be mailed to
the shareholders of the Company on or about August 3, 1999.
VOTING RIGHTS; VOTES REQUIRED FOR APPROVAL
The Board of Directors has fixed the close of business on July 26, 1999
(the "Record Date"), as the date for the determination of holders of the Voting
Securities entitled to notice of and to vote at the annual meeting. Only holders
of record of shares of the Voting Securities at the close of business on the
Record Date are entitled to notice of and to vote at the annual meeting.
Holders of record of the Voting Securities at the close of business on the
Record Date will be entitled to vote on all matters to come before the annual
meeting. At the close of business on the Record Date, there were: 23,790,745
shares of Series A common stock outstanding and entitled to vote at the annual
meeting; and 62,500,000 shares of Series B common stock outstanding and entitled
to vote at the annual meeting.
The presence, in person or by proxy, of the holders of a majority of the
combined voting power of the outstanding shares of the Voting Securities
entitled to vote is necessary to constitute a quorum at the annual meeting. All
shares of the Voting Securities represented by properly executed proxies
received prior to or at the annual meeting, and not revoked, will be voted in
accordance with the instructions indicated in such proxies. If no instructions
are indicated, such proxies will be voted FOR the Contribution Transaction, FOR
the approval of the amendments to the Certificate of Incorporation, FOR the
approval of the Deferred Compensation and Stock Appreciation Rights Plan and FOR
the election of directors. The Board of Directors does not know of any other
matters to be acted upon at the annual meeting. As to any other matter which may
properly come before the annual meeting, the persons named in the accompanying
proxy card will vote thereon in accordance with their discretion.
Shareholders of record who are present at the meeting in person or by proxy
and who abstain are counted for purposes of determining whether there is a
quorum and for purposes of determining the aggregate voting power of the
outstanding shares represented and entitled to vote at the annual meeting.
Brokers holding shares of record for the beneficial owner generally are not
entitled to vote on certain matters unless they receive voting instructions from
their customers. As used in this proxy statement, "uninstructed shares" means
shares held by a broker who has not received instructions from the beneficial
owner on such matters. As used in this proxy statement, "broker non-votes" means
the votes that could have been cast on the matter in question by brokers with
respect to uninstructed shares if the brokers had received their customers'
instructions. Shares represented by broker non-votes will be counted for
purposes of determining whether there is a quorum at the annual meeting.
Regarding matters as to which uninstructed shares may be voted: (1) if they are
voted they will count as votes cast either for or against the matter; and (2) if
they are not voted, they will be treated in the same manner as abstentions as
described below. Regarding matters as to which uninstructed shares may not be
voted, broker non-votes will be treated as shares not entitled to vote on the
particular matter and will therefore be disregarded.
Approval of the Contribution Transaction. Under the Nasdaq Stock Market
Rules, approval of the Company's shareholders is required for any transaction or
series of transactions in which a substantial shareholder of the Company has a
5% or greater interest, directly or indirectly, in the assets to be acquired or
the consideration to be paid in a transaction or series of transactions in which
5% or more of the voting stock of the Company is to be issued. To be adopted,
the Contribution Transaction must be approved by the affirmative vote of a
majority of the combined voting power of the outstanding Voting Securities
represented in person or by proxy and entitled to vote at the annual meeting,
voting together as a single class. Uninstructed shares may
10
<PAGE> 19
not be voted on this matter. For purposes of this matter, abstentions have the
effect of negative votes but broker non-votes will not be taken into account.
Approval of Amendments to Certificate of Incorporation. The affirmative
vote of the holders of at least 66 2/3% of the combined voting power of the
outstanding Voting Securities voting together as a single class is required to
approve the amendments to the Certificate of Incorporation. Uninstructed shares
are entitled to vote on this matter. Therefore, abstentions have the effect of
negative votes.
Approval of Deferred Compensation and Stock Appreciation Rights Plan. Under
the Nasdaq Stock Market Rules, approval of the Company's shareholders is
required when a stock option plan is to be established or other arrangement made
pursuant to which stock in excess of (1) 1% of the number of shares of common
stock, (2) 1% of the voting power or (3) 25,000 shares may be acquired by
officers and directors. The affirmative vote of the holders of a majority of the
combined voting power of the outstanding Voting Securities represented in person
or by proxy and entitled to vote at the annual meeting, voting together as a
single class is required to approve the Deferred Compensation and Stock
Appreciation Rights Plan. Uninstructed shares may not be voted on this matter.
For purposes of this matter, abstentions have the effect of negative votes but
broker non-votes will not be taken into account.
Election of Directors. The election of directors must be approved by a
plurality of the votes cast with respect to the shares of the Voting Securities,
represented in person or by proxy and entitled to vote at the annual meeting,
voting together as a single class. Abstentions and broker non-votes will not be
taken into account in determining the outcome of the election. Liberty has
agreed to cause its controlled affiliates to vote all shares of Voting
Securities owned by them in favor of each proposal. Thus, the proposals will be
approved at the annual meeting, whether or not any other shareholder votes for
them. Upon completion of the Contribution Transaction, Liberty will own
approximately 50.3% of the outstanding shares of Series A common stock, 100% of
the outstanding shares of Series B common stock, and 100% of the outstanding
shares of Series B preferred stock. As a result, Liberty will beneficially own
shares representing approximately 99.4% of the voting power of the outstanding
capital stock of the Company. In addition, Liberty will be able to acquire
beneficial ownership of up to an additional 25,751,100 shares of Series B common
stock upon conversion of the Series B preferred stock.
Liberty has agreed to cause its controlled affiliates to vote all shares of
Voting Securities owned by them in favor of each proposal. Thus, the proposals
will be approved at the annual meeting, whether or not any other shareholder
votes for them. Upon completion of the Contribution Transaction, Liberty will
own approximately 50.3% of the outstanding shares of Series A common stock, 100%
of the outstanding shares of Series B common stock, and 100% of the outstanding
shares of Series B preferred stock. As a result, Liberty will beneficially own
shares representing approximately 99.4% of the voting power of the outstanding
capital stock of the Company. In addition, Liberty will be able to acquire
beneficial ownership of up to an additional 25,751,100 shares of Series B common
stock upon conversion of the Series B preferred stock.
Each holder of record as of the Record Date of (1) the Series A common
stock is entitled to cast one vote per share and (2) the Series B common stock
is entitled to cast ten votes per share on each matter on which holders of
shares of such series are entitled to vote at the annual meeting.
PROXIES
A shareholder may revoke his or her proxy at any time prior to its use by
delivering to the Secretary of the Company a signed notice of revocation or a
later dated signed proxy or by attending the annual meeting and voting in
person. Attendance at the annual meeting will not in itself constitute the
revocation of a proxy.
The cost of solicitation of proxies will be paid by the Company. In
addition to solicitation by mail, officers and regular employees of the Company
may solicit proxies by telephone, telegram, in person or by other means. Such
persons will receive no additional compensation for such services. Brokerage
houses, nominees, fiduciaries and other custodians will be requested to forward
soliciting material to the beneficial owners of shares held of record by them
and will be reimbursed for their reasonable out-of-pocket expenses in connection
therewith.
11
<PAGE> 20
RECENT DEVELOPMENTS
On March 9, 1999, as a result of arrangements entered into in connection
with the AT&T Merger, Liberty succeeded to the beneficial ownership of all
shares of Series A common stock, Series B common stock and Series A convertible
preferred stock ("Series A preferred stock") that had previously been
beneficially owned by TCI. Prior to the AT&T Merger such shares were attributed
to TCI's Liberty Media Group. Following the AT&T Merger, TCI became part of the
AT&T Broadband and Internet Services division of AT&T ("AT&T Broadband").
In connection with the AT&T Merger, (1) TCI became a wholly owned
subsidiary of AT&T, (2) the businesses and assets of the Liberty Media Group and
the TCI Ventures Group of TCI were combined and (3) the holders of TCI's Liberty
Media Group common stock and TCI Ventures Group common stock received in
exchange for their shares a new class of common stock of AT&T intended to
reflect the results of the combined Liberty Media Group and TCI Ventures Group.
Following the AT&T Merger, AT&T's "Liberty Media Group" consists of the assets
and businesses of TCI's Liberty Media Group and its TCI Ventures Group prior to
the AT&T Merger (except for certain assets which were transferred to TCI's TCI
Group in connection with the AT&T Merger) and AT&T's "Common Stock Group"
consists of all of the other assets and businesses of AT&T. TCI Music is
included in AT&T's "Liberty Media Group".
As a result of arrangements entered into in connection with the AT&T
Merger, although Liberty is a wholly owned subsidiary of AT&T, a majority of the
members of the Board of Directors is comprised of persons designated by TCI
prior to the AT&T Merger who will serve as directors until at least 2006.
Therefore, Liberty's Board and its management, not AT&T, exercise control over
the business and affairs of Liberty.
On May 17, 1999, the Company called for redemption on June 11, 1999 all of
the outstanding shares of its Series A preferred stock. In lieu of redemption,
holders could convert each share of Series A preferred stock into three shares
of Series A common stock. As of June 11, 1999, 921,912 shares of Series A
preferred stock were converted to 2,765,736 shares of Series A common stock and
6,404 shares of Series A preferred stock were redeemed. Liberty converted all of
the shares of Series A preferred stock beneficially owned by it into shares of
Series A common stock prior to the redemption date.
On July 15, 1999 MTVN, a division of Viacom International Inc. and the
Company formed MTVN Online L.P., a Delaware limited partnership (the "MTVN
Partnership") pursuant to various arrangements and agreements entered into
pursuant to a binding letter agreement dated May 19, 1999. MTVN Partnership's
business will be to develop, operate, manage, market, distribute and license
text, audio and video music, music-related and music-themed services online and
engage in reasonably related activities, including e-commerce applications and
consumer oriented commercial transactions (the "MTVN Partnership Business").
With certain exceptions (the "MTVN Partnership Excluded Assets"), the Company
contributed to the MTVN Partnership substantially all of the assets and
businesses of SonicNet and The Box, and the stock of their respective
subsidiaries which exclusively conduct their respective international
businesses. MTVN contributed to the MTVN Partnership the assets and businesses
owned or controlled by it that constituted all of its current or planned assets
and businesses engaged, or to be engaged, exclusively in the MTVN Partnership
Business, including those assets and businesses used exclusively in connection
with their MTV.com, VH1.com and Imagine Radio businesses, and all wholly owned
international assets and businesses engaged exclusively in the MTVN Partnership
Business. For their respective contributions, the Company received an aggregate
10% limited partnership interest in the MTVN Partnership and MTVN received an
aggregate 90% general and limited partnership interest in the MTVN Partnership.
The Company and Liberty have each agreed not to, and to cause their
respective controlled affiliates not to, own, operate or make an investment in
the MTVN Partnership Business (other than the investment in the MTVN
Partnership) or any cable or satellite audio/video television services, digital
or analog, that principally or, in large part, are devoted to music-related or
music-themed programming (the "MTVN Partnership Television Business"), in each
case subject to certain exceptions, until the first to occur of (a) three years
(in the case of the MTVN Partnership Business) or five years (in the case of the
MTVN Partnership Television Business) after the closing of the MTVN Partnership
transaction and (b) such date as MTVN ceases to own
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the largest percentage of the equity in the MTVN Partnership and to have the
right to designate the most members of the management committee or board of
directors of the MTVN Partnership.
In connection with the negotiation of the Letter Agreement, the Company
entered into an agreement dated May 18, 1999, with AT&T Broadband, as an
inducement to AT&T Broadband to enter into a revised affiliation agreement with
MTVN for the distribution of MTVN's services on AT&T Broadband cable systems.
AT&T Broadband's entering into a revised affiliation agreement was a condition
of MTVN's entering into the Letter Agreement. Pursuant to this agreement, on the
first to occur of the closing of the MTVN Partnership's initial public offering
and the second anniversary of the closing under the Letter Agreement (or the
fifth anniversary of the closing, if extended by AT&T Broadband because the
public offering has not occurred by the second anniversary of the closing), the
Company will become obligated to pay AT&T Broadband an amount equal to 10% of
the Excess Value (as defined below) of its equity interest in the MTVN
Partnership, but in no event more than $30 million, nor less than $15 million.
The Excess Value means the amount by which (a) the average market price or
appraised fair market value of the Company's equity interest in the MTVN
Partnership exceeds (b) the sum of (x) the lesser of $175 million and the value
of the Company's interest in the MTVN Partnership as determined in accordance
with certain provisions of the Letter Agreement and (y) any additional capital
contributions made by the Company to MTVN Partnership. The Company may pay such
amount in cash or shares of its Series A common stock (valued at market).
The descriptions of the Letter Agreement and the agreements with AT&T
Broadband appearing above are qualified in their entirety by reference to the
full text of those agreements, copies of which are filed as exhibits to the
Company's Form 8-K dated May 19, 1999 and incorporated by reference into this
proxy statement. See "Incorporation of Certain Information by Reference."
PROPOSAL 1 -- APPROVAL OF CONTRIBUTION TRANSACTION
BACKGROUND OF THE CONTRIBUTION TRANSACTION
In January 1999, Liberty formed Liberty Digital, LLC ("Liberty Digital") as
an indirect wholly owned subsidiary of Liberty. In forming Liberty Digital, it
was Liberty's intent that Liberty Digital would be its primary vehicle for new
opportunities in the areas of music and new media. In connection with the
formation of Liberty Digital, Liberty agreed to contribute certain shares of TCI
Music common stock and Series A preferred stock beneficially owned by Liberty,
certain of its rights under the Access Agreement and certain of its investments
in interactive programming and content related assets and lend to Liberty
Digital $50 million. In anticipation of the formation of Liberty Digital, in
September 1998, Liberty entered into an employment agreement with Lee Masters
(the "Masters Employment Agreement") pursuant to which Mr. Masters was engaged
to direct the development and integration of TCI Music's business and to
develop, in coordination with affiliates of Liberty Digital, new media or cable
programming businesses to take advantage of the competencies of Liberty Digital.
In connection with the Masters Employment Agreement, in January, 1999 Mr.
Masters was appointed a director, President and CEO of Liberty Digital and
Chairman of the Board of TCI Music. At the same time, Bruce W. Ravenel was
appointed Executive Vice President of Liberty Digital.
Pursuant to the Masters Employment Agreement, Mr. Masters was granted a
stock appreciation right representing the right to receive cash payments equal
to 7 1/2% of the increase of Liberty Digital's equity value from a base of $500
million. Liberty Digital's equity value for purposes of the SAR included not
only the assets held directly or indirectly by Liberty Digital but also certain
investments in interactive programming and content related assets held by
certain other subsidiaries and affiliates of Liberty. In the Contribution
Transaction, all of the assets that are included in the assets that are valued
for purposes of the stock appreciation right granted by Liberty Digital will be
contributed to TCI Music. Mr. Ravenel was also granted a stock appreciation
right on the same terms as the stock appreciation right granted to Mr. Masters,
except that it applied to 2% of the increase of Liberty Digital's equity value
over the $500 million threshold amount. Since January 1999, Mr. Masters and Mr.
Ravenel have been working to identify and acquire additional
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interactive programming and content related assets and to develop the
interactive television channels to be provided under the Access Agreement.
Beginning in early 1999, Liberty executives Robert R. Bennett, a director
of the Company and President and Chief Executive Officer and a director of
Liberty, David B. Koff, a Vice President and director of the Company and a
Senior Vice President of Liberty, Lee Masters and Bruce W. Ravenel began to
consider ways to increase shareholder value of TCI Music, including through a
transaction with Liberty. This group focused on a potential transaction in which
Liberty would contribute certain assets of Liberty to TCI Music, including
certain of the assets of Liberty Digital. Liberty personnel began working on
developing the details of a proposal regarding such a potential transaction,
including determining which assets of Liberty might be included, the valuation
of the assets, the consideration to be given by TCI Music in exchange for the
assets and related tax aspects.
Management of TCI Music had been exploring opportunities for joint ventures
and additional outlets to expand its Internet music business. While some of its
efforts had been successful, such ventures and acquisitions had not resulted in
market recognition of the value of these new opportunities. Management analyzed
alternatives for further development and concluded it should consider expanding
in Internet and interactive services beyond a music format.
In late March 1999, Mr. Koff, on behalf of TCI Music, contacted Morgan
Stanley to solicit a proposal from Morgan Stanley with respect to its review of
a potential transaction between TCI Music and Liberty and to provide a fairness
opinion, if appropriate, with respect to the potential transaction, in the event
that Liberty determined to propose a transaction. Representatives of several
recognized investment banking firms also were contacted to solicit proposals.
During the next week, Mr. Koff conducted interviews with the firms that had
submitted proposals to the Company.
After the close of business on April 5, 1999, Liberty presented a formal
written proposal to TCI Music. In its proposal, Liberty (1) offered to
contribute to the Company the stock of certain wholly owned subsidiaries of
Liberty holding interactive programming and content related assets and the
rights with respect to interactive television services under the Access
Agreement (which included all of the assets of Liberty Digital), (2) offered to
loan an additional $50 million in exchange for an unsecured subordinated
convertible promissory note on market terms, with the underlying Series B common
stock valued based at a premium to the average daily closing prices of the
Series A common stock for the 30 trading days ending April 5, 1999 and (3)
proposed that approximately $50 million of existing debt of the Contributed
Subsidiaries be assumed by the Company and such debt and the existing debt of
the Company to Liberty of approximately $15 million be evidenced by an unsecured
subordinated convertible promissory note on market terms, with the underlying
common stock valued based on the average daily closing prices of the Series A
common stock for the 30 trading days ending April 5, 1999. In consideration of
the foregoing, TCI Music would issue to Liberty 128,755,360 shares of Series B
common stock. On April 6, 1999, the Company publicly announced that it had
received Liberty's proposal.
On April 8, 1999 the Board convened a special telephonic meeting to
consider Liberty's proposal. At the meeting, the Board received an extensive
presentation from the Company's management regarding the terms of the proposal.
The Board also reviewed the effect of the announcement of the proposal on the
trading prices of the Series A common stock. The Board also received extensive
presentations from the Company's legal advisors regarding the proposal and
related legal issues. The Board then determined to authorize Mr. McPartland, who
had no relationship with Liberty other than his position with TCI Music, to
negotiate with Liberty on behalf of the Company and its stockholders to obtain
the best possible transaction, to report back to the Board from time to time,
and to present to the Board a potential transaction for the Board's
consideration. The Board also authorized management to retain Morgan Stanley to
review a potential transaction with Liberty and provide a fairness opinion with
respect to a transaction, if one was appropriate. The Board also approved the
engagement of Sherman & Howard L.L.C. as the Company's legal advisor and
Richards, Layton & Finger as the Company's special Delaware counsel in
connection with this potential transaction. In connection with the engagement of
Sherman & Howard L.L.C. and Richards, Layton & Finger, the Board considered that
(1) both firms had in the past and were currently representing Liberty and
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its officers and directors on various matters unrelated to the potential
transaction with Liberty and (2) Richards, Layton & Finger had been retained by
Liberty as Liberty's special Delaware counsel in connection with a potential
transaction. The Board also considered that Baker & Botts LLP, counsel to
Liberty in connection with the proposed transaction, was currently representing
the Company on various matters unrelated to the potential transaction. The Board
elected to waive any conflict of interest arising out of Sherman & Howard
L.L.C.'s, Richards, Layton & Finger's and Baker and Botts LLP's dual
representations.
Following the Board meeting, Liberty and TCI Music, advised by their
respective legal advisors, negotiated the terms and conditions of the
Contribution Agreement and related agreements. These negotiations focused
particularly on the valuation of the assets to be contributed and the
methodology used to value the Series B common stock to be issued by TCI Music
under the Contribution Agreement and upon the conversion terms of the proposed
convertible note. There were no material changes to the proposed transaction as
a result of these negotiations.
On April 20, 1999 the Board held a special meeting to consider the proposed
transaction. At the meeting, the Board received an extensive presentation from
the Company's management regarding the terms the initial proposal, the course of
the negotiations and the terms of the proposed transaction. The Board also
received detailed presentations from the Company's legal advisors. Morgan
Stanley also provided the Board with an extensive presentation regarding Morgan
Stanley's evaluation of the potential transaction from a financial point of
view.
The Board held another special telephonic meeting on April 23, 1999. At
that meeting, management updated the Board on the status of negotiations and
legal counsel reviewed the current terms of the proposed transaction. Morgan
Stanley delivered its oral opinion that as of such date, the proposed
transaction considered as a whole, was fair from a financial point of view to
the holders of Series A common stock and preferred stock (other than Liberty and
its affiliates). Following these presentations and considering the presentations
at the April 20, 1999 special Board meeting, the Board determined that the terms
of the proposed transaction, convertible note and related agreements and the
proposed transaction as a whole were advisable and fair to and in the best
interests of the shareholders of TCI Music (other than Liberty and its
affiliates). The Board also considered amending the Certificate of Incorporation
to (1) change the name of the Company to Liberty Digital, Inc. upon completion
of the proposed transaction, (2) increase the authorized number of shares of
Series A common stock and Series B common stock so that sufficient shares would
be available (A) for issuance in connection with the proposed transaction, (B)
upon conversion of the Series B common stock to be issued in the proposed
transaction and (C) to provide for additional shares of Series A common stock
and Series B common stock to be available if and when needed for issuance from
time to time for any proper purpose approved by the Board, and (3) eliminate the
prohibition against shareholder action without a meeting. The Board determined
that such amendments were in the best interests of the Company and its
shareholders. The Board unanimously approved the proposed transaction and
authorized its management to finalize the terms of the Contribution Agreement,
convertible note and related agreements and unanimously approved the amendments
to the Certificate of Incorporation and recommended that TCI Music's
shareholders approve the proposed transaction and the amendments to the
Certificate of Incorporation.
Following the Board meeting Liberty and TCI Music, advised by their
respective legal advisors, conducted further negotiations of the terms and
conditions of the Contribution Agreement. The negotiations focused on the terms
of a policy to be adopted by Liberty with respect to Liberty's making available
to TCI Music its corporate opportunities relating to interactive programming and
interactive content and the tax consequences of the proposed transaction. The
negotiations also included discussions regarding whether the Masters Employment
Agreement and the Executive SARs would be contributed by Liberty to Liberty
Digital and therefore become liabilities of TCI Music pursuant to the
Contribution Agreement. As a result of these considerations and upon the
recommendation of Liberty's tax advisors, it was determined to change the
structure of the transaction [to provide that]: Liberty (through an indirect
wholly owned subsidiary) would contribute (1) the contributed assets, (2) notes
payable to Liberty (or one or more wholly owned subsidiaries of Liberty) from
the Contributed Subsidiaries and TCI Music and (3) cash in the aggregate amount
of $150 million in exchange for the Series B common stock and a number of shares
of a new series of preferred
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stock, on terms similar to those in the proposed convertible note. The new
structure eliminated the issuance of the convertible note for the existing debt
of the Contributed Subsidiaries and TCI Music. The $150 million included up to
$35 million in additional debt that would, in effect, provide TCI Music with the
benefits of the Liberty policy during the period after the date of Liberty's
proposal until the closing. These provisions would permit Liberty to advance
funds of up to $35 million to Liberty Digital for the purpose of making
additional investments during that period that would then be contributed to TCI
Music at the closing of the Contribution Transaction.
On May 18, 1999, Mr. McPartland announced his resignation as a director and
President and Chief Executive Officer of the Company effective June 1, 1999 in
order to pursue opportunities in new media. Following Mr. McPartland's
resignation, Ralph J. Sorrentino, Executive Vice President and Chief Financial
Officer of TCI Music, who had assisted Mr. McPartland in the negotiations, was
authorized to conduct further negotiations on behalf of TCI Music. Mr.
Sorrentino has no relationships with Liberty other than his position with TCI
Music.
During further negotiations of the terms and conditions of the Contribution
Agreement, the parties determined that it was appropriate that the employment
compensation arrangements with respect to Messrs. Masters and Ravenel become the
obligations of TCI Music, since following the Contribution Transaction, the
assets that they were hired to develop and manage and that relate to the
Executive SARs would be owned by TCI Music. However, based on a recommendation
of Liberty's tax and accounting advisors, it was determined that the Executive
SARs should be replaced by a plan similar to the Deferred Compensation and Stock
Appreciation Rights Plan (having substantially the same economic terms as the
Executive SARs) to be adopted by TCI Music, so that the compensation paid to Mr.
Masters and Mr. Ravenel should be deductible for federal income tax purposes by
the Company. If the Company had assumed an assignment of the Executive SARs, a
portion of any compensation paid pursuant to the Executive SARs may not have
been deductible. Pursuant to the Tax Sharing Agreement, the Company will
reimburse Liberty for any tax benefit to the Company from any deductions arising
from compensation paid pursuant to the Deferred Compensation and Stock
Appreciation Rights Plan. Since the Executive SARs provided for appreciation on
9 1/2% of Liberty's investment in Liberty Digital, the Deferred Compensation and
Stock Appreciation Rights Plan would provide that it relate to 9 1/2% of the
appreciation of the value of Liberty's equity investment in TCI Music over $500
million, or $2.46 per share of Series A common stock. In consideration of TCI
Music's assuming the liability under the Deferred Compensation and Stock
Appreciation Rights Plan, Liberty agreed that the number of shares of Series B
common stock that Liberty would otherwise receive upon the closing of the
Contribution Transaction would be reduced by 19,305,193 shares, the number of
shares to be subject to the Deferred Compensation and Stock Appreciation Rights
Plan. In addition, TCI Music, Liberty, Mr. Masters and Mr. Ravenel agreed that
the Executive SARs would be cancelled upon adoption of the Deferred Compensation
and Stock Appreciation Rights Plan and that the Masters Employment Agreement
would be amended to make other changes appropriate to reflect the fact that TCI
Music, rather than Liberty, would be the employer under the Masters Employment
Agreement. See "Proposal 3 -- Approval of Deferred Compensation and Stock
Appreciation Rights Plan" for a discussion of the terms of the Deferred
Compensation and Stock Appreciation Rights Plan and "Executive
Officers -- Employment Agreements, Termination of Employment and Change of
Control Arrangements" for a summary of the terms of the revised Masters
Employment Agreement.
A special telephonic meeting of the Board was held on June 22, 1999. At
that meeting, management updated the Board on the status of negotiations and
legal counsel reviewed the current terms of the proposed transaction, including
the changes in the structure of the transaction, and the terms of the proposed
Series B preferred stock and the proposed Deferred Compensation and Stock
Appreciation Rights Plan. Morgan Stanley advised the Board, based on information
available to Morgan Stanley as of June 21, 1999, that the changes in the terms
of the Contribution Agreement, the issuance of Series B preferred stock in lieu
of the convertible notes, the terms of the Series B preferred stock and the
proposed adoption by the Company of the Deferred Compensation and Stock
Appreciation Rights Plan and changes to the value of the assets being
contributed since April 23, 1999 would not prevent it from delivering its
written opinion, as of the date of the proxy statement, that the Contribution
Transaction, considered as a whole, is fair from a financial point of view
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to the holders of Series A common stock (other than Liberty and its affiliates).
Following these presentations, the Board determined that the terms of the
Contribution Agreement and the Contribution Transaction as a whole were still
advisable and fair to and in the best interests of the shareholders of TCI Music
(other than Liberty and its affiliates). The Board unanimously approved the (1)
Contribution Transaction, (2) Certificate of Designations for the Series B
preferred stock to be issued in connection with the Contribution Transaction,
(3) amendments to the Certificate of Incorporation to (A) change the name of the
Company to Liberty Digital, Inc. upon completion of the Contribution
Transaction, (B) increase the authorized number of shares of capital stock,
Series A common stock and Series B common stock, and (C) eliminate the
prohibition against shareholder action without a meeting and (4) the Deferred
Compensation and Stock Appreciation Rights Plan on the terms presented to the
Board, subject to shareholder approval and approval by the Compensation
Committee of the Board of Directors, and recommended that TCI Music's
shareholders approve the Contribution Transaction, the amendments to the
Certificate of Incorporation and the Deferred Compensation and Stock
Appreciation Rights Plan. In addition, Messrs. Masters and Ravenel were
appointed, effective June 1, 1999, to the same offices with the Company they
hold in Liberty Digital: Lee Masters, President and Chief Executive Officer of
Liberty Digital, was appointed as President and Chief Executive Officer of the
Company to fill the vacancy caused by Mr. McPartland's resignation; and Bruce W.
Ravenel, Executive Vice President of Liberty Digital, was appointed an Executive
Vice President of the Company. Mr. Ravenel was also elected to fill the vacancy
on the Board created by the resignation of Mr. McPartland. The Board also
determined to elect Mr. Bennett, currently Chairman of the Board of Liberty
Digital, as Chairman of the Board of TCI Music immediately after the closing of
the Contribution Transaction. The Board also recommended that the Compensation
Committee approve the Deferred Compensation and Stock Appreciation Rights Plan
and make any grants pursuant to the Deferred Compensation and Stock Appreciation
Rights Plan.
The Compensation Committee approved the terms of the Deferred Compensation
and Stock Appreciation Rights Plan for Messrs. Masters and Ravenel on July 30,
1999, subject to shareholder approval, and the consummation of the Contribution
Transaction. See "Proposal 3 -- Approval of Deferred Compensation and Stock
Appreciation Rights Plan" for a discussion of the terms of the Deferred
Compensation and Stock Appreciation Rights Plan.
DESCRIPTION OF CONTRIBUTION TRANSACTION
General
Pursuant to the Contribution Agreement, Liberty DMX, Inc. ("Liberty DMX"),
a wholly owned subsidiary of Liberty, will contribute to the Company all of the
outstanding stock of the Contributed Subsidiaries. Liberty, Liberty DMX, and the
subsidiaries contributing the Contributed Subsidiaries to Liberty DMX are
referred to in this proxy statement as the "Contributing Parties." In addition,
Liberty (through Liberty DMX) has agreed in the Contribution Agreement to assign
to the Company certain of its rights under the Access Agreement regarding the
provision of certain interactive video services over the cable television
systems of AT&T and its controlled affiliates (the "AT&T Systems"). The Access
Agreement establishes a framework to negotiate definitive agreements for digital
channel capacity on the AT&T Systems equal to one six-megahertz channel (which,
under current digital compression technology, will enable carriage of between 12
and 15 video channels) to be used for interactive, category specific channels
providing entertainment, information and merchandise programming, subject to
certain conditions ("Interactive Video Services"). The material terms of the
definitive agreements, other than those included in the Access Agreement, are
subject to negotiation between the Company and AT&T. Pursuant to this
assignment, the Company will become subject to certain obligations imposed by
the Access Agreement, including, but not limited to, AT&T's option to enter into
joint ventures with the Company regarding the provision of such Interactive
Video Services on the AT&T Systems, and, if such ventures are formed, AT&T's
right to acquire the Company's interest in such joint ventures at their fair
market value after a three year period. In connection with the Contribution
Agreement, the Board of Directors of Liberty adopted a policy that TCI Music
will be the primary (but not exclusive) vehicle for the pursuit of corporate
opportunities relating to interactive programming and content related services
in the United States and Canada, subject to certain limitations.
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Liberty has also agreed in the Contribution Agreement that it will use
reasonable efforts to make available to the Company for its Interactive Video
Services the benefits of the "preferred vendor status" to which Liberty is
entitled under the Access Agreement with respect to the access, timing and
placement of new programming services on the AT&T Systems. Both the assignment
of rights with respect to Interactive Video Services and the agreement to make
such benefits available to the Company are subject to the terms, conditions and
obligations set forth in the Access Agreement, the Contribution Agreement and
the assignment.
In addition, Liberty DMX will contribute to TCI Music a combination of cash
and notes payable to Liberty or one or more of its affiliates (which notes will
be assigned to Liberty DMX prior to the closing of the Contribution Transaction)
by the Contributed Subsidiaries and TCI Music equal to $150 million.
Finally, TCI Music agreed to adopt the Deferred Compensation and Stock
Appreciation Rights Plan. See "Proposal 3 -- Approval of the Deferred
Compensation and Stock Appreciation Rights Plan" for a detailed description of
the Deferred Compensation and Stock Appreciation Rights Plan.
In consideration of the foregoing, the Company will issue to Liberty DMX
(1) 109,450,167 shares of Series B common stock and (2) 150,000 shares of Series
B preferred stock having an initial liquidation aggregate preference of $150
million.
The effective issue price of the shares of Series B common stock to be
issued pursuant to the Contribution Agreement was based on the average of the
daily closing prices of the Series A common stock on the Nasdaq SmallCap Market
for the 30 day period ended April 5, 1999 (the day before the public
announcement of the Contribution Transaction) rounded down to the nearest cent.
That average market price was $4.66 per share. The conversion price for the
Series B preferred stock to be issued in the Contribution Transaction is 125% of
the average market price used to calculate the issue price of the Series B
Common Stock, or $5.825.
Liberty and TCI Music have agreed that the aggregate net value of the
Contribution Transaction is $600 million. The value of the Contributed
Subsidiaries that hold stock of public companies was based on the closing
trading price of the stock held by the Contributed Subsidiaries in publicly
traded companies on April 5, 1999; and the value of the Contributed Subsidiaries
that do not hold publicly traded investments was based on the most recent
purchase price paid for such investment, in both cases less the amount of any
liabilities to be assumed by TCI Music. The value of the assignment of the
rights with respect to Interactive Video Services under the Access Agreement was
determined based on a discounted cash flow analysis using projections made by
Liberty of the operating income of the interactive television business for the
term of the Access Agreement.
A copy of the Contribution Agreement is attached to this proxy statement as
Appendix I.
Liberty Policy
The following is a description of a general policy adopted by the Liberty
Board in connection with the Contribution Agreement. The policy provides that
TCI Music will be the primary (but not exclusive) vehicle for the pursuit of
corporate opportunities relating to interactive programming or interactive
content ("Interactive Programming Opportunities") that are provided or otherwise
made available to Liberty and its controlled affiliates. However, the term
Interactive Programming Opportunities does not include opportunities (1)
developed by or made available to any public company that is a controlled
affiliate of Liberty or of any of Liberty or Liberty's controlled affiliates
(other than the Company and its controlled affiliates or any person in which
Liberty or any controlled affiliates (other than the Company and its controlled
affiliates) has an interest but which person is not a controlled affiliate of
Liberty or Liberty's controlled affiliates), (2) relating to Interactive
Programming Services that are additional to, enhancements of or ancillary to
linear video programming and content that are developed by or provided or made
available to a controlled affiliate of Liberty whose primary business is the
provision of linear video programming and content, (3) relating to Interactive
Programming Opportunities that are intended to be distributed primarily outside
the United States and Canada, (4) relating to hardware, software or other
equipment, facilities, services, technologies or utilities associated with the
distribution or enablement of Interactive Programming Services or other
hardware, utilities or non-content
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related software, (5) arising out of or relating to Interactive Programming
Opportunities that have been provided or made available to TCI Music but which
TCI Music has determined not to pursue or has failed to pursue within the
applicable time period, or (6) that Liberty or any of its controlled affiliates
is legally or contractually obligated to provide or make available to a person
other than TCI Music.
Under the policy, the Company is not obligated to pursue any Interactive
Programming Opportunity presented to it by Liberty. If the Company determines
not to pursue or fails to pursue an opportunity, in each case within such time
as Liberty may reasonably specify (taking into account the type and nature of
the Interactive Programming Opportunity provided or made available) in its
communication to TCI Music relating to such Interactive Programming Opportunity,
then Liberty and its controlled affiliates may pursue such Interactive
Programming Opportunity.
The policy is effective from April 6, 1999; provided that, until the
closing of the Contribution Transaction, the policy will be implemented in a
manner consistent with the provisions of the Contribution Agreement. The policy
automatically terminates upon the first to occur of (1) Liberty ceasing to
beneficially own at least a majority in voting power of the outstanding voting
securities of TCI Music entitled to vote generally upon all matters submitted to
common shareholders, (2) Liberty ceasing to beneficially own at least a majority
of the common equity securities of TCI Music outstanding (with shares issuable
upon the conversion, exercise, or exchange of securities beneficially owned by
Liberty that are convertible into or exercisable or exchangeable for, common
equity securities of TCI Music being deemed outstanding) and (3) the termination
of the Contribution Agreement.
The policy provides that the Liberty Board or its Executive Committee is
required to act in accordance with their fiduciary duties owed to Liberty and
Liberty's fiduciary duties, if any, to its controlled affiliates (other than TCI
Music and its controlled affiliates) in making all determinations in connection
with the policy. With respect to any Interactive Programming Opportunity that
may be subject to the policy and any obligation (fiduciary or otherwise) to one
or more other controlled affiliates, the Liberty Board will have discretion to
determine, without reference to the policy, to which of TCI Music or such other
controlled affiliate of Liberty such Interactive Programming Opportunity will be
provided or made available. Notwithstanding anything set forth in the policy,
Liberty will have no obligation to exercise any rights it may have as a
shareholder, partner or member of such person that is not a wholly owned
subsidiary or to exercise any rights available to it under agreements with other
shareholders, partners or members, in order to implement determinations under
the policy. All determinations of the Liberty Board or its Executive Committee
with respect to the Liberty policy and the interpretation of the Liberty policy
are conclusive and binding.
The policy further provides that Liberty's Board or its Executive Committee
from time to time may amend, modify or rescind the policy or adopt additional or
other policies or make exceptions with respect to the application of the policy
in connection with particular facts and circumstances, all as the Liberty Board
or its Executive Committee may determine, consistent with their fiduciary
duties.
The policy provides that the nature of the assets being contributed to TCI
Music pursuant to the Contribution Agreement shall not create any inference or
course of dealing as to the opportunities to which the policy applies.
The Contributed Subsidiaries; Investments of the Contributed Subsidiaries
The Contributed Subsidiaries, including Liberty Digital, were formed solely
for the purpose of holding some of the interactive programming and content
related assets of Liberty. Other than these assets, the Contributed Subsidiaries
have no other assets and their only liabilities are (1) the notes payable to
Liberty, which will be contributed to TCI Music as part of the Contribution
Transaction, (2) obligations under the documents governing these investments in
such interactive programming and content related assets, and (3) the Masters
Employment Agreement and the Executive SARs.
The assets of the Contributed Subsidiaries are generally identified in the
table below. The table also includes investments in entities that were made
after April 7, 1999 and that will be contributed to the Company as part of the
Contribution Transaction. Please see "Description of the Contribution Agreement
and
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<PAGE> 28
Related Agreements -- Additional Covenants and Agreements". Such assets will be
held indirectly by the Company through the Contributed Subsidiaries'
partnerships, joint ventures, common stock investments and investments
convertible or exchangeable into common stock. In some cases, the interests are
subject to buy-sell procedures, repurchase rights, performance guarantees and
other restrictions. Ownership interests in the table are approximate, and were
determined as of June 1, 1999.
<TABLE>
<CAPTION>
EQUITY
INVESTMENT INTEREST DESCRIPTION
---------- -------- -----------
<S> <C> <C>
Academic Systems Corp. 5% Provider of higher education multi-media
instructional material
ACTV, Inc. (Nasdaq/SC: IATV; BSE: IAT) 12%(1) Producer of tools for the creation of
programming that allows viewer participation
for both television and Internet platforms
drugstore.com, Inc. (Nasdaq/NM: DSCM) 2% Internet provider of on-line drugstore
services
HomeGrocer.com, Inc. 2% Internet provider of on-line home grocery
delivery service
iBEAM Broadcasting Corporation 7% Provider of satellite delivery of streaming
media to Internet service providers
Interactive Pictures Corporation 4% Provider of interactive photography services
and technology for the Internet
iVillage, Inc. (Nasdaq/NM: IVIL) 3% Developer and provider of branded on-line
network tailored to interests and needs of
adult women
Kaleidoscope Interactive, LLC 50% Provider of Internet services to chronic
disease and disability communities
Kaleidoscope Network, Inc. 12% Producer and distributor of video programming
for pharmaceutical and healthcare advisers
KPCB Java Fund, L.P. 5% Venture fund for entities that develop
applications using Java software
Lifescape, LLC 15% Provider of Internet-based behavioral health
services
The Lightspan Partnership, Inc. 11% Provider of educational curriculum software
and Internet services to schools
MedScholar Digital Network, LLC 100% Provider of continuous medical education
services to healthcare professionals
priceline.com Incorporated (Nasdaq/NM: 2% Developer and provider of on-line electronic
PCLN) commerce site for products and services at a
price offered by consumers
Quokka Sports, Inc. (Nasdaq/NM: QKKA) 3% Internet provider of live digital sports
entertainment
SportsLine USA, Inc. (Nasdaq/NM: SPLN) 3% Internet provider of branded interactive
sports information, programming and
merchandise
TE Network, Inc. (Total Entertainment 19% Internet provider of family-oriented on-line
Network) games
</TABLE>
- ---------------
(1) On June 30, 1999 Liberty invested an additional $9 million in ACTV by
exercising warrants and purchasing additional common stock. In addition,
Liberty received new warrants, which it may exercise over a period of one to
five years. The percentage in the table includes the exercise of the
existing warrants and the purchase of the additional shares. Exercise of the
additional warrants would increase Liberty's (or TCI Music's, if the
warrants are exercised after completion of the Contribution Transaction)
ownership from approximately 12% to approximately 25%.
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<PAGE> 29
Interactive Video Services
Prior to the closing of the AT&T Merger, AT&T and Liberty entered into the
Access Agreement. The Access Agreement incorporates the terms of a schedule to
the AT&T merger agreement that contains some of the material terms of the
matters to be included in a definitive agreement relating to the execution or
renewal of certain affiliation agreements between TCI and affiliates of Liberty
prior to the AT&T Merger, the status of Liberty and its affiliates as "preferred
vendors" to the AT&T Systems, and Liberty's rights with respect to channel
capacity equivalent to one six-megahertz channel on the AT&T's Systems for the
provision of Interactive Video Services. The Access Agreement further provides
that upon the request of either party, AT&T and Liberty (the Company after the
closing of the Contribution Transaction) will negotiate in good faith to enter
into a definitive agreement regarding the matters covered by the Access
Agreement, but that until such definitive agreement is executed and delivered
the Access Agreement will remain a binding agreement of the parties. The
material terms of the definitive agreement, other than those included in the
Access Agreement, are subject to negotiation between the parties. Pursuant to
the Contribution Agreement, Liberty DMX will assign its rights with respect to
Interactive Video Services on the AT&T Systems to TCI Music (which will be
assigned by Liberty to Liberty DMX prior to the closing of the Contribution
Transaction). With respect to those Interactive Video Services on AT&T's
Systems, the Access Agreement provides that such services will be provided under
one of the two arrangements described below, at the election of AT&T:
- Pursuant to the first arrangement, AT&T will make available to Liberty
for five years (renewable for an additional four-year period on
then-current most favored nation terms) capacity equal to one six-
megahertz channel (in digital form and including interactive enablement,
first screen access and hot links to relevant Web sites -- all to the
extent implemented by AT&T Systems) to be used for interactive,
category-specific video channels that will provide entertainment,
information and merchandising programming. AT&T will not be required to
disrupt other programming or other channel arrangements. The suite of
services will be accessible through advanced set top devices or boxes
deployed by AT&T, except that, unless specifically addressed in a
mutually acceptable manner, AT&T will have no obligation to deploy set
top devices or boxes of a type, design or cost materially different from
that it would otherwise have deployed. The content categories may
include, among others, music, travel, health, sports, books, personal
finance, automotive, home video sales and games.
- Under the second arrangement, AT&T may enter into one or more mutually
agreeable ventures with Liberty for the interactive video services
described in the first sentence of the preceding paragraph. Such ventures
will be structured as 50/50 ventures for a reasonable commercial term and
provide that AT&T and Liberty will not provide interactive services in
the category(s) of interactive video services provided through the
ventures for the duration of such term other than the joint venture
services in the applicable categories. When the distribution of such
interactive video services occurs through a venture arrangement, AT&T
will share in the revenue and expense of the provision of such
interactive services pro rata to its ownership interest in lieu of the
commercial arrangements described in the preceding paragraph. At the
third anniversary of the formation of any such venture, AT&T may elect to
purchase the ownership interest of Liberty in such venture at fair market
value. The parties will endeavor to make such transaction, if any, tax
efficient to Liberty.
In connection with the letter agreement regarding the MTVN Partnership,
AT&T Broadband entered into an agreement with TCI Music pursuant to which AT&T
Broadband agreed to negotiate in good faith to enter into an agreement with the
Company or a joint venture between the Company and the MTVN Partnership for AT&T
Broadband to provide and enable the functionalities necessary to provide to AT&T
digital subscribers an interactive music and music-related transaction/commerce
channel to be developed by the joint venture.
Contribution of Cash and Notes Payable
Pursuant to the Contribution Agreement, Liberty will contribute (through an
indirect wholly owned subsidiary) to TCI Music a combination of cash and notes
payable to Liberty or a wholly owned subsidiary of
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<PAGE> 30
Liberty by the Contributed Subsidiaries and TCI Music equal to $150 million. The
Contribution Agreement provides that Liberty or any of its subsidiaries may make
additional investments in interactive programming and content related assets
after April 7, 1999 and prior to the closing of the Contribution Transaction
without the consent of TCI Music, so long as the aggregate amount expended
during this interim period does not exceed $35 million. The Contribution
Agreement provides that Liberty will advance funds for such additional
investments and that those investments will be contributed to TCI Music at the
closing and the Liberty advances will become part of the notes payable to be
contributed to TCI Music at the closing.
If Liberty proposes to make investments that would exceed $35 million, then
such investments would not be contributed to TCI Music without the consent of
TCI Music. Liberty will not be required to advance more than $85 million in
connection with such additional investments. To the extent that any such
investments are not contributed to TCI Music at the closing, such investments
(and opportunities arising out of such investments) will be exempt from the
Liberty policy.
As of the date of this proxy statement, Liberty has advanced approximately
$10 million to Liberty Digital for the purchase of equity interests in Quokka
Sports, Inc. and $9 million for an additional investment in ACTV, Inc. These
additional equity interests are held by wholly owned subsidiaries of Liberty
Digital; all of Liberty Digital's equity interests in these subsidiaries and
subsidiaries formed to hold additional investments made pursuant to the
Contribution Agreement after April 7, 1999 and prior to the closing of the
Contribution Transaction will become "Contributed Subsidiaries" and will be
contributed to TCI Music in connection with the closing of the Contribution
Transaction. The amount of cash contributed to TCI Music at the closing of the
Contribution Agreement will be an amount equal to the difference between $150
million and the amount of debt of the Contributed Subsidiaries and TCI Music
payable to Liberty (or a wholly owned subsidiary of Liberty) at the closing of
the Contribution Transaction.
Issuance of Series B Common Stock and Series B Preferred Stock
In consideration of all of the foregoing provisions, TCI Music will issue
to Liberty DMX, Inc., a wholly owned subsidiary of Liberty and holder of all of
the outstanding Series B common stock currently outstanding (1) 109,450,167
shares of Series B common stock; and (2) 150,000 shares of Series B preferred
stock having an initial aggregate liquidation preference of $150 million.
Holders of the Series B preferred stock will be entitled to receive cash
dividends at the rate of 5% of the liquidation preference, on a quarterly basis.
The liquidation preference is $1,000 per share plus all accrued dividends. The
shares of Series B preferred stock are convertible at any time at the option of
the holder into shares of Series B common stock at $5.825 per share, which
represents a 25% premium over the value of the Series B common stock issuable by
TCI Music under the Contribution Agreement. The Series B preferred stock is
subordinate to the obligations of the Company under its bank credit facility.
Change in Management; New Director
As part of the Contribution Transaction, the parties contemplated that
after the closing the management of Liberty Digital, one of the Contributed
Subsidiaries, and the subsidiary of Liberty that was formed to manage some of
Liberty's interactive programming and content related assets, would be appointed
to the same positions with the Company they hold in Liberty Digital: Robert R.
Bennett, Chairman of the Board of Liberty Digital would become Chairman of the
Board of the Company; Lee Masters, a director and President and Chief Executive
Officer of Liberty Digital, would resign as Chairman of the Board but continue
as a director and become President and Chief Executive Officer of the Company;
and Bruce W. Ravenel, a director and Executive Vice President of Liberty
Digital, would become a director and an Executive Vice President of the Company.
However, effective June 1, 1999, Thomas McPartland, a director and President and
Chief Executive Officer of the Company resigned and accordingly, the Board
determined to make some of these changes prior to the closing of the
Contribution Transaction. Effective June 1, 1999, Mr. Masters was appointed
President and Chief Executive Officer of TCI Music and Mr. Ravenel was appointed
Executive Vice President. Mr. Ravenel was also elected to fill the vacancy on
the Board created by Mr. McPartland's resignation. Mr. Bennett will become
Chairman of the Board upon the closing of the Contribution Transaction. The
Board believes that Mr. Masters and Mr. Ravenel are valuable additions to the
Company's
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<PAGE> 31
daily operational management since they have expertise and experience relating
to identifying and acquiring additional strategic interactive programming and
content related investments and assets and developing interactive television
programming and assets.
RISK FACTORS RELATING TO THE CONTRIBUTION TRANSACTION
Shareholders should carefully consider the following matters in addition to
the matters set forth elsewhere in this proxy statement and its appendices in
deciding how to vote on the proposal to approve the Contribution Transaction.
THE SET TOP BOXES REQUIRED FOR INTERACTIVE TELEVISION MAY NOT BE DEVELOPED OR
DEPLOYED
The success of interactive television is dependent on the availability of
the next generation of digital set top box that is capable of handling the
required type of two-way cable communications. These set top boxes are currently
under development. Unless and until these advanced digital set top boxes are
commercially available, interactive television cannot be implemented. Although
the Company believes that these advanced boxes will begin to be available in
late 1999, such deployment is subject to a number of factors not controlled by
the Company. Any delay in the availability of these advanced boxes will
adversely affect the Company's development of its interactive television
business after the Contribution Transaction is complete.
The success of interactive television is also dependent on the deployment
of such set boxes once they become commercially available. Neither AT&T nor any
of the other multiple cable television system operators ("MSOs") has any
obligation to deploy the set top boxes even when the advanced digital set top
boxes become available. Such deployment could also be affected by the numbers of
set top boxes that are available from suppliers and shortages of trained
personnel necessary to install the set top boxes. AT&T and other MSOs, based on
their own business plans, may elect not to deploy the set top boxes or not to do
so within a time frame that would benefit the Company's goal to develop and
profit from interactive television services. In addition, the advanced set top
box deployed by AT&T and the other MSOs could be of a type that supports new
services that they intend to provide to their subscribers, such as telephony,
but not interactive television. If AT&T and the other MSOs choose not to deploy
advanced boxes that support interactive television, the Company will not be able
to develop its interactive television business.
THE PHYSICAL PLANT UPGRADES NECESSARY FOR INTERACTIVE TELEVISION MAY NOT OCCUR
ON A TIMELY BASIS
Interactive television requires cable plant capable of two-way
communications. AT&T and many MSOs are in the process of upgrading their
physical cable television plants to two-way capability for their own business
purposes, such as providing local telephony and Internet access services. These
upgrades will also support interactive television services. As of the date of
this proxy statement, the Company believes that AT&T has upgraded approximately
40% of the AT&T Systems to these requirements. The success of interactive
television will be largely dependent upon its number of viewers. If the plant
upgrades are not completed in a timely fashion in a sufficient number of the
AT&T Systems and in the cable television systems of other MSOs, the Company's
interactive television business may not reach enough viewers to be successful.
If AT&T's recently announced acquisition of MediaOne is completed, that
transaction may have a material adverse effect on the timing of AT&T's plant
upgrades as a result of the anticipated adverse effect on the cash flow of AT&T
otherwise available for expenditures related to interactive television,
including deployment of the required set top boxes and plant upgrades. There can
be no assurance that a sufficient number of systems will be upgraded or that the
upgrades will occur in a time frame that allows the Company to implement its
interactive television business in a successful manner.
WE WILL HAVE TO RAISE SIGNIFICANT FUNDS TO DEVELOP INTERACTIVE TELEVISION AND
MAKE INVESTMENTS IN INTERACTIVE PROGRAMMING AND CONTENT RELATED ASSETS
It will be necessary for the Company to expend a significant amount of
funds on the development of interactive television before revenues, if any, will
be derived from such development efforts. Those funds will be used for, among
other things, video and online program development, operations, distribution on
cable
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<PAGE> 32
systems, marketing, satellite uplinking and general and administrative expenses.
Pursuant to the Contribution Agreement, an amount of cash may be contributed to
the Company, for the Company's use in its business. Please see "Proposal
1 -- Approval of the Contribution Transaction -- Contribution of Cash and Notes
Payable." However, any amount contributed will not be sufficient to cover the
anticipated expenses in developing interactive television before any revenues
are derived from operations and will not be sufficient to fund its operations
and investments. In addition, the Company will need additional funds in order to
take advantage of the investment opportunities that may be presented to the
Company under the Liberty policy or opportunities developed by the Company to
invest in interactive programming and content related companies and other
businesses. To date, the Company has not generated any significant free cash
flow from its operations and has relied on Liberty, in addition to its bank line
of credit, to fund its operations. After the closing of the Contribution
Transaction, Liberty will have no obligation to make additional funds available
to the Company. If in the future Liberty were to agree to provide funds to the
Company, such advances may take the form of additional equity purchases or
indebtedness. The terms under which such funds are made available would be
separately negotiated by the Company and Liberty, and there can be no assurance
that Liberty will agree to advance any or all of the funds required by the
Company or, if funds are advanced, there is no assurance with respect to the
terms upon which such amounts may be provided. The Company has no amounts
available under its bank line of credit as of the date of this proxy statement.
If the Company needs money from outside sources it may not be able to find a
source to provide it with the needed funds.
TERMS AND CONDITIONS OF AGREEMENTS TO BE ENTERED INTO IN CONNECTION WITH THE
ACCESS AGREEMENT ARE UNCERTAIN AND MAY NOT BE FAVORABLE TO THE COMPANY
The Access Agreement provides that Liberty (the Company after the closing
of the Contribution Transaction) and AT&T will negotiate in good faith the terms
and conditions of a definitive agreement with respect to providing Interactive
Video Services. It is possible that the parties will not be able to agree on
such additional terms and no definitive agreement will be entered into. If no
definitive agreement is entered into, the Company may have to negotiate a
separate agreement with AT&T, without the full benefit of the framework provided
by the Access Agreement regarding the distribution of Interactive Video
Services. In addition, the Company anticipates that it may be required to
negotiate a separate agreement for each digitally compressed channel that is
developed, rather than one agreement covering all of the 12 to 15 digital
channels that may be carried on the six-megahertz of bandwidth provided for in
the Access Agreement. AT&T, in its sole discretion, may elect that these
separate agreements be entered into pursuant to one of two arrangements. The
first provides access to the AT&T Systems for a certain period of time. Under
that scenario, the Company would have rights to bandwidth capacity for the
distribution of interactive television channels on the AT&T Systems. The
Company's assumptions regarding the development of interactive television
contemplates that AT&T will elect the first option. The second arrangement
requires the Company to enter into 50/50 ventures with AT&T for a reasonable
commercial term. Those ventures will be the sole vehicle of AT&T and the Company
for interactive video services in the specified categories channels to be
carried on the AT&T Systems. Under either option, the Company will still have
the right to distribute its interactive television channels over the cable
television systems of other MSOs. In the case of a joint venture, AT&T will
share revenues and expenses pro rata to its ownership interest in lieu of the
Company being required to pay AT&T a fee for use of its bandwidth. However,
under this arrangement, AT&T may purchase the ownership interest of the Company
in such venture at fair market value at the third anniversary after the
formation of such venture. The Company believes that because interactive
television is a new venture that has not been broadly or successfully developed
in any market, the success of its interactive television development efforts may
not be fully realized until after the third anniversary. If AT&T elects to
purchase the Company's interest in any joint venture, the Company would be
precluded from participating in any increased value of the interactive
television venture with AT&T after the third anniversary of the venture.
Mr. Leo J. Hindery, Jr. is a director of TCI Music and Liberty and the
President and Chief Executive officer of AT&T Broadband. Accordingly, he may be
subject to a conflict of interest in negotiating the terms of definitive
agreements to be entered into with respect to providing Interactive Video
Services on the AT&T Systems.
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<PAGE> 33
OUR SUCCESS DEPENDS UPON DISTRIBUTION OF INTERACTIVE TELEVISION SERVICES TO
MSOS OTHER THAN AT&T
The Company believes that the success of its interactive television
business will be greatly limited if the Company fails to obtain distribution of
its interactive television programming from MSOs other than AT&T. In order to
obtain distribution on the other MSOs cable systems, the Company will have to
create services that will make it attractive to customers and will have to
develop pricing, revenue splits and other strategies which will incentivize the
other MSOs to carry the Company's programming and provide the other related
services necessary to provide interactive television services. There can be no
assurance that the Company will be able to enter into arrangements with other
MSO's regarding such distribution, the terms of any such arrangement or the
amount of channel capacity the Company may be able to acquire from such other
MSO's.
THE CREATION OF AN INTERACTIVE TELEVISION BUSINESS DEPENDS ON OUR ABILITY TO
ENTER INTO STRATEGIC CONTENT ALLIANCES AND AGREEMENTS FOR NETWORK AND
FULFILLMENT SERVICES
The interactive television business is in its early stage of development.
It is uncertain whether this business can be successfully developed. The Company
plans to develop category specific channels that will provide entertainment,
information and merchandising programming. In order to develop these channels
the Company must provide content and establish the various network and
fulfillment services necessary to provide Interactive Video Services for each
channel developed. The content for the Company's interactive television channels
depends on the Company's ability to enter into strategic alliances, on favorable
terms, pursuant to which Company would be entitled to use the provider's
content, brand name or other resources. Pursuant to the Contribution Agreement,
the Company will acquire investments in a number of companies that it believes
may ultimately provide it with channel content. The Company also plans to invest
in other potential content providers after the completion of the Contribution
Transaction, if funds are available. However, as of the date of this proxy
statement, neither the Company nor Liberty Digital has entered into any
agreements for channel content, except that as part of the investment in the
MTVN Partnership the Company and MTVN announced their intention to cooperate on
the creation and launch of an interactive commerce oriented music channel and
AT&T Broadband agreed to negotiate in good faith to enter into an agreement with
the Company or a joint venture between the Company and the MTVN Partnership for
AT&T Broadband to provide and enable the functionalities necessary to provide to
AT&T digital subscribers an interactive music and music-related
transaction/commerce channel to be developed by the Company or such joint
venture.
In addition, the Company must enter into agreements to establish the
services necessary to provide Interactive Video Services, such as order
fulfillment for merchandise orders. The Company may not be able to enter into
any of these agreements at all or on terms favorable to it. The failure to
obtain or a delay in obtaining any one of these agreements will adversely affect
the Company's ability to develop an interactive television business.
OUR SUCCESS IN DEVELOPING THE INTERACTIVE TELEVISION BUSINESS DEPENDS ON
CUSTOMER ACCEPTANCE
Interactive television using two-way capability of the cable plant has not
yet been broadly or successfully deployed. Previous attempts have failed for a
variety of reasons, including lack of customer acceptance. The success of
interactive television will depend in large part on customer acceptance.
Customer acceptance will depend upon, among other factors,
- the price of components required to deliver interactive television to the
consumer and allow it to function;
- the amount of any additional cable charges to receive interactive
television;
- the Company's ability to develop interactive cable television programming
that is attractive to consumers and economically beneficial to the
Company;
- the ability of the Company to develop and implement software and other
capabilities to provide customers with ready to use e-commerce
experience, including fulfillment of orders; and
- customer satisfaction with security and subscriber privacy.
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<PAGE> 34
Even if two-way interactive television is successfully developed, there is
no certainty that consumers will accept this new offering in numbers sufficient
to provide economic success. Therefore, the timing and amount of return on the
investment of the Company in interactive television cannot be determined.
OUR NEW BUSINESS DEPENDS ON KEY PERSONNEL
The services of Lee Masters and Bruce Ravenel, as President and Chief
Executive Officer and as Executive Vice President, respectively, will be
important to the Company's development of interactive television and acquisition
of interests in interactive programming and content related assets. Their
familiarity with developing and distributing programming and developing
investment strategies and strategic alliances make them especially valuable to
the Company. The loss of the services of Mr. Masters or Mr. Ravenel could harm
the Company's ability to develop its new business. In connection with the
completion of the Contribution Transaction, the Company will assume the Masters
Employment Agreement having a term through December 15, 2003, subject to certain
amendments to eliminate the Executive SARs and to reflect other changes
appropriate to the Company, rather than Liberty, being the employer under the
agreement. The Company does not have an employment agreement with Mr. Ravenel.
In addition, in connection with the Contribution Agreement, the Company has
adopted the Deferred Compensation and Stock Appreciation Rights Plan in which
Messrs. Masters and Ravenel will be the sole participants. Any amounts payable
to them under the deferred compensation portion of the Deferred Compensation and
Stock Appreciation Rights Plan is payable only upon termination of their
employment. Depending on the value attributable to the deferred compensation
portion of the Deferred Compensation and Stock Appreciation Rights Plan upon
vesting, Mr. Masters and Mr. Ravenel may have an incentive to terminate their
employment in order to receive the deferred compensation payments.
OTHERS MAY DEVELOP COMPETING INTERACTIVE TELEVISION SERVICES
The Company may face competition from third parties in its efforts to
develop interactive television. Potential competitors include MSOs (including
AT&T), major studios, technology companies, including Microsoft, and
entertainment companies. Potential competitors may have resources, including
access to capital, that will provide them with a competitive advantage over the
Company. Further, if MSOs develop their own interactive television programming,
the potential market for the Company's programming will be reduced.
THERE ARE LIMITATIONS ON LIBERTY'S POLICY THAT MAY ADVERSELY AFFECT TCI MUSIC'S
PURSUIT OF OPPORTUNITIES IN INTERACTIVE PROGRAMMING
Pursuant to the Contribution Agreement, Liberty has adopted a policy that
the Company will be the primary (but not exclusive) vehicle of Liberty for the
pursuit of corporate Interactive Programming Opportunities that are provided or
otherwise made available to Liberty, subject to certain exclusions and
limitations set forth in "Proposal 1 -- Approval of Contribution Transaction
-- Liberty Policy." It is a condition to the completion of the Contribution
Transaction that the policy be in full force and effect at the date of the
closing. However, the Company may not benefit from the policy at all or benefits
derived from the policy may be limited or less than expected for any number of
reasons, including the following:
- The policy is not exclusive and Liberty has no obligation to continue to
maintain the policy after the closing of the Contribution Transaction. If
Liberty determines to change, modify or abandon the policy, the number of
opportunities the Company will have to invest in or develop interactive
programming could be reduced or eliminated.
- The policy specifically provides that it does not apply to opportunities
(1) developed by or made available to any public company that is a
controlled affiliate of Liberty or any of Liberty's controlled affiliates
(other than the Company and its controlled affiliates or any person in
which Liberty or any controlled affiliate of Liberty (other than the
Company and its controlled affiliates) has an interest but which person
is not a controlled affiliate of Liberty or any of its controlled
affiliates), (2) relating to Interactive Programming Services that are
additional to, enhancements of or ancillary to linear video
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<PAGE> 35
programming and content that are developed by or provided or made
available to a controlled affiliate of Liberty whose primary business is
the provision of linear video programming and content, (3) relating to
Interactive Programming Opportunities that are intended to be distributed
primarily outside the United States and Canada, (4) relating to hardware,
software or other equipment, facilities, services, technologies or
utilities associated with the distribution or enablement of Interactive
Programming Services or other hardware, utilities or non-content related
software, (5) arising out of or relating to Interactive Programming
Opportunities that have been provided or made available to TCI Music but
which TCI Music has determined not to pursue or has failed to pursue
within the applicable time period, or (6) that Liberty or any of its
controlled affiliates is legally or contractually obligated to provide or
make available to a person other than TCI Music.
- The policy also provides that if the Company determines not to pursue or
fails to pursue an opportunity, in each case within such time as Liberty
may reasonably specify (taking into account the type and nature of the
Interactive Programming Opportunity provided or made available) in its
communication to TCI Music relating to such Interactive Programming
Opportunity, then Liberty and its controlled affiliates may pursue such
Interactive Programming Opportunity. The Company's ability to act on an
opportunity will depend on, among other things, the availability of funds
to pursue the opportunity. The availability of such funds is not certain.
Please see "We Will Have to Raise Significant Funds to Develop
Interactive Television and Make Investments in Interactive Programming
and Content Television Related Assets."
- The policy provides that it terminates automatically upon the first to
occur of (1) Liberty's ceasing to beneficially own at least a majority in
voting power of the Company's voting securities entitled to vote
generally upon all matters submitted to common shareholders, (2)
Liberty's ceasing to beneficially own at least a majority of the common
equity securities of TCI Music outstanding and (3) the termination of the
Contribution Agreement. As a result, Liberty could still effectively
control the Company but would not be subject to the policy.
- Liberty's willingness to advance funds to the Company and, if Liberty
determines to advance funds, the terms on which Liberty may provide such
funds, may affect the Company's ability to pursue such opportunities.
- The Company anticipates that many of the video programming entities in
which Liberty has investments may attempt to add interactive services and
enhancements to their video programming. Because the policy only applies
to Liberty and its controlled affiliates and because most of Liberty's
affiliates are not "controlled" by it for purposes of the policy, the
policy will not apply to these opportunities. Moreover, even to the
extent such entities are controlled by Liberty, if such entity's primary
business relates to video programming and the Interactive Programming
Opportunities relate to interactive additions and enhancements to video
programming then the policy would not be applicable to such opportunity.
- Mr. Bennett is a director of Liberty and a director of the Company. Mr.
Hindery is a director of both Liberty and TCI Music and the President and
Chief Executive Officer of AT&T Broadband. Mr. Koff is a Senior Vice
President of Liberty and a director and Vice President of the Company.
Messrs. Bennett, Hindery and Koff, as Liberty directors and/or officers,
may be involved in the determination as to whether a particular
opportunity is within the scope of the policy, and whether to approve or
terminate the policy, and as TCI Music directors and/or officers may also
be involved in the determination as to whether or not to cause the
Company to accept and pursue an opportunity or allow it revert back to
Liberty based on Liberty's interests.
SELLING OUR EQUITY INVESTMENTS MAY PRESENT CERTAIN RISKS
At the present time the Company does not have any plans to sell the equity
interests in various companies held by the Contributed Subsidiaries after the
closing of the Contribution Transaction. However, in the future the Company may
determine that it is appropriate to sell all or a portion of those interests for
any number of reasons, including to provide funds for development of the
interactive television business or for other strategic
27
<PAGE> 36
investments. Market and other conditions largely beyond the Company's control
will affect its ability to engage in such sales, the timing of such sales and
the amount of proceeds from such sales. As a result, the Company may not be able
to sell all or any portion of its investments or, if the Company is able to
sell, it may not be able to sell at favorable prices. If the Company is unable
to sell certain investments at favorable prices its operating results and
business could be harmed.
THE FLUCTUATING VALUE OF THE ASSETS OF THE CONTRIBUTED SUBSIDIARIES MAY AFFECT
THE VALUE OF THE COMPANY
Following the Contribution Transaction, the Company will hold equity
interests in publicly-traded companies, including ACTV, iVillage, SportsLine USA
and priceline.com, and in private companies. The values of securities held by
the Company in these and other companies depends on market and other conditions
that are outside the Company's control. Changes in those conditions may affect
the market price of TCI Music's publicly-traded stock.
THE MARKET FOR THE COMPANY'S STOCK IS VOLATILE
Since the announcement of the Contribution Transaction and the Company's
intention to expand its business to include the development of the interactive
television business and investment in interactive programming and content
related assets, the Company believes that it may now be perceived by the market
as an Internet company. As a result, the trading price for the Series A common
stock has risen sharply overall and has been extremely volatile, and is likely
to continue to be extremely volatile. The trading price of Internet stocks in
general have experienced extreme price and volume fluctuations in recent months.
These fluctuations often have been unrelated or disproportionate to the
operating performance of these companies. The valuations of many Internet stocks
are extraordinarily high based on conventional valuation standards such as price
to earnings and price to sales ratios. These valuations may not be sustained.
Any negative change in the public's perception of the prospects of Internet
companies could depress the Company's stock prices regardless of its results.
Other broad market and industry factors may result in a decrease in the market
price of the Series A common stock regardless of the Company's operating
performance. Market fluctuations, as well as general political and economic
conditions such as recession or interest rate or currency rate fluctuations,
also may cause a decrease in the market price of the Series A common stock. In
the past, following declines in the market price of a company's securities,
securities class-action litigation often has been instituted against the
company. Litigation of this type, if instituted, could result in substantial
costs and a diversion of management's attention and resources.
The price of the Company's Series A common stock is made even more volatile
by the fact that the public holds only 49.7% of the outstanding Series A common
stock and that there were only approximately 3,800 beneficial owners as of June
30, 1999. If Liberty converted all of its Series B common stock beneficially
owned by it into Series A common stock, the public would hold only 11.8% of the
Series A common stock. As a result, the price of the Series A common stock can
be materially affected by a rather limited trading volume.
CONFLICTS OF INTEREST
Certain members of TCI Music's management and its Board are also members of
the management and Board of Directors of Liberty. Robert R. Bennett, a director
of TCI Music, is a director, President and Chief Executive Officer of Liberty.
David B. Koff, a Vice President and director of TCI Music, is a Senior Vice
President of Liberty. Leo J. Hindery, Jr., a director of TCI Music, is also a
director of Liberty and President and Chief Executive Officer of AT&T Broadband,
which will be providing Interactive Video Services under the Access Agreement.
The directors of TCI Music have fiduciary obligations under Delaware law to TCI
Music and all of its shareholders. Mr. Bennett and Mr. Hindery also have the
fiduciary obligations to Liberty and to AT&T, as the sole shareholder of
Liberty. Mr. Hindery also has obligations to AT&T Broadband. Mr. Bennett, Mr.
Koff and Mr. Hindery hold options to acquire shares and/or restricted shares of
AT&T Class A Liberty Media Group common stock, and options to acquire shares of
TCI Music Series A common stock. In addition, Mr. Hindery holds options to
acquire shares, restricted shares and shares of AT&T common stock. Lee Masters,
a director and President and Chief Executive Officer of Liberty Digital, is
Chairman of the Board and President and Chief Executive Officer of TCI Music.
Bruce W. Ravenel, a
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<PAGE> 37
director and Executive Vice President of Liberty Digital, is a director and an
Executive Vice President of TCI Music. Liberty Digital will become a wholly
owned subsidiary of the Company as a result of the Contribution Transaction.
Thomas McPartland, Ralph Sorrentino and Alan McGlade, President and Chief
Executive Officer of The Box, exercised a number of options to purchase shares
of Series A common stock and/or sold shares of Series A common stock in open
market transactions after the announcement of Liberty's proposal.
TCI MUSIC'S REASONS FOR THE CONTRIBUTION TRANSACTION; RECOMMENDATION OF THE TCI
MUSIC BOARD
The following briefly describes the material reasons, factors and
information taken into account by the Board in deciding to approve the
Contribution Transaction and to recommend that TCI Music shareholders approve
the Contribution Transaction.
Reasons for the Contribution Transaction
- Strategic Opportunity. Since its formation, the Company's goal has been
to develop a portfolio of integrated interactive digitally delivered
music entertainment services. The Board believes that the Contribution
Transaction provides a strategic opportunity to increase shareholder
value by broadening the Company's focus from distributing digital music
to a broad Internet and interactive television business. Upon completion
of the Contribution Transaction the Company will have three components to
its business -- its current DMX music business, the development of an
interactive television business and its equity investments in businesses
that take advantage of the opportunities of interactive programming and
content and interactive television. The rights under the Access Agreement
will provide the Company with the opportunity to develop an interactive
television programming business. The Company believes there are
significant opportunities to develop electronic commerce, interactive
advertising and other fee transactions in an interactive television
business. In addition, the Company believes that it may have the
opportunity to develop strategic alliances with the companies in which
the Contributed Subsidiaries hold equity investments to obtain the rights
to use the products and technology of such companies in interactive
television. Mr. Masters, President and Chief Executive Officer of Liberty
Digital, and Mr. Ravenel, an Executive Vice President of Liberty Digital,
were appointed President and Chief Executive Officer and Executive Vice
President, respectively, of the Company after the announcement of the
Contribution Transaction. They have been working to implement the
interactive television business since January 1, 1999. Their experience
and know-how and any progress they have made will carry over to the
benefit of the Company after the closing of the Contribution Transaction.
The Board believes that, based on the market's perception of Internet and
interactive technology businesses, the Contribution Transaction has the
potential to increase shareholder value and provide the Company with the
currency, in the form of equity securities, for additional growth and
development of its new business.
- Additional Investment Opportunities. Pursuant to the Contribution
Agreement, Liberty has adopted a general policy that the Company will be
the primary (but not exclusive) vehicle for the pursuit of corporate
opportunities involving investments in and/or development of interactive
programming and content, subject to certain exclusions and limitations.
The Board believes that, as a result of Liberty's profile as an investor
in the technology and Internet industries, and the expertise and
reputation of Messrs. Masters and Ravenel in those industries, the
Company will be presented with quality investment opportunities which
will enhance the Company's investment portfolio as well as result in
strategic opportunities to obtain interactive programming or content for
its interactive television business.
- Additional Capital; Enhanced Financing Ability. As of the date of
Contribution Agreement, the Company had no funds available under its
revolving loan agreement and believes that it would not be able to
readily obtain additional financing from outside sources on acceptable
terms. The cash to be contributed to the Company in connection with the
Contribution Transaction may provide some of the additional capital
needed to permit the Company to continue to expand its current music
operations and to acquire additional interactive programming and content
related investments and to develop interactive television. The Board also
believes that the Contribution Transaction will provide the
29
<PAGE> 38
Company with an increased ability to obtain debt financing from third
parties to fund its operations, if necessary. In addition, the higher
market value of the Series A common stock improves the Company's
opportunities for issuing its stock to raise capital or as consideration
in future transactions.
INFORMATION AND FACTORS CONSIDERED BY TCI MUSIC
In connection with its approval of the terms of the Contribution
Transaction and its recommendation that TCI Music shareholders approve the
Contribution Transaction the Board considered the following factors:
- the reasons described under "-- Reasons for the Contribution
Transaction";
- the terms and conditions of the Contribution Agreement, including (1) the
fact that the Company can acquire the Contributed Subsidiaries and the
rights relating to Interactive Video Services under the Access Agreement
in the Contribution Transaction without having to expend any of its cash
resources or borrow funds, (2) the valuation of the Contributed
Subsidiaries and rights relating to Interactive Video Services under the
Access Agreement and the determination of the number of shares of Series
B common stock to be issued in the Contribution Transaction, (3) that the
value of the Series B common stock be issued in the Contribution
Transaction is fixed at $4.66 per share, which was based on the average
daily closing prices of the shares for the 30 trading days prior to the
announcement of Liberty's proposal, which was significantly less than the
trading prices as of the date of the Contribution Agreement, (4) that the
value of the assets contributed in the Contribution Transaction is fixed
and that fluctuations in the market prices of the stock of entities that
are public companies in which the Contributed Subsidiaries hold
investments prior to the closing of the Contribution Transaction could
affect the value of the Contributed Subsidiaries, (5) the adoption by
Liberty of a general policy that the Company will be the primary (but not
exclusive) vehicle for the pursuit of corporate opportunities relating to
interactive programming or interactive content, subject to certain
exclusions and limitations, (6) Liberty's agreement to use its reasonable
efforts to make available to the Company for its Interactive Video
Services the benefits of "preferred vendor status" to which Liberty is
entitled under the Access Agreement, (7) Liberty's agreement to fund
interim investments, if any, to be made by Liberty Digital prior to the
closing of the Contribution Transaction that will become part of the
assets contributed to the Company as part of the Contribution
Transaction, (8) the agreement of Liberty to cause its wholly owned
subsidiaries to vote the Voting Securities held by them in favor of the
Contribution Transaction, and (9) the relatively limited number of
conditions to the completion of the Contribution Transaction, which
provides increased certainty that the Contribution Transaction will be
consummated;
- the terms and conditions of the Series B preferred stock to be issued by
the Company in connection with the Contribution Agreement including the
fact that the Series B preferred stock is convertible at a rate of $5.825
per share;
- the terms and conditions of the Deferred Compensation and Stock
Appreciation Rights Plan to be adopted by the Company in connection with
the Contribution Transaction;
- the opinion of Morgan Stanley (a copy of which is attached as Appendix II
to this proxy statement) described under the heading "-- Opinion of
Morgan Stanley";
- that Messrs. Masters and Ravenel have joined the Company as President and
Chief Executive Officer and as a director and Executive Vice President,
respectively;
- the business rationale for the Contribution Transaction, including the
ability of the Company to broaden its business in interactive programming
and content and interactive television areas;
- the increase in the trading prices of the Series A common stock after the
announcement of Liberty's proposal for the Contribution Transaction;
- the expected treatment of the Contribution Transaction for federal income
tax purposes; and
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<PAGE> 39
- the interests of officers and directors of Liberty, the Contributing
Parties and TCI Music in the Contribution Transaction.
The TCI Music Board also considered the following potential adverse
consequences of the Contribution Transaction:
- the matters discussed under "-- Risk Factors in Connection with the
Contribution Transaction";
- the inherent risks in Internet investments, including the risk that some
or all of the companies in which the Company will hold investments may
fail to achieve their business plans and the volatility of the market
price of stock of those companies that are public companies; and
- that shareholders will not have dissenters' rights in connection with the
Contribution Transaction.
The foregoing discussion of the information and factors considered by the
Board is not intended to be exhaustive, but it does include the factors that the
Board considered material to its decision to approve the Contribution
Transaction. In view of the factors considered in connection with its
evaluation, the Board did not find it practicable to and did not quantify or
attempt to assign relative weights to the specific factors considered in
reaching its decision. In addition, individual members of the Board may have
given different weight to different factors.
THE PROPOSAL TO APPROVE THE CONTRIBUTION TRANSACTION IS CONTINGENT ON THE
APPROVAL BY THE SHAREHOLDERS OF THE PROPOSALS TO APPROVE THE AMENDMENTS TO THE
COMPANY'S CERTIFICATE OF INCORPORATION AND THE DEFERRED COMPENSATION AND STOCK
APPRECIATION RIGHTS PLAN.
RECOMMENDATION OF THE TCI MUSIC BOARD
FOR THE REASONS DISCUSSED ABOVE, THE TCI MUSIC BOARD HAS UNANIMOUSLY
APPROVED AND RECOMMENDS THAT THE SHAREHOLDERS VOTE "FOR" APPROVAL OF THE
CONTRIBUTION TRANSACTION.
OPINION OF MORGAN STANLEY
Pursuant to a letter agreement dated as of April 9, 1999 (the "Engagement
Letter"), Morgan Stanley was engaged by TCI Music to review the Contribution
Transaction and provide an opinion as to the fairness of the Contribution
Transaction, considered as a whole, from a financial point of view, to the
holders of Series A common stock and the then outstanding Series A convertible
preferred stock, other than Liberty and its affiliates. Morgan Stanley was
selected by the Board to provide a fairness opinion based on Morgan Stanley's
qualifications and expertise in the industries considered relevant for this
purpose.
At the meeting of the TCI Music Board on April 23, 1999, Morgan Stanley
rendered its oral opinion, that as of April 23, 1999, based upon and subject to
the various considerations set forth in the opinion, the Contribution
Transaction, considered as a whole, was fair from a financial point of view to
the holders of Series A common stock and Series A preferred stock, other than
Liberty and its affiliates. At the meeting of the TCI Music Board on June 22,
1999, Morgan Stanley advised the Board that, based on information available to
Morgan Stanley as of June 21, 1999, the changes in the terms of the Contribution
Agreement, the proposed adoption by the Company of the Deferred Compensation and
Stock Appreciation Rights Plan and changes to the value of the assets being
contributed since April 23, 1999 would not prevent it from delivering its
written opinion, as of the date of this proxy statement, that the Contribution
Transaction, considered as a whole, is fair from a financial point of view to
the holders of Series A common stock (other than Liberty and its affiliates). On
July 30, 1999, Morgan Stanley delivered its written opinion to the effect that,
as of July 30, 1999, based upon and subject to the various considerations set
forth in the opinion, the Contribution Transaction, considered as a whole, was
fair from a financial point of view to the holders of Series A common stock
other than Liberty and its affiliates.
THE FULL TEXT OF MORGAN STANLEY'S WRITTEN OPINION DATED JULY 30, 1999,
WHICH SETS FORTH, AMONG OTHER THINGS, THE ASSUMPTIONS MADE, PROCEDURES FOLLOWED,
MATTERS CONSIDERED AND THE LIMITS OF THE REVIEW
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<PAGE> 40
UNDERTAKEN, IS ATTACHED AS APPENDIX II TO THIS PROXY STATEMENT AND IS
INCORPORATED HEREIN BY REFERENCE. HOLDERS OF SERIES A COMMON STOCK ARE URGED TO,
AND SHOULD, READ THE OPINION CAREFULLY AND IN ITS ENTIRETY. MORGAN STANLEY'S
OPINION IS ADDRESSED TO THE TCI MUSIC BOARD AND ADDRESSES ONLY THE FAIRNESS OF
THE CONTRIBUTION TRANSACTION, CONSIDERED AS A WHOLE, FROM A FINANCIAL POINT OF
VIEW TO THE HOLDERS OF SERIES A COMMON STOCK, OTHER THAN LIBERTY AND ITS
AFFILIATES, AND IT DOES NOT ADDRESS ANY OTHER ASPECT OF THE CONTRIBUTION
AGREEMENT NOR DOES IT CONSTITUTE A RECOMMENDATION TO ANY HOLDER OF TCI MUSIC
VOTING SECURITIES AS TO HOW TCI MUSIC'S SHAREHOLDERS SHOULD VOTE AT THE ANNUAL
MEETING. THE SUMMARY OF THE OPINION OF MORGAN STANLEY SET FORTH IN THIS PROXY
STATEMENT IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE FULL TEXT OF ITS
OPINION.
In rendering its opinion, Morgan Stanley, among other things:
- reviewed certain publicly available financial statements and other
information of TCI Music and the entities in which Contributed
Subsidiaries have holdings (as set forth in the Contribution Agreement)
(the "Investee Companies");
- reviewed certain internal financial statements and other financial and
operating data concerning TCI Music prepared by the management of TCI
Music and certain limited information concerning the Investee Companies
provided by Liberty;
- analyzed certain financial projections of TCI Music and Liberty prepared
by the management of TCI Music and Liberty, respectively;
- discussed the past and current operations and financial condition and the
prospects of TCI Music and Liberty with senior executives of TCI Music
and Liberty (including, in the case of TCI Music, TCI Music's anticipated
cash requirements), respectively, and discussed the operations and
prospects of the Investee Companies with senior executives of Liberty;
- reviewed the reported prices and trading activity for Series A common
stock and the publicly traded Investee Companies;
- reviewed the financial terms, to the extent publicly available, of
certain transactions deemed to be relevant;
- reviewed the Contribution Agreement dated April 23, 1999; and
- performed such other analyses as Morgan Stanley deemed appropriate.
In rendering its opinion, Morgan Stanley assumed and relied upon, without
independent verification, the accuracy and completeness of the information
reviewed by it for the purposes of the opinion. With respect to the financial
projections of TCI Music, Morgan Stanley assumed that they had been reasonably
prepared on bases reflecting the best currently available estimates and
judgments of management as to the future financial performance of TCI Music.
Among other things, Morgan Stanley relied upon, without independent
verification, the assessment by management: (1) of Liberty of the underlying
assumptions regarding projected services to be supplied under the rights with
respect to Interactive Video Services under the Access Agreement; and (2) of TCI
Music and Liberty of TCI Music's and the Investee Companies' existing and future
technologies. Morgan Stanley also gave consideration to the existence of the
general policy adopted by Liberty described under the heading "Proposal
1 -- Approval of the Contribution Transaction -- Liberty Policy" set forth in
the Contribution Agreement. Morgan Stanley also noted that, in connection with
the Company's establishment of the Deferred Compensation and Stock Appreciation
Rights Plan, the number of shares of Series B common stock to be issued by the
Company as a part of the Contribution Transaction was decreased by approximately
20 million shares.
Morgan Stanley did not make any independent appraisal of the assets or
liabilities or technology of TCI Music, Liberty, the Contributed Subsidiaries or
the Investee Companies, nor was Morgan Stanley furnished with any such
appraisals. Morgan Stanley assumed that the Contributed Subsidiaries had no
assets other than those set forth in Schedule 1 to the Contribution Agreement
and no liabilities other than the express contractual obligations of the
Contributed Subsidiaries under the agreements set forth on such Schedule.
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<PAGE> 41
Furthermore, Morgan Stanley depended on TCI Music for its valuation of the KPCB
Java Fund, L.P. and its valuation of the MTVN Partnership, and relied on TCI
Music in its assessment of the tax treatment of the Contribution Transaction
contemplated by the Contribution Agreement. The Morgan Stanley opinion is
necessarily based on economic, market and other conditions as in effect on, and
the information made available to Morgan Stanley as of, July 30, 1999. In
addition, the Morgan Stanley opinion does not address any specific aspect of the
Contribution Transaction, but, instead, addresses the fairness, from a financial
point of view, of the Contribution Transaction considered as a whole.
The following is a brief summary of certain analyses performed by Morgan
Stanley in connection with its oral opinion and the preparation of its opinion
letter dated July 30, 1999. Certain of these summaries of financial analyses
include information presented in tabular format. In order to fully understand
the financial analyses used by Morgan Stanley, the tables must be read together
with the text of each summary. The tables alone do not constitute a complete
description of the financial analyses.
Historical Common Stock Performance. Morgan Stanley's analysis of Series A
common stock performance consisted of an historical analysis of closing prices
and trading volumes over the period from April 5, 1998 to July 30, 1999. During
that period, based on closing prices on the Nasdaq SmallCap National Market,
Series A common stock achieved a high closing price of $52.00 on April 26, 1999
and a low closing price of $2.625 on September 17, 1998. Morgan Stanley noted
that during the period from July 11, 1997 to August 13, 1998, all of the Series
A common stock traded with a right, originally issued in connection with TCI
Music's acquisition of DMX, to require TCI to purchase each share of Series A
common stock for $8.00 per share. Additionally, Morgan Stanley noted that for
the period during the 30 business days ending April 5, 1999 the average closing
price of Series A common stock was $4.66.
Morgan Stanley's analysis of the publicly traded Investee Companies,
specifically, Priceline.com, iVillage Inc., SportsLine USA, Inc., ACTV, Inc.,
drugstore.com and Quokka Sports consisted of an analysis of the current trading
price of the common shares of the respective entity as well as an analysis over
a specified date range of the average price of the respective entity's common
shares based on (i) the price below which 25 percent of the volume of shares
traded during the specified period (the "25th Trading Percentile") and (ii) the
price below which 75 percent of the volume of shares traded during the specified
period (the "75th Trading Percentile"). The chart below details the results of
this analysis.
<TABLE>
<CAPTION>
EQUITY MARKET 25TH TRADING 75TH TRADING
RELEVANT DATE VALUE 7/30/99 PERCENTILE PERCENTILE MEAN
COMPANY RANGE ($MM) ($MM) ($MM) ($MM)
- ------- ------------------ ------------- ------------ ------------ ---------
<S> <C> <C> <C> <C> <C>
SportsLine USA.......... 11/13/97 - 7/30/99 $ 513.0 $ 417.8 $ 799.1 $ 576.7
iVillage................ 3/19/99 - 7/30/99 $ 956.8 $ 1,261.9 $ 2,233,4 $ 1,484.0
ACTV.................... 1/1/98 - 7/30/99 $ 514.1 $ 192.7 $ 591.6 $ 432.8
Priceline.com........... 3/30/99 - 7/30/99 $10,754.1 $12,151.3 $18,022.0 $13,642.5
drugstore.com........... 7/27/99 - 7/30/99 $ 2,133.2 $ 2,202.0 $ 2,525.1 $ 2,286.8
Quokka Sports........... 7/27/99 - 7/30/99 $ 455.7 $ 578.4 $ 578.4 $ 537.5
</TABLE>
In addition, Morgan Stanley valued the currently outstanding warrants to
purchase common stock of ACTV being contributed as part of the Contributed
Subsidiaries using the Black/Scholes option pricing model.
Peer Group Comparison. In analyzing the value of TCI Music's indirect
wholly owned subsidiary, SonicNet, Morgan Stanley analyzed certain publicly
available financial information of SportsLine USA, Inc., CDnow, Inc. and CNET,
Inc. The following table represents the aggregate value of these companies (as
determined by the mean of the current market value as of July 30, 1999 and the
25th and 75th trading percentiles over the indicated date range plus debt, less
cash) as a multiple of 1999 expected ("1999E") revenues and current number of
registered users of their respective Internet sites. The 1999E revenue for CDnow
was excluded from the Morgan Stanley analysis due to the lack of comparability
of its revenue source
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to that of SonicNet because CDnow's revenue is derived from retail sales while
SonicNet's revenue is derived from advertising and sponsorships.
<TABLE>
<CAPTION>
AGGREGATE 1999E AGG. VALUE/ AGG. VALUE/
DATE VALUE REVENUE REGISTERED 1999E REGISTERED
COMPANY RANGE ($MM) ($MM) USERS REVENUE USERS
- ------- ------------------ --------- ------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
SportsLine USA....... 11/13/97 - 7/30/99 $ 529.1 $ 56.8 3,712,000 9.3x $142.5
CDnow................ 2/10/98 - 7/30/99 $ 518.7 NA 4,520,000 NA $114.8
CNET................. 7/2/96 - 7/30/99 $2,101.8 $ 86.4 8,326,000 24.3x $252.4
</TABLE>
In analyzing the value of the privately held Investee Companies, iBEAM,
Inc., Interactive Pictures Corporation, Total Entertainment Network, The
Lightspan Partnership, Inc., and Academic Systems Corporation, Morgan Stanley
analyzed certain publicly available financial information of comparable
companies. The following table displays the comparable companies used in the
valuation and the aggregate value of such companies (as determined by the
current market value as of July 30, 1999 plus debt, less cash) as a multiple of
revenues.
<TABLE>
<CAPTION>
AGGREGATE
VALUE RELEVANT AGG.
INVESTEE COMPARABLE 7/30/99 RELEVANT STATISTIC VALUE/
COMPANY COMPANY ($MM) EXPECTED REVENUE ($MM) REVENUE
- -------- ----------------------- --------- ---------------- --------- -------
<S> <C> <C> <C> <C> <C>
iBEAM, Inc.............. PSINet, Inc. $4,378.5 2000E Revenue $730.0 6.0x
EarthLink Network, Inc. $1,814.3 2000E Revenue $569.5 3.2x
Interactive Pictures
Corporation........... 24/7 Media, Inc. $ 614.5 1999E Revenue $ 65.2 9.4x
NetGravity, Inc. $ 374.0 1999E Revenue $ 25.1 14.9x
Total Entertainment
Network............... Lycos, Inc. $3,488.4 1999E Revenue $159.8 21.8x
InfoSeek Corporation $2,309.8 1999E Revenue $150.2 15.4x
The Lightspan
Partnership, Inc...... Apollo Group, Inc. $1,910.5 1999E Revenue $590.4 3.2x
Academic Systems
Corporation........... Apollo Group, Inc. $1,910.5 1999E Revenue $590.4 3.2x
</TABLE>
No company utilized in the peer group comparison analysis as a comparison
is identical to SonicNet or any of the privately held Investee Companies. In
evaluating the peer groups, Morgan Stanley made judgments and assumptions with
regard to industry performance, general business, economic, market and financial
conditions and other matters, many of which are beyond the control of Liberty or
TCI Music, such as the impact of competition on Liberty or TCI Music or the
industry generally, industry growth and the absence of any material adverse
change in the financial condition and prospects of TCI Music or the Investee
Companies or the industry or in the financial markets in general. Mathematical
analysis (such as determining the average or median) is not in itself a
meaningful method of using peer group data. Morgan Stanley obtained 1999 and
2000 revenue estimates from publicly available research reports and obtained
registered user information from Media Metrix, Inc.
Analysis of Selected Precedent Transactions. In valuing DMX, LLC and The
Box Worldwide, Inc., subsidiaries of TCI Music, and The Lightspan Partnership,
Inc. and Academic Systems Corporation, both privately held Investee Companies,
Morgan Stanley analyzed selected precedent transactions and compared certain
statistics for the transactions to the relevant financial statistics for the
subsidiary or Investee Company being valued.
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<PAGE> 43
The following table presents the implied aggregate values of the target
companies in selected precedent transactions deemed to be relevant by Morgan
Stanley in analyzing the value of DMX, LLC as a multiple of last twelve months
("LTM") revenue and LTM earnings before interest, taxes, depreciation and
amortization ("EBITDA").
<TABLE>
<CAPTION>
IMPLIED AGG. AGG.
AGGREGATE LTM LTM VAL./ VAL./
DATE VALUE REVENUE EBITDA LTM LTM
TRANSACTION TARGET/ACQUIROR ANNOUNCED ($MM) ($MM) ($MM) REVENUE EBITDA
- --------------------------- --------- --------- ------- ------ ------- ------
<S> <C> <C> <C> <C> <C> <C>
Muzak/ABRY Broadcast Partners....... Feb. 1999 $349.2 $99.7 $20.7 3.5x 16.9x
DMX/TCI Music....................... June 1997 $114.6 $21.7 ($14.9) 5.3 NA
</TABLE>
The following table presents the implied aggregate values of the target
companies in selected precedent transactions deemed to be relevant by Morgan
Stanley in analyzing the value of The Box Worldwide, Inc., as a multiple of LTM
revenue, for instances in which such information is available, and number of
subscribers.
<TABLE>
<CAPTION>
IMPLIED AGG. AGG.
AGGREGATE LTM NUMBER OF VAL./ VAL./
DATE VALUE REVENUE SUBS. LTM NUMBER
TRANSACTION TARGET/ACQUIROR ANNOUNCED ($MM) ($MM) (MM) REVENUE OF SUBS.
- --------------------------- ---------- --------- ------- --------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Speedvision, Outdoor Life/Fox
Liberty............................ March 1998 $200.0 NA 22.0 NA $ 9.09
TV Food Network/E.W. Scripps Co. .... Sept. 1997 $223.0 NA 25.8 NA $ 8.64
ZDTV/Paul Allen, Vulcan Ventures..... Nov. 1998 $164.0 NA 9.0 NA $18.22
The Box Worldwide/TCI Music.......... Dec. 1997 $ 36.1 $20.3 7.4 1.8x $ 4.89
Kaleidoscope/Liberty................. 1998 $ 23.9 NA 4.6 NA $ 5.22
</TABLE>
In analyzing the value of The Lightspan Partnership, Inc. and Academic
Systems Corporation, both privately held Investee Companies, Morgan Stanley
analyzed the implied aggregate value as a multiple of 1999 expected revenue of
The Learning Company based on its pending acquisition by Mattel announced on
December 11, 1998. This analysis yielded implied aggregate value / 1999 expected
revenues of 3.9x.
No transaction utilized as a comparison in the precedent transactions
analysis is identical to any of the transactions contemplated by the
Contribution Agreement. In evaluating the precedent transactions, Morgan Stanley
made judgments and assumptions regarding industry performance, general business,
economic, market and financial conditions and other matters, many of which are
beyond the control of TCI Music or Liberty, such as the impact of competition on
TCI Music or the Investee Companies or the industry generally, industry growth
and the absence of any material adverse change in the financial condition and
prospects of TCI Music or the Investee Companies or the industry or in the
financial markets in general. Mathematical analysis (such as determining the
average or median) is not in itself a meaningful method of using comparable
transaction data.
Discounted Cash Flow Analysis. Morgan Stanley performed an analysis of the
present value of cash flows for DMX, The Box, and the rights to provide
Interactive Video Services under the Access Agreement as of April 15, 1999. For
DMX, Morgan Stanley's analysis was based on projections provided by TCI Music
and utilized an illustrative Weighted Average Cost of Capital (WACC) of 13% and
an illustrative 2003 EBITDA exit multiple of 15x. For The Box, Morgan Stanley's
analysis was based on projections provided by TCI Music and utilized an
illustrative WACC of 20% and an illustrative 2003 EBITDA exit multiple of 10x.
For the rights to provide Interactive Video Services under the Access Agreement,
Morgan Stanley's analysis was based on projections provided by Liberty and
utilized illustrative WACCs of 30% and 23%, and illustrative 2004 EBITDA exit
multiples of 15x and 10x.
Valuation. As a result of the foregoing analyses, Morgan Stanley arrived at
a range of equity values for TCI Music and the Contributed Subsidiaries, as
indicated in the following table.
<TABLE>
<CAPTION>
LOW HIGH MEAN
COMPANY ($MM) ($MM) ($MM)
- ------- ------ ------ ------
<S> <C> <C> <C>
TCI Music................................................... $237.4 $414.5 $325.9
Contributed Subsidiaries.................................... $656.0 $860.8 $758.4
</TABLE>
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<PAGE> 44
In connection with the review of the Contribution Transaction by the TCI
Music Board, Morgan Stanley performed a variety of financial and comparative
analyses for purposes of its opinion. The summary set forth above does not
purport to be a complete description of the analyses performed by Morgan Stanley
in connection with the Contribution Transaction.
The preparation of a fairness opinion is a complex process and is not
necessarily susceptible to a partial analysis or summary description. In
arriving at its opinion, Morgan Stanley considered the results of all of its
analyses as a whole and did not attribute any particular weight to any
particular analysis or factor considered by it. Furthermore, Morgan Stanley
believes that selecting any portion of Morgan Stanley's analyses, without
considering all analyses, would create an incomplete view of the process
underlying its opinion. In addition, Morgan Stanley may have deemed various
assumptions more or less probable than other assumptions, so that the ranges of
valuations resulting from any particular analysis described above should not be
taken to be Morgan Stanley's view of the actual value of TCI Music or the
Investee Companies.
In performing its analysis, Morgan Stanley made numerous assumptions with
respect to industry performance, general business and economic conditions and
other matters, many of which are beyond the control of TCI Music or Liberty. The
analyses performed by Morgan Stanley are not necessarily indicative of actual
values, which may be significantly more or less favorable than suggested by such
analyses. The analyses were prepared solely as a part of Morgan Stanley's
analysis of the fairness from a financial point of view of the Contribution
Transaction, considered as a whole, to the holders of Series A common, other
than Liberty and its affiliates, and were provided to the TCI Music Board in
connection with the delivery of its opinion. The analyses do not purport to be
appraisals of value or to reflect the prices at which the Contributed
Subsidiaries might actually be sold or the Investee Companies might trade. In
addition, as described above, the opinion of Morgan Stanley was one of the many
factors taken into consideration by the TCI Music Board in making its
determination to approve the Contribution Agreement and the Contribution
Transaction. Morgan Stanley did not participate in the structuring or
negotiation of the Contribution Transaction and, in connection with its opinion,
did not solicit or consider any alternative transactions.
In addition, as described above, Morgan Stanley's opinion and presentation
to the Board was one of the many factors taken into consideration by the Board
in making its determination to approve the Contribution Transaction.
Consequently, the Morgan Stanley analyses summarized above should not be viewed
as determinative of the opinion of the Board with respect to the value of the
Contribution Transaction or of whether the Board would have been willing to
agree to a different consideration. TCI Music does not intend to obtain an
updated opinion with regard to the fairness of the Contribution Transaction from
Morgan Stanley as of the date of the closing of the Contribution Transaction.
Morgan Stanley is an internationally recognized investment banking and
advisory firm. Morgan Stanley, as part of its investment banking business, is
regularly engaged in the valuation of businesses and their securities in
connection with mergers and acquisitions, negotiated underwritings, competitive
biddings, secondary distributions of listed and unlisted securities, private
placements and valuations for corporate, estate and other purposes. Morgan
Stanley may continue to provide investment banking services to Liberty and TCI
Music and their respective affiliates in the future. In the ordinary course of
its trading, brokerage and financing activities, Morgan Stanley and its
affiliates may, at any time, have a long or short position in, and buy and sell
the debt or equity securities and senior loans of TCI Music and Liberty for its
account or the account of its customers. In the past, Morgan Stanley and its
affiliates have provided financing services for Liberty and financial advisory
and financing services for affiliates of Liberty and have received fees for the
rendering of these services.
Pursuant to the Engagement Letter, TCI Music agreed to pay Morgan Stanley a
fee of $500,000 for the rendering of its opinion. TCI Music has also agreed to
reimburse Morgan Stanley for certain expenses incurred in connection with the
services provided by Morgan Stanley. TCI Music has agreed to indemnify Morgan
Stanley and its affiliates, their respective directors, officers, agents and
employees, and each person, if any, controlling Morgan Stanley or any of its
affiliates against certain liabilities and expenses, including liabilities under
the federal securities laws arising out of or in connection with Morgan
Stanley's engagement and any related transactions.
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<PAGE> 45
INTERESTS OF CERTAIN PERSONS IN THE CONTRIBUTION TRANSACTION
In considering the recommendation of the Board with respect to the
Contribution Transaction, shareholders should be aware that certain members of
the Board and of TCI Music's management have certain interests in the
Contribution Transaction that are in addition to or different from the interests
of the shareholders of TCI Music generally.
Certain members of TCI Music's management and its Board are also members of
the management and Board of Directors of Liberty. Robert R. Bennett, a director
of TCI Music, is a director, President and Chief Executive Officer of Liberty.
David B. Koff, a Vice President and director of TCI Music, is a Senior Vice
President of Liberty. Leo J. Hindery, Jr., a director of TCI Music, is also a
director of Liberty and President and Chief Executive Officer of AT&T Broadband,
which will be providing services under the Access Agreement. The directors of
TCI Music have fiduciary obligations under Delaware law to TCI Music and all of
its shareholders. Mr. Bennett and Mr. Hindery also have the fiduciary
obligations to Liberty and to AT&T, as the sole shareholder of Liberty. Mr.
Hindery also has obligations to AT&T Broadband. Mr. Bennett, Mr. Koff and Mr.
Hindery hold options to acquire and/or restricted shares of stock of AT&T
Liberty Media Group Series A common stock, and options to acquire shares of TCI
Music Series A common stock. In addition, Mr. Hindery holds AT&T common stock
and AT&T Class A Liberty Media Group common stock. Lee Masters, Chairman of the
Board, and President and Chief Executive Officer of Liberty Digital, is and
President and Chief Executive Officer of TCI Music. Bruce W. Ravenel, a director
and Executive Vice President of Liberty Digital, is a director and an Executive
Vice President of TCI Music. Liberty Digital will become a wholly owned
subsidiary of the Company as a result of the Contribution Transaction. Thomas
McPartland, Ralph Sorrentino and Alan McGlade exercised a number of options to
purchase shares of Series A common stock and/or sold shares of Series A common
stock in open market transactions after the announcement of Liberty's proposal.
TAX AND ACCOUNTING TREATMENT
The following summary is based on the provisions of the Treasury
Regulations issued pursuant thereto and published rulings and court decisions in
effect as of the date of this proxy statement, all of which are subject to
change. This summary does not take into account possible changes in such laws or
interpretations; such changes may have a retroactive effect and may adversely
affect the discussion in this summary.
The Contribution Transaction has been structured so that it will qualify as
a tax-free exchange under Section 351 and Section 1032 of the Code.
Consequently, the Contribution Transaction should not give rise to any federal
income tax liability for any of the parties to the Contribution Agreement,
except that it is possible that Liberty DMX may recognize gain in connection
with the grant of rights and options to Liberty pursuant to the Deferred
Compensation and Stock Appreciation Rights Plan. Such gain would be the amount
of the fair market value of such rights and options, and would be "deferred
intercompany gain" meaning that it would not be recognized for federal income
tax purposes until the earlier of (1) the date the Company ceases to be part of
the consolidated group or (2) the transfer of the rights and options outside the
consolidated group. Although the parties to the Contribution Agreement believe
that the Contribution Transaction will not give rise to any federal income tax
liability (except as noted above), no tax opinion or ruling will be obtained
with respect to the Contribution Transaction.
The Contribution Transaction will be accounted for as a combination of
entities under common control in a manner similar to a pooling of interests.
NO APPRAISAL RIGHTS
The TCI Music shareholders are not entitled to appraisal or dissenters'
rights under Delaware law in connection with the Contribution Transaction.
NO GOVERNMENTAL APPROVALS
No federal or state regulatory requirements must be complied with or
approval obtained in connection with the Contribution Transaction.
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<PAGE> 46
VOTES REQUIRED FOR APPROVAL
Under the Nasdaq Stock Market Rules, approval of the Company's shareholders
is required for any transaction or series of transactions in which a substantial
shareholder of the Company has a 5% or greater interest, directly or indirectly,
in the assets to be acquired or the consideration to be paid in a transaction or
series of transactions in which 5% or more of the voting stock of the Company is
to be issued. To be adopted, the Contribution Transaction must be approved by
the affirmative vote of a majority of the combined voting power of the Voting
Securities represented in person or by proxy and entitled to vote at the annual
meeting, voting together as a single class.
Affiliates of Liberty beneficially own approximately 86.3% of the
outstanding shares of Voting Securities and approximately 98.2% of the voting
power of the outstanding Voting Securities. Liberty has agreed to cause its
wholly owned subsidiaries to vote all shares of Voting Securities beneficially
owned by them "FOR" approval of the Contribution Transaction at the annual
meeting, thus assuring its approval at the annual meeting. Upon completion of
the transactions contemplated by the Contribution Agreement, Liberty will
beneficially own approximately 50.3% of the outstanding shares of Series A
common stock, 100% of the outstanding shares of Series B common stock, and 100%
of the outstanding shares of Series B preferred stock.
THE PROPOSAL TO APPROVE THE CONTRIBUTION TRANSACTION IS CONTINGENT ON THE
APPROVAL BY THE SHAREHOLDERS OF THE PROPOSALS TO APPROVE THE AMENDMENTS TO THE
CERTIFICATE OF INCORPORATION AND THE DEFERRED COMPENSATION STOCK APPRECIATION
RIGHTS PLAN.
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<PAGE> 47
DESCRIPTION OF THE CONTRIBUTION AGREEMENT
AND RELATED AGREEMENTS
THE CONTRIBUTION AGREEMENT
The description of the Contribution Agreement set forth below describes the
material terms but does not purport to describe all the terms of the
Contribution Agreement. The full text of the Contribution Agreement is attached
as Appendix I to this proxy statement and is incorporated by reference herein.
All shareholders are urged to read the Contribution Agreement in its entirety.
Pre-Closing Transfers. The Contribution Agreement provides that immediately
prior to the closing of the Contribution Transaction that Liberty and the
Contributing Parties will engage in a series of transactions as the result of
which Liberty DMX will: (1) hold rights with respect to Interactive Video
Services under the Access Agreement, (2) hold all of the outstanding capital
stock of the Contributed Subsidiaries, (3) hold the notes payable of TCI Music
and the Contributed Subsidiaries (which is currently payable to Liberty or one
or more of its affiliates) and any note or instrument representing advances made
during the Interim Period and cash to be contributed in the Contribution
Transaction, and (4) own all of the outstanding shares of capital stock of
subsidiaries that were formed to hold investments made after April 23, 1999 and
before the closing of the Contribution Transaction that will be included in the
assets to be contributed to TCI Music in the Contribution Transaction (the
"Additional Contributed Subsidiaries"). The following wholly owned subsidiaries
constitute the Contributed Subsidiaries or Additional Contributed Subsidiaries
as of the date of this proxy statement: LMC Digital, Inc., Liberty Digital LLC,
Liberty DS, Inc., Liberty IB, Inc., Liberty IP, Inc., Liberty TE, Inc., Liberty
PL, Inc., Liberty QS, Inc., Liberty Java, Inc., Liberty KI, Inc., Liberty Online
Health K1 Holdings, Inc., Liberty Online Health RN Holdings, Inc., Liberty
Village, Inc., Liberty HG, Inc., Liberty IATV Events, Inc., Liberty IATV, Inc.,
Liberty OnLine Sports Holdings, Inc., Liberty Academic Systems Holdings, Inc.,
Liberty On-Line Village Holdings, Inc., Liberty MedScholar, Inc., and Liberty
Lightspan Holdings, Inc.
Closing Contribution. The Contribution Agreement provides that at the
closing of the Contribution Transaction:
- Liberty DMX will contribute:
- all of its rights, benefits and obligations in, to and under paragraph 4
of Schedule 7.14 of the Access Agreement ("paragraph 4") with respect to
cable television systems in the United States and Canada (relating to
the provision of Interactive Video Services);
- all of the shares of capital stock of each of the Contributed
Subsidiaries and the Additional Contributed Subsidiaries to the Company
free and clear of all liens; and
- notes payable of the Contributed Subsidiaries, the Additional
Contributed Subsidiaries and TCI Music to Liberty or one or more wholly
owned subsidiaries of Liberty and cash in an amount equal to the
positive difference between (1) $150 million and (2) the outstanding
notes payable of the Contributed Subsidiaries, the Additional
Contributed Subsidiaries and TCI Music to Liberty or one or more wholly
owned subsidiaries of Liberty;
- TCI Music and Liberty DMX will enter into an assignment and assumption
agreement pursuant to which Liberty DMX will assign its rights, benefits
and obligations under paragraph 4 of the Access Agreement with respect to
cable television systems in the United States and Canada (relating to the
provision of Interactive Video Services) and TCI Music will accept and
assume such rights, benefits and obligations and agree to be bound by the
provisions of paragraph 4 of the Access Agreement; and TCI Music will
enter into an assumption agreement pursuant to which TCI Music will
assume and after the closing, pay, discharge and perform due the
obligations and liabilities of the Contributing Parties that relate
solely to the Contributed Subsidiaries that are set forth on a schedule
to the Contribution Agreement (as such schedule may be modified to
reflect Additional Contributed Subsidiaries or additional obligations
associated with any Interim Investment);
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<PAGE> 48
- In consideration of the foregoing, TCI Music will issue and deliver to
Liberty DMX, (1) 109,450,167 shares of Series B common stock; and (2)
150,000 shares of Series B preferred stock having an initial aggregate
liquidation preference of $150 million.
Closing. The Contribution Agreement will be consummated and the closing
will occur as soon as practicable after all requisite shareholder approvals are
obtained and all other closing conditions are satisfied or waived. It is
anticipated by the Company that the consummation of the transactions
contemplated by the Contribution Agreement will occur as soon as practicable
after the annual meeting.
Conditions to Completion of the Contribution Transaction. The Company and
the Contributing Parties are not obligated to consummate the transactions
contemplated by the Contribution Agreement unless (1) the Company's shareholders
approve the Contribution Transaction and the Certificate of Amendment to the
Certificate of Incorporation is effective, (2) the Certificate of Designations
for the Series B preferred stock has been filed with the Secretary of State of
the State of Delaware and is effective, (3) there is no judicial, regulatory or
other legal prohibition preventing the completion of the Contribution
Transaction in effect, (4) the inclusion of the fairness opinion of Morgan
Stanley in the Proxy Statement has been approved by Morgan Stanley and such firm
shall not have withdrawn such opinion prior to the closing date and (5) the
documents and instruments and agreement to be executed and delivered pursuant to
the Contribution Agreement have been executed and delivered by the parties
thereto.
The obligations of the Company to consummate the transactions contemplated
by the Contribution Agreement are subject to the following conditions:
- the accuracy in all material respects of Liberty's and the Contributing
Subsidiaries' representations and warranties in the Contribution
Agreement when made and as of the date of the closing;
- the Contributing Parties' performance in all material respects of their
respective agreements to be performed by them at or before the closing;
- receipt of certain consents of persons whose consents are required in
connection with the Contribution Agreement; and
- Liberty's Board having adopted the policy with respect to the Company
being Liberty's primary (but not exclusive) vehicle for Liberty's pursuit
of Interactive Programming Opportunities and such policy is in effect on
the closing date.
The Company may, at its option, waive any of such conditions.
The obligations of the Contributing Parties to consummate the transactions
contemplated by the Contribution Agreement are subject to the following
conditions:
- the accuracy in all material respects of the Company's representations
and warranties in the Contribution Agreement when made and as of the date
of the closing as though such representations and warranties were made as
of such date;
- the Company's performance in all material respects of all its agreements
under the Contribution Agreement at or before the closing; and
- receipt of certain consents of persons whose consents are required in
connection with the Contribution Agreement.
The Contributing Parties may, at their option, waive any of such conditions.
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Representations and Warranties. The Contribution Agreement contains various
representations and warranties customary for transactions similar to the
Contribution Transaction. The Contribution Transaction includes customary
representations and warranties by each of the Contributing Parties to the
Company as to:
- corporate organization, standing and power of Liberty and the
Contributing Parties;
- power and authority of the Contributing Parties to execute the
Contribution Agreement and the other documents and agreements to be
entered into in connection with the Contribution Agreement, subject to
certain consents and shareholder approval; and the absence of conflicts
between the terms of the Contribution Agreement, the other documents and
agreements to be entered into in connection with the Contribution
Agreement and the charter documents of the Contributing Parties;
- absence of certain legal proceeding that would have a material adverse
effect on the Contributing Parties or the Contributed Subsidiaries or on
the ability of the Contributing Parties to consummate the transaction
contemplated by the Contribution Agreement;
- brokers and finders employed by the Contributing Parties;
- provision of access to information concerning the transactions
contemplated by the Contribution Agreement and the opportunity make
inquiries and obtain information;
- reliance by the Contributing Parties on their own tax, legal and
financial advisers;
The Contribution Agreement includes customary representations and
warranties by Liberty as to:
- the due execution, binding nature and enforceability of paragraph 4 of
the Access Agreement; absence of actions pending and absence of a basis
for actions relating to the Access Agreement; and vesting of the rights,
benefits and obligations under paragraph 4 of the Access Agreement in the
Company;
The Contribution Agreement includes customary representations and
warranties by Liberty DMX as to:
- title to the equity interests in the Contributed Subsidiaries and absence
of rights to acquire interests in or rights with respect to the equity
interests of the Contributed Subsidiaries;
- with respect to the Contributed Subsidiaries:
- capitalization of the Contributed Subsidiaries;
- identity of and title to the assets held by the Contributed
Subsidiaries;
- liabilities of the Contributed Subsidiaries; and conduct of business,
disposition of assets of Contributed Subsidiaries and absence of
material adverse changes;
- compliance with certain laws and regulations; and
- investment intent in acquiring the Series B common stock and Series B
preferred stock under the Contribution Agreement.
The Contribution Agreement also contains customary representations and
warranties by the Company as to:
- corporate organization, standing and power of the Company;
- power and authority of the Company to execute the Contribution Agreement
and the other documents and agreements to be entered into connection with
the Contribution Agreement, subject to certain consents, including
consent of shareholders; and the absence of conflicts between the terms
of the Contribution Agreement, and the other documents and agreements to
be entered into in connection with the Contribution Agreement and the
charter documents of the Contributing Parties;
- authorization and validity of the shares of Series B common stock and
Series B preferred stock to be issued pursuant to the Contribution
Agreement;
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<PAGE> 50
- investment intent in acquiring the shares of capital stock of the
Contributed Subsidiaries;
- capitalization of the Company;
- absence of certain material adverse changes;
- brokers and finders employed by the Company;
- fairness opinion delivered by Morgan Stanley;
- compliance with certain laws and regulations;
- provision of access to information to the Company by the Contributing
Parties;
- approval by the TCI Music Board and submission for shareholder approval
of the transactions contemplated by the Contribution Agreement, including
the issuance of the shares of Series B common stock and Series B
preferred stock, the proposed amendments to TCI Music's Certificate of
Incorporation; and
- authorization and validity of the Series B preferred stock to be issued
under the Contribution Agreement; reservation of shares of Series B
common stock for issuance upon conversion of the Series B preferred
stock.
Additional Covenants and Agreements. Pursuant to the Contribution Agreement
Liberty has agreed:
- to cause its controlled affiliates that hold shares of TCI Music Voting
Securities to vote all shares held by them in favor of approval of the
Contribution Transaction and the transactions contemplated by the
Contribution Agreement, and the amendments of the Certificate of
Incorporation, and the election of the nominees for director at the
annual meeting; and
- as long as it beneficially owns a majority of the voting power of the
outstanding shares of stock having the right to vote that it will use its
commercially reasonable best efforts to make available to the Company the
rights and benefits to which Liberty and its controlled affiliates are
entitled pursuant to paragraph 1 of Schedule 7.14 with respect to TCI
Music's offering of Interactive Video Services under paragraph 4 of the
Access Agreement.
Each of the Contributing Parties has agreed, except to the extent permitted
by the Contribution Agreement, to transfer to each Contributed Subsidiary prior
to the closing the assets attributed to such Contributed Subsidiary in the
Contribution Agreement. The Contributing Parties also agreed that prior to the
closing they will not and will not permit any Contributed Subsidiary to sell or
dispose of any of the equity interests they hold.
In addition, during the period from April 7, 1999 until the closing (the
"interim period"), Liberty or its controlled affiliates may be offered
Interactive Programming Opportunities ("Interim Opportunities") and the
Contributed Subsidiaries may be offered the right to acquire additional
ownership interests in entities in which they currently hold equity interests
("Additional Ownership Interests"). If Interim Opportunities arise during the
interim period, Liberty may make such Interim Opportunities available to TCI
Music for purposes of the Liberty policy by making such Interim Opportunity
available to Liberty DMX and if TCI Music requests that Liberty proceed and make
an investment resulting from such Interim Opportunity such investment will be
made by Liberty DMX (an "Interim Investment"). If a Contributed Subsidiary is
offered the right to acquire an Additional Ownership Interest, Liberty Digital
may determine to cause such Contributed Subsidiary to accept such offer and
acquire such Additional Ownership Interest and such Interim Opportunities and
Additional Ownership Interests will be included in the assets contributed to the
Company at the closing of the Contribution Transaction. Subject to the
limitations set forth in the next sentence, Liberty will advance the funds
necessary to make any Interim Investment or acquire an Additional Ownership
Interest. The Contributed Subsidiaries and the Additional Contributed
Subsidiaries may not invest more than $35 million for Interim Opportunities and
Additional Ownership Interests, during the interim period without the consent of
TCI Music; provided however that Liberty will not be required to advance more
than $85 million in connection with any such additional investments.
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<PAGE> 51
The parties have agreed to operate their businesses in the ordinary course
consistent with past practices and use their best efforts to keep available the
services of its employees and to preserve any beneficiary business relationship
with customers, suppliers and others having business dealings with them. The
parties have also agreed to use commercially reasonable efforts to obtain
consents of third parties required to consummate the transactions contemplated
by the Contribution Agreement and to consummate the Contribution Transaction.
The parties also agreed to use reasonable efforts to cause the Contribution
Transaction to constitute a tax-free exchange under Section 351 of the Code.
Under the Contribution Agreement, the Company agreed to adopt the Deferred
Compensation and Stock Appreciation Rights Plan and enter into agreements with
Messrs. Masters and Ravenel upon the terms set forth in a Schedule to the
Contribution Agreement.
Pursuant to the Contribution Agreement, the Company agreed, to the extent
such rights and benefits are made available to it, that it shall fulfill all
obligations of Liberty under paragraph 4 of the Access Agreement (relating to
the provision of Interactive Video Services).
Termination; Effect of Termination. The Contribution Agreement may be
terminated by mutual consent of TCI Music and Liberty or by either the Company
on the one hand and Liberty on the other hand if the Contribution Transaction
has not been consummated before December 31, 1999; provided, however, that the
party seeking to terminate did not fulfill any obligation causing the
Contribution Agreement not to be consummated by that date; (b) if there is a
material breach of any representation, warranty, covenant or agreement on the
part of the other party to the Contribution Agreement and the breach has not
been cured within 15 business days after written notice thereof shall have been
received by the party alleged to be in breach; (c) a court of competent
jurisdiction or governmental entity enters and order, decree or ruling or takes
other action which prevents the consummation of the Contribution Transaction and
such order, decree, ruling or other action shall have become final and
nonappealable; or (d) if the Contribution Transaction is not approved by the
requisite vote of the shareholders of the Company on or prior to December 31,
1999. The Contribution Agreement generally provides that in the event of
termination of the Contribution Agreement, no party will have any liability or
further obligation to any other party to the Contribution Agreement, except with
respect to liabilities for breach of a party's representations and warranties
and covenants in the Contribution Agreement and the indemnification provisions
described below.
Indemnification. Under the Contribution Agreement, the Contributing Parties
have agreed to indemnify the Company with respect to certain liabilities and
losses arising out of breaches of covenants and representations and warranties
made by the Contributing Parties in the Contribution Agreement and in any other
agreement entered into in connection with the Contribution Agreement to which it
is a party, provided that the amount of such liabilities and losses exceeds,
individually or in the aggregate, $1,000,000, in which case Liberty and the
Contributing Parties will be liable for the full amount of all such losses up to
a maximum of $200,000,000.
Under the Contribution Agreement the Company has agreed to indemnify
Liberty and the Contributing Parties with respect to certain liabilities and
losses arising out of breaches of covenants and representations and warranties
made by the Company in the Contribution Agreement and in any other agreement
entered into in connection with the Contribution Agreement to which it is a
party, provided that the amount of such losses exceeds, individually or in the
aggregate, $1,000,000, in which case the Company will be liable for the full
amount of all such losses up to a maximum $200,000,000.
SERIES B PREFERRED STOCK
Liquidation Preference. The liquidation preference of each share of the
Series B preferred stock as of any date of determination is equal to the sum of
(a) the stated value per share of $1,000, plus (b) an amount equal to all
dividends accrued on such share which have been added to and remain a part of
the liquidation preference as of such date, plus (c) for purposes of the
liquidation, redemption and conversion provisions of the Series B preferred
stock, an amount equal to all unpaid dividends accrued on the sum of the amounts
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<PAGE> 52
specified in clauses (a) and (b) above during the period from and including the
immediately preceding dividend payment date to but excluding the date in
question.
Dividends. The holders of Series B preferred stock are entitled to receive
cumulative dividends, when and as declared by the TCI Music Board out of
unrestricted funds legally available for that purpose, in preference to
dividends on junior securities, including the common stock. Dividends accrue on
the Series B preferred stock on a daily basis at the rate of 5% per annum of the
liquidation preference per share, whether or not such dividends are declared or
funds are available for payment of dividends. Accrued dividends are payable
quarterly in cash. Dividends not paid on any dividend payment date are added to
the liquidation preference on such date and remain a part of the liquidation
preference until such dividends are paid. Upon the occurrence of any event
described under "Default" below, the rate per annum at which dividends will
accrue will increase to 7% per annum. Accrued dividends not paid as provided
above on any dividend payment date accumulate and such accumulated unpaid
dividends may be declared and paid at any time without reference to any regular
dividend payment date, to holders of record of Series B preferred stock as of a
special record date fixed by the Board.
Subject to certain specified exceptions, TCI Music is prohibited from
paying dividends on any parity securities or any junior securities (including
common stock) during any period in which TCI Music is in arrears with respect to
payment of dividends on Series B preferred stock.
Liquidation. Upon any liquidation, dissolution or winding up of TCI Music,
the holders of Series B preferred stock are entitled to receive from the assets
of TCI Music available for distribution to stockholders an amount in cash per
share equal to the liquidation preference of a share of Series B preferred
stock, after payment is made on any senior securities and before any
distribution or payment is made on any junior securities, which payment will be
made ratably among the holders of Series B preferred stock and the holders of
any parity securities. The holders of Series B preferred stock will be entitled
to no other or further distribution of or participation in the remaining assets
of TCI Music after receiving the liquidation preference per share.
Conversion. Shares of Series B preferred stock are convertible into Series
B common stock at the initial conversion rate of 171.674 fully paid and
non-assessable shares of Series B common stock for each share of Series B
preferred stock, which conversion rate was determined by dividing the stated
value of a share of Series B preferred stock by $5.825. If on the conversion
date for a share of Series B preferred stock the liquidation preference of such
share is greater than its stated value, then an additional number of shares of
Series B common stock or units of securities or other assets will be issued with
respect to the amount of such difference. The number of additional shares or
units to be issued will be determined by dividing the amount of the difference
between the liquidation preference and the stated value by the quotient obtained
by dividing the stated value of such share by the conversion rate then in
effect. The conversion rate is subject to adjustment upon certain events
specified in the certificate of designations establishing the Series B preferred
stock.
Subject to the provisions described in the immediately following paragraph,
if the holders of Series B preferred stock would be entitled to receive upon
conversion of such Series B preferred stock any TCI Music capital stock that is
redeemable or exchangeable at the election of TCI Music ("Redeemable Capital
Stock"), and all of the outstanding shares or other units of the Redeemable
Capital Stock are redeemed or exchanged, then after such event (a "Redemption
Event"), the holders of Series B preferred stock will be entitled to receive
upon conversion of such shares, in lieu of shares of the Redeemable Capital
Stock, the kind and amount of shares of stock and other securities and property
receivable upon the Redemption Event by a holder of the number of shares or
units of Redeemable Capital Stock into which such shares of Series B preferred
stock could have been converted immediately prior to the effectiveness of the
Redemption Event. After the Redemption Event, the holders of the Series B
preferred stock will have no other conversion rights with respect to the
Redeemable Capital Stock.
Notwithstanding the foregoing, if (1) the redemption price for the shares
of the Redeemable Capital Stock is paid in whole or in part in stock of a
subsidiary of TCI Music ("Redemption Securities") and (2) in connection with the
Redemption Event, the "Mirror Preferred Stock condition" is met, as such term is
defined in the certificate of designations for the Series B preferred stock,
then the provisions described in the
44
<PAGE> 53
immediately preceding paragraph will not apply, and after the Redemption Event
the holders of Series B preferred stock that are not exchanged as described in
this paragraph will not have conversion rights with respect to the Redeemable
Capital Stock so redeemed or exchanged. Generally, the Mirror Preferred Stock
condition will be satisfied if TCI Music makes appropriate provisions so that
holders of Series B preferred stock have the right, exercisable on the effective
date of the Redemption Event, to exchange their shares of Series B preferred
stock for convertible preferred stock of TCI Music and convertible preferred
stock of the issuer of the Redemption Securities. Such convertible preferred
stocks shall together have an aggregate liquidation preference equal to the
aggregate liquidation preference of the Series B preferred stock to be exchanged
for them and otherwise shall contain terms and conditions equivalent to those of
the Series B preferred stock, except that applicable time periods under the
Series B preferred stock will be tacked to corresponding time periods under such
convertible preferred stocks, and except that (A) the convertible preferred
stock of the issuer of the Redemption Securities will be convertible into the
kind and amount of Redemption Securities, cash and other assets that the holder
of a share of Series B preferred stock in respect of which such convertible
preferred stock is issued would have received in the Redemption Event, had such
shares of Series B preferred stock been converted prior to the Redemption Event,
and (B) (the convertible preferred stock of TCI Music will not be convertible
into the Redeemable Capital Stock redeemed, or the Redemption Securities issued,
in the Redemption Event.
If TCI Music distributes the stock of one of its subsidiaries as a dividend
to all holders of Series B common stock (a "Spin Off"), TCI Music will make
appropriate provision so that holders of Series B preferred stock have the right
to exchange their shares of Series B preferred stock on the effective date of
the Spin Off for convertible preferred stock of TCI Music and convertible
preferred stock of that subsidiary. These convertible preferred stocks shall
together have an aggregate liquidation preference equal to the liquidation
preference of a share of Series B preferred stock on the effective date of the
Spin Off and otherwise shall contain terms and conditions equivalent to those of
the Series B preferred stock, except that applicable time periods under the
Series B preferred stock will be tacked to corresponding time periods under such
convertible preferred stocks, and except that (1) the convertible preferred
stock of the subsidiary whose stock is distributed in such Spin Off will be
convertible into the kind and amount of stock of that subsidiary, and other
securities and property that the holder of a share of Series B preferred stock
in respect of which such convertible preferred stock is issued would have
received in the Spin Off, had such shares of Series B preferred stock been
converted prior to the record date for such Spin Off, and (2) the convertible
preferred stock of TCI Music will not be convertible into the stock of that
subsidiary. From and after the effective date of the Spin Off, holders of any
shares of Series B preferred stock that have not been exchanged for convertible
preferred stock of TCI Music and convertible preferred stock of that subsidiary
shall have no conversion rights with respect to the stock of the subsidiary
distributed in the Spin Off.
Exchange Option. In the event an exchange offer is made by TCI Music or one
of its subsidiaries to holders of Series B common stock pursuant to which
capital stock of TCI Music or a subsidiary of TCI Music and/or other property
will be issued in exchange for shares of Series B common stock, TCI Music or
such subsidiary is required to make an equivalent offer to the holders of Series
B preferred stock in lieu of any antidilution adjustment which might otherwise
apply to the conversion rate of the Series B preferred stock. Pursuant to such
offer holders may tender their shares of Series B preferred stock, based on the
number of shares of Series B common stock into which such shares are then
convertible, and receive in lieu of the securities or other property offered in
such exchange offer (the "Exchange Securities"), a new series of preferred stock
of the issuer of the Exchange Securities, which would be convertible into such
Exchange Securities, would have an aggregate liquidation preference equal to the
aggregate liquidation preference of the shares of Series B preferred stock
exchanged for such new preferred stock and would otherwise contain terms and
conditions equivalent to those of the Series B preferred stock.
Redemption. Shares of Series B preferred stock are redeemable at the option
of TCI Music at any time after June 30, 2006 at a redemption price per share
payable in cash equal to the liquidation preference of such share on the
redemption date. Any redemptions by TCI Music are required to be made pro rata
if less than all shares of Series B preferred stock are to be redeemed.
45
<PAGE> 54
At any time on or after June 30, 2006, or prior to that date if an event
described under "Default" below has occurred and is continuing, any holder of
Series B preferred stock has the right to require TCI Music to redeem all or any
portion of such holder's shares for a redemption price per share payable in cash
equal to the liquidation preference of that share on the redemption date. The
Company will redeem shares at the option of the holder out of funds that are
legally available for that purpose and not restricted pursuant to any debt
instrument of the Company. If the legally available funds are insufficient for
that purpose, the Company will redeem the maximum number possible of the shares
requested to be redeemed on the redemption date and will redeem the balance of
such shares as additional funds become legally available.
If and so long as TCI Music fails to redeem any shares of Series B
preferred stock required to be redeemed at the option of the holder, TCI Music
may not redeem or discharge any sinking fund obligation with respect to any
shares of Series B preferred stock or any parity securities or junior securities
or pay any dividends on any junior securities, and neither TCI Music nor any of
its subsidiaries may purchase or otherwise acquire any Series B preferred stock,
parity securities or junior securities unless all shares of Series B preferred
stock required to be redeemed are redeemed. The foregoing prohibitions do not
apply to (1) the redemption, exchange, purchase or other acquisition of Series B
preferred stock, parity securities or junior securities solely in exchange for
junior securities, (2) the payment of dividends on any junior securities solely
in shares of junior securities or (3) certain purchase or exchange offers made
to all holders of Series B preferred stock.
Rank. Series B preferred stock will not rank junior to any other stock of
TCI Music in respect of the right to receive dividends or liquidating
distributions. TCI Music may not issue any senior securities without the consent
of the holders of at least 66 2/3% of the number of shares of Series B preferred
stock then outstanding.
Voting Rights. Holders of Series B preferred stock are not entitled to vote
on any matters submitted to a vote of the shareholders of TCI Music, except as
required by law and except that without the consent of the holders of at least
66 2/3% of the number of shares of Series B preferred stock then outstanding,
TCI Music may not take any action, including by merger, to amend any of the
provisions of the certificate of designations for the Series B preferred stock,
amend any of the provisions of the Certificate of Incorporation of the Company
so as to adversely affect any preference or right of the Series B preferred
stock or the Series B common stock, or amend any of the provisions of the
Certificate of Incorporation relating to the convertibility of the Series B
common stock into Series A common stock or the requirements with respect to
dividends and share distributions on the Series A and Series B common stock.
The shares of Series B preferred stock issued in connection with the
Contribution Transaction will be fully paid and non-assessable.
Default. A default under the certificate of designations for the Series B
preferred stock occurs if any of the following occur: (1) events of default
under the Company's revolving credit facility or any other debt instrument
evidencing indebtedness in excess of $20 million; (2) the failure of the Company
to declare and, on or within five days after the applicable dividend payment
date, pay any portion of accrued dividends on the Series B preferred stock, (3)
the entry of a decree or order for relief in respect of the Company under Title
11 of the United States Code or any other applicable federal or state bankruptcy
law or similar law (a "Bankruptcy Law") or the appointment of a receiver,
liquidator, assignee, trustee, custodian, sequestrator or similar official (a
"Receiver") of the Company or of any substantial part of its properties, or
ordering the winding up or liquidation of the affairs of the Company or the
filing of an involuntary petition and the entry of a temporary stay and such
petition and stay are not diligently contested or continue undismissed for a
period of 60 consecutive days; (4) or the filing by the Company of a petition,
answer or consent seeking relief under any Bankruptcy Law or the consent by the
Company to the institution of proceedings under any Bankruptcy Law or to the
filing of any such petition or to the appointment or taking of possession of a
Receiver of the Company or any substantial part of its properties or the Company
failing generally to pay its respective debts as they become due or taking any
action in furtherance of any such action.
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<PAGE> 55
In the event of any action at law or suit in equity with respect to the
Series B preferred stock, the Company may be required to pay reasonable sums for
attorneys' fees incurred by the holder thereof in connection with such action or
suit and all other costs of collections.
OTHER AGREEMENTS
Tax Liability Allocation and Indemnification Agreement. Pursuant to the
Contribution Agreement, at the closing TCI Music, on behalf of itself and its
subsidiaries, and Liberty and Liberty Media Group LLC will enter into the Tax
Sharing Agreement, with terms, mutually satisfactory to the parties, pursuant to
which the parties will agree to allocate and settle among themselves in an
equitable manner the respective consolidated federal income tax liability and
benefits of such parties in connection with a filing of a consolidated federal
income tax return with Liberty and its affiliates and to allocate and settle
among themselves in an equitable manner the state, local or foreign tax
liability and benefits in connection with combined, consolidated and unitary
state, local and foreign income tax returns which include such parties.
The Tax Sharing Agreement will generally provide that (1) the Company will
compensate Liberty to the extent that the Company has tax liability calculated
on a separate return basis, and (2) the Company will receive a credit against
payments required under (1), above, to the extent of Company losses that are
used by the consolidated group. In addition, the Company will reimburse Liberty
for any tax benefit to the Company from any deductions arising under the
Deferred Compensation and Stock Appreciation Rights Plan, regardless of whether
such tax benefit is received before or after deconsolidation. Furthermore,
Company losses will be increased by certain "deemed deductions" arising from
dividends payable to Liberty DMX with respect to the Series B preferred stock
that Liberty DMX will hold after the closing of the Contribution Transaction. In
the event that the Company has not received the benefit of credits for Company
losses by the time (if ever) it leaves the consolidated group, the Company will
be compensated for such losses (unless such losses would otherwise have expired
unused) at the earlier of the time that the (A) Company would have been able to
use such losses to offset income in its separate tax return; or (B) Liberty
ownership of Company voting stock falls below 20%.
Registration Rights Agreement. Pursuant to the Contribution Agreement, at
the closing, TCI Music, Liberty and any of Liberty's controlled affiliates that
hold any shares of stock will enter into a Registration Rights Agreement, with
terms mutually satisfactory to the parties. Such agreement will provide Liberty
and any such controlled affiliate the right to require the Company to effect up
to six separate registrations under the Securities Act of 1933 with respect to
such stock held by Liberty or its controlled subsidiaries (including the shares
acquired in the Contribution Transaction) and the right to include such shares
in any other registration statement filed by TCI Music with the Commission. The
registration rights will be transferable by Liberty and its controlled
affiliates to any transferee of the shares of common stock or Series B preferred
stock or to a secured party in connection with any hedging transaction.
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<PAGE> 56
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
The following unaudited proforma condensed combined financial information
has been prepared to give pro forma effect to the Contribution Transaction, the
investment in the MTVN Partnership and the conversion of the Series A preferred
stock prior to redemption and the redemption of the Series A preferred stock.
The Contribution Transaction has been accounted for in a manner similar to a
pooling of interests, as Liberty and TCI Music are entities under common
control, while the investment in the MTVN Partnership has been accounted for as
a sale between unaffiliated parties.
The unaudited proforma condensed combined balance sheet as of March 31,
1999 and the unaudited proforma condensed combined statements of operations for
the three months ended March 31, 1999 and for the year ended December 31, 1998
give proforma effect to (1) the Contribution Transaction, which includes (A) the
contribution of the contributed assets and (B) the assignment of the rights to
provide Interactive Video Services under the Access Agreement (as discussed
elsewhere herein) in exchange for common and preferred stock, (2) the exchange
of SonicNet and The Box, for a 10% ownership interest in the MTVN Partnership,
(3) the conversion of the Series A preferred stock prior to redemption and the
redemption of the Series A preferred stock (it is assumed all shares are
converted for pro forma purposes) and (4) the related tax effects of the
transactions. The unaudited proforma information gives effect to the
transactions as if they had occurred as of March 31, 1999, for the unaudited
condensed combined balance sheet and as of January 1, 1998 for the unaudited
condensed combined statements of operations.
The unaudited proforma condensed combined balance sheet and condensed
combined statement of operations do not purport to represent what TCI Music's
results of operations would have actually been if the foregoing transactions
had, in fact occurred on January 1, 1998. The unaudited proforma condensed
combined balance sheet and condensed combined statement of operations should be
read in conjunction with the historical audited consolidated financial
statements of TCI Music.
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<PAGE> 57
TCI MUSIC AND SUBSIDIARIES
UNAUDITED PROFORMA CONDENSED COMBINED BALANCE SHEET
AS OF MARCH 31, 1999
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
ADD:
ADD: LESS: INVESTMENT IN ADD:
CONTRIBUTED EXCHANGED MTVN PREFERRED SHARE
HISTORICAL ASSETS ASSETS(F) PARTNERSHIP(G) CONVERSION(H) PROFORMA
---------- ----------- --------- -------------- --------------- ----------
<S> <C> <C> <C> <C> <C> <C>
Assets
Total current assets....... $ 26,206 $ 50,000(a) $ 7,021 $ 69,185
Investments in affiliates
and other cost
investments.............. 882 500,344(b) 501 $150,000 650,725
Property, plant and
equipment, net........... 25,258 -- 10,571 14,687
Intangible assets, net..... 148,462 -- 47,678 100,784
Other assets............... 7,808 250,000(c) 6,509 -- -- 251,299
-------- -------- ------- -------- -------- ----------
Total assets..... 208,616 800,344 72,280 150,000 -- 1,086,680
-------- -------- ------- -------- -------- ----------
Liabilities and
Stockholders' Equity
Total current
liabilities.............. 19,656 -- 5,021 14,635
Debt, including related
party.................... 102,817 -- 102,817
Other liabilities.......... 13,378 300,140(d) 1,283 51,610 -- 363,845
-------- -------- ------- -------- -------- ----------
Total
liabilities.... 135,851 300,140 6,304 51,610 481,297
Redeemable convertible
preferred stock.......... 34,679 150,000(e) (34,679) 150,000
Stockholders' Equity....... 38,086 350,204(e) 65,976 98,390 34,679 455,383
-------- -------- ------- -------- -------- ----------
Total liabilities
and
stockholders'
equity......... $208,616 $800,344 $72,280 $150,000 $ -- $1,086,680
-------- -------- ------- -------- -------- ----------
Weighted average common
shares................... 81,377 109,450 4,853 195,680
======== ======== ======== ==========
Book value per share....... $ 0.47 $ 2.33
======== ==========
</TABLE>
- ---------------
Contributed Assets
(a) Assumes $50 million in cash will be received from Liberty in connection
with the Contribution Agreement.
(b) Amount represents the carrying value of the investments contributed to TCI
Music by Liberty under the Contribution Agreement.
(c) Amount reflects the carrying value of the rights to provide Interactive
Video Services under the Access Agreement assigned to TCI Music under the
Contribution Agreement.
(d) Amount reflects the deferred tax liability associated with the assets
contributed to TCI Music.
(e) Reflects the issuance of $150 million of TCI Music Series B convertible
preferred stock and 109.4 million shares of Series B common stock to
Liberty in exchange for the net assets and liabilities contributed to TCI
Music under the Contribution Agreement.
Exchanged Assets
(f) Amounts reflect the carrying values of the assets and liabilities of
SonicNet and The Box (contributed by TCI Music to the MTVN Partnership in
exchange for a 10% ownership interest in the MTVN Partnership) as if such
assets were deconsolidated from TCI Music on March 31, 1999.
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<PAGE> 58
Investment in the MTVN Partnership
(g) TCI Music will record its 10% ownership interest in the MTVN Partnership at
its ascribed fair value of $150 million (such ascribed fair value has been
estimated by management and is subject to final valuation procedures). TCI
Music will account for its investment in the MTVN Partnership under the
cost method. The contribution of SonicNet and The Box in exchange for the
10% interest in the MTVN Partnership will be accounted for as a sale for
financial reporting purposes, and accordingly, it is expected that TCI
Music will recognize a gain on the transaction. An illustration of the gain
computation, on a proforma basis, at March 31, 1999 is as follows:
<TABLE>
<S> <C>
Ascribed fair value of the MTVN Partnership investment...... $150,000
Less: Net assets of SonicNet and The Box.................... 65,976
Less: Make-well liability to AT&T (reflected in other
liabilities above)........................................ 30,000
--------
Pre-tax gain on sale........................................ 54,024
Less: Deferred income taxes (reflected in other liabilities
above).................................................... 21,610
--------
Proforma effect on net income............................... $ 32,414
========
</TABLE>
The above proforma gain has not been reflected in the accompanying
unaudited proforma condensed statements of operations due to its
nonrecurring nature.
Preferred Share Conversion
(h) Amounts reflect the conversion of 1,617,574 shares of redeemable
convertible preferred stock into TCI Music Series A common stock, at a
conversion rate of one preferred share to three TCI Music Series A common
shares.
50
<PAGE> 59
TCI MUSIC AND SUBSIDIARIES
UNAUDITED PROFORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1999
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
ADD: LESS: ADD:
CONTRIBUTED EXCHANGED PREFERRED SHARE
HISTORICAL ASSETS ASSETS(6) CONVERSION PROFORMA
---------- ----------- --------- --------------- ---------
<S> <C> <C> <C> <C> <C>
Revenue............................ $22,591 $ -- $ 6,866 $ -- $ 15,725
Operating expenses................. 20,899 -- 10,508 -- 10,391
Depreciation and amortization...... 6,837 6,944 (1) 2,899 -- 10,882
------- -------- ------- ------ --------
Operating income/(loss).......... (5,145) (6,944) (6,541) -- (5,548)
Interest income/(expense).......... (1,518) -- 51 -- (1,569)
Share of losses of affiliates...... (106) (66)(2) (111) -- (61)
Other, net......................... (51) -- (37) -- (14)
------- -------- ------- ------ --------
Income/(loss) before income
taxes......................... (6,820) (7,010) (6,638) -- (7,192)
Income tax benefit/(expense)....... 441 2,804 (3) 2,655 (3) -- 590
------- -------- ------- ------ --------
Net income/(loss) from continuing
operations.................... (6,379) (4,206) (3,983) (6,602)
Accretion of redeemable convertible
preferred stock.................. (378) -- -- 378(7) --
------- -------- ------- ------ --------
Preferred stock dividends.......... -- (1,875)(4) -- -- (1,875)
------- -------- ------- ------ --------
Net income/(loss) attributable to
common stockholders from
continuing operations............ $(6,757) $ (6,081) $(3,983) $ 378 $ (8,477)
------- -------- ------- ------ --------
Weighted average common shares... 81,377 109,450 (5) 4,853 195,680
======= ======== ====== ========
Basic and diluted loss to common
stockholders from continuing
operations per common share... $ (0.08) $ (0.04)
======= ========
</TABLE>
- ---------------
Contributed Assets
(1) Amount reflects the amortization expense under the Access Agreement, using a
life of nine years.
(2) Amount reflects Liberty's share of losses and net gains recognized by
Liberty on certain equity transactions of equity affiliates, contributed in
the Contribution Transaction.
(3) Amount reflects the tax effect of the proforma adjustments, using an assumed
tax rate of 40%.
(4) Amount reflects the dividends that would have been paid on the $150 million
of Series B convertible preferred stock issued in the Contribution
Transaction.
(5) Amount reflects the issuance of 109.4 million shares of Series B common
stock to Liberty DMX in connection with the Contribution Transaction.
Exchanged Assets
(6) Amounts reflect historical results from operations of SonicNet and The Box
for the three months ended March 31, 1999. The amounts have been revised to
reflect the results of operations of TCI Music as if the transaction had
occurred on January 1, 1998. The effective tax rate has been assumed to be
40%.
Preferred Share Conversion
(7) Amount reflects the reversal of accretion on historical TCI Music preferred
shares as if the conversion of such shares had occurred on January 1, 1998.
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<PAGE> 60
TCI MUSIC AND SUBSIDIARIES
UNAUDITED PROFORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1998
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
ADD:
ADD: LESS: PREFERRED
CONTRIBUTED EXCHANGED SHARE
HISTORICAL ASSETS ASSETS(6) CONVERSION PROFORMA
---------- ----------- --------- ---------- --------
<S> <C> <C> <C> <C> <C>
Revenue............................ $ 84,452 $ -- $ 27,899 $ -- $ 56,553
Operating expenses................. 77,822 -- 39,628 -- 38,194
Depreciation and amortization...... 24,120 27,777 (1) 9,403 -- 42,494
-------- -------- -------- ------ --------
Operating loss................... (17,490) (27,777) (21,132) -- (24,135)
Interest income (expense).......... (5,370) -- -- (5,370)
Share of losses of affiliates...... (526) (494)(2) (676) -- (344)
Other, net......................... (135) 751 (2) -- -- 616
-------- -------- -------- ------ --------
Income/(loss) before income
taxes......................... (23,521) (27,520) (21,808) -- (29,233)
Income tax benefit/(expense)....... 1,229 11,008 (3) 8,723 (3) -- 3,514
-------- -------- -------- ------ --------
Net income/(loss) from continuing
operations.................... (22,292) (16,512) (13,085) (25,719)
Accretion of redeemable convertible
preferred stock.................. (1,354) -- -- 1,354(7) --
-------- -------- -------- ------ --------
Preferred stock dividends.......... -- (7,500)(4) -- -- (7,500)
-------- -------- -------- ------ --------
Net income/(loss) attributable to
common stockholders from
continuing operations............ $(23,646) $(24,012) $(13,085) $1,354 $(33,219)
-------- -------- -------- ------ --------
Weighted average common shares... 81,046 109,450 (5) 4,853 195,349
======== ======== ====== ========
Basic and diluted loss to common
stockholders from continuing
operations per common share... $ (0.29) $ (0.17)
======== ========
</TABLE>
- ---------------
Contributed Assets
(1) Amount reflects the amortization expense under the Access Agreement, using a
life of nine years.
(2) Amount reflects Liberty's share of losses and net gains recognized by
Liberty on certain equity transactions of equity affiliates, contributed in
the Contribution Transaction.
(3) Amount reflects the tax effect of the proforma adjustments, using an assumed
tax rate of 40%.
(4) Amount reflects the dividends that would have been paid on the $150 million
of Series B convertible preferred stock issued in the Contribution
Transaction.
(5) Amount reflects the issuance of 109.4 million shares of Series B common
stock to Liberty DMX in connection with the Contribution Transaction.
Exchanged Assets
(6) Amounts reflect historical results from operations of SonicNet and The Box
for the three months ended March 31, 1999. The amounts have been revised to
reflect the results of operations of TCI Music as if the transaction had
occurred on January 1, 1998. The effective tax rate has been assumed to be
40%.
Preferred Share Conversion
(7) Amount reflects the reversal of accretion on historical TCI Music preferred
shares as if the conversion of such shares had occurred on January 1, 1998.
52
<PAGE> 61
PROPOSAL 2 -- APPROVAL OF AMENDMENTS TO THE COMPANY'S
CERTIFICATE OF INCORPORATION
REASON FOR AND EFFECTS OF AMENDMENTS TO THE COMPANY'S CERTIFICATE OF
INCORPORATION
On April 23, 1999, the Board of Directors unanimously approved, and
recommended for adoption by the shareholders at the annual meeting, amendments
to Article I, Article IV and Article VIII of the Company's Certificate of
Incorporation to (i) change the Company's name to Liberty Digital, Inc.; (ii) to
increase the number of authorized shares of capital stock to 1,755,000,000 from
495,000,000, consisting of an increase in the authorized number of shares of
Series A common stock to 1,000,000,000 from 295,000,000 and an increase in the
authorized number of shares of Series B common stock to 755,000,000 from
200,000,000; and (iii) to eliminate the prohibition against shareholder action
by without a meeting written consent.
Name Change. At the time of the Company's inception, the Company's strategy
was to develop a portfolio of integrated, interactive, digitally-delivered music
entertainment services. As a result of the Contribution Transaction the
Company's business will no longer be focused primarily on the music business.
The Board of Directors is proposing to change the Company's name to Liberty
Digital, Inc. The Board believes that the name Liberty Digital, Inc. will better
reflect the Company's association with its parent, Liberty Media Corporation,
and will more accurately communicate the Company's focus on the interactive
television and interactive programming businesses and investments as a result of
the Contribution Transaction. In connection with the name change the Company
expects to change the trading symbol for the Series A common stock on the Nasdaq
SmallCap Market from "TUNE" to "LDIG.A" effective as soon as practicable
following the filing of a certificate of amendment to the Certificate of
Incorporation with the Secretary of State of the State of Delaware.
Increase of Authorized Shares of the Company. Pursuant to its Certificate
of Incorporation, the Company is authorized to issue a maximum of 495,000,000
shares of common stock, consisting of 295,000,000 shares of Series A common
stock and 200,000,000 shares of Series B common stock. As of July 26, 1999,
there were issued and outstanding 23,790,745 shares of Series A common stock and
62,500,000 shares of Series B common stock. The number of shares of Series B
common stock available for issuance is not sufficient to cover all of the shares
of Series B common stock issuable in connection with the Contribution
Transaction, including the number that may be issuable upon conversion of the
Series B preferred stock. Pursuant to the Contribution Agreement, 109,450,167
shares of Series B common stock will be issued at the closing and up to
25,751,100 shares of Series B common stock will be issuable upon conversion of
the Series B preferred stock issued to Liberty DMX at the closing of the
Contribution Transaction. The Board is proposing to amend Article IV of the
Certificate of Incorporation to increase the number of authorized shares of
capital stock to 1,755,000,000 from 495,000,000; to increase the number of
authorized shares of Series A common stock to 1,000,000,000 from 295,000,000;
and to increase the number of authorized shares of Series B common stock to
755,000,000 from 200,000,000. The number of shares of authorized preferred stock
will remain the same at 5,000,000 shares. The purpose of this proposal is to
ensure that sufficient shares of Series A common stock and Series B common stock
will be available (1) for issuance in connection with the transactions
contemplated by the Contribution Agreement, (2) for issuance upon conversion of
the Series B common stock and Series B preferred stock to be issued in the
Contribution Transaction and (3) if and when needed for issuance from time to
time for any proper purpose approved by the Board, including issuances to effect
other acquisitions, to grant options, to provide for stock splits, raise capital
and for other corporate purposes. The Board believes that the availability of
the number of additional authorized shares for issuance upon approval of the
Board will be beneficial to the Company and its shareholders by providing the
Company with the flexibility required to promptly consider and respond to future
business opportunities and needs as they arise.
Elimination of Prohibition Against Shareholder Action by Written
Consent. The purpose of this amendment is to enable shareholders to utilize
Section 228 of the Delaware General Corporation Law, which permits a
corporation's shareholders to act without a meeting by written consent. Section
B of Article VIII of the Company's Certificate of Incorporation currently
prohibits shareholder action by written consent in lieu of a meeting. The
amendment would delete Section B of Article VIII in its entirety.
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The Company does intend to continue to hold annual meetings of
shareholders. In addition, the rules of the Nasdaq Stock Market on which the
Series A common stock is listed require the holding of shareholder meetings in
connection with certain actions, unless such requirement is waived by Nasdaq.
Section 228 of the Delaware General Corporation Law provides that if shareholder
action is taken by less than unanimous written consent, prompt notice of such
action shall be given to those shareholders who have not consented in writing
and who, if the action had been taken at a meeting, would have been entitled to
notice of the meeting. Additionally, Regulation 14C of the Exchange Act requires
that an information statement be mailed to shareholders of a publicly traded
company at least 20 days prior to the taking of any shareholder action by
written consent.
A provision prohibiting shareholder action by written consent in lieu of a
meeting is often considered to be part of an antitakeover defensive strategy. In
light of the number of shares of the Company's Voting Securities that are and
will be beneficially owned by Liberty after the Contribution Transaction as
described in this proxy statement, the Board of Directors believes that this
provision is not appropriate for the Company. After the Contribution Transaction
is completed affiliates of Liberty will hold approximately 50.3% of the
outstanding shares of Series A common stock, 100% of the outstanding shares of
Series B common stock, and 100% of the outstanding shares of Series B preferred
stock. As a result, Liberty's vote will determine the outcome of the vote of any
matter submitted to the shareholders for their approval. The Board believes that
Section B of Article VIII of the Company's Certificate of Incorporation should
be deleted in its entirety to eliminate this provision.
EFFECTIVE DATE OF AMENDMENTS
The amendments to the Certificate of Incorporation will become effective
upon the filing of a certificate of amendment to the Certificate of
Incorporation with the Secretary of State of the State of Delaware, which is
anticipated to be as soon as practicable following the date of the annual
meeting.
In accordance with Delaware law and notwithstanding approval of the
amendments by the shareholders, at any time prior to the effectiveness of the
filing of certificate of amendment to the Certificate of Incorporation with the
Secretary of State, the Board may abandon such proposed amendments without
further action by the shareholders. The amendments to the Certificate of
Incorporation will not affect in any way the validity or transferability of
currently outstanding stock certificates. Shareholders will not be required to
surrender or exchange any stock certificates that they currently hold.
VOTES REQUIRED FOR APPROVAL
The affirmative vote of the holders of at least 66 2/3% of the combined
voting power of the outstanding Voting Securities voting together as a single
class is required to approve the amendment to the Certificate of Incorporation.
Affiliates of Liberty own approximately 86.3% of the outstanding shares of
the Voting Securities and 98.2% of the voting power of the Voting Securities.
Liberty agreed to cause its affiliates to vote its shares of Voting Securities
beneficially owned by them "FOR" approval of the change of the Company's name,
thus assuring its approval at the annual meeting.
THE PROPOSAL TO AMEND THE COMPANY'S CERTIFICATE OF INCORPORATION IS
CONTINGENT ON THE APPROVAL BY THE SHAREHOLDERS OF THE PROPOSALS TO APPROVE THE
CONTRIBUTION TRANSACTION AND THE DEFERRED COMPENSATION AND STOCK APPRECIATION
RIGHTS PLAN.
RECOMMENDATION OF BOARD
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT SHAREHOLDERS VOTE FOR
THE ADOPTION OF THE AMENDMENTS TO THE CERTIFICATE OF INCORPORATION.
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PROPOSAL 3 -- APPROVAL OF DEFERRED COMPENSATION
AND STOCK APPRECIATION RIGHTS PLAN
BACKGROUND
As part of the Contribution Transaction, TCI Music will adopt the Deferred
Compensation and Stock Appreciation Rights Plan. The Deferred Compensation and
Stock Appreciation Rights Plan will be adopted to replace the Executive SARs
previously granted by Liberty to Messrs. Masters and Ravenel (the "Executives").
In consideration of TCI Music incurring the liability under the Deferred
Compensation and Stock Appreciation Rights Plan, it was determined that the
number of shares of Series B common stock that Liberty would receive upon the
closing of the Contribution Transaction be reduced by 9 1/2% of the sum of (1)
total number of shares of Series A common stock and Series B common stock held
by Liberty (74,457,196 shares) and (2) the 128,755,360 shares otherwise issuable
to Liberty in the Contribution Transaction, or 19,305,193 shares. See "Proposal
1 -- Approval of Contribution Transaction -- Background of the Contribution
Transaction". The number of shares subject to the Deferred Compensation and
Stock Appreciation Rights is 19,295,193, which was decreased to reflect Mr.
Masters waiving awards with respect to 10,000 shares in consideration of the
Company's granting an option to purchase 10,000 shares to one of TCI Music's
employees. The purpose of the Deferred Compensation and Stock Plan is to provide
an incentive compensation plan for Mr. Masters and Mr. Ravenel that has
substantially the same economic terms as the Executive SARs and on terms that
should permit the Company to deduct any compensation paid to Executives under
the Deferred Compensation and Stock Appreciation Rights Plan, with certain
exceptions. Pursuant to the Tax Sharing Agreement, the Company will reimburse
Liberty for any tax benefit to the Company from any deductions arising from
compensation paid pursuant to the Deferred Compensation and Stock Appreciation
Rights Plan. The Executive SARs provide that Messrs. Masters and Ravenel have
the right to receive cash payments in an aggregate amount equal to 9 1/2% of the
increase of Liberty Digital's equity value from a base of $500 million.
DESCRIPTION OF THE DEFERRED COMPENSATION AND STOCK APPRECIATION RIGHTS PLAN
On July 30, 1999, the Compensation Committee adopted the Deferred
Compensation and Stock Appreciation Rights Plan, subject to the approval of the
Deferred Compensation and Stock Appreciation Rights Plan by the shareholders at
the annual meeting and the closing of the Contribution Transaction. The
following description is a brief summary of the Deferred Compensation and Stock
Appreciation Rights Plan. The Compensation Committee of the board of directors
intends to grant awards under the Deferred Compensation and Stock Appreciation
Rights Plan on a date prior to or concurrently with the closing of the
Contribution Transaction.
Only two persons, Mr. Masters and Mr. Ravenel, are eligible to participate
in the Deferred Compensation and Stock Appreciation Rights Plan. If the Deferred
Compensation and Stock Appreciation Rights Plan is adopted, it will replace the
Executive SARs, which will be terminated. The Deferred Compensation and Stock
Appreciation Rights Plan is comprised of a deferred compensation component and
stock appreciation rights grants. The deferred compensation component provides
Messrs. Masters and Ravenel with the right to receive an aggregate of 9 1/2% of
the appreciation in the Series A common stock (as reflected by its market price)
over a base price, subject to a maximum amount payable; and the stock
appreciation rights provide Executives with the appreciation in the market price
of the Series A common stock above the maximum amount payable under the deferred
compensation component.
Deferred Compensation Component
Pursuant to the deferred compensation component of the Deferred
Compensation and Stock Appreciation Rights Plan, Executives will be entitled to
deferred compensation in an aggregate amount equal to the appreciation in the
fair market value above $2.46 per share on 19,295,193 shares of TCI Music Series
A common stock, which represents approximately 9 1/2% of the aggregate number of
shares of Series A common stock and Series B common stock that would have been
held by Liberty after the consummation of the transactions contemplated by the
Contribution Transaction but for the adjustments negotiated with TCI
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Music regarding the adoption of the Deferred Compensation and Stock Appreciation
Rights Plan. The $2.46 per share amount was determined by dividing the number of
shares of Series A common stock and Series B common stock that Liberty would
have otherwise held following the Contribution Transaction by $500 million,
which was the base threshold for the measurement of appreciation under the
Executive SARs. The aggregate amount of deferred compensation payable pursuant
to the deferred compensation component of the Deferred Compensation and Stock
Appreciation Rights Plan is capped at the difference between (1) the Strike
Price and (2) $2.46 per share, multiplied by 19,295,193 (the number of shares on
which the deferred compensation is calculated).
Each of Messrs. Masters and Ravenel will be entitled to deferred
compensation in an amount equal to the difference between (1) the lesser of the
Strike Price and the Valuation Price Per Share of a share of Series A common
stock and (2) $2.46 per share, multiplied by the number of shares attributable
to him. Under the Deferred Compensation and Stock Appreciation Rights Plan,
deferred compensation with respect to 15,230,942 shares will be granted to Mr.
Masters and deferred compensation with respect to 4,064,251 shares will be
granted to Mr. Ravenel. The deferred compensation is payable only if the fair
market value of the TCI Music Series A common stock on the Valuation Date
exceeds $2.46 plus interest on that amount from January 1, 1999 at the rate of
10% per annum, compounded annually.
The "Valuation Date" is the earliest to occur of (1) the termination of the
Executive's employment, (2) a change of control or sale of TCI Music (as
defined) or (3) December 15, 2003. Interest will accrue on the amount of any
deferred compensation from the Valuation Date until the payment date. No
payments under the deferred compensation component of the Deferred Compensation
and Stock Appreciation Rights Plan will be made until after termination of
employment with TCI Music.
Stock Appreciation Rights
On the Effective Date, Mr. Masters will be granted stock appreciation
rights with respect to 15,230,942 shares of Series A common stock and Mr.
Ravenel will be granted stock appreciation rights with respect to 4,064,251
shares of Series A common stock pursuant to which they will be entitled to any
increase in the value of Series A common stock above the Strike Price. Upon
exercise of stock appreciation right, participants will receive the difference
between the fair market value of a share of Series A common stock on the date of
exercise and the Strike Price; provided however in the case of a deemed exercise
on a Valuation Date, executives will receive the difference between the
Valuation Price Per Share of a share of Series A common stock on the date of
exercise and the Strike Price, in each case multiplied by the number of shares
as to which the exercise relates. All vested but unexercised stock appreciation
rights are automatically deemed exercised (to the extent they are in-the-money)
on the Valuation Date. All unexercised options expire immediately after the
Valuation Date.
Payment
Amounts payable under the Deferred Compensation and Stock Appreciation
Rights Plan or may be made at TCI Music's option in cash or TCI Music stock. On
any payment date, Liberty will have the right to direct TCI Music to pay amounts
due to participant in cash and to purchase from TCI Music a number of shares of
Series B common stock equal to the amount of cash to be paid to Executive
divided by the value of a share of Series A common stock used to determine the
amount of the payment to Executive. The purchase price paid by Liberty will be
equal to the amount of cash paid to Executive. As an alternative to the
foregoing payment procedure, Liberty may, in the case of an exercise of a stock
appreciation right, purchase the number of shares of Series B common stock equal
to the number of shares subject to the stock appreciation right from TCI Music
for value of a share of Series A common stock used to determine the amount of
the payment to participant multiplied by the number of stock appreciation rights
exercised. In no event will Liberty have the right to purchase more than an
aggregate of 19,295,193 shares of Series A common stock.
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Vesting
Mr. Masters and Mr. Ravenel will become vested in the rights to
appreciation under the deferred compensation component and the stock
appreciation rights granted under the Deferred Compensation and Stock
Appreciation Rights Plan with respect to 20% of the shares attributable to each
of them on each December 15 beginning December 15, 1999. Upon the sale of the
Company, a change of control of the Company (as defined), Executive's death,
termination of Executive's employment by the Company for any reason other than
cause (as defined) or termination of the Executive's employment by him for good
reason (as defined) all such rights and options will become fully vested. All
rights and options not vested will be forfeited by Executive if he is terminated
for cause (as defined).
Other Terms
TCI Music has agreed to provide registration rights for any shares issued
to an Executive pursuant to the Deferred Compensation and Stock Appreciation
Rights Plan. Each Executive will have a duty to sell the securities in a manner
that will, in the good faith judgment of Executive and his financial advisors,
maximize the average price per share.
If payments are made in TCI Music stock, Liberty will provide price
protection for the 180-day period after the effective date of the registration
statement for the difference between the fair market value on the date of
exercise or the Valuation Date or the Valuation Price Per Share of a share of
Series A common stock, as applicable, and the market value of the shares on the
date of sale in order to ensure that the Executives are not adversely affected
by the payment being made in stock, rather than cash, which was the only form of
payment permitted under the Executive SARs.
FEDERAL INCOME TAX CONSEQUENCES
THE FOLLOWING DISCUSSION IS A BRIEF SUMMARY OF THE PRINCIPAL FEDERAL INCOME
TAX CONSEQUENCES UNDER CURRENT LAW OF TRANSACTIONS UNDER THE DEFERRED
COMPENSATION AND STOCK APPRECIATION RIGHTS PLAN. THIS INFORMATION IS NOT
INTENDED TO BE A DEFINITIVE EXPLANATION OF ALL THE TAX CONSEQUENCES OF SUCH
TRANSACTIONS AND DOES NOT DESCRIBE STATE, LOCAL OR OTHER TAX CONSEQUENCES.
The Deferred Compensation and Stock Appreciation Rights Plan will defer
receipt, and therefore the recognition as income for federal income tax
purposes, of the Executive's compensation payable under the deferred
compensation portion of the Deferred Compensation and Stock Appreciation Rights
Plan. The maximum number of shares of Series A common stock that may be issued
under the Deferred Compensation and Stock Appreciation Rights Plan is 19,295,193
plus the number of shares determined by dividing the difference between the
Strike Price and $2.46 by the Valuation Price Per Share of a share of series A
common stock.
In general, an Executive will recognize no income at the time of the grant
of the stock appreciation right. Upon exercise of a stock appreciation right, an
Executive will recognize ordinary income (treated as compensation subject to
withholding) in an amount equal to the excess of the fair market value of the
shares of Series A common stock on the date of exercise over the exercise price
of the stock appreciation right. The basis in shares, if any, acquired upon
exercise of a stock appreciation right will equal the fair market value of such
shares at the time of exercise, and the holding period of the shares (for
capital gain purposes) will begin on the date of exercise.
Section 162(m) of the Code limits the deduction that a publicly traded
company may take for otherwise deductible compensation payable to certain
executive officers of the Company to the extent that compensation paid to such
officers for such year exceeds $1 million, unless such compensation is
performance-based, is approved by the Company's stockholders and meets certain
other criteria. Compensation attributable to a stock appreciation right is
deemed to satisfy the requirements for performance-based compensation only if
(1) the grant is made by a committee composed of two or more outside directors,
(2) the plan states the
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maximum number of shares and the maximum amount of compensation to be received
with respect to which awards may be granted during a specified period to any
employee and (3) under the terms of the plan, the amount of compensation the
employee could receive is based solely on an increase in the value of the stock
after the date of the grant. The Deferred Compensation and Stock Appreciation
Rights Plan has been designed to enable the stock appreciation rights to qualify
as performance-based compensation for purposes of Section 162(m) of the Code.
The deferred compensation rights have been structured so that Section 162(m) of
the Code will not affect the deductibility of the deferred compensation
payments. Accordingly, absent a change of control or sale of the Company, the
Company believes it should be entitled to a business expense deduction in the
same amount and at the same time as the Executive recognizes ordinary income.
Pursuant to the Tax Sharing Agreement, the Company will reimburse Liberty for
any tax benefit to the Company from any deductions arising from compensation
paid pursuant to the Deferred Compensation and Stock Appreciation Rights Plan.
In general, upon payment of deferred compensation or the exercise of a
stock appreciation right under the Deferred Compensation and Stock Appreciation
Rights Plan as a result of acceleration of vesting of such rights pursuant to a
change in control or sale of the Company, the federal income tax consequences to
the Company and Executives will be the same as for the payment of the deferred
compensation and the exercise of a stock appreciation right, except to the
extent Code provisions relating to payment of compensation upon the change of
control or sale of the Company may apply.
APPROVAL OF THE DEFERRED COMPENSATION AND STOCK APPRECIATION RIGHTS PLAN
Under the Nasdaq Stock Market Rules, approval of the Company's shareholders
is required when a stock option plan is to be established or other arrangement
made pursuant to which stock in excess of (1) 1% of the number of shares of
common stock, (2) 1% of the voting power of voting securities or (3) 25,000
shares may be acquired by officers and directors. To be adopted, the Deferred
Compensation and Stock Appreciation Rights Plan must be approved by the
affirmative vote of a majority of the combined voting power of the outstanding
Voting Securities represented in person or by proxy and entitled to vote at the
annual meeting, voting together as a single class. Uninstructed shares may not
be voted on this matter. For purposes of this matter, abstentions have the
effect of negative votes but broker non-votes will not be taken into account.
THE PROPOSAL TO APPROVE THE DEFERRED COMPENSATION AND STOCK APPRECIATION
RIGHTS PLAN IS CONTINGENT ON THE APPROVAL BY THE SHAREHOLDERS OF THE PROPOSALS
TO APPROVE THE CONTRIBUTION TRANSACTION AND THE AMENDMENTS TO THE COMPANY'S
CERTIFICATE OF INCORPORATION.
RECOMMENDATION OF THE BOARD
THE BOARD UNANIMOUSLY RECOMMENDS THAT SHAREHOLDERS VOTE "FOR" APPROVAL OF
THE DEFERRED COMPENSATION AND STOCK APPRECIATION RIGHTS PLAN.
PROPOSAL 4 -- ELECTION OF DIRECTORS
GENERAL
The persons named in the accompanying proxy will vote for the election of
three directors, with the term of office of each to continue until the annual
meeting of shareholders in the year 2002 or until his successor shall have been
duly elected and qualified, unless authority to vote is withheld. Robert R.
Bennett, Peter M. Kern and Bruce W. Ravenel are the three nominees for election
as directors of the Company, and the Company is informed that these nominees are
willing to serve as directors. However, if any such nominee should decline or
shall become unable to serve as a director for any reason, votes will be cast
for a substitute nominee, if any, designated by the Board of Directors, or, if
none is so designated prior to the election, votes will be cast according to the
judgment in such matters of the person or persons voting the proxy. Messrs.
Bennett, Kern and Ravenel are each incumbent directors.
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The following lists the current directors of TCI Music, their birth dates,
and a description of their business experience and positions held as of June 30,
1999. The Board currently consists of nine directors. Directors are elected to
staggered three year terms with approximately one-third elected annually. The
Company is considering, but has not determined to reduce the size of its board
of directors after the annual meeting.
NOMINEES FOR ELECTION AS DIRECTORS
<TABLE>
<CAPTION>
NAME POSITIONS
- ---- ---------
<S> <C>
Robert R. Bennett Has served as a director of TCI Music since January 1997 and
Born April 19, 1958 as acting Chief Financial Officer of TCI Music from June
1997 until July 1997. Mr. Bennett has served as President
and Chief Executive Officer of Liberty since April 1997 and
a director of Liberty since September 1994. Mr. Bennett
served as an Executive Vice President of TCI from April 1997
to March 1999. 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 serves as a director of TV
Guide, Inc., a media and communications company.
Peter M. Kern Has served as a director of TCI Music since January 1997.
Born June 2, 1967 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.
Bruce W. Ravenel Has served as a director and Executive Vice President of the
Born January 25, 1950 Company since June 1999. He has served as a director and
Executive Vice President of Liberty Digital, a subsidiary of
Liberty, since January 1999. From September 1998 to January
1999 he was employed by Liberty in connection with the
formation of Liberty Digital. From April 1998 to September
1998, Mr. Ravenel was Executive Vice
President -- Interactive Ventures of TCI Communications,
Inc., a former subsidiary of TCI. Mr. Ravenel also served as
President and Chief Executive Officer of TCI.Net, Inc. and
Senior Vice President -- Internet Services of TCI
Communications, Inc. from January 1996 to April 1998; and
Senior Vice President and Chief Operating Officer of TCI
Technology Ventures, Inc. from March 1994 to January 1996.
Mr. Ravenel was a founder and served on the board of
directors of At Home Corporation from March 1995 until the
closing of the AT&T Merger. Prior to joining TCI in 1991,
Mr. Ravenel was Director of Strategic Alliance Management
for U S WEST, Inc. Prior to that he worked for DI-SYS, Ltd.,
the developer of the X*Press Information Service, from 1984
to 1987. He was founder and President of Language Resources,
Inc. from 1978 to 1984. He began his career at Intel
Corporation in 1976, where he was a designer of the 8086 and
8087 microprocessors.
</TABLE>
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DIRECTORS WHOSE TERMS EXPIRE IN 2000
<TABLE>
<CAPTION>
NAME POSITIONS
- ---- ---------
<S> <C>
Leo J. Hindery, Jr. Has served as a director of TCI Music since January 1997.
Born October 31, 1947 Mr. Hindery served Chairman of the Board of TCI Music from
January 1997 to January 1999. He has been President of AT&T
Broadband since March 1999. He 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 TCI Communications, Inc. ("TCIC"), a former subsidiary of
AT&T engaged in the ownership and operation of cable
television systems and the predecessor company of TCI from
March 1997 to March 1999, when it merged into TCI and has
served as President and Chief Executive Officer of TCI
Pacific Communications, Inc. ("TCI Pacific"), an operator of
cable television systems and a subsidiary of TCI since
September 1997. 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. from May 1996 to July 1997. Until March 8, 1999,
Mr. Hindery was a director of United Video Satellite Group,
Inc. (now known as TV Guide, Inc.), a distributor of
satellite based television services that prior to March 1,
1999 was a subsidiary of TCI. Mr. Hindery is also a director
of At Home Corporation, a subsidiary of AT&T, TCI Satellite
Entertainment, Inc., a distributor of satellite-based
television services, Cablevision Systems Corporation
Knowledge Enterprises, Inc. and Lenfest Communications, Inc.
David B. Koff Has served as a director of TCI Music since May 1997. Mr.
Born December 26, 1958 Koff was interim 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.
Lee Masters Has served as Chairman of the Board of TCI Music since
Born December 26, 1951 January 1999. Mr. Masters was appointed President and Chief
Executive Officer of the Company in June 1999. Since January
1999, Mr. Masters has served as a director and President and
Chief Executive Officer of Liberty Digital. From January
1990 to December 1998 Mr. Masters served as President and
CEO of E! Entertainment television, a cable television
program network. From March 1986 to December 1989 he served
as executive vice president and general manager of MTV.
Prior to his career in television, Mr. Masters had a 20-year
career in radio. Mr. Masters' legal name is Jarl Mohn. Mr.
Masters serves as a director of NewStar Media, Inc.
(formerly Dove Audio), an independent producer of audio
books, printed books and television films.
</TABLE>
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DIRECTORS WHOSE TERMS EXPIRE IN 2001
<TABLE>
<CAPTION>
NAME POSITIONS
- ---- ---------
<S> <C>
Donne F. Fisher Has served as a director of TCI Music since January 1997.
Born May 24, 1938 Mr. Fisher was an 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 TCIC from December 1991 to October 1994. Mr.
Fisher served as a director of TCI from June 1994 to March
1999, served as a TCIC director from 1980 to March 1999, and
served as a director of TCI Pacific from July 1996 to March
1999. Mr. Fisher is a director of General Communications,
Inc.
J C Sparkman Has served as a director of TCI Music since May 1997. He
Born September 12, 1932 served as a director of TCI from December 1996 to March
1999. 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.
Lon A. Troxel Has served as a director of TCI Music since May 1997. Mr.
Born October 14, 1947 Troxel was 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>
VOTES REQUIRED FOR APPROVAL
The election of directors must be approved by a plurality of the votes cast
with respect to the shares of the voting securities, represented in person or by
proxy and entitled to vote at the annual meeting, voting together as a single
class.
Affiliates of Liberty own approximately 86.3% of the outstanding shares of
the Voting Securities and 98.2% of the voting power of the Voting Securities.
Liberty has agreed to cause its affiliates to vote all shares of Voting
Securities beneficially owned by them "FOR" the election of the nominees, thus
assuring their election at the annual meeting.
RECOMMENDATION OF BOARD
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT SHAREHOLDERS VOTE "FOR"
THE ELECTION OF THE NOMINEES.
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EXECUTIVE OFFICERS
The following lists the executive officers of the Company, their birth
dates, a description of their business experience and positions held with the
Company as of June 30, 1999. Information concerning Mr. Koff, Mr. Masters, Mr.
Ravenel and Mr. Troxel who are also directors, is listed under the heading
"Election of Directors," above. All officers are appointed for an indefinite
term, serving at the pleasure of the Board of Directors.
<TABLE>
<CAPTION>
NAME POSITIONS
- ---- ---------
<S> <C>
Ralph J. Sorrentino Has served as Executive Vice President and Chief Financial
Born June 28, 1952 Officer of TCI Music since May 1998. From March 1992 to
September 1997, Mr. Sorrentino served at Bohbot
Entertainment & Media Inc., an international television
production and syndication company. From October 1994 to
September 1997, Mr. Sorrentino was President and Chief
Operating Officer of Bohbot Entertainment & Media Inc.; from
March 1992 to October 1994, Mr. Sorrentino was Executive
Vice President/Chief Financial & Administrative Officer of
Bohbot Entertainment & Media Inc. While serving as Executive
Vice President and Chief Financial and Administrative
Officer at Bohbot, in January 1994, Mr. Sorrentino also
served as President of Bohbot's Entertainment division
before being named President & COO of the overall Bohbot
organization. From 1982 to 1992, Mr. Sorrentino served in
three executive positions at The Interpublic Group of
Companies, a diversified advertising concern. From 1990 to
1992, he was Senior Vice President/Director of Finance for
its subsidiary, Lintas New York.
</TABLE>
There are no family relations, of first cousin or closer, among the
Company'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 ability or integrity.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act requires the Company's executive officers
and directors, and persons who own more than ten percent of a registered class
of the Company's equity securities, to file reports of ownership and changes in
ownership with the Commission. Officers, directors and greater-than ten percent
shareholders are required by Commission regulation to furnish the Company 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 the Company with respect
to its most recent fiscal year, the Company believes that, during the year ended
December 31, 1998, its executive officers, directors and greater-than-ten-
percent beneficial owners complied on a timely basis with all Section 16(a)
filing requirements.
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<PAGE> 71
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table shows, for fiscal 1998, a summary of certain
information regarding all forms of compensation for the Chief Executive Officer
and the other executive officers and one former executive officer (the "named
executive officers") whose total annual salary and bonus exceeded $100,000
during fiscal 1998. Mr. McPartland served as President and Chief Executive
Officer until May 31, 1999; Mr. McGlade was President and Chief Executive
Officer of The Box until July 15, 1999, when substantially all of the assets of
The Box were contributed to the MTVN Partnership.
<TABLE>
<CAPTION>
LONG TERM COMPENSATION
AWARDS
---------------------------
ANNUAL SECURITIES
COMPENSATION UNDERLYING
----------------- OTHER ANNUAL RESTRICTED STOCK OPTIONS/ ALL OTHER
SALARY BONUS COMPENSATION STOCK SARS(1) COMPENSATION
NAME AND PRINCIPAL POSITION YEAR $ $ $(5) AWARDS # $(6)
--------------------------- ---- ------- ------ ------------ ---------- -------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Thomas McPartland.................... 1998 375,000(2) -- -- -- 250,000(7) --
President and CEO 1997 N/A
Alan R. McGlade...................... 1998 273,552 -- 100,000(8) -- 155,000(7) 10,000
President and CEO of The Box 1997 88,931(3) -- -- -- 64,200(7) --
Ralph J. Sorrentino.................. 1998 174,519(4) -- -- -- 150,000(7) 10,000
Executive Vice President and 1997 N/A
Chief Financial Officer
Lon A. Troxel........................ 1998 285,577 15,000 -- 9,230 -- 10,000
President and CEO of DMX 1997 189,660 -- -- -- 200,000(7) --
J. Wendy Kim......................... 1998 121,630 101,250 125,000 -- -- 11,309
former Vice President and Chief 1997 110,096 -- -- -- -- 6,924
Financial Officer
</TABLE>
- ---------------
(1) For information concerning these awards see "Option/SAR-Grants in Last
Fiscal Year" set forth below. There were no grants from other long term
incentive plans; therefore column "LTIP Payouts" is omitted.
(2) Mr. McPartland began employment with the Company on January 1, 1998, the day
after the Company acquired Paradigm. Accordingly, the salary information
included in the table represents only salary from that date through December
31, 1998.
(3) Mr. McGlade began employment with the Company on December 16, 1997, the date
the Company acquired The Box. Accordingly, the 1997 salary information
included in the table represents only 15 days' employment during 1997.
(4) Mr. Sorrentino began employment with the Company on May 11, 1998.
Accordingly, the salary information included in the table represents only
salary from that date through December 31, 1998.
(5) 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 fiscal 1998.
(6) Amounts represent contributions to the TCI Employee Stock Purchase Stock
Plan ("TCI Stock Plan"). The TCI Stock Plan provides benefits upon an
employee's retirement which normally is when the employee reaches 65 years
of age. TCI Stock Plan participants may contribute up to 10% of their
compensation and the Company (by annual resolution of the Board of
Directors) may contribute up to a matching 100% of the participants'
contributions. Participant contributions to the TCI Stock Plan are fully
vested upon contribution.
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<PAGE> 72
Generally, participants acquire a vested right in the Company contributions
as follows:
<TABLE>
<CAPTION>
VESTING
YEARS OF SERVICE PERCENTAGE
---------------- ----------
<S> <C>
Less than 1................................................. 0%
1-2......................................................... 33%
2-3......................................................... 66%
3 or more................................................... 100%
</TABLE>
With respect to the Company contributions made to the TCI Stock Plan in 1998
and 1997 Mr. Troxel is fully vested. The TCI Stock Plan also includes a
salary deferral feature in respect of employee contributions. Forfeitures
(due to participants' withdrawal prior to full vesting) are used to reduce
the Company's otherwise determined contributions.
Directors who are not employees of the Company are ineligible to participate
in the TCI Stock Plan. Under the terms of the TCI Stock Plan, employees are
eligible to participate after three months of service. Although the Company
has not expressed an intent to terminate the TCI Stock Plan, it may do so at
any time. The TCI Stock Plan provides for full immediate vesting of all
participants' rights upon termination of the TCI Stock Plan.
(7) These options were repriced on December 11, 1998. See "Option/SAR Repricing
below."
(8) Represents loan by the Company that was forgiven. See "Certain Relationships
and Related Party Transactions."
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 fiscal 1998.
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES % OF TOTAL
UNDERLYING OPTIONS/SARS
OPTIONS/ TO EXERCISE GRANT DATE
SARS EMPLOYEES PRICE EXPIRATION PRESENT VALUE
NAME GRANTED(1) IN FISCAL YEAR ($/SH) DATE ($)(2)
- ---- ---------- -------------- -------- ---------- -------------
<S> <C> <C> <C> <C> <C>
Thomas McPartland.................. 250,000 16.0 4.00(3) 1/15/08 1,502,500
President and CEO
Alan R. McGlade.................... 155,000 9.9 4.00(3) 1/15/08 931,550
President and CEO of The Box
Ralph J. Sorrentino................ 150,000 9.6 4.00(3) 1/15/08 901,500
Executive Vice President and
Chief Financial Officer
Lon A. Troxel...................... -- -- -- -- --
President and CEO of DMX
J. Wendy Kim....................... -- -- -- -- --
former Vice President and Chief
Financial Officer
</TABLE>
- ---------------
(1) All grants of stock options were options to purchase 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 January 15, 1998, vest in 20% cumulative increments, with the
first increment vesting as of January 15, 1999, 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
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<PAGE> 73
of an Approved Transaction, the compensation committee under the
circumstances specified in the 1997 Plan, determines otherwise.
(2) 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 5.13% risk-free interest rate; (b) a 88% volatility factor; (c) a
60-month expected life term; (d) a weighted average expected individual
yield; and (e) the closing market price of a share of Series A common stock
on the date of grant, resulting in a fair value of the options granted
during fiscal 1998 of $6.01. The actual value the executive may realize will
depend upon the extent to which the stock price exceeds the exercise price
on the date the option is exercised. Accordingly, the value, if any,
realized by the executive will not necessarily be the value determined by
the model.
(3) These options were repriced on December 11, 1998. See "Option/SAR
Repricings" below.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END
OPTION/SAR VALUES
The following table shows certain information with respect to the exercise
of stock options/SARs by the named executive officers during fiscal 1998 and
year-end value of unexercised stock options/SARs at December 31, 1998.
<TABLE>
<CAPTION>
NUMBER OF UNEXERCISED VALUE OF UNEXERCISED IN
SHARES VALUED SECURITIES UNDERLYING THE MONEY OPTIONS/SARS
ACQUIRED ON REALIZE OPTIONS/SARS AT FY-END (#) AT FY-END ($)(2)
NAME EXERCISE(#) ($)(1) EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
- ---- ----------- ------- -------------------------- -------------------------
<S> <C> <C> <C> <C>
Thomas McPartland............. -- -- 0/250,000 0/171,875
President and CEO
Alan R. McGlade............... 21,400 11,771 42,800/155,000 29,425/106,562
President and CEO of The Box
Ralph J. Sorrentino........... -- -- 0/150,000 0/103,125
Executive Vice President and
Chief Financial Officer
Lon A. Troxel................. -- -- 80,000/120,000 55,000/82,500
President and CEO of DMX
J. Wendy Kim.................. -- -- -- --
former Vice President and
Chief Financial Officer
</TABLE>
- ---------------
(1) Based on fair market value of the Series A common stock on the exercise
date.
(2) The values indicated are based upon the closing trading price on the Nasdaq
SmallCap Market of one share of Series A common stock on December 31, 1998,
or $4.6875.
65
<PAGE> 74
OPTION/SAR REPRICINGS
The table below sets forth certain information concerning the repricing of
stock options/SARs held by any executive officer of the Company which occurred
December 11, 1998. Further explanation concerning these repricings is included
in the Report of the Compensation Committee on Executive Compensation, below.
<TABLE>
<CAPTION>
SECURITIES UNDERLYING MARKET PRICE OF EXERCISE PRICE AT NEW
OPTIONS/SARS STOCK AT TIME OF TIME OF EXERCISE
NAME DATE REPRICED (#) REPRICING ($) REPRICING ($) PRICE ($)(1)
- ---- -------- --------------------- ---------------- ----------------- ------------
<S> <C> <C> <C> <C> <C>
Thomas McPartland.......... 12/11/98 250,000 $3.90 $6.50 $4.00
President and CEO
Alan R. McGlade............ 12/11/98 21,400 $3.90 $6.25 $4.00
President and CEO of 21,400 $3.90 $6.25 $4.00
The Box 21,400 $3.90 $6.25 $4.00
155,000 $3.90 $6.50 $4.00
Ralph J. Sorrentino........ 12/11/98 150,000 $3.90 $6.50 $4.00
Executive Vice President
and Chief Financial
Officer
Lon A. Troxel.............. 12/11/98 200,000 $3.90 $6.25 $4.00
President and CEO of DMX
<CAPTION>
LENGTH OF ORIGINAL
OPTION TERM REMAINING
NAME AT DATE OF REPRICING
- ---- ---------------------
<S> <C>
Thomas McPartland.......... 9 yrs. 1 mo.
President and CEO
Alan R. McGlade............ 1/2 mo.
President and CEO of 1 year
The Box 2 years
9 yrs. 1 mo.
Ralph J. Sorrentino........ 9 yrs. 5 mos.
Executive Vice President
and Chief Financial
Officer
Lon A. Troxel.............. 8 yrs. 7 mos.
President and CEO of DMX
</TABLE>
- ---------------
(1) Represents the average of averages of the closing prices of a share of
Series A common stock over the 60 trading days ending December 10, 1998 and
the 60 calendar days ended December 9, 1998, rounded up to the nearest cent.
EMPLOYMENT AGREEMENTS, TERMINATION OF EMPLOYMENT AND CHANGE OF CONTROL
ARRANGEMENTS
Masters Employment Agreement
In connection with the Contribution Transaction, Mr. Masters and the
Company will amend the Masters Employment Agreement to omit his Executive SAR
and replace it with awards under the Deferred Compensation and Stock
Appreciation Rights Plan, among other changes, and the Company will replace
Liberty as a party to and the employer under the Masters Employment Agreement.
The following is a summary of the material terms of the Masters Employment
Agreement as so amended.
Compensation. During the term of the Masters Employment Agreement the
Company will pay Mr. Masters salary at the rate of $750,000 per annum. That rate
is to be increased annually, on January 1, by the greater of the increase in a
consumer price index for the previous year or 5%. The Board will review Mr.
Masters' compensation annually to determine whether any additional increase in
Mr. Masters' salary is appropriate.
Term; Termination. Mr. Masters' Employment Agreement will be for a term
through December 15, 2003. His employment may be terminated by the Company (1)
upon the death of Mr. Masters, (2) upon 180 days prior notice from the Company
to Mr. Masters in the event of an illness or other disability which has
incapacitated Mr. Masters from performing his duties thereunder for at least 180
consecutive during the 12-calendar months preceding the month in which such
notice is given or (3) at any time upon notice of termination and by paying Mr.
Masters in a lump sum on the effective date all compensation for the remaining
term of the Employment Agreement, calculated at the annual rate then in effect.
Mr. Masters can also be terminated for cause (as defined in the Masters
Employment Agreement). Mr. Masters may terminate his employment with the Company
at any time by giving notice to the Company.
If Mr. Masters terminates his employment for good reason (as defined in the
Masters Employment Agreement), Mr. Masters will be entitled to a lump sum
payment of the compensation for the remaining term of the Masters Employment
Agreement, calculated at the annual rate then in effect. If Mr. Masters'
employment is terminated for illness or disability, the Company will continue to
pay his annual salary, at the rate in effect at the time of termination of his
employment, for one year from the date of termination. If Mr. Masters dies while
employed by the Company or during the period he is receiving payments from the
66
<PAGE> 75
Company on account of termination for illness or disability, the Company will,
following his death, pay to Mr. Masters' beneficiary a lump sum amount equal to
one years' compensation, calculated at the annual rate in effect at the time of
the death.
Indemnification. The Company will indemnify Mr. Masters to the fullest
extent permitted by applicable law in respect of any claim or threatened claims
(including reasonable counsel fees incurred in connection with the defense
thereof) against him by reason of his being or having been an officer or
director of the Company or any subsidiary of the Company or having served at the
request of the Company as a director, officer, employee or agent of another
corporation or of another entity.
Non-Competition; Confidentiality. Mr. Masters has agreed that during his
employment and, in the case of a voluntary termination (as defined in the
Masters Employment Agreement) by Mr. Masters or a termination by the Company for
cause (as defined in the Masters Employment Agreement), for a period from the
date of termination until the earlier of December 31, 2003 or the second
anniversary of the date of such termination, he will not directly or indirectly
own, manage, operate, participate in or be employed by or otherwise be
interested in or connected in any manner with any person, firm, corporation or
other enterprise that competes in the United States or elsewhere in the world in
any material respect with any business conducted by the Company or any of its
subsidiaries during Mr. Masters' employment, with certain exceptions. In
addition, the Masters Employment Agreement provides that Mr. Masters will not,
as long as he is employed by the Company or thereafter, make use of, divulge to
any person and use his best efforts to prevent the publication or disclosure of
confidential or proprietary information concerning the business of the Company
or of the dealings of the Company or of any of its customers that may have come
into his knowledge during his employment, with certain exceptions.
Troxel Employment Agreement
DMX and Lon A. Troxel are parties to an Employment Agreement dated October
1, 1991, as amended, for a term until May 31, 2002. Pursuant to the Employment
Agreement Mr. Troxel receives annual salary of $300,000 from June 1, 1998
through December, 1999 and $350,000 thereafter. 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.
REPORT OF THE COMPENSATION COMMITTEE
ON EXECUTIVE COMPENSATION
Neither the report of the Compensation Committee of the Board of Directors
nor the stock performance graphs which follow such report shall be deemed
incorporated by reference by any general statement incorporating by reference
this proxy statement into any filing under the Securities Act of 1933, as
amended, or under the Exchange Act, except to the extent that the Company
specifically incorporates this information by reference, and shall not otherwise
be deemed filed under such Acts.
COMPENSATION PHILOSOPHY
The Compensation Committee's compensation philosophy is based on the belief
that a link should exist between executive compensation and the return on
investment provided to shareholders as reflected by the appreciation in the
price of the Company's stock. In applying this philosophy, the Compensation
Committee has developed and implemented a compensation policy which seeks to
attract, motivate and retain highly qualified executives with the business
experience and acumen necessary for achievement of the long-term business
objectives of the Company and to align the financial interests of the Company's
senior executives with those of its shareholders. The Company attempts to
realize these goals by providing competitive compensation and by linking a
portion of the compensation to the enhancement of shareholder value.
67
<PAGE> 76
The Company's executive compensation is based principally on two
components -- salary and equity-based incentives -- each of which is intended to
serve the Company's overall compensation philosophy.
Base Salaries. Base salary for executive officers is generally targeted at
the median for executives with comparable qualifications, experience and
responsibilities at other companies in the industry. In the aggregate, executive
salaries are consistent with this philosophy. Salary levels for executive
officers also reflect the Committee's judgments on appropriate salaries in light
of the duties and responsibilities inherent in the executives' respective
positions. The particular qualifications of an individual holding the position
and his or her level of experience, as well as information concerning
compensation paid by other companies in the industry, are considered in
establishing salary levels. The Committee's assessment of the individual's
performance and contribution to the Company's performance are the primary
criteria influencing decisions regarding salary. For those executives who joined
the Company during the year, the primary factor in setting salary levels was the
Company's desire to provide compensation in amounts sufficient to induce these
individuals to join the Company. Although the 1997 Plan permits cash bonuses and
other performance based awards, the Company pays a limited number of cash
bonuses to its senior executives.
Annual salary adjustments are recommended by the Chief Executive Officer of
TCI Music by evaluating the performance of each executive officer after
considering new responsibilities and the previous year's performance of TCI
Music and such executive officer. The Compensation Committee performs a similar
review of the Chief Executive Officer's salary. Individual performance ratings
take into account such factors as achievement of specific goals that are driven
by TCI Music's strategic plan and attainment of specific individual objectives.
The factors affecting base salary levels are not assigned specific weights but
are subject to adjustments by the Compensation Committee. Certain terms of the
employment agreement of certain named executive officers are described in
"Employment Contracts and Termination of Employment and Change of Control
Arrangements" above.
Equity-Based Incentives. A key component of executive officers'
compensation is the grant of equity-based incentives under the 1997 Plan.
The Compensation Committee grants equity-based incentives to TCI Music's
executives in order to align their interests with those of the shareholders,
primarily stock options and stock appreciation rights. Equity-based incentives
are considered by the Compensation Committee to be an effective long-term
incentive because the executives' gains are linked to increases in the value of
Series A common stock, which in turn provides shareholder gains. Equity-based
incentives also provide executive officers with the opportunity to acquire and
build a meaningful ownership interest in the Company.
The Compensation Committee generally grants options and SARs to new
executive officers and other key employees upon their commencement of employment
with TCI Music, and considers stock option awards throughout the year. In
determining the number of options awarded to an individual executive officer,
the Compensation Committee generally establishes a level of award based upon the
position of the individual and his or her level of responsibility and upon
recommendations made by the Company's Chief Executive Officer. The Committee's
decisions concerning individual option awards are based on its judgment
concerning the appropriate amount of long-term compensation that should be paid
to the executive in question. The Company awarded stock options to acquire an
aggregate of 1,560,900 shares of Series A common stock, together with tandem
SARs, to certain executive officers and other employees of the Company during
1998. The Company also has granted a limited number of restricted stock awards.
Stock options and SARs are generally granted at an exercise price equal to
or near the average market price of a share of Series A common stock for a
period preceding the date of the grant. Options granted to executive officers
typically vest ratably over a period of five years following the date of grant
and expire after ten years. The full benefit of the options is realized upon
appreciation of the stock price in future periods, thus providing an incentive
to create value for TCI Music's shareholders through appreciation of the stock
price. Management of TCI Music believes that stock options and SARs have been
helpful in attracting and retaining skilled executive personnel.
68
<PAGE> 77
The stock options in tandem with stock appreciation rights and the
restricted stock awards are more fully described in "Executive
Compensation -- Summary Compensation Table of the Company" and "Executive
Compensation -- Option/SAR Grants Table of the Company."
The Company made the above-described grants after a review of the exercise
prices, numbers and dates of the awards of the stock options, tandem stock
appreciation rights, and restricted stock already held by the Company's
executives and other key employees. The Compensation Committee based its grants
for 1998 in part upon the level of the executive or other key employee's
responsibilities, experience and expertise and the degree to which such person
is in a position to contribute to the achievement or advancement of the
Company's financial and strategic objectives. Specifically, during 1998, the
Compensation Committee granted to Mr. McPartland options in tandem with stock
appreciation rights to purchase 250,000 shares of Series A common stock.
CHIEF EXECUTIVE OFFICER COMPENSATION
The executive compensation policy described above was applied in setting
Mr. McPartland's compensation. Mr. McPartland generally participates in the same
executive compensation plans and arrangements available to the other senior
executives. Accordingly, his compensation consists of annual base salary and
long-term equity-linked compensation in the form of stock options and SARs. The
Compensation Committee's general approach in establishing Mr. McPartland's
compensation was to be competitive with peer companies, but to have a large
percentage of his target compensation based upon the long-term performance of
TCI Music, as reflected in part by the market price of the Series A common
stock.
Mr. McPartland's compensation for the year ended December 31, 1998 included
$375,000 in base salary. Mr. McPartland's salary for 1998 was based on, among
other factors, TCI Music's performance and the 1997 compensation of chief
executive officers of comparable companies, although his compensation was not
linked to any particular group of these companies.
The award granted to Mr. McPartland is more fully described in "Executive
Compensation -- Summary Compensation Table of the Company" and "Executive
Compensation -- Option/SAR Grants Table of the Company."
DEDUCTIBILITY OF EXECUTIVE COMPENSATION
Section 162(m) of the Code and the U.S. Treasury regulations relating
thereto restrict publicly traded companies from claiming or receiving a tax
deduction on compensation paid to an executive officer in excess of $1 million,
unless such compensation is performance based. As such, many companies with
executive pay levels exceeding the $1 million limit have revised or amended
current compensation programs to qualify the payments thereunder for
deductibility. The Compensation Committee has not determined whether the 1997
Plan conforms to such 162(m) requirements.
OPTION/SAR REPRICING
On November 30, 1998 the Compensation Committee met to consider repricing
of options/SARs granted in 1997 and 1998 to certain officers and employees of
the Company as a result of a significant decline in the market price of the
shares of Series A common stock after the expiration of the rights attached to
such shares ("TCI Rights"). The Compensation Committee was concerned that the
decline significantly reduced the incentive the outstanding options were
intended to create. When the options were granted in July 1997, December 1997,
May 1998 and July 1998, the Series A common stock was then trading with a TCI
Right granted by TCI in connection with the DMX Merger. Each TCI Right entitled
the holder to require TCI to purchase from such holder one share of Series A
common stock for $8.00, payable at the election of TCI, in cash, a number of
shares of TCI's Series A TCI Group Common Stock having an equivalent value, or a
combination thereof, if during the one-year period beginning on July 11, 1997
the price of the Series A common stock trading with associated TCI Rights did
not equal or exceed $8.00 for a period of at least 20 consecutive trading days.
The TCI Rights became exercisable from July 11, 1998 through August 13, 1998
69
<PAGE> 78
and on August 14, 1998 Series A common stock without TCI Rights commenced
trading on the Nasdaq SmallCap Market.
During the period the Series A common stock was trading with a TCI Right,
there was no public market for the Series A common stock without attached TCI
Rights and accordingly, there was no way to determine the value of the Series A
common stock without TCI Rights. After the TCI Rights expired in August, the
high sale prices of Series A common stock declined substantially from $7.125 on
August 14, 1998 (the first trading day after the TCI Rights expired), to $4.50
on August 31, 1998, and $2.8125 by September 15, 1998. The Committee determined
that repricing of the options/SARs would be corrective in nature to accurately
and fairly reflect the fair market value of the Series A common stock without
TCI Rights and to provide the incentives for optionees that was intended when
the options/SARs were granted. The Compensation Committee considered the market
prices of the Series A common stock since August 14, 1998 and the average market
prices over various time frames and determined that a 60-day average was an
appropriate measure to determine the new exercise price. The averages of the
closing prices of a share of Series A common stock over the 60 trading days
ending November 27, 1998 was $3.85. Accordingly, the Compensation Committee
determined to recommend to the Board that the options/SARs be repriced at $3.85.
The Compensation Committee recommended to the Board that the options/SARs be
repriced to become exercisable at $3.85 per share.
On December 11, 1998, the Board met and considered the Committee's
recommendation. The Board agreed that repricing was appropriate to restore the
incentives the grant of the options/SARs was intended to create. The Board
considered the average market prices over various time frames and likewise
determined that a 60-day average was an appropriate measure to determine the new
exercise price. The Board then considered the average of the closing prices of a
share of Series A common stock over the 60 trading days ended December 10, 1998
($3.90) and the 60 calendar days ended December 9, 1998 ($4.08) and determined
that the option/SARs should be repriced at the average of such averages rounded
up to the next cent, or $4.00. All other terms and conditions of the options,
including grant date and vesting schedule, remained the same.
COMPENSATION COMMITTEE
Donne F. Fisher
Peter M. Kern
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<PAGE> 79
STOCK PERFORMANCE GRAPHS
From July 11, 1997, when the Series A common stock began trading on the
Nasdaq SmallCap Market until August 13, 1998, each share of Series A common
stock issued in connection with the merger of the Company and DMX (the "DMX
Merger") traded on the Nasdaq SmallCap Market together with a TCI Right in
connection with the DMX Merger. Each TCI Right entitled the holder to require
TCI to purchase from such holder one share of Series A common stock for $8.00,
payable at the election of TCI, in cash, a number of shares of TCI's Series A
TCI Group Common Stock having an equivalent value, or a combination thereof, if
during the one-year period beginning on July 11, 1997 the price of the Series A
common stock trading with associated TCI Rights did not equal or exceed $8.00
for a period of at least 20 consecutive trading days. The TCI Rights became
exercisable from July 11, 1998 through August 13, 1998. All unexercised TCI
Rights expired at the close of business on August 13, 1998. On August 14, 1998
Series A common stock without TCI Rights commenced trading on the Nasdaq
SmallCap Market. There was no public trading market for the Company's securities
prior to July 11, 1997.
The following graphs compare: (a) the percentage change in the cumulative
total shareholder return on the Series A common stock (with associated TCI
Rights) from July 11, 1997 to August 13, 1998 (the date the TCI Rights expired);
and (b) the percentage change in the cumulative total shareholder return on the
Series A common stock (without TCI Rights) from August 14, 1998 (the date the
Series A common stock (without TCI Rights) commenced trading on the Nasdaq
SmallCap Market) to December 31, 1998. The Series A common stock graphs are
compared for each time period with the cumulative total return on the Nasdaq
Composite Index (U.S. and Foreign) and with a peer group consisting of College
Television Network, Inc., Gaylord Entertainment Company and ACTV, Inc.
The comparisons assume $100 was invested at the beginning of each time
period and assume the reinvestment of dividends.
COMPARATIVE TOTAL RETURNS
TCI MUSIC, INC., NASDAQ COMPOSITE INDEX AND PEER GROUP
(PERFORMANCE RESULTS 7/11/97 THROUGH 8/13/98)
<TABLE>
<CAPTION>
NASDAQ
MEASUREMENT PERIOD TCI MUSIC, COMPOSITE
(FISCAL YEAR COVERED) INC. INDEX PEER GROUP
--------------------- ---------- --------- ----------
<S> <C> <C> <C>
7/11/97 100.00 100.00 100.00
12/31/97 108.93 104.51 110.68
8/13/98 113.39 119.96 105.64
</TABLE>
71
<PAGE> 80
COMPARATIVE TOTAL RETURNS
TCI MUSIC, INC., NASDAQ COMPOSITE INDEX AND PEER GROUP
(PERFORMANCE RESULTS 8/14/98 THROUGH 12/31/98)
<TABLE>
<CAPTION>
NASDAQ
MEASUREMENT PERIOD TCI MUSIC, COMPOSITE
(FISCAL YEAR COVERED) INC. INDEX PEER GROUP
--------------------- ---------- --------- ----------
<S> <C> <C> <C>
8/14/98 100.00 100.00 100.00
10/22/98 50.94 95.11 84.72
12/31/98 70.75 122.48 108.26
</TABLE>
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<PAGE> 81
CONCERNING THE BOARD OF DIRECTORS
COMPENSATION OF DIRECTORS
Standard Arrangements. Members of the Board of TCI Music who are also
full-time employees of TCI Music or TCI or Liberty, 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 Liberty or any of their respective
subsidiaries. All members of the Board are reimbursed for expenses incurred to
attend any meetings of the Board and any committee thereof.
Other Arrangements. The Board granted, effective as of July 11, 1997, (i)
to each of Messrs. Hindery, Kern and Fisher, options to purchase 833,334 shares
of Series A common stock at a price of $6.25 per share, (ii) to Mr. Troxel,
options to purchase 200,000 shares of 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 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. Mr. Troxel's options were repriced on December 11,
1998 to be exercisable at $4.00 per share. See "Executive
Compensation -- Option/SAR Repricing."
BOARD MEETINGS
During 1998, the Board of Directors of the Company held three meetings.
None of the directors attended fewer than 75% of the meetings of the Board of
Directors or of any committee of which he is a member except for Mr. Hindery,
Mr. Sparkman and Mr. Troxel.
COMMITTEES OF THE BOARD OF DIRECTORS
The Company has an Executive Committee, an Audit Committee and a
Compensation Committee. There is no standing nomination committee of the
Company's Board of Directors.
The members of the Executive Committee are Peter M. Kern, Leo J. Hindery
and Robert R. Bennett. The Executive Committee exercises all of the powers and
authority of the Board of Directors between meetings of the entire Board of
Directors, other than such powers and authority as the Delaware General
Corporation Law specifically prohibits an executive committee from performing.
During 1998, the Executive Committee did not hold any meetings.
The members of the Audit Committee are Peter M. Kern and Robert R. Bennett.
The duties of the Audit Committee are to review and monitor the Company's
financial reports and accounting practices to ascertain that they are within
acceptable limits of sound practice, to receive and review audit reports
submitted by the Company's independent auditors and by its internal auditing
staff and to make such recommendations to the Board of Directors as may seem
appropriate to the Committee to assure that the interests of the Company are
adequately protected and to review all related party transactions and potential
conflict-of-interest situations. The Audit Committee of the Company did not hold
any meetings during 1998 since matters usually considered by the Audit Committee
were considered by the full Board.
The members of the Compensation Committee are Donne F. Fisher and Peter M.
Kern. The functions of the Compensation Committee are to review and make
recommendations to the Board of Directors concerning the compensation of the
executive officers of the Company, to consider and make recommendations to the
Board of Directors concerning existing and proposed employment agreements
between the Company and its executive officers and to administer the 1997 Plan.
The Compensation Committee of the Company held four meetings during 1998.
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<PAGE> 82
SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information with respect to the beneficial
ownership of the common stock and Series A preferred stock of TCI Music as of
June 30, 1999 by: (1) 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
Series A common stock and the Series B common stock; (2) each director of TCI
Music; (3) the named executive officers; and (4) all of TCI Music's directors
and executive officers as a group. Upon completion of the Contribution
Transaction Liberty will beneficially own all of the issued and outstanding
shares of Series B preferred stock. The table also shows information regarding
ownership of the common stock and the Series B preferred stock on a pro forma
basis following the Contribution Transaction. Each share of Series B common
stock is convertible into one share of Series A common stock at the option of
the holder. Each share of Series B preferred stock is convertible into 171.674
shares of Series B common stock. The table does not assume conversion of these
shares. Shares issuable upon exercise of options within 60 days of June 30, 1999
are deemed to be outstanding for the purpose of computing the percentage
ownership of persons beneficially owning such options, but have not been deemed
to be outstanding for the purpose of computing the percentage ownership of any
other person. Voting power in the table is computed with respect to a general
election of directors. So far as is known to TCI Music, the persons indicated
below have sole voting and investment power with respect to the shares indicated
as owned by them, except as otherwise stated in the notes to the table. All
information is taken from or based upon ownership filings made by such persons
with the Commission or upon information provided by such persons to the Company.
The address of the directors and named executive officers of TCI Music is 67
Irving Place North, Fourth Floor, New York, New York 10003.
<TABLE>
<CAPTION>
AS OF JUNE 30, 1999 ADJUSTED FOR THE CONTRIBUTION TRANSACTION
------------------------------------ ------------------------------------------
AMOUNT AND AMOUNT AND
NATURE OF NATURE OF
NAME AND ADDRESS OF BENEFICIAL PERCENT OF VOTING BENEFICIAL PERCENT OF VOTING
BENEFICIAL OWNER TITLE OF CLASS OWNERSHIP CLASS(1) POWER(1) OWNERSHIP(11) CLASS(1) POWER(1)
- ------------------- --------------- ---------- ---------- ---------- -------------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Liberty Media Corporation... Series A Common 11,957,196 50.3 98.2 11,957,196 50.3 99.4
9197 South Peoria Street Series B Common 62,500,000 100.0 171,950,167 100.0
Englewood, CO 80112 Series B
Preferred -- -- 150,000 100.0
Shaw Communications, Inc.... Series A Common 1,900,000(2) 8.0 * 1,900,000(2) 8.0 *
630 Third Avenue Suite 900 Series B Common -- -- -- --
Calgary, Alberta
CANADA T2P 4L4
JR Shaw..................... Series A Common 1,900,000(3) 8.0 * 1,900,000(3) 8.0 *
c/o Shaw Communications,
Inc. Series B Common -- -- -- --
H.F. Lenfest................ Series A Common 1,503,873(4) 6.3 * 1,503,873(4) 6.3 *
c/o StarNet, Inc. Series B Common -- -- -- --
1332 Enterprise Drive
Suite 200
West Chester, PA 19380
Robert R. Bennett........... Series A Common 40,000(5) * * 40,000(5) * *
Series B Common -- -- -- --
Donne F. Fisher............. Series A Common 333,334(6) 1.4 * 333,334(6) 1.4 *
Series B Common -- -- -- --
Leo J. Hindery, Jr. ........ Series A Common 333,334(6) 1.4 * 333,334(6) 1.4 *
Series B Common -- -- -- --
Peter M. Kern............... Series A Common 333,334(6) 1.4 * 333,334(6) 1.4 *
Series B Common -- -- -- --
David B. Koff............... Series A Common 40,000(5) * * 40,000(5) * *
Series B Common -- -- -- --
Lee Masters................. Series A Common -- -- * -- -- *
Series B Common -- -- -- --
Alan R. McGlade............. Series A Common 30,000(7) * * 30,000(7) * *
Series B Common
</TABLE>
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<PAGE> 83
<TABLE>
<CAPTION>
AS OF JUNE 30, 1999 ADJUSTED FOR THE CONTRIBUTION TRANSACTION
------------------------------------ ------------------------------------------
AMOUNT AND AMOUNT AND
NATURE OF NATURE OF
NAME AND ADDRESS OF BENEFICIAL PERCENT OF VOTING BENEFICIAL PERCENT OF VOTING
BENEFICIAL OWNER TITLE OF CLASS OWNERSHIP CLASS(1) POWER(1) OWNERSHIP(11) CLASS(1) POWER(1)
- ------------------- --------------- ---------- ---------- ---------- -------------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Thomas McPartland........... Series A Common 105,471 * * 105,471 * *
Series B Common -- -- -- --
Bruce W. Ravenel............ Series A Common -- * * -- * *
Series B Common -- -- -- --
Ralph Sorrentino............ Series A Common -- * * -- * *
Series B Common -- -- -- --
J.C. Sparkman............... Series A Common 77,500(8) * * 77,500(8) * *
Series B Common -- -- -- --
Lon A. Troxel............... Series A Common 60,000(9) * * 60,000(9) * *
Series B Common
All Directors and Executive
Officers as a Group (11
Persons).................. Series A Common 1,209,999(10) 5.0 * 1,209,999(10) 5.0 *
Series B Common -- -- -- --
</TABLE>
- ---------------
* Less than 1%
(1) Based upon 23,755,997 shares of Series A common stock and 62,500,000 shares
of Series B common stock outstanding on June 30, 1999.
(2) 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.
(3) Includes 1,900,000 shares held by Shaw of which Mr. Shaw disclaims
beneficial ownership.
(4) 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").
Suburban Cable TV Co. Inc. ("Suburban") is a wholly owned subsidiary of
LCI. H.F. Lenfest (together with his children) and AT&T 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 shareholders
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. StarNet Interactive has sole voting power
and sole dispositive power as to no shares and shared voting power and
shared dispositive power as to 946,455 shares of Series A common stock.
StarNet has sole voting power and sole dispositive power as to no shares
and shared power and shared dispositive power as to 395,541 shares of
Series A common stock. Suburban has sole voting power and sole dispositive
power as to no shares and shared voting power and shared dispositive power
as to 161,877 shares of Series A common stock. AT&T has disclaimed
beneficial ownership of the shares of Series A common 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 AT&T.
(5) Assumes the exercise in full of stock options to acquire 40,000 shares of
Series A common stock, which are currently exercisable.
(6) Assumes the exercise in full of stock options to acquire 333,334 shares of
Series A common stock, which are currently exercisable.
(7) Assumes the exercise in full of stock options to acquire 30,000 shares of
Series A common stock, which are currently exercisable.
(8) Assumes the exercise in full of options to acquire 40,000 shares of Series
A common stock, which are currently exercisable.
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<PAGE> 84
(9) Assumes the exercise in full of options to acquire 60,000 shares of Series
A common stock, which are currently exercisable.
(10) Assumes the exercise in full of options held by such persons to acquire
3,429,002 shares of Series A common stock, 1,209,999 of which are currently
exercisable.
(11) Adjusted for the issuance of 109,450,167 shares of Series B common stock
and 150,000 shares of Series B preferred stock to be issued in connection
with the Contribution Transaction.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Liberty beneficially owns approximately 50.3% of the outstanding shares of
Series A common stock and 100% of the outstanding shares of Series B common
stock, collectively representing 98.2% of the aggregate voting power related to
the outstanding Voting Securities.
DMX, a wholly owned subsidiary of the company, under an agreement with
National Digital Television Center, Inc., an indirect wholly owned subsidiary of
Liberty's corporate parent, AT&T ("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 and The Box are 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 Liberty
Media International, Inc., a subsidiary of Liberty.
Shaw Communications, Inc. ("Shaw") beneficially owns approximately 8.0% of
the outstanding shares of Series A common stock, which it acquired upon the
consummation of the DMX Merger on July 11, 1997, in exchange for the shares of
common stock of DMX it owned prior to the DMX Merger. JR Shaw, President and
Chief Executive Officer of Shaw, was a director of DMX prior to the DMX Merger.
Mr. Shaw beneficially owns 8.0% of Series A common stock, which he acquired upon
the consummation of the DMX Merger in exchange for the shares of common stock of
DMX he beneficially owned prior to the DMX Merger. Mr. Sparkman, 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 was 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.
DMX-Canada and DMX are parties to an agreement to distribute DMX's digital
music services (the "DMX Services") to the Canadian residential cable market.
The service includes a total of 40 formats and is distributed through Shaw cable
systems and their affiliates. DMX received license fees of approximately
$183,000 for the fiscal year ended December 31, 1998 under this agreement.
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<PAGE> 85
DMX-Canada also distributes the DMX Service to the commercial sector via
direct broadcast satellite pursuant to a license agreement with DMX that grants
DMX-Canada an exclusive license and right to distribute the DMX Service to
commercial establishments in Canada. The license agreement expires March 31,
2012. DMX received total license fees of approximately $508,000 for the fiscal
year ended December 31, 1998 under the agreement with DMX-Canada.
On April 21, 1994, The Box entered into a Lease Agreement with Island
Trading Company, owner of more than 5% of the Series A preferred stock during
fiscal 1998, pursuant to which The Box leased from Island Trading Company
approximately 16,000 square feet of space for its principal executive offices.
The lease expires on January 15, 2002. 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 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.
The Box is a party to a program affiliation agreement with Satellite
Services, Inc., a wholly owned subsidiary of AT&T ("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.
Prior to being acquired by the Company, The Box loaned Mr. McGlade
$100,000. In 1997, The Box agreed to forgive the loan but took no formal action
to forgive the loan prior to the acquisition of The Box by TCI Music in December
1997. The Company forgave the loan in 1998.
Prior to the AT&T Merger, TCI Music and TCI have entered into a number of
agreements more fully described below covering matters such as the provision of
services and allocation of tax liabilities. TCI, prior to the AT&T Merger, also
provided certain administrative, financial, legal, treasury, accounting, tax and
other services to TCI Music and made 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, are as favorable to TCI Music as could be obtained from
unaffiliated third parties. As a result of arrangements entered into in
connection with the AT&T Merger, although Liberty is a wholly owned subsidiary
of AT&T, a majority of the members of Liberty's Board of Directors is comprised
of persons designated by TCI prior to the AT&T Merger who will serve as
directors until at least 2006. Therefore, Liberty's Board and its management,
not AT&T, exercise control over the business and affairs of Liberty, as holder
of 98.2% of the voting power of TCI Music.
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
digital music 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 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 "Amended TCI 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
77
<PAGE> 86
TCI Music under the Amended TCI 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. Payments made by TCI under
the Contribution Agreement were approximately $20 million in fiscal 1998.
Affiliation Agreement. In connection with the DMX 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.
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 fiscal
year ended December 31, 1998, TCI Music recognized $8.5 million pursuant to the
Affiliation Agreement. In addition, the Company received subscriber revenue from
TCI of $3.2 million in connection with the distribution of the DMX Service
through TCI.
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 May 7, 2000, with respect to the Superaudio
service.
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 Series A
common stock issued to DMX shareholders in connection with the DMX Merger. Each
TCI Right entitled the holder to require TCI to purchase from such holder the
related share of Series A common stock for $8.00 per share (subject to reduction
by the aggregate amount per share of any dividend and certain other
distributions, if any, made by TCI Music to its shareholders) 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 Series A common stock (trading together
with associated TCI Rights) did not equal or exceed $8.00 per share for a period
of at least 20 consecutive trading days. The TCI Rights became exercisable on
July 11, 1998 through August 13, 1998. During the exercise period TCI Rights
with respect to 7,602,483 shares of Series A common stock were exercised and
such shares were purchased by TCI for cash. All unexercised TCI Rights expired
on August 13, 1998.
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 loan was paid in full on March 2, 1998.
Services Agreement. Pursuant to a Services Agreement between TCI and TCI
Music (the "Services Agreement"), prior to the AT&T Merger TCI provided 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
included: (1) 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, (2) other services typically performed
by TCI's accounting, finance, treasury, corporate, legal, tax, benefits,
insurance, facilities, purchasing, and advanced information technology
department personnel, (3) use of telecommunications and data facilities and of
systems and software developed, acquired or licensed by TCI from time to time
for financial forecasting,
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<PAGE> 87
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, (4) technology support and
consulting services and (5) 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 provided TCI Music access to any volume
discounts that may be available to TCI for the purchase of certain equipment.
The Services Agreement also provided that TCI, for so long as TCI continued to
beneficially own at least a majority of the voting power of the outstanding
shares of the Voting Securities, would 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 was 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
reimbursed 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. The Services Agreement provided that it would
continue in effect until terminated by (1) TCI Music upon 60 days' prior written
notice to TCI, (2) TCI at any time after three years upon not less than six
months' prior notice to TCI Music, and (3) either party if the other party is
the subject of certain bankruptcy or insolvency-related events. As a result of
the AT&T Merger, TCI no longer provides services under the Services Agreement.
However, the Services Agreement may be assigned by TCI to Liberty.
INDEPENDENT AUDITORS
The firm of KPMG LLP serves as the Company's independent certified public
accountants. A partner of KPMG LLP will be present at the annual meeting with
the opportunity to make a statement if KPMG LLP so desires and will be available
to respond to appropriate questions.
EXPERTS
The consolidated balance sheets of TCI Music, Inc. and subsidiaries as of
December 31, 1998 and 1997, and the related consolidated statements of
operations and comprehensive earnings, shareholders' equity (deficit), and cash
flows for the year ended December 31, 1998 and the six months ended December 31,
1997 and the related consolidated statements of operations and comprehensive
earnings, shareholders' equity (deficit), and cash flows of DMX, LLC and
subsidiaries (Predecessor) for the nine months ended June 30, 1997 and the year
ended September 30, 1996, which appear in the Company's Annual Report on Form
10-K, incorporated by reference herein, have been incorporated by reference
herein in reliance upon the reports of KPMG LLP, independent certified public
accountants, and upon the authority of said firm as experts in accounting and
auditing.
SHAREHOLDERS' PROPOSALS
Proposals by shareholders for which consideration is desired at the 2000
annual meeting of shareholders must be received by the Company by March 30, 2000
to be considered for inclusion in proxy materials for the 2000 annual meeting.
Such proposals may be included in next year's Proxy Statement if they comply
with certain rules and regulations of the Commission.
Shareholders who intend to present a proposal to be considered at the
annual meeting of shareholders to be held in 2000 must provide notice of such
proposal to the Company not later than June 15, 2000. Otherwise, the proxies
will have discretionary authority to vote on the matter.
All notices should be sent to TCI Music, Inc., 67 North Irving Plaza North,
4th Floor, New York, New York, 10003, Attn: Secretary.
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<PAGE> 88
OTHER BUSINESS
The Company does not anticipate that any other matters will be brought
before the annual meeting. However, if any additional matters shall properly
come before the annual meeting, it is intended that the persons authorized under
proxies may, in the absence of instructions to the contrary, vote or act thereon
in accordance with their best judgment.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
The following documents filed with the Commission by the Company (File No.
0-22815) are incorporated herein by reference:
- the Company's Annual Report on Form 10-K for the year ended December 31,
1998, as amended by Form 10K/A, filed April 30, 1999
- The Company's Quarterly Report on Form 10-Q for the quarter ended March
31, 1999
- The Company's Current Reports on Form 8-K dated April 6, 1999, May 5,
1999, May 19, 1999 and May 21, 1999, as amended
All documents subsequently filed by the Company pursuant to Section 13(a),
13(c), 14 or 15(d) of the Exchange Act after the date of this proxy statement
and prior to the date of the annual meeting shall be deemed to be incorporated
by reference in this proxy statement and to be a part hereof from the dates of
filing of such documents.
Any statement contained in a document incorporated or deemed to be
incorporated by reference in this proxy statement shall be deemed to be modified
or superseded for purposes of this proxy statement to the extent that a
statement contained herein or in any other subsequently filed document which
also is or is deemed to be incorporated by reference in this proxy statement
modifies or supersedes such previous statement. Any statement so modified or
superseded shall not be deemed, except as so modified or superseded, to
constitute a part of this proxy statement.
All information appearing in this proxy statement is qualified in its
entirety by the information and financial statements (including notes thereto)
appearing in the documents incorporated herein by reference.
THIS PROXY STATEMENT INCORPORATES BY REFERENCE DOCUMENTS THAT ARE NOT
PRESENTED HEREIN OR DELIVERED HEREWITH. THESE DOCUMENTS (OTHER THAN EXHIBITS TO
SUCH DOCUMENTS UNLESS SUCH EXHIBITS ARE SPECIFICALLY INCORPORATED BY REFERENCE
HEREIN) ARE AVAILABLE WITHOUT CHARGE, UPON WRITTEN OR ORAL REQUEST BY ANY PERSON
TO WHOM THIS PROXY STATEMENT HAS BEEN DELIVERED, FROM TCI MUSIC, INC., 67 NORTH
IRVING PLAZA NORTH, 4TH FLOOR, NEW YORK, NEW YORK, 10005, ATTN: SECRETARY IN
ORDER TO ENSURE TIMELY DELIVERY OF THE DOCUMENTS, ANY SUCH REQUEST SHOULD BE
RECEIVED BY AUGUST 20, 1999.
By the Board of Directors
/s/ Lee Masters
------------------------------------
President and Chief Executive
Officer
New York, New York
July 30, 1999
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INDEX OF DEFINED TERMS
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C>
1997 Plan................................................... 64
1999E....................................................... 33
25th Trading Percentile..................................... 33
75th Trading Percentile..................................... 33
Access Agreement............................................ i
Additional Contributed Subsidiaries......................... 39
Additional Ownership Interests.............................. 42
Affiliation Agreement....................................... 78
Amended TCI Contribution Agreement.......................... 77
annual meeting.............................................. i
AT&T........................................................ i
AT&T Broadband.............................................. 12
AT&T Merger................................................. i
AT&T Systems................................................ 17
Bankruptcy Law.............................................. 46
Box Merger Agreement........................................ 77
broker non-votes............................................ 10
Code........................................................ 3
common stock................................................ ii
Company..................................................... 1
Contributed Subsidiaries.................................... i
Deferred Compensation and Stock Appreciation Rights Plan.... i
DMX......................................................... 1
DMX Merger.................................................. 71
DMX Services................................................ 76
DMX-Canada.................................................. 76
EBITDA...................................................... 35
Effective Date.............................................. 5
Engagement Letter........................................... 31
Exchange Act................................................ iii
Exchange Securities......................................... 45
Executives.................................................. 55
Executive SARs.............................................. 5
Interactive Programming Opportunities....................... 18
Interactive Video Services.................................. 17
Interim Investment.......................................... 42
Interim Opportunities....................................... 42
interim period.............................................. 42
Investee Companies.......................................... 32
LCI......................................................... 75
Liberty..................................................... 1
Liberty Digital............................................. 13
Liberty DMX................................................. 17
Liberty Media Group......................................... 12
LTM......................................................... 35
Masters Employment Agreement................................ 13
MSOs........................................................ 23
MTVN........................................................ 1
MTVN Partnership............................................ 12
</TABLE>
81
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<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C>
MTVN Partnership Business................................... 12
MTVN Partnership Excluded Assets............................ 12
MTVN Partnership Television Business........................ 12
named executive officers.................................... 63
NDTC........................................................ 76
Old Affiliation Agreement................................... 78
paragraph 4................................................. 39
Receiver.................................................... 46
Record Date................................................. 10
Redeemable Capital Stock.................................... 44
Redemption Event............................................ 44
Redemption Securities....................................... 44
SARs........................................................ 64
Series A preferred stock.................................... 12
Services Agreement.......................................... 78
Shaw........................................................ 76
Sky-LA...................................................... 76
SonicNet.................................................... 1
Spin Off.................................................... 45
SSI......................................................... 77
StarNet..................................................... 75
StarNet Group............................................... 75
StarNet Interactive......................................... 75
Strike Price................................................ 5
Suburban.................................................... 75
Tax Sharing Agreement....................................... 4
TCI Music................................................... 1
TCI Rights.................................................. 69
TCI Stock Plan.............................................. 63
The Box..................................................... 1
uninstructed shares......................................... 10
Valuation Date.............................................. 56
Valuation Price Per Share................................... 5
Voting Securities........................................... ii
</TABLE>
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APPENDIX I
CONTRIBUTION AGREEMENT
This Contribution Agreement (this "Agreement") is made on the 23rd day of
April, 1999, by and among Liberty Media Corporation, a Delaware corporation
("LMC"), LMC Capital, LLC, a Delaware limited liability company ("LMC Capital"),
Liberty DMX, Inc., a Colorado corporation ("Liberty DMX"), TCI Interactive,
Inc., a Delaware corporation ("TCI-I"), ETC w/tci, Inc., a Delaware corporation
("ETC") (collectively, the "Contributing Parties"), and TCI Music, Inc., a
Delaware corporation ("TCI Music").
RECITALS
A. LMC directly owns 100% of the outstanding capital stock of each of the
following Subsidiaries (defined in Section 1 below): LMC Digital, Inc., Liberty
IP, Inc., Liberty TE, Inc., Liberty PL, Inc., TCI Java, Inc., Liberty KI, Inc.,
Liberty Medscholar, Inc., TCI Online Health KI Holdings, Inc., TCI Online Health
RN Holdings, Inc., Liberty Village, Inc., Liberty HG, Inc., Liberty IATV Events,
Inc. and Liberty IATV, Inc. (collectively, the "LMC Direct Subsidiaries"). Each
of the LMC Direct Subsidiaries, directly or indirectly, owns 100% of the
outstanding capital stock of, or 100% of the ownership interests in (if the
Subsidiary is an entity other than a corporation), the Subsidiary(s) set forth
under its respective name on Schedule 1. The LMC Direct Subsidiaries and the
Subsidiaries set forth under the name of each of the LMC Direct Subsidiaries on
Schedule 1 will be referred to in this Agreement collectively as the "LMC
Contributed Subsidiaries." TCI-I, an Affiliate of LMC, directly owns 100% of the
outstanding capital stock of TCI Online Sports Holdings, Inc. and TCI Online
Village Holdings, Inc. (the "TCI-I Contributed Subsidiaries"). ETC, an indirect
Subsidiary of LMC, directly owns 100% of the outstanding capital stock of TCI
Lightspan Holdings, Inc. and TCI Academic Systems Holdings, Inc. (the "ETC
Contributed Subsidiaries). The LMC Contributed Subsidiaries, the TCI-I
Contributed Subsidiaries and the ETC Contributed Subsidiaries, all as set forth
on Schedule 1, will be referred to in this Agreement collectively as the
"Contributed Subsidiaries."
B. The percentage ownership interest (if the Contributed Subsidiary is an
entity other than a corporation) or the percentage equity interest, including
the number of shares of capital stock representing the equity interest (if the
Contributed Subsidiary is a corporation), of (a) LMC (or its Subsidiaries) in
each of the LMC Contributed Subsidiaries, (b) TCI-I in each of the TCI-I
Contributed Subsidiaries and (c) ETC in each of the ETC Contributed Subsidiaries
is set forth on Schedule 1 next to the name of such Contributed Subsidiary and
will be referred to in this Agreement collectively as the "Equity Interests."
C. LMC is a party to a letter agreement with AT&T Corporation ("AT&T")
dated as of March 9, 1999 (the "Access Agreement"), which incorporates therein
by reference Schedule 7.14 ("Schedule 7.14") to the Agreement and Plan of
Restructuring and Merger dated as of June 23, 1998, among Tele-Communications,
Inc., Italy Merger Corp. and AT&T (the "Merger Agreement"). Pursuant to the
Access Agreement, among other things, AT&T has agreed, subject to the terms and
conditions thereof, to make certain digital channel capacity available to LMC
for the provision of interactive video services.
D. In accordance with the terms set forth in this Agreement and the Liberty
Interactive Restructuring Plan, the principal terms of which are set forth on
Exhibit A to this Agreement (the "Restructuring Plan"), (i) Liberty DMX desires
to effect the assignment of certain rights, benefits and obligations under the
Access Agreement and the transfers of the Equity Interests in the Contributed
Subsidiaries (through certain intermediary pre-closing assignments and transfers
by LMC and the Contributing Parties) to TCI Music and (ii) Liberty DMX desires
to contribute cash and debt payable to LMC (or a wholly owned subsidiary of LMC)
equal to an aggregate amount of $150,000,000. The assignment, transfers and
contributions described in clauses (i) and (ii) above will be referred to in
this Agreement collectively as the "Contribution."
E. TCI Music desires to accept the Contribution, and in consideration
thereof, TCI Music desires to issue shares of TCI Music, Inc. Series B Common
Stock, par value $0.01 per share (the "Series B Common
<PAGE> 92
Stock"), and to issue shares of TCI Music, Inc. Series B Convertible Preferred
Stock, par value $0.01 per share, to Liberty DMX in accordance with the terms of
this Agreement and the Restructuring Plan.
AGREEMENTS
In consideration of the mutual covenants set forth in this Agreement and
other good and valuable consideration, the receipt and sufficiency of which are
acknowledged, the parties agree as follows:
SECTION 1.
DEFINITIONS
As used in this Agreement, terms with initial capital letters that are not
otherwise defined will have the meanings ascribed to them below, unless the
context clearly requires otherwise:
Access Agreement has the meaning set forth in Recital C.
Additional Advance has the meaning set forth in Section 4.9(b).
Additional Contributed Subsidiary means any Subsidiary of LMC formed
following the date hereof in order to pursue an Opportunity or investment
pursuant to Section 4.9.
Additional Ownership Interests has the meaning set forth in Section 4.9.
Affiliate means, with respect to any Person, any other Person Controlling,
Controlled by, or under common Control with, such first Person.
Assignment has the meaning set forth in Section 2.4.2.
Assumed Obligations has the meaning set forth in Section 2.4.1.
Assumption has the meaning set forth in Section 2.4.1.
Board has the meaning set forth in Section 3.3.12.
Business Day means any day other than a Saturday or Sunday or a day on
which banks in New York, New York or Denver, Colorado are authorized to be
closed.
Cash Contribution Amount means an amount equal to the positive difference,
if any, between (a) $150,000,000 and (b) the sum of the Liberty Digital
Obligations, the TCI Music Debt and the Additional Advances.
Charter Amendments has the meaning set forth in Section 3.3.12.
Closing means the consummation of the Contribution.
Closing Date has the meaning set forth in Section 7.1.
Contributing Parties has the meaning set forth in the preamble to this
Agreement.
Contributed Subsidiaries has the meaning set forth in Recital A.
Contribution has the meaning set forth in Recital D.
Control means, with respect to any Person, the possession, directly or
indirectly, of the power to direct or cause the direction of the management and
policies of such Person, whether by the ownership of voting securities, by
contract or otherwise.
Controlled Affiliate means, with respect to any Person, any other Person
Controlled by such first Person.
Deferred Compensation Arrangements has the meaning set forth in Section
4.14.
Designation means the Certificate of Designations attached as Exhibit B to
this Agreement.
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Equity Interests has the meaning set forth in Recital B.
Excluded Obligations has the meaning set forth in Section 2.4.1.
ETC Contributed Subsidiaries has the meaning set forth in Recital A.
ETC Contributed Subsidiaries Value has the meaning set forth in Section
2.2.4.
Excluded Liabilities has the meaning set forth in Section 2.4.2.
Fairness Opinion has the meaning set forth in Section 3.3.8.
Financial Statements has the meaning set forth in Section 3.2.3.
GAAP means generally accepted accounting principles as in effect from time
to time in the United States of America.
Governmental Authority means (a) the United States of America, (b) any
state, commonwealth, territory or possession of the United States of America and
any political subdivision thereof (including counties, municipalities and the
like), (c) any foreign (as to the United States of America) sovereign entity and
any political subdivision thereof, or (d) any agency, authority or
instrumentality of any of the foregoing, including any court, tribunal,
department, bureau, commission or board.
Interactive Video Services has the meaning set forth in Section 4.5.
Interim Opportunities has the meaning set forth in Section 4.9.
Interim Period has the meaning set forth in Section 4.9.
Investment Documents has the meaning set forth in Section 3.2.3.
Liberty Digital means Liberty Digital, LLC.
Liberty Digital Obligations means the aggregate amount outstanding as of
the date hereof on all loans and advances made by LMC to any of the Contributed
Subsidiaries and which amount does not exceed $50,000,000.
Lien means any restriction on transfer, mortgage, pledge, lien, charge,
encumbrance or other security interest (other than any of the foregoing created
by or resulting from (i) this Agreement and (ii) applicable federal and state
securities laws).
LMC Contributed Subsidiaries has the meaning set forth in Recital A.
LMC Contributed Subsidiaries Value has the meaning set forth in Section
2.2.4.
LMC Direct Subsidiaries has the meaning set forth in Recital A.
LMC Policy has the meaning set forth in Section 4.8.
Material Adverse Effect means, with respect to any Person, any event,
change or effect that (individually or when aggregated with other such events,
changes or effects affecting such Person) is materially adverse to the business,
properties, operations or condition (financial or otherwise) of such Person,
other than any such event, change or effect arising out of or resulting from
general business or economic conditions or from changes in or affecting the
digital, new media, interactive and internet services industries generally.
Meeting has the meaning set forth in Section 4.1.
Merger Agreement has the meaning set forth in Recital C.
NASD means National Association of Securities Dealers, Inc.
Opportunity has the meaning assigned to the term "Interactive Programming
Opportunities" in Schedule 4.8.
Ownership Interest has the meaning set forth in Section 3.2.3.
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Paragraph 4 has the meaning set forth in Section 2.1.1.
Parties means, collectively, the Contributing Parties and TCI Music.
Person means a human being or a corporation, general or limited
partnership, limited or unlimited liability company, trust, association,
unincorporated organization, Governmental Authority or other entity.
Proxy Statement has the meaning set forth in Section 4.2.
Registration Rights Agreement has the meaning set forth in Section 4.6.
Required Consents has the meaning set forth in Section 3.1.2.
Restructuring Plan has the meaning set forth in Recital D.
Schedule 7.14 has the meaning set forth in Recital C.
SEC means the Securities and Exchange Commission.
Securities Act means the Securities Act of 1933, as amended.
Series B Common Stock has the meaning set forth in Recital E.
Series B Preferred Stock means the Series B Convertible Preferred Stock of
TCI Music having the rights, powers and preferences set forth in the
Designation.
Share Issuance has the meaning set forth in Section 3.3.12.
Share Price has the meaning set forth in Section 2.4.2.
Subsidiary means, with respect to any Person, any other Person that such
Person Controls and in which all the outstanding common stock, in the case of a
corporation, or, in the case of a Person that is not a corporation, all the
ownership interests, are owned, directly, or indirectly, by such Person,
including with respect to such Person, any other Person that pursuant to the
preceding clause would be a Subsidiary of any other Subsidiary.
Tax Agreement has the meaning set forth in Section 4.6.2.
TCI-I Contributed Subsidiaries has the meaning set forth in Recital A.
TCI Music Debt means the outstanding debt evidenced by the promissory note
in the maximum principal amount of $15,000,000 payable by TCI Music to LMC.
Transaction Documents means the Registration Rights Agreement, the Tax
Agreement, the Assignment, the Assumption, the Deferred Compensation
Arrangements and any and all other documents, instruments and agreements to be
executed and delivered pursuant to this Agreement, or in connection with the
transactions contemplated by this Agreement.
SECTION 2.
CONTRIBUTION AND ISSUANCE OF SHARES; ASSUMED LIABILITY
Subject to the terms and conditions set forth in this Agreement, and in the
chronological order and sequence set forth in the Restructuring Plan, the
Parties agree as follows:
2.1 Pre-closing Transfers.
2.1.1 Immediately prior to the Closing and the consummation of the
transfer contemplated by Section 2.1.2, LMC will (a) assign all of its
rights, benefits and obligations granted to it pursuant to the Access
Agreement with respect to Paragraph 4 of Schedule 7.14 with respect to
cable television systems located in the United States and Canada ("Assigned
Paragraph 4 Rights"), and (b) transfer all of the shares of the capital
stock of each of the LMC Direct Subsidiaries and (c) transfer the Liberty
Digital Obligations, the TCI Music Debt, any note or instrument
representing an Additional Advance and
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contribute cash in an amount equal to the Cash Contribution Amount, to LMC
Capital, as an equity contribution;
2.1.2 Immediately after the consummation of the transfer contemplated
by Section 2.1.1 and immediately prior to the Closing, LMC Capital will (a)
assign all of its rights, benefits and obligations under the Access
Agreement with respect to the Assigned Paragraph 4 Rights, and (b) transfer
all of the shares of the capital stock of each of the LMC Direct
Subsidiaries and any Additional Contributed Subsidiary and (c) transfer the
Liberty Digital Obligations, the TCI Music Debt, any note or instrument
representing an Additional Advance and contribute cash in an amount equal
to the Cash Contribution Amount, to Liberty DMX, as a capital contribution;
2.1.3 Prior to the Closing, LMC Capital will cause Liberty VJN, Inc.
to be merged with and into Liberty DMX.
2.1.4 Prior to the Closing, TCI-I will transfer pursuant to an
intracompany plan of reorganization all of the shares of the capital stock
of the TCI-I Contributed Subsidiaries to Liberty DMX in exchange for 94
shares of the common stock of Liberty DMX.
2.1.5 Prior to the Closing, ETC will transfer pursuant to an
intracompany plan of reorganization all of the shares of the capital stock
of the ETC Contributed Subsidiaries to Liberty DMX in exchange for 18
shares of the common stock of Liberty DMX.
2.2 The Closing Contribution. At the Closing, Liberty DMX will (a)
assign all of its rights, benefits and obligations under the Access
Agreement with respect to the Assigned Paragraph 4 Rights, (b) transfer all
of the shares of the capital stock of each of the LMC Direct Subsidiaries
and any Additional Contributed Subsidiary, the TCI-I Contributed
Subsidiaries and the ETC Contributed Subsidiaries, and (c) contribute the
Liberty Digital Obligations, the TCI Music Debt, any note or instrument
representing an Additional Advance and contribute cash in an amount equal
to the Cash Contribution Amount, to TCI Music.
2.3 All Transfers and Contributions Subject to Consummation of the
Contribution at the Closing. The obligation of the Parties to consummate
each of the transfers and contributions set forth in Sections 2.1 and 2.2
is subject to the consummation of each other transfer and contribution and
the consummation of the Contribution at the Closing.
2.4 Issuance of Series B Common Stock, Series B Preferred and
Assumption of Liabilities.
2.4.1 At the Closing, TCI Music and Liberty DMX will enter into an
assignment and assumption agreement in a form reasonably acceptable to TCI
Music and Liberty DMX (the "Assignment"), pursuant to which (i) Liberty DMX
will assign all of its rights, benefits and obligations under the Access
Agreement with respect to the Assigned Paragraph 4 Rights and (ii) TCI
Music will accept and assume such rights, benefits and obligations and
agree to be bound by the applicable provisions of the Access Agreement with
respect to the Assigned Paragraph 4 Rights as if it were a signatory to the
Access Agreement. In addition to the assumption of obligations under the
Assignment, as of the Closing, except for any excluded liabilities set
forth on Schedule 2.4.1 (the "Excluded Obligations"), TCI Music will enter
into an assumption agreement in a form reasonably acceptable to TCI Music
and Liberty DMX (the "Assumption"), pursuant to which TCI Music will
assume, and after the Closing, TCI Music will pay, discharge and perform
when due, the obligations and liabilities of the Contributing Parties, if
any, that relate solely to the Contributed Subsidiaries and are set forth
on Schedule 2.4.1 (as such Schedule may be modified prior to Closing to
reflect any Additional Contributed Subsidiaries or additional obligations
associated with any Interim Investment) (the foregoing, together with the
obligations assumed by it under the Assignment, are hereinafter referred to
as the "Assumed Obligations").
2.4.2 TCI Music will issue and, at the Closing, will deliver to
Liberty DMX (i) 109,450,167 shares of Series B Common Stock and (ii)
150,000 shares of Series B Preferred Stock, in each case free and clear of
all Liens (other than Liens created by any Contributing Party).
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SECTION 3.
REPRESENTATIONS AND WARRANTIES
3.1 Representations and Warranties of the Contributing Parties. Each
Contributing Party, solely as to itself and not as to any other Contributing
Party, represents and warrants, to TCI Music that:
3.1.1 Organization, Good Standing and Authority. It, and each of its
Contributed Subsidiaries, is a corporation or limited liability company
duly organized, validly existing and in good standing under the laws of the
jurisdiction of its incorporation or organization and has all requisite
corporate or organizational power and authority to enter into and to
perform its obligations under this Agreement and any other agreements and
instruments to be executed and delivered by it pursuant to this Agreement.
3.1.2 Authorization and Validity; Consents; No Conflicts. The
execution and delivery by it of, and the performance by it of its
obligations under, this Agreement and the Transaction Documents to which it
is a party have been duly authorized by all requisite corporate or
organizational action of such Contributing Party. Assuming the due
execution and delivery by each other Party hereto, and thereto, this
Agreement constitutes, and when executed and delivered by it pursuant to
this Agreement, the Transaction Documents to which it is a party, will
constitute the legal, valid and binding obligations of such Contributing
Party, enforceable in accordance with their respective terms, except as
such enforceability may be affected by applicable bankruptcy,
reorganization, insolvency, moratorium or similar laws affecting creditors'
rights generally or by general equitable principles. Except for any
required notices, filings and consents set forth on Schedule 3.1.2 (the
"Required Consents"), no consent or approval of, notice to, or filing with,
any other Person is required, on behalf of itself or on behalf of any of
its Contributed Subsidiaries, in connection with the execution, delivery
and performance by such Contributing Party of this Agreement or any of the
Transaction Documents to which it is a party, or the consummation by it of
the transactions contemplated hereby or thereby, the failure of which to be
obtained, given or made would have a Material Adverse Effect on any of its
Contributed Subsidiaries or on its ability to perform its obligations
under, and consummate the transactions contemplated by, this Agreement or
any of the Transaction Documents to which it is a party. The execution and
delivery by such Contributing Party of, and the performance by it of its
obligations under, this Agreement and any of the Transaction Documents to
which it is a party will not violate its, or any of its Contributed
Subsidiaries', certificate or articles of incorporation, bylaws, articles
of organization or operating agreement or any material agreement to which
it, or any of its Contributed Subsidiaries, is a party or by which it, or
any of its Contributed Subsidiaries, is bound or affected except as would
not have a Material Adverse Effect on its Contributed Subsidiaries, or on
the property of its Contributed Subsidiaries (taken as a whole), or on its
ability to consummate the transactions under this Agreement.
3.1.3 Brokers' and Finders' Fees. It has not incurred, and will not
incur, directly or indirectly, any liability for brokerage or finders' fees
or agents' commissions or investment bankers' fees or any similar charges
in connection with this Agreement or any transaction contemplated hereby.
3.1.4 Information. It has been given full access to and ample
opportunity to review such financial and other information concerning the
transactions contemplated by this Agreement and the Transaction Documents
as it has deemed necessary to make an informed investment decision and has
availed itself of such access and opportunity to the full extent that it
desired. It acknowledges that TCI Music has afforded it the opportunity to
make inquiries and obtain information from TCI Music and its
representatives and advisors. Based upon its own investigations and upon
information provided by TCI Music, it has relied on its own tax, legal,
financial and regulatory advisers with regard to all matters relating to
this Agreement and not on any advice or recommendation of TCI Music.
3.1.5 Legal Proceedings. There is no injunction, judgment or order
outstanding, or any action, suit, complaint, proceeding or investigation by
or before any Governmental Authority or any arbitrator pending, or to such
Contributing Party's knowledge, threatened, against such Contributing Party
or any of its Contributed Subsidiaries that, individually or in the
aggregate, could reasonably be expected to have a
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Material Adverse Effect on the Contributed Subsidiaries taken as a whole or
on the ability of such Contributing Party to consummate the transactions
contemplated by this Agreement.
3.2 Additional Representations and Warranties.
3.2.1 Access Agreement. LMC represents and warrants to TCI Music that
the Access Agreement has been duly executed and delivered by it, and is a
valid and binding obligation of it, enforceable in accordance with its
terms, except as such enforceability may be limited by bankruptcy,
insolvency, reorganization, moratorium or similar laws affecting creditors
rights generally and by general principles of equity and there is no
action, suit, investigation or proceeding, governmental or otherwise,
pending, or to the best of LMC's knowledge, threatened against it
specifically relating to the Access Agreement, nor is there any basis
therefor known to it. LMC, LMC Capital and Liberty DMX further represent
and warrant to TCI Music, that the Assignment and all assignment documents
necessary for the assignment of LMC's rights as to the Access Agreement
with respect to the Assigned Paragraph 4 Rights to Liberty DMX, when
executed and delivered, will vest in TCI Music such rights, benefits and
obligations under the Access Agreement as are specified herein.
3.2.2 Equity Interests. Liberty DMX represents and warrants to TCI
Music that, immediately following the consummation of the pre-closing
transfers referred to in Section 2.1, and as of the Closing Date:
(i) It will have good and valid title (directly or indirectly) to
the Equity Interests in the Contributed Subsidiaries, free and clear of
all Liens (other than Liens created by TCI Music);
(ii) If the Contributed Subsidiary set forth on Schedule 1 is a
corporation, it, or one of its Subsidiaries, will hold of record and own
beneficially the number of shares of the outstanding capital stock of
such Contributed Subsidiary set forth on Schedule 1, free and clear of
all Liens (other than Liens created by TCI Music), and such shares will
represent the entire Equity Interest in and 100% of the outstanding
capital stock of each such Contributed Subsidiary. If the Contributed
Subsidiary is not a corporation, it, or one of its Subsidiaries, will
hold the Equity Interest of such Contributed Subsidiary, free and clear
of all Liens (other than Liens created by TCI Music), and such Equity
Interest will represent 100% of the ownership interests in such
Contributed Subsidiary;
(iii) It will not be a party to any option, warrant, purchase
right, or other contract or commitment that could require it to sell,
transfer or otherwise dispose of any of its Equity Interests in such
Contributed Subsidiary (other than this Agreement); and
(iv) It will not be a party to any voting trust, proxy, or other
agreement or understanding with respect to the voting of any of its
Equity Interests.
3.2.3 Contributed Subsidiaries. Liberty DMX represents and warrants
to TCI Music, as of the Closing Date, with respect to each of the
Contributed Subsidiaries that are set forth on Schedule 1 that:
(i) Organization, Good Standing and Authority. Such Contributed
Subsidiary is a corporation or limited liability company duly organized,
validly existing and in good standing under the laws of the jurisdiction
of its incorporation or organization. Such Contributed Subsidiary is
duly authorized to conduct business and is in good standing under the
laws of each jurisdiction where such qualification is required, except
where the lack of such qualification would not have a Material Adverse
Effect on such Contributed Subsidiary.
(ii) Capitalization and Ownership of Contributed Subsidiaries. The
authorized capital stock and the number of shares which are issued and
outstanding of such Contributed Subsidiary that is a corporation are
described on Schedule 1. All of the issued and outstanding shares of
such Contributed Subsidiary have been duly authorized, are validly
issued, fully paid, and nonassessable and will be held of record and
beneficially by it. All of the ownership interest in such Contributed
Subsidiary that is not a corporation will be held of record and
beneficially by it. Except as set forth on Schedule 3.2.3(ii), (i) there
are no outstanding or authorized options, warrants, purchase rights,
subscription rights, conversion rights, exchange rights, or other
contracts or commitments that could
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require such Contributed Subsidiary to issue, sell, or otherwise cause
to become outstanding any of its capital stock or ownership interests
and (ii) there are no outstanding or authorized stock appreciation,
phantom stock, profit participation, or similar rights with respect to
such Contributed Subsidiary. There are no voting trusts, proxies, or
other agreements or understandings with respect to the voting of the
capital stock or ownership interests of such Contributed Subsidiary.
(iii) Title to Assets. The ownership or equity interest in certain
corporations and business associations held by such Contributed
Subsidiary (the "Ownership Interest"), which is set forth next to the
name of such Contributed Subsidiary on Schedule 3.2.3(iii)(a), together
with all material agreements and instruments evidencing such Ownership
Interest or pursuant to which such Ownership Interest is held (the
"Investment Documents"), represent all of the assets of such Contributed
Subsidiary. The Investment Documents are listed on Schedule
3.2.3(iii)(b) and copies of each have been delivered to TCI Music. Such
Contributed Subsidiary has good and valid title to the Ownership
Interest set forth on Schedule 3.2.3(iii)(a) and good and valid title to
its rights under the Investment Documents set forth on Schedule
3.2.3(iii)(b), free and clear of all Liens (other than Liens created by
TCI Music or by the Investment Documents); such Contributed Subsidiary
has duly executed the Investment Documents to which it is a party and
such Investment Documents constitute the legal, valid, binding and
enforceable obligation of such Contributed Subsidiary that is a party to
such Investment Document; and there is no action, suit, investigation or
proceeding, governmental or otherwise, pending, or to the best knowledge
of Liberty DMX threatened against such Contributed Subsidiary
specifically relating to any of such Investment Documents, nor is there
any basis therefor known to it.
(iv) Undisclosed Liabilities. Except for (i) the Liberty Digital
Obligations, (ii) any Additional Advances, (iii) the matters disclosed
in Schedule 2.4.1 or Schedule 3.2.3(iv) (as such Schedules may be
revised in accordance with Section 4.9(b)), (iv) obligations,
liabilities and restrictions imposed upon a Contributed Subsidiary under
the Investment Documents, and (v) liabilities or obligations that are
not in the aggregate material to the business, assets, results of
operations or financial condition of the Contributed Subsidiaries, taken
as a whole, or that arise in the ordinary course of business after April
7, 1999 which are not material in amount, or that arise from changes in
general business or economic conditions or from events affecting the
digital, new media, interactive or internet services industries
generally, (a) such Contributed Subsidiary does not have any outstanding
liabilities or obligations (including any obligations to guarantee the
obligations of any other Person), or to the best of Liberty DMX's
knowledge, potential liability or obligation of any nature, whether due
or to become due, whether absolute, accrued, fixed or contingent or
otherwise; and (b) it has no actual knowledge of any existing fact or
circumstances that is reasonably likely to give rise in the future to
any liability or obligation of such Contributed Subsidiary, other than
any obligations or liabilities which may be incurred in accordance with
Section 4.9(b) and (c). Since April 7, 1999, other than as otherwise
permitted, contemplated or required by this Agreement, (a) the business
of such Contributed Subsidiary has been operated only in the ordinary
course, (b) such Contributed Subsidiary has not sold or disposed of any
of the Equity Interests or Ownership Interests, (c) there has been no
material adverse change in, and no event has occurred and no condition
exists which, individually or together with other events or conditions,
has had or, insofar as Liberty DMX can reasonably foresee, is reasonably
likely to have, a Material Adverse Effect on the Contributed
Subsidiaries, taken as a whole, and no event has occurred which, to
Liberty DMX's knowledge, is reasonably likely, individually or in the
aggregate, to result in any material breach, violation or default under
any material agreement to which such Contributed Subsidiary is a party
or by which it or its property is bound, or any Material Adverse Effect
on the Contributed Subsidiaries taken as a whole.
(v) Legal Compliance. Each Contributed Subsidiary has complied with
all applicable laws (including rules, regulations, codes, plans,
injunctions, judgments, orders, decrees, rulings, and charges
thereunder) of federal, state, local, and foreign governments (and all
agencies thereof), and no action, suit, proceeding, hearing,
investigation, charge, complaint, claim, demand, or notice has
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been filed or, to Liberty DMX's knowledge, commenced against any
Contributed Subsidiary alleging any failure so to comply, in each case
except where the failure so to comply has not had and, insofar as
reasonably can be foreseen, in the future will not have, either
individually or in the aggregate, a Material Adverse Effect on the
Contributed Subsidiaries taken as a whole.
3.2.4 Investment Intent. Liberty DMX represents and warrants to TCI
Music that it is acquiring the shares of Series B Common Stock and the
shares of Series B Preferred Stock for investment purposes only and
acknowledges that such shares may not be sold without registration under
the Securities Act and applicable state securities laws, unless an
exemption therefrom is available.
3.3 Representations and Warranties of TCI Music. TCI Music represents and
warrants to the Contributing Parties that:
3.3.1 Organization, Good Standing and Authority. TCI Music is a
corporation duly organized, validly existing and in good standing under the
laws of the jurisdiction of its incorporation and has all requisite
corporate power and authority to enter into and to perform its obligations
under this Agreement and the other agreements and instruments to be
executed and delivered by it pursuant to this Agreement.
3.3.2 Authorization and Validity; Consents; No Conflicts. The
execution and delivery by TCI Music of, and subject to obtaining approval
of its stockholders, the performance by it of its obligations under, this
Agreement and the Transaction Documents to which it is a party have been
duly authorized by all requisite corporate action of TCI Music. Assuming
the due execution by the other Parties hereto, and thereto, this Agreement
constitutes, and when executed and delivered by TCI Music pursuant to this
Agreement, the Transaction Documents to which it is a party will
constitute, the legal, valid and binding obligations of TCI Music,
enforceable in accordance with their terms, except as such enforceability
may be affected by applicable bankruptcy, reorganization, insolvency,
moratorium or similar laws affecting creditors' rights generally or by
general equitable principles. Subject to obtaining stockholder approval,
except for the Required Consents set forth on Schedule 3.1.2, no consent or
approval of, notice to, or filing with, any other Person is required in
connection with the execution, delivery and performance by TCI Music of
this Agreement or any of the Transaction Documents to which it is a party,
or the consummation by it of the transactions contemplated hereby or
thereby, the failure of which to be obtained, given or made would have a
Material Adverse Effect on TCI Music or on its ability to perform its
obligations under this Agreement or any of the Transaction Documents to
which it is a party. The execution and delivery by TCI Music of, and the
performance by it of its obligations under, this Agreement and the
Transaction Documents to which it is a party will not violate its
certificate of incorporation or bylaws or any material agreement to which
it is a party or by which it is bound or affected.
3.3.3 Shares. When issued and delivered by it at the Closing, the
shares of Series B Common Stock and the shares of Series B Preferred Stock
to be issued pursuant to this Agreement will be validly issued, fully paid
and nonassessable and will be owned by Liberty DMX or LMC, as the case may
be, free and clear of all Liens (other than Liens created by the terms of
this Agreement or by any of the Contributing Parties).
3.3.4 Investment Intent. TCI Music is acquiring the shares of capital
stock representing the Equity Interests for investment purposes only and
acknowledges that they may not be sold without registration under the
Securities Act and applicable state securities laws, unless an exemption
therefrom is available.
3.3.5 Capitalization of TCI Music. As of the date of this Agreement,
TCI Music's authorized common stock consists of 295,000,000 shares of
Series A Common Stock, par value $0.01 per share, and 200,000,000 shares of
Series B Common Stock, par value $0.01 per share. As of the Closing, TCI
Music's authorized common stock will consist of 1,000,000,000 shares of
Series A Common Stock, $0.01 per share, and 750,000,000 shares of Series B
Common Stock, par value $0.01 per share. As of January 31, 1999, there were
18,876,867 shares of Series A Common Stock issued and outstanding and
62,500,000 shares of Series B Common Stock issued and outstanding. As of
the date of this Agreement,
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TCI Music is authorized to issue up to 5,000,000 shares of preferred stock,
par value $0.01 per share, of which up to 2,250,000 shares were authorized
as Series A Convertible Preferred Stock pursuant to a Certificate of
Designations filed with the Delaware Secretary of State on December 16,
1997. As of January 31, 1999, there were 1,617,574 shares of Series A
Preferred Stock issued and outstanding. As of the Closing Date, TCI Music
will be authorized to issue at least 150,000 shares of Series B Preferred
Stock.
3.3.6 Absence of Certain Changes or Events. Since April 7, 1999,
there has not been any material adverse change in, and no event has
occurred and no condition exists which, individually or together with other
events or conditions, has had or, insofar as TCI Music can reasonably
foresee, is reasonably likely to have, a Material Adverse Effect on TCI
Music.
3.3.7 Brokers' and Finders' Fees. Except for the engagement of Morgan
Stanley Dean Witter as contemplated by Section 3.3.8, the fees and expenses
of which shall be borne by TCI Music, TCI Music has not incurred, and will
not incur, directly or indirectly, any liability for brokerage or finders'
fees or agents' commissions or investment bankers' fees or any similar
charges in connection with this Agreement or any transaction contemplated
hereby.
3.3.8 Fairness Opinion. TCI Music has received a written opinion of
Morgan Stanley Dean Witter (the "Fairness Opinion") reasonably satisfactory
in form, scope and substance to TCI Music to the effect that the
consideration to be issued by TCI Music to Liberty DMX in exchange for the
Contribution is fair from a financial point of view to the holders of the
capital stock of TCI Music other than LMC and its Subsidiaries.
3.3.9 Legal Compliance. Each of TCI Music and its Subsidiaries has
complied with all applicable laws (including rules, regulations, codes,
plans, injunctions, judgments, orders, decrees, rulings, and charges
thereunder) of federal, state, local, and foreign governments (and all
agencies thereof), and no action, suit, proceeding, hearing, investigation,
charge, complaint, claim, demand, or notice has been filed or, to TCI
Music's knowledge, commenced against TCI Music or any of its Subsidiaries
alleging any failure so to comply, in each case except where the failure so
to comply has not had and, insofar as reasonably can be foreseen, in the
future will not have, either individually or in the aggregate, a Material
Adverse Effect on TCI Music.
3.3.10 Information. TCI Music has been given full access to and ample
opportunity to review such financial and other information concerning the
Contribution as it has deemed necessary to make an informed investment
decision and TCI Music has availed itself of such access and opportunity to
the full extent that it desired. TCI Music acknowledges that each of the
Contributing Parties has afforded TCI Music the opportunity to make
inquiries and obtain information from such Contributing Party and its
representatives and advisors. Based upon its own investigation and upon
information provided by the Contributing Parties, TCI Music has relied on
its own tax, legal, financial and regulatory advisers with regard to all
matters relating to this Agreement and not on any advice or recommendation
of any of the Contributing Parties.
3.3.11 Assignment. The Assignment, when executed and delivered by TCI
Music, will obligate TCI Music to perform such of LMC's obligations under
the Access Agreement as are specified therein and the Assumption, when
executed and delivered by TCI Music, will obligate TCI Music to perform the
obligations specified therein.
3.3.12 Board Approval. The Board of Directors of TCI Music (the
"Board") has approved (i) this Agreement and the transactions contemplated
hereby, (ii) the issuance of the shares of TCI Music Series B Common Stock
to Liberty DMX at the Closing and upon conversion of the Series B Preferred
Stock and the issuance of the Series B Preferred Stock to Liberty DMX at
the Closing (collectively the "Share Issuance"), (iii) a resolution
adopting the Designation and (iv) the amendments to TCI Music's certificate
of incorporation (the "Charter Amendments") necessary to (1) delete Section
(b) of Article III of TCI Music's Certificate of Incorporation, (2) change
the name of TCI Music to Liberty Digital, Inc., (3) increase the authorized
capital stock of TCI Music from 500,000,000
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to 1,755,000,000, (4) increase the authorized shares of Series A Common
Stock from 295,000,000 to 1,000,000,000, and (5) increase the authorized
shares of Series B Common Stock from 200,000,000 to 750,000,000. The Board
of Directors of TCI Music has directed that the Share Issuance and the
Charter Amendments be submitted to stockholders of TCI Music at the Meeting
for their approval and has recommended that stockholders of TCI Music
approve the Share Issuance and the Charter Amendments.
3.3.13 The Preferred Stock. The Designation has been duly authorized
by all necessary corporate action on the part of TCI Music and, when filed
with the Delaware Secretary of State will constitute its legal, valid, and
binding obligation, enforceable against it in accordance with its terms. As
of the Closing Date, the number of shares of Series B Common Stock into
which the Series B Preferred Stock is convertible (subject to adjustment)
will have been reserved for issuance by TCI Music, and when issued and
delivered upon conversion of the Series B Preferred, such shares will be
duly authorized, validly issued, fully paid and nonassessable, and will be
issued to the holder of the Series B Preferred Stock free and clear of all
Liens (other than Liens created by such holder).
3.3.14 Shareholder Approval. The affirmative approval, by vote of the
holders of shares representing a majority of the combined voting power of
the outstanding shares of TCI Music's Series A and Series B Common Stock
(voting as a single class), is the only vote of the holders of any class or
series of capital stock of TCI Music necessary to adopt this Agreement and
approve the transactions contemplated hereby, except that approval, by vote
or written consent, of the holders of shares representing 66 2/3% of the
combined voting power of the outstanding shares of TCI Music's Series A and
Series B Common Stock (voting as a single class) is required for approval
of the Charter Amendments.
3.4 Additional Contributed Subsidiaries. To the extent that any Additional
Contributed Subsidiaries are formed in order to pursue Opportunities or make
related investments in accordance with Section 4.9, such Additional Contributed
Subsidiaries shall not be deemed to have made any representations and warranties
as of the date hereof, but Liberty DMX shall be deemed to make the
representations and warranties referred to in Section 3.2.2, 3.2.3 and 3.2.4
hereof as to such Additional Contributed Subsidiary immediately following the
formation of such Additional Contributed Subsidiary with respect to any
investment made by it as provided in Section 4.9.
SECTION 4.
COVENANTS
4.1 Stockholders' Meeting. TCI Music, acting through its Board, will, in
accordance with applicable law and TCI Music's charter and bylaws, duly call,
give notice of, convene and hold a meeting (including any adjournment or
postponement thereof, the "Meeting") of its stockholders as soon as practicable
following the date of this Agreement, but in any event no later than 20 Business
Days after the mailing of the Proxy Statement (as hereinafter defined) for the
purpose of considering and taking action upon the approval of the Share Issuance
and the Charter Amendments, and any other related matters required under
applicable law to be approved by such stockholders. The Board will recommend
such approval by the stockholders and shall take all reasonable, lawful action
to solicit such approval by its stockholders.
4.2 Proxy Statement. TCI Music will (i) as promptly as practicable
following the date of this Agreement, prepare and file with the SEC, and use its
best efforts to have cleared by the SEC and thereafter mail to its stockholders
as promptly as practicable, a proxy statement and a form of proxy, in connection
with the vote at the Meeting of TCI Music's stockholders with respect to this
Agreement and the transactions contemplated by this Agreement (such proxy
statement, together with any amendments thereof or supplements thereto, in each
case in the form or forms mailed to TCI Music's stockholders, is called the
"Proxy Statement") and (ii) otherwise comply with all legal requirements
applicable to the Meeting. TCI Music will include in the Proxy Statement the
recommendation of its Board that stockholders of TCI Music vote in favor of the
approval of the Contribution and the transactions contemplated by this
Agreement. Whenever any event occurs which is required to be set forth in an
amendment or supplement to the Proxy Statement, TCI Music
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shall promptly inform LMC of such occurrence and shall file such amendment or
supplement with the SEC or its staff or any other applicable Governmental
Authority, and shall use reasonable efforts to mail such amendment or supplement
to the stockholders of TCI Music at the earliest practicable date. TCI Music
shall notify LMC promptly of the receipt of any comments of the SEC or its staff
and of any request by the SEC or its staff or any other governmental officials
for amendments or supplements to the Proxy Statement or for additional
information, and will supply LMC with copies of all correspondence between it
and any of its representatives, on the one hand, and the SEC or its staff or any
other governmental officials, on the other hand, with respect to the Proxy
Statement. The Proxy Statement shall comply in all material respects with all
applicable requirements of law.
4.3 Notices and Consents. Each of the Contributing Parties and TCI Music
will use its commercially reasonable efforts to obtain the Required Consents and
to consummate the transactions contemplated hereby.
4.4 Vote in Favor of the Transaction. LMC will cause each of its
Controlled Affiliates to vote at the Meeting all shares of the capital stock of
TCI Music that each holds of record in favor of the Contribution and the
transactions contemplated by this Agreement, the Share Issuance, the Charter
Amendments, the election of the Board's nominees for director, the Deferred
Compensation Arrangements and the transactions contemplated by this Agreement.
4.5 Access Agreement. LMC agrees that, so long as it beneficially owns a
majority of the voting power of the outstanding capital stock of TCI Music, LMC
will use its commercially reasonable best efforts to make available to TCI Music
such rights and benefits as LMC and its Controlled Affiliates are entitled
pursuant to Paragraph 1 of Schedule 7.14 with respect to TCI Music's offering of
the Interactive Video Services referred to in The Assigned Paragraph 4 Rights
and TCI Music hereby agrees that, to the extent such rights and benefits are
made available to it, it shall fulfill all obligations of LMC thereunder. The
foregoing covenant shall not require LMC to exercise any rights under Paragraph
1 of Schedule 7.14 or to enter into any additional agreement or arrangement with
AT&T regarding the making of such rights and benefits available to TCI Music.
4.6 Registration Rights; Tax Agreement.
4.6.1 TCI Music and LMC will enter into a Registration Rights
Agreement (the "Registration Rights Agreement"), with terms mutually
satisfactory to the parties, to be effective as of the Closing Date,
pursuant to which, (a) TCI Music will grant to LMC and any Controlled
Affiliate of LMC which holds shares of TCI Music stock the right to require
the Company to effect up to six separate registrations under the Securities
Act of shares held by LMC and such Controlled Affiliates and TCI Music will
also grant unlimited piggyback registration rights (with respect to the
series of the Company's stock otherwise being registered). Such
registration rights will be transferable by LMC and such Controlled
Affiliates to any transferee of such shares or to a secured party in
connection with any hedging or financing transaction.
4.6.2 TCI Music, on behalf of itself and its subsidiaries, and LMC
will enter into, and LMC will cause Liberty Media Group LLC to enter into,
a Tax Liability Allocation and Indemnification Agreement (the "Tax
Agreement") with terms mutually satisfactory to the parties, to be
effective as of the Closing Date, pursuant to which the parties thereto
will agree to allocate and settle among themselves in an equitable manner
the respective consolidated federal income tax liability and benefits of
such parties in connection with the filing of a consolidated federal income
tax return with LMC and its affiliates and to allocate and settle among
themselves in an equitable manner the state, local or foreign tax liability
and benefits in connection with combined, consolidated and unitary state,
local and foreign income tax returns which include such parties.
4.7 Name Change. LMC will cause Liberty Digital to file all necessary
documents in order to effect a name change in accordance with applicable law to
be effective prior to the Closing, and such as to distinguish it upon the
records in the office of the Secretary of State of the State of Delaware from
the name "Liberty Digital," so that TCI Music may effect a name change to
"Liberty Digital" in accordance with applicable law immediately after the
Closing.
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4.8 LMC Policy. LMC will contemporaneously with the execution of this
Agreement, adopt the policy set forth on Schedule 4.8 (the "LMC Policy").
4.9 Equity Interests and Ownership Interests.
(a) Except as provided in Section 4.9(b), each of the Contributing
Parties will take any and all necessary actions to transfer to each
Contributed Subsidiary listed on Schedule 3.2.3(iii)(a) prior to the
Closing the Ownership Interest that is set forth next to such Contributed
Subsidiary's name on Schedule 3.2.3(iii)(a). Each of the Contributing
Parties will otherwise maintain all of its Equity Interests, and will cause
each of its Contributed Subsidiaries to maintain all of its Ownership
Interests, in full force and effect, and no Contributing Party will sell,
transfer, assign or take any action to make any disposition of, and such
Contributing Party will not permit any of its Contributed Subsidiaries to
sell, transfer, assign or dispose of, any of the Equity Interests or the
Ownership Interests held by such Person prior to the Closing other than as
contemplated by this Agreement and the Transaction Documents.
(b) The parties acknowledge that during the period from April 7, 1999
to the Closing (the "Interim Period"), (i) Opportunities may arise or
become available to LMC or its Controlled Affiliates which, pursuant to the
LMC Policy, LMC may make available to TCI Music ("Interim Opportunities")
and (ii) the Contributed Subsidiaries may be offered the right to acquire
additional Ownership Interests pursuant to preemptive or other rights set
forth in the Investment Documents ("Additional Ownership Interests"). The
parties agree that (x) to the extent any such Interim Opportunities arise
during the Interim Period, LMC may make such Interim Opportunities
available to TCI Music for purposes of the LMC Policy by making such
Opportunity available to Liberty DMX as provided herein and, if TCI Music
requests that LMC proceed to make an investment on behalf of TCI Music (an
"Interim Investment") resulting from such Interim Opportunity, such
investment will be made by Liberty DMX (or a wholly owned Subsidiary of
Liberty DMX) and such Interim Investment will become an Ownership Interest
hereunder and such wholly owned Subsidiary of Liberty DMX will become an
Additional Contributed Subsidiary hereunder and (y) if a Contributed
Subsidiary is offered the right to acquire an Additional Ownership Interest
in a Person as a result of the rights described in clause (ii) above or
otherwise, LMC may determine to cause such Contributed Subsidiary to accept
such offer, and such Contributed Subsidiary shall be entitled to acquire
such Additional Ownership Interest and such additional interest shall
become an Ownership Interest hereunder; subject, in each case, to the
provisions of Section 4.9(c). In the event such an Interim Investment is to
be made or an Additional Ownership Interest is to be acquired, then,
subject to Section 4.9(c), LMC shall, or shall cause a Subsidiary of LMC
to, advance to Liberty DMX, and Liberty DMX shall advance to any Additional
Contributed Subsidiary formed to acquire such Interim Investment or such
Contributed Subsidiary the funds necessary to make such Interim Investment
or acquire such Additional Ownership Interest. Such advance (an "Additional
Advance") shall be evidenced by a promissory note of such Contributed
Subsidiary having terms and conditions substantially similar to the terms
of the Liberty Digital Obligations, such note will be contributed to TCI
Music at the Closing, and the representations and warranties set forth
herein and the Schedules to this Agreement (including references to Assumed
Obligations associated with any such Additional Contributed Subsidiary), as
well as the actions referred to in Section 2 of this Agreement, will be
modified accordingly.
(c) Notwithstanding the provisions of Section 4.9(b), the maximum
amount of all Additional Advances which may be incurred pursuant to Section
4.9(b) without TCI Music's prior written consent shall be $35,000,000. At
such time as the aggregate amount of all Additional Advances exceeds
$35,000,000, Liberty DMX shall be required to request the consent of TCI
Music to the incurrence of Additional Advances in excess of $35,000,000. In
the event that TCI Music so consents, then LMC shall make such Additional
Advance, and cause a newly formed Additional Contributed Subsidiary to make
such Interim Investment or cause the Contributed Subsidiary to acquire such
Additional Ownership Interest, and such Additional Contributed Subsidiary
holding such Interim Investment or such Additional Ownership Interest shall
be included with the Ownership Interests already owned by such Contributed
Subsidiary, and shall be contributed to and accepted by TCI Music;
provided, however, that the maximum amount of all Additional Advances LMC
shall be obligated to make shall not exceed
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$85 million. In the event that TCI Music does not request LMC to pursue
such Interim Opportunity or TCI Music does not consent to the making of
Additional Advances in excess of the $35 million limit set forth herein,
then (i) any such Opportunity or any investment made in respect thereof
will be retained by LMC or any of its Subsidiaries, and (ii) LMC (or any
Subsidiary of LMC) may acquire such Interim Opportunity, Interim Investment
or Additional Ownership Interest and, in either case, such Interim
Opportunity may be pursued, such Interim Investment may be made or such
Additional Ownership Interest may be acquired, by LMC or its Subsidiaries
without regard to the LMC Policy, and the LMC Policy will be inapplicable
to any Interim Investment arising out of such Interim Opportunity or any
such Additional Ownership Interest, the acquisition of additional equity
interests in any Person which arise out of or result from any such
acquisition by LMC of an Interim Investment or an Additional Ownership
Interest, or any additional or further Interim Opportunities or rights to
acquire Additional Ownership Interests which arise out of or are reasonably
related to such determination not to pursue an Interim Opportunity or right
to acquire Additional Ownership Interests which TCI Music has determined
not to pursue.
4.10 Continuity and Maintenance of Operations.
(a) Except as LMC may otherwise agree in writing, until the Closing,
TCI Music will continue to operate its businesses in the ordinary course
consistent with past practices and will use its best efforts to keep
available the services of its employees and to preserve any beneficial
business relationships with customers, suppliers and others having business
dealings with TCI Music relating to its businesses. Without limiting the
generality of the foregoing, TCI Music will maintain its assets in good
condition and repair, will maintain insurance as in effect on the date of
this Agreement and will keep all of its business books, records and files
in the ordinary course of business in accordance with past practices.
(b) Except as otherwise provided in Section 4.9 and except as TCI
Music may otherwise agree in writing, until the Closing, each Contributing
Party will continue to operate the businesses of its Contributed
Subsidiaries in the ordinary course consistent with past practices and will
use its best efforts to keep available the services of its employees and to
preserve any beneficial business relationships with customers, suppliers
and others having business dealings with its Contributed Subsidiaries
relating to their businesses. Without limiting the generality of the
foregoing, each Contributing Party will cause its Contributed Subsidiaries
to (i) maintain its assets in good condition and repair, (ii) maintain
insurance as in effect on the date of this Agreement and (iii) keep all of
its business books, records and files in the ordinary course of business in
accordance with past practices.
4.11 Preferred Stock Designation. TCI Music will, in accordance with
applicable law and TCI Music's charter and bylaws, promptly following approval
of the Share Issuance at the Stockholders' meeting, cause the Designation to be
executed, acknowledged and filed with the Delaware Secretary of State and will
take all other action necessary to cause such Designation to become effective in
accordance with applicable law immediately prior to Closing.
4.12 Tax Matters. Each of the parties hereto agrees to use reasonable
efforts to cause the Contribution to constitute a tax-free exchange under
Section 351 of the Internal Revenue Code of 1986, as amended (the "Code"). None
of the parties will take any action that would cause the Contribution to fail to
qualify as a tax-free exchange under Section 351 of the Code. Unless and then
only to the extent otherwise required by a "determination" (as defined in
Section 1313(a)(1) of the Code) or by a similar applicable provision of state or
local income or franchise tax or law, each party agrees (i) to report the
Contribution as an exchange qualifying under Section 351 of the Code and (ii)
not to take any position in any audit, administrative proceeding or litigation
that is inconsistent with the characterization of the Contribution as a tax-free
exchange under Section 351 of the Code.
4.13 Stock Splits, Etc. During the Interim Period the Company will not
take any action (i) to effect any stock splits, reverse splits, stock dividends,
recapitalizations or similar actions affecting TCI Music Series A or Series B
Common Stock, (ii) to declare or pay any dividends on or make any distribution
on TCI Music Series A or Series B Common Stock, or (iii) which would require any
adjustment to the Conversion Price or the Conversion Ratio (each as defined in
the Designation) (assuming for such purpose that shares of
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Series B Common Stock were outstanding at the time of such action), in each case
without the prior written consent of LMC.
4.14 Deferred Compensation Agreement. TCI Music will adopt a Deferred
Compensation Plan and LMC and TCI Music will enter into agreements with each of
Lee Masters and Bruce Ravenel pursuant to such plan (the "Deferred Compensation
Arrangements"), to be effective as of the Closing Date, upon the terms set forth
in Schedule 4.14 and otherwise with terms mutually satisfactory to LMC and TCI
Music, including, without limitation, a release of all claims related to the
agreements described in Schedule 2.4.1, to be effective as of the Closing Date.
SECTION 5.
CONDITIONS TO OBLIGATIONS OF TCI MUSIC AND
THE CONTRIBUTING PARTIES
The respective obligations of TCI Music and each of the Contributing
Parties to consummate the transactions contemplated by this Agreement to take
place at the Closing are subject to the satisfaction or the waiver by it, at or
prior to the Closing, of each of the following conditions:
5.1 Approval of Stockholders. This Agreement and the transactions
contemplated hereby, including the issuance of the Series B Common Stock and the
amendment of TCI Music's charter, shall have been approved in accordance with
applicable laws by the required vote of the stockholders of TCI Music at the
Meeting and the Charter Amendments and the Designation shall have been filed and
shall have become effective in accordance with applicable law.
5.2 Absence of Injunctions. No permanent or preliminary injunction or
restraining order or other similar order issued or entered by any court or other
Governmental Authority of competent jurisdiction, or other legal restraint or
prohibition, preventing consummation of the transactions contemplated hereby as
provided herein shall be in effect.
5.3 Fairness Opinion. The inclusion of the Fairness Opinion in the Proxy
Statement shall have been approved by Morgan Stanley Dean Witter, and such firm
shall not have withdrawn such opinion prior to the Closing Date.
5.4 Transaction Documents. Each of the Transaction Documents shall have
been executed and delivered, effective as of the Closing, by the Parties
thereto.
SECTION 6.
CONDITIONS TO OBLIGATIONS OF TCI MUSIC
The obligations of TCI Music to consummate the transactions contemplated by
this Agreement to take place at the Closing are subject to satisfaction or the
waiver by it, at or prior to the Closing, of each of the following conditions:
6.1 Truth of Representations and Warranties. All representations and
warranties of each of the Contributing Parties set forth in this Agreement, if
qualified by a reference to materiality or Material Adverse Effect, are true
and, if not so qualified, are true in all material respects, in each case when
made and on and as of the Closing Date as though made on and as of the Closing
Date (except for representations and warranties made as of a specified date,
which need be true or true in all material respects only as of the specified
date, except for changes permitted or contemplated by this Agreement.
6.2 Performance of Agreements. All agreements of each of the Contributing
Parties set forth in this Agreement that are required to be performed by it at
or before the Closing have been performed in all material respects.
6.3 Notices and Consents. All of the Required Consents have been obtained
by the Contributing Parties pursuant to Section 4.3 other than where failure to
obtain such consents does not have a Material
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Adverse Effect on the Contributed Subsidiaries or their properties, taken as a
whole, or on the ability of the Contributing Parties to consummate the
transactions contemplated hereby.
6.4 LMC Policy. The policy set forth on Schedule 4.8 hereto has been
adopted by LMC and is in effect as of the Closing Date.
SECTION 7.
CONDITIONS TO OBLIGATIONS OF THE CONTRIBUTING PARTIES
The obligations of the Contributing Parties to consummate the transactions
contemplated by this Agreement to take place at the Closing are subject to
satisfaction or the waiver by LMC, at or prior to the Closing, of each of the
following conditions:
7.1 Truth of Representations and Warranties. All representations and
warranties of TCI Music set forth in this Agreement, if qualified by a reference
to materiality or Material Adverse Effect, are true and, if not so qualified,
are true in all material respects, in each case when made and on and as of the
Closing Date as though made on and as of the Closing Date (except for
representations and warranties made as of a specified date, which are true in
all material respects only as of the specified date.
7.2 Performance of Agreements. All agreements of TCI Music set forth in
this Agreement that are required to be performed by it at or before the Closing
have been performed in all material respects.
7.3 Notices and Consents. All of the Required Consents have been obtained
pursuant to Section 4.3 other than where failure to obtain such consent does not
have a Material Adverse Effect on the Contributed Subsidiaries or their
properties, taken as a whole, or on the ability of the Contributing Parties to
consummate the transactions contemplated hereby.
SECTION 8.
CLOSING
8.1 Closing. Subject to the provisions of Section 9.1, the Closing will
take place on a date mutually agreed to by the Parties that is as soon as
practicable after all requisite SEC and shareholder approvals are obtained and
all other closing conditions are satisfied or waived (the "Closing Date").
8.2 Items to be Delivered by the Contributing Parties.
8.2.1 At the Closing, the applicable Contributing Parties will
deliver to TCI Music (a) evidence of the pre-closing assignments and
transfers set forth in Section 2.1 assigning the rights, benefits and
obligations under the Access Agreement with respect to the Assigned
Paragraph 4 Right and transferring the shares representing the Equity
Interests in the Contributed Subsidiaries (through intermediary assignments
and transfers) to Liberty DMX; (b) the formation documents and all material
contracts and agreements relating to any Additional Contributed Subsidiary;
and (c) such other assignments, bills of sale or other instruments as are
reasonably sufficient to transfer to TCI Music all legal and beneficial
interests in such rights or as may be reasonably necessary to consummate
the transactions contemplated by this Agreement.
8.2.2 At the Closing, Liberty DMX will deliver to TCI Music duly
executed certificates or assignments in blank representing the shares
evidencing the Equity Interests, including any equity interest in any
Additional Contributed Subsidiary.
8.2.3 At the Closing, Liberty DMX will wire cash funds to the account
of TCI Music in the amount of the Cash Contribution Amount, pursuant to
wire instructions delivered by TCI Music to Liberty DMX prior to the
Closing Date.
8.3 Items to be Delivered by TCI Music. At the Closing, TCI Music will
deliver (a) to Liberty DMX, duly executed certificates representing the shares
of Series B Common Stock and the shares of Series B
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Preferred Stock as provided in Section 2.4.2 and (b) such other instruments as
may be necessary to consummate the transactions contemplated by this Agreement.
8.4 Additional Closing Deliveries.
8.4.1 At the Closing, TCI Music and Liberty DMX will execute and
deliver (a) the Assignment and (b) the Assumption as set forth in Section
2.4.2.
8.4.2 At the Closing, TCI Music, LMC and Liberty DMX, will execute
and deliver the Registration Rights Agreement as set forth in Section 4.6.
8.4.3 At the Closing, TCI Music and LMC will execute and deliver the
Tax Agreement as set forth in Section 4.6.2.
8.4.4 At the Closing, TCI Music will have entered into the Deferred
Compensation Arrangements and delivered to Liberty DMX true and complete
copies of the Deferred Compensation Plan and the agreements referenced in
Section 4.14.
8.4.5 At the Closing, LMC will deliver evidence that Liberty Digital
has effected a name change as set forth in Section 4.7.
8.4.6 At the Closing, Liberty DMX will contribute to TCI Music the
Liberty Digital Obligations, the TCI Music Debt, any notes or other
instruments evidencing Additional Advances, and cash in an amount equal to
the Cash Contribution Amount.
SECTION 9.
TERMINATION
9.1 Termination and Abandonment. This Agreement may be terminated and the
transactions contemplated hereby may be abandoned at any time, whether before or
after approval of this Agreement and the transactions contemplated hereby by the
stockholders of TCI Music:
(i) by mutual consent of TCI Music and LMC; or
(ii) by either TCI Music, on the one hand, or LMC, on the other hand:
(A) if the Contribution shall not have been consummated before December 31,
1999, provided that the right to terminate this Agreement pursuant to this
clause (ii)(A) shall not be available to any Party whose failure to perform
any of its obligations under this Agreement required to be performed by it
has resulted in the failure of the Contribution to be consummated before
such date, (B) if there has been a material breach of any representation,
warranty, covenant or agreement on the part of the other Party contained in
this Agreement and such breach shall not have been cured within fifteen
Business Days after written notice thereof shall have been received by the
Party alleged to be in breach, (C) if any court of competent jurisdiction
or other Governmental Authority shall have issued an order, decree or
ruling or taken any other action permanently restraining, enjoining or
otherwise prohibiting the Contribution and such order, decree, ruling or
other action shall have become final and nonappealable, or (D) if the
requisite approval of this Agreement and the transactions contemplated
hereby by the stockholders of TCI Music shall not have been duly obtained
by December 31, 1999, provided that the terminating party has complied with
its obligations under Sections 4.1 and 4.2.
9.2 Effect of Termination. If this Agreement is terminated pursuant to
Section 9.1, this Agreement forthwith shall become null and void and have no
further effect, and there shall be no liability or obligation on the part of TCI
Music or any of the Contributing Parties or their respective Affiliates,
stockholders, directors, officers, agents or representatives except that the
obligations of the Parties pursuant to Section 11.2 shall survive the
termination of this Agreement indefinitely and provided that the termination of
this Agreement will in no way limit any obligation or liability of any Party
based on or arising from a breach or default by such Party of any of its
representations, warranties, covenants or agreements contained in this
Agreement.
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SECTION 10.
INDEMNIFICATION
10.1 Indemnification by the Contributing Parties. Subject to written
notice of such claim for indemnification being given to the Contributing Parties
within the appropriate survival period referred to in Section 11.11, the
Contributing Parties, jointly and severally, covenant and agree to indemnify,
defend and hold harmless TCI Music, its Affiliates and their respective
stockholders, directors, officers, employees, agents, successors and assigns
from and against:
(i) all losses, damages, liabilities, deficiencies, obligations, costs
and expenses resulting from or arising out of any misrepresentation or
breach of warranty or any nonperformance or breach of any covenant or
agreement of the Contributing Parties or any of them contained in this
Agreement or any Transaction Document to which it is a Party; and
(ii) all claims, actions, suits, proceedings, demands, judgments,
assessments, fines, interest, penalties, costs and expenses (including,
without limitation, settlement costs and reasonable legal, accounting,
experts, and other fees, costs and expenses) incident or relating to or
resulting from any of the foregoing.
Notwithstanding the foregoing provisions of this Section 10.1, no claim
shall be made by TCI Music hereunder unless and until any or all of the losses,
damages, liabilities, deficiencies, obligations, costs and expenses (and amounts
incident or relating to or resulting from any or all of the foregoing)
(collectively, the "Losses") referred to in this Section 10.1 exceeds, either
individually or in the aggregate, $1,000,000 (the "Minimum Amount"); provided,
however, that at such time as the aggregate amount of the Losses exceeds the
Minimum Amount, TCI Music may assert a claim for the full amount of the Losses
up to a maximum of $200,000,000 (the "Maximum Amount").
10.2 Indemnification by TCI Music. Subject to written notice of such claim
for indemnification being delivered to TCI Music within the appropriate survival
period set forth in Section 11.11, TCI Music agrees to indemnify, defend and
hold harmless the Contributing Parties, their Affiliates and their respective
stockholders, directors, officers, employees, agents, successors and assigns
from and against:
(i) all losses, damages, liabilities, deficiencies, obligations, costs
and expenses resulting from or arising out of any misrepresentation or
breach of warranty or any nonperformance or breach of any covenant or
agreement of TCI Music contained in this Agreement or any Transaction
Document to which it is a Party; and
(ii) all claims, actions, suits, proceedings, demands, judgments,
assessments, fines, interest, penalties, costs and expenses (including,
without limitation, settlement costs and reasonable legal, accounting,
experts, and other fees, costs and expenses) incident or relating to or
resulting from any of the foregoing.
Notwithstanding the foregoing provisions of this Section 10.2, no claim
shall be made by any Contributing Party hereunder unless and until any or all of
the Losses referred to in this Section 10.2 exceeds, either individually or in
the aggregate the Minimum Amount; provided, however, that at such time as the
aggregate amount of the Losses exceeds the Minimum Amount, each of the
Contributing Parties may assert a claim for the full amount of its Losses up to
a maximum of the Maximum Amount.
10.3 Third Party Claims. Promptly after the receipt by TCI Music or the
Contributing Parties of notice of any claim, action, suit or proceeding
(collectively, an "Action") by any third party for which indemnification is
sought hereunder, such party (the "Indemnified Party") shall give reasonable
written notice to the party from whom indemnification is claimed (the
"Indemnifying Party"). The Indemnified Party's failure to so notify the
Indemnifying Party of any such matter shall not release the Indemnifying Party,
in whole or in part, from its obligations to indemnify under this Section 10,
except to the extent the Indemnified Party's failure to so notify actually
prejudices the Indemnifying Party's ability to defend against such Action. The
Indemnified Party shall be entitled, at the sole expense and liability of the
Indemnifying Party, to exercise full control of the defense, compromise or
settlement of any such Action unless the Indemnifying Party, within a reasonable
time after the giving of such notice by the Indemnified Party, shall: (i) admit
in writing to the
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Indemnified Party, the Indemnifying Party's obligations to the Indemnified Party
for such Action under the terms of this Section 10; (ii) notify the Indemnified
Party in writing of the Indemnifying Party's intention to assume the defense
thereof, and (iii) retain legal counsel reasonably satisfactory to the
Indemnified Party to conduct the defense of such Action; in which case the
Indemnifying Party shall be entitled to exercise full control of the defense,
compromise or settlement of such action, subject to the terms of this Section
10. The Indemnified Party and the Indemnifying Party shall cooperate with the
party assuming the defense, compromise or settlement of any such Action in
accordance herewith in any manner that such party reasonably may request. If the
Indemnifying Party so assumes the defense of any such Action, the Indemnified
Party shall have the right to employ separate counsel and to participate in (but
not control) the defense, compromise, or settlement thereof, but the fees and
expenses of such counsel shall be the expense of the Indemnified Party unless
(i) the Indemnifying Party has agreed to pay such fees and expenses, (ii) any
relief other than the payment of money damages is sought against the Indemnified
Party or (iii) the Indemnified Party shall have been advised by its counsel that
there may be one or more legal defenses available to it which are different from
or additional to those available to the Indemnifying Party, and in any such case
the fees and expenses of such separate counsel shall be borne by the
Indemnifying Party, it being understood and agreed, however, that, if TCI Music
is the Indemnifying Party, TCI Music shall not be liable for the fees and
expenses of more than one separate firm of attorneys at any time for the
Contributing Parties. No Indemnified Party shall settle or compromise or consent
to entry of any judgment with respect to any such Action for which it is
entitled to indemnification hereunder without the prior written consent of the
Indemnifying Party, unless the Indemnifying Party shall have failed, after
reasonable notice thereof, to undertake control of such Action in the manner
provided above in this Section 10.3. No Indemnifying Party shall, without the
written consent of the Indemnified Party, settle or compromise or consent to
entry of any judgment with respect to any such Action in which any relief other
than the payment of money damages is sought against any Indemnified Party or any
Action unless such settlement, compromise or consent includes as an
unconditional term thereof the giving by the claimant, petitioner or plaintiff,
as applicable, to such Indemnified Party of a release from all liability with
respect to such Action.
SECTION 11.
MISCELLANEOUS
11.1 Notices. All notices, requests, demands and other communications
called for or contemplated hereunder will be in writing and will be deemed to
have been duly given if delivered in person or by United States certified or
registered mail, postage prepaid, return receipt requested, addressed to the
Parties, their permitted successors in interest or assignees, or sent by
overnight courier or telecopier (with acknowledgment received):
To any of the Contributing Parties at:
c/o Liberty Media Corporation
9197 South Peoria Street
Englewood, Colorado 80112
Attention: David Koff
Telecopy: (303) 721-5445
with a copy similarly addressed, Attention: Charles Y. Tanabe, General
Counsel
and another copy to:
Baker & Botts, L.L.P.
599 Lexington Avenue
New York, New York 10022
Attention: Frederick H. McGrath, Esq.
Telecopy: (212) 705-5125
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To TCI Music at:
TCI Music, Inc.
67 Irving Place North
4th Floor
New York, New York 10003
Attention: President
Telecopy: (303) 721-5445
with a copy similarly addressed, Attention: Ralph J. Sorrentino, Chief
Financial Officer and another copy to:
Sherman & Howard L.L.C.
633 Seventeenth Street
Suite 3000
Denver, Colorado 80202
Attention: Steven D. Miller, Esq.
Deborah Land Buckley, Esq.
Telecopy: (303) 298-0940
Any Party may change the address to which notices are required to be sent
by giving notice of such change in the manner provided in this Section. All
notices and other communications given to a Person in accordance with the
provisions of this Section will be deemed to have been received (i) on the date
of delivery if delivered by hand or transmitted by telecopier (with
acknowledgment received), (ii) on the next Business Day after the sending
thereof by a reliable overnight courier service, with acknowledgment of receipt,
or (iii) on the third Business Day after the mailing thereof by certified or
registered mail, postage prepaid, return receipt requested, except that any
notice of a change of address will be effective only upon actual receipt.
11.2 Expenses. Whether or not the transactions contemplated hereby are
consummated, each of the Parties will bear the fees and expenses relating to its
compliance with the various provisions of this Agreement, and each of the
Parties will pay all of its own expenses (including all attorneys' fees and
expenses) incurred in connection with this Agreement, the transactions
contemplated hereby, the negotiations leading to the same and the preparation
made for carrying the same into effect.
11.3 Modification; Waiver. This Agreement may be modified by mutual
agreement only by a writing signed by each of the Parties, and no provision or
condition herein may be waived other than by a writing signed by the Party
waiving such provision or condition.
11.4 Headings. Article and Section headings in this Agreement are for the
sole purpose of convenient reference and in no way define, limit or prescribe
the scope or intent of this Agreement or any part hereof, and such headings will
not be considered in interpreting or construing this Agreement.
11.5 Assignment. Neither TCI Music nor any of the Contributing Parties may
assign any of its rights under this Agreement or delegate its duties hereunder
unless it obtains the prior written consent of the other, which consent may be
withheld at any such Party's absolute discretion; provided that LMC and each
Contributing Party may assign its rights hereunder to a wholly owned Subsidiary
of such party without the consent of TCI Music but no such assignment shall
relieve such Person from its obligations hereunder.
11.6 Counterparts. This Agreement may be executed in any number of
counterparts, each of which may be deemed to be an original, and all of which
taken together will constitute one instrument.
11.7 Additional Documents. At the Closing and from time to time after the
Closing, at any Party's request and without further consideration, any of the
other Parties will execute and deliver (or cause to be executed and delivered)
such other instruments of conveyance and transfer and will take such other
actions as may reasonably be required effectively to carry out the Contribution
and the other transactions contemplated by this Agreement and the Transaction
Documents.
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<PAGE> 111
11.8 Other. This Agreement constitutes the entire agreement of the Parties
regarding the subject matter hereof, and all prior or contemporaneous
agreements, understandings, representations and statements, oral or written, are
merged into this Agreement. This Agreement will be binding upon and inure to the
benefit of the Parties and, subject to the limitations set forth in Section 9.5,
their respective successors and assigns. The provisions of this Agreement are
for the and no other Person is intended to be a third-party beneficiary or to
have any rights by virtue of this Agreement.
11.9 Governing Law. This Agreement will be governed by the laws of the
State of Colorado, without regard to the conflicts of laws rules thereof.
11.10 Interpretation. Terms used with initial capital letters will have
the meanings specified, applicable to both singular and plural forms, for all
purposes of this Agreement. All pronouns (and any variation) will be deemed to
refer to the masculine, feminine or neuter, as the identity of the Person may
require. The singular or plural includes the other, as the context requires or
permits. The word "include" (and any variation) is used in an illustrative sense
rather than a limiting sense. The word "day" means a calendar day, and if the
last day for the giving of any notice or the taking of any other action is a day
that is not a Business Day, the time for giving such notice or taking such
action will be deemed extended to the next Business Day.
11.11 Survival of Representations and Warranties. The representations and
warranties of the applicable parties contained in Sections 3.1.3, 3.1.4, 3.1.5,
3.2.3(i), 3.2.3(ii), 3.2.3(iv), 3.2.3(v) and 3.3.6 through 3.3.10 of this
Agreement shall survive the Closing hereunder and continue in full force and
effect for a period of one year thereafter. All of the other representations and
warranties of the Parties shall survive the Closing without limitation (subject
to any applicable statute of limitations), except as otherwise provided herein.
11.12 Severability. In the event that any provision of this Agreement, or
the application thereof, becomes or is declared by a court of competent
jurisdiction to be illegal, void or unenforceable, the remainder of this
Agreement will continue in full force and effect and the application of such
provision to other persons or circumstances will be interpreted so as reasonably
to effect the intent of the Parties. The Parties further agree to replace such
void or unenforceable provision of this Agreement with a valid and enforceable
provision that will achieve, to the extent possible, the economic, business and
other purposes of such void or unenforceable provision.
IN WITNESS WHEREOF, the Parties have executed this Agreement on the date
first above written.
<TABLE>
<S> <C> <C>
LIBERTY MEDIA CORPORATION
By: /s/ CHARLES Y. TANABE
------------------------------------
Name: Charles Y. Tanabe
------------------------------------
Title: Senior Vice President
------------------------------------
LMC CAPITAL, LLC
By: /s/ CHARLES Y. TANABE
------------------------------------
Name: Charles Y. Tanabe
------------------------------------
Title: Senior Vice President
------------------------------------
</TABLE>
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<TABLE>
<S> <C> <C>
LIBERTY DMX, INC.
By: /s/ CHARLES Y. TANABE
------------------------------------
Name: Charles Y. Tanabe
------------------------------------
Title: Senior Vice President
------------------------------------
TCI INTERACTIVE, INC.
By: /s/ CHARLES Y. TANABE
------------------------------------
Name: Charles Y. Tanabe
------------------------------------
Title: Senior Vice President
------------------------------------
ETC w/tci, INC.
By: /s/ CHARLES Y. TANABE
------------------------------------
Name: Charles Y. Tanabe
------------------------------------
Title: Senior Vice President
------------------------------------
TCI MUSIC, INC.
By: /s/ RALPH J. SORRENTINO
------------------------------------
Name: Ralph J. Sorrentino
------------------------------------
Title: Executive Vice President
------------------------------------
and Chief Financial Officer
------------------------------------
</TABLE>
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APPENDIX II
MORGAN STANLEY DEAN WITTER
July 30, 1999
Board of Directors
TCI Music, Inc.
67 Irving Place North, 4th Floor
New York, NY 10003
Members of the Board of Directors:
We understand that TCI Music, Inc. (the "Company") has entered into a
Contribution Agreement dated as of April 23, 1999 (the "Agreement") with Liberty
Media Corporation ("Liberty Media"), LMC Capital, LLC, Liberty DMX, Inc., TCI
Interactive Inc. and ETC w/tci, Inc. (together, the "Liberty Entities") which
provides for, among other things, (i) the contribution by the Liberty Entities
to the Company of the Access Agreement (as defined in the Agreement) and the
Equity Interests (as defined in the Agreement) in the Contributed Subsidiaries
(as defined in the Agreement), (ii) the contribution to the Company of a
combination of cash and notes payable to Liberty Media or its affiliates in an
aggregate amount of $150 million, and (iii) the adoption by the Company of a
deferred compensation and stock appreciation rights plan for key executives of
the Company (the transactions contemplated by (i), (ii) and (iii) above,
together, the "Contribution"). In consideration of the Contribution, the Company
would issue an aggregate of 109,450,167 shares of its Series B common stock, par
value $0.01 per share (the "Company Series B Common Stock") to the Liberty
Entities and would issue 150,000 shares of the Company's convertible preferred
stock, Series B to Liberty Media. The transactions referred to in the preceding
sentence, together with the Contribution, are referred to collectively as the
"Transactions". We understand that approximately 98% of the Company's total
voting power currently is owned by Liberty Media.
You have asked for our opinion as to whether the Transactions, considered as a
whole, are fair from a financial point of view to the holders of the Company's
Series A common stock, par value $0.01 per share (the "Company Series A Common
Stock" and, together with the Company Series B common stock, the "Company Common
Stock"), other than Liberty Media and its affiliates.
<PAGE> 114
MORGAN STANLEY DEAN WITTER
For purposes of the opinion set forth herein, we have:
(i) reviewed certain publicly available financial statements and
other information of the Company and the entities in which
Contributed Subsidiaries have holdings (as set forth in the
Agreement) (the "Investee Companies");
(ii) reviewed certain internal financial statements and other
financial and operating data concerning the Company prepared
by the management of the Company and certain limited
information concerning the Investee Companies provided by
Liberty Media;
(iii) analyzed certain financial projections of the Company prepared
by the management of the Company;
(iv) discussed the past and current operations and financial
condition and the prospects of the Company and Liberty Media
with senior executives of the Company and Liberty Media
(including, in the case of the Company, the Company's
anticipated cash requirements), respectively, and discussed
the operations and prospects of the Investee Companies with
senior executives of Liberty Media;
(v) reviewed the reported prices and trading activity for the
Company Common Stock and the publicly traded Investee
Companies;
(vi) reviewed the financial terms, to the extent publicly
available, of certain transactions deemed to be relevant;
(vii) reviewed the Agreement dated April 22, 1999 and a draft of the
Note dated April 22, 1999; and
(viii) performed such other analyses as we have deemed appropriate.
We have assumed and relied upon without independent verification the accuracy
and completeness of the information reviewed by us for the purposes of this
opinion. With respect to the financial projections, we have assumed that they
have been reasonably prepared on bases reflecting the best currently available
estimates and judgments of management as to the future financial performance of
the Company. Among other things, we have relied upon, without independent
verification, the assessment by management (i) of the Company of the underlying
assumptions regarding projected services to be supplied under the Access
Agreement; and (ii) of the Company and Liberty Media of the Company's and the
Investee Companies' existing and future technologies. We also gave consideration
to the existence of the policies set forth in the Schedule entitled "Liberty
Media Corporation Executive Committee of the Board of Directors Policy Statement
Regarding Internet Business Opportunities" to the Agreement.
We have not made any independent appraisal of the assets or liabilities or
technology of the Company, Liberty Media, the Contributed Subsidiaries or the
Investee Companies, nor have we been furnished with any such appraisals. We have
assumed that the Contributed Subsidiaries
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<PAGE> 115
MORGAN STANLEY DEAN WITTER
have no assets other than those set forth in the Schedule entitled "Ownership
Interests Held by the Contributed Subsidiaries in Corporations, Partnerships and
Business Associations" to the Agreement and no liabilities other than the
express contractual obligations of the Contributed Subsidiaries under the
agreements set forth on such Schedule. Furthermore, we have depended on the
Company for its valuation of the KP Java Fund as well as its valuation of the
MTVN Partnership, and we have relied on the Company in its assessment of the tax
treatment resulting from the Agreement. Our opinion is necessarily based on
economic, market and other conditions as in effect on, and the information made
available to us as of, the date hereof.
We did not participate in the structuring or negotiation of the Transactions
and, in connection with our opinion, have not solicited or considered any
alternative transactions. In addition, our opinion does not address any specific
aspect of the Transactions, but, instead, addresses the fairness, from a
financial point of view, of the Transactions considered as a whole.
We have been engaged by the Board of Directors of the Company to provide a
fairness opinion in connection with this transaction and will receive a fee for
our services. In the past, Morgan Stanley & Co. Incorporated and its affiliates
have provided financing services for Liberty Media and financial advisory and
financing services for affiliates of Liberty Media and have received fees for
the rendering of these services.
It is understood that this letter is for the information of the Board of
Directors of the Company only and may not be used for any other purpose without
our prior written consent, except that a copy of our opinion may be included in
its entirety in any proxy filing made by the Company with the Securities and
Exchange Commission in connection with the Contribution.
Based on the foregoing, we are of the opinion on the date hereof that the
Transactions, considered as a whole, are fair from a financial point of view to
the holders of the Company Series A Common Stock, other than Liberty Media and
its affiliates.
Very truly yours,
MORGAN STANLEY & CO. INCORPORATED
By: /s/ Stuart J. Epstein
-----------------------------------
Stuart J. Epstein
Managing Director
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<PAGE> 116
CONSENT OF INDEPENDENT AUDITORS
We consent to incorporation by reference in the proxy statement of TCI Music,
Inc. of our report dated February 12, 1999, relating to the consolidated balance
sheets of TCI Music, Inc. and subsidiaries as of December 31, 1998 and 1997, and
the related consolidated statements of operations and comprehensive earnings,
stockholders' equity (deficit), and cash flows for the year ended December 31,
1998 and the six months ended December 31, 1997 and the related consolidated
statements of operations and comprehensive earnings, stockholders' equity
(deficit), and cash flows of DMX, LLC and subsidiaries (Predecessor) for the
nine months ended June 30, 1997 and the year ended September 30, 1996, which
report appears in the December 31, 1998, annual report on Form 10-K of TCI
Music, Inc.
Century City, California KPMG LLP
July 30, 1999
<PAGE> 117
TCI MUSIC, INC.
67 IRVING PLACE NORTH
4TH FLOOR
NEW YORK, NEW YORK 10003
TCI MUSIC, INC.
TCI MUSIC SERIES A COMMON STOCK
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoints Lee Masters and Bruce W. Ravenel, as
Proxies, with full power to act without the other and each with the power to
appoint his substitute, and hereby authorizes them to represent and to vote, as
designated on the reverse side hereof, all the shares of the above-referenced
common stock of TCI Music, Inc. ("TCI Music") held of record by the undersigned
on July 26, 1999, at the annual meeting of TCI Music to be held on September 8,
1999 or any adjournment thereof.
This Proxy when properly executed will be voted in the manner directed
herein by the undersigned shareholder.
IF NO DIRECTION IS MADE, THIS PROXY WILL BE VOTED FOR PROPOSALS 1, 2, 3
AND 4 (AND IN THE PROXIES' DISCRETION ON ANY OTHER MATTER THAT PROPERLY COMES
BEFORE THE ANNUAL MEETING). THE EFFECTIVENESS OF PROPOSALS 1, 2 AND 3 ARE EACH
CONDITIONED UPON APPROVAL OF THE OTHER TWO PROPOSALS.
(Continued, and to be signed and dated on reverse side.)
1. To consider and vote upon a proposal to approve the Contribution
Transaction pursuant to which shares of Series A common stock and shares of
Series B preferred stock may be issued to affiliates of Liberty Media
Corporation.
FOR ___ AGAINST ___ ABSTAIN ___
2. To consider and vote upon a proposal to approve the amendments to
the Company's Certificate of Incorporation.
FOR ___ AGAINST ___ ABSTAIN ___
<PAGE> 118
3. To consider and vote upon a proposal to approve the Deferred
Compensation and Stock Appreciation Rights Plan and the issuance of shares of
common stock thereunder.
4. Election of Three Directors (Nominees: Robert R. Bennett, Peter M.
Kern and Bruce W. Ravenel).
FOR all nominees listed above: ___ WITHHOLD AUTHORITY to vote for all
nominees listed above:___
*EXCEPTIONS:
--------------------------
(Instructions: To withhold authority to vote for any individual
nominee, mark the "Exceptions" box and write that nominee's name in the space
provided below. Your shares will be cast FOR the other nominee(s).)
5. In their discretion, the Proxies are authorized to vote upon any
other business as may properly come before the annual meeting.
Signature should agree with name printed
hereon. If stock is held in the name of
more than one person, each joint owner
should sign. Executors, administrators,
trustees, guardians, and attorneys should
indicate the capacity in which they sign.
DATED: , 1999
------------------------------
------------------------------------------
Shareholder's Signature
------------------------------------------
Shareholder's Signature
Please Sign, Date and Return the Proxy Card
Promptly Using the Enclosed Envelope
<PAGE> 119
TCI MUSIC, INC.
67 IRVING PLACE NORTH
4TH FLOOR
NEW YORK, NEW YORK 10003
TCI MUSIC, INC.
TCI MUSIC SERIES B COMMON STOCK
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoints Lee Masters and Bruce W. Ravenel, as
Proxies, with full power to act without the other and each with the power to
appoint his substitute, and hereby authorizes them to represent and to vote, as
designated on the reverse side hereof, all the shares of the above-referenced
common stock of TCI Music, Inc. ("TCI Music") held of record by the undersigned
on July 26, 1999, at the annual meeting of TCI Music to be held on September 8,
1999 or any adjournment thereof.
This Proxy when properly executed will be voted in the manner directed
herein by the undersigned shareholder.
IF NO DIRECTION IS MADE, THIS PROXY WILL BE VOTED FOR PROPOSALS 1, 2, 3
AND 4 (AND IN THE PROXIES' DISCRETION ON ANY OTHER MATTER THAT PROPERLY COMES
BEFORE THE ANNUAL MEETING). THE EFFECTIVENESS OF PROPOSALS 1, 2 AND 3 ARE EACH
CONDITIONED UPON APPROVAL OF THE OTHER TWO PROPOSALS.
(Continued, and to be signed and dated on reverse side.)
1. To consider and vote upon a proposal to approve the Contribution
Transaction pursuant to which shares of Series A common stock and shares of
Series B preferred stock may be issued to affiliates of Liberty Media
Corporation.
FOR ___ AGAINST ___ ABSTAIN ___
2. To consider and vote upon a proposal to approve the amendments to
the Company's Certificate of Incorporation.
FOR ___ AGAINST ___ ABSTAIN ___
3. To consider and vote upon a proposal to approve the Deferred
Compensation and Stock Appreciation Rights Plan and the issuance of shares of
common stock thereunder.
4. Election of Three Directors (Nominees: Robert R. Bennett, Peter M.
Kern and Bruce W. Ravenel).
FOR all nominees listed above: ___ WITHHOLD AUTHORITY to vote for all
nominees listed above:___
*EXCEPTIONS:
--------------------------
(Instructions: To withhold authority to vote for any individual
nominee, mark the "Exceptions" box and write that nominee's name in the space
provided below. Your shares will be cast FOR the other nominee(s).)
5. In their discretion, the Proxies are authorized to vote upon any
other business as may properly come before the annual meeting.
<PAGE> 120
Signature should agree with name printed
hereon. If stock is held in the name of
more than one person, each joint owner
should sign. Executors, administrators,
trustees, guardians, and attorneys should
indicate the capacity in which they sign.
DATED: , 1999
------------------------------
------------------------------------------
Shareholder's Signature
------------------------------------------
Shareholder's Signature
Please Sign, Date and Return the Proxy Card
Promptly Using the Enclosed Envelope
